<PAGE>
As filed with the Securities and Exchange Commission on March 31, 2000
Registration No. 333-30772
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 1 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
Centillium Communications, Inc.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 3661 94-3263530
(State or other jurisdiction
of (Primary Standard Industrial (I.R.S. Employer
incorporation or
organization) Classification Code Number) Identification Number)
</TABLE>
47211 Lakeview Boulevard
Fremont, California 94538
(510) 771-3700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Faraj Aalaei
Chief Executive Officer
47211 Lakeview Boulevard
Fremont, California 94538
(510) 771-3700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Arthur F. Schneiderman Nora L. Gibson
Michael J. Danaher Laura M. de Petra
Stephen M. Welles Dorothy Vinski
Paul A. Okada Lora D. Blum
Micheal J. Reagan Brobeck, Phleger & Harrison LLP
Wilson Sonsini Goodrich & Rosati Spear Street Tower
Professional Corporation One Market
650 Page Mill Road San Francisco, California 94105
Palo Alto, California 94304 (415) 442-0900
(650) 493-9300
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Maximum
Title of Each Class of Securities Amount Offering Price Proposed Maximum Amount of
to be Registered to be Registered Per Share Aggregate Offering Price(1) Registration Fee(2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value.. 4,600,000 $24.00 $110,400,000 $29,146
- --------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Estimated pursuant to Rule 457(a) of the Securities Act of 1933 solely for
the purpose of computing the amount of the registration fee.
(2) $21,648 of the Registration Fee was previously paid.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall hereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to such Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MARCH 31, 2000
4,000,000 Shares
[Centillium logo]
Centillium Communications, Inc.
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of our common stock is expected to be between
$22.00 and $24.00 per share. We have applied to list our common stock on The
Nasdaq Stock Market National Market under the symbol "CTLM."
The underwriters have an option to purchase a maximum of 600,000 additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 4.
<TABLE>
<CAPTION>
Underwriting
Discounts
Price to and Proceeds to
Public Commissions Centillium
------------ ------------ ------------
<S> <C> <C> <C>
Per Share.................................. $ $ $
Total...................................... $ $ $
</TABLE>
Delivery of the shares of common stock will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston
Robertson Stephens
Salomon Smith Barney
The date of this prospectus is , 2000.
<PAGE>
[INSIDE FRONT COVER OF PROSPECTUS]
[Graphics]
[Caption: "Empowering Broadband Networks" with Centillium logo]
[Graphic depicting the core network, the access network and the home
network and where our voice over packet products, DSL products and home
networking products fit into the network].
<PAGE>
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 4
You Should Not Rely on Forward-
Looking Statements................. 12
Use of Proceeds..................... 12
Dividend Policy..................... 12
Capitalization...................... 13
Dilution............................ 14
Selected Consolidated Financial
Data............................... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 16
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Business......................... 23
Management....................... 37
Related Party Transactions....... 45
Principal Stockholders........... 47
Description of Capital Stock..... 49
Shares Eligible for Future Sale.. 52
Underwriting..................... 54
Notice to Canadian Residents..... 56
Legal Matters.................... 57
Experts.......................... 57
Additional Information........... 57
Index To Consolidated Financial
Statements...................... F-1
</TABLE>
-----------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may only be used where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Dealer Prospectus Delivery Obligation
Until , 2000 (25 days after the commencement of this offering), all
dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights basic information about us and this
offering contained more fully elsewhere in this prospectus. You should read
this entire prospectus carefully, including the section entitled "Risk Factors"
and the financial statements and the related notes to those statements included
in this prospectus. This prospectus contains forward-looking statements that
involve risks and uncertainties.
Centillium Communications, Inc.
Centillium delivers technologies that enable broadband communications to the
home and business enterprise. We provide broadband equipment vendors with
system-level products for the DSL market and we are leveraging our technology
to develop products for complementary markets which share common technologies
and customers. We plan to release products before the end of this year that
target the voice over packet and home networking markets. Our core technology
and expertise have enabled us to establish a viable product roadmap within
these three complementary markets.
As more consumers and businesses have begun to rely on the Internet and
communications networks, the demand for access to these networks has
accelerated. In addition, the demand for access is increasing as more and more
small businesses, self-employed individuals and corporate telecommuters are
regularly accessing the Internet and other communications networks. To meet the
demand for high-speed, broadband data transmission, network service providers
have begun deploying digital subscriber line, or DSL technology.
DSL technology provides high speed data transmission using the telephone
company's existing copper wire infrastructure and delivers "always on"
availability, eliminating the tedious dial-up process associated with
traditional analog modem technologies. DSL is a point-to-point technology that
connects the end user to the local phone company's central office or to an
intermediate hub. DSL equipment is deployed at each end of the copper wire and
the transmission speed depends on the length and condition of the existing wire
as well as the capabilities of the DSL equipment.
As network access providers deploy DSL services, demand is emerging for
complementary networking technologies. Two of these technologies are voice over
packet, which allows integrated transmission of voice and data, and home
networking, which enables users to share high bandwidth resources throughout
the home. Broadband equipment manufacturers that seek to serve the DSL, voice
over packet and home networking markets must develop solutions to meet
constantly evolving technology and networking standards, size constraints,
power constraints and shorter product life-cycles. Our products allow
communications equipment companies to develop solutions to these issues by
providing flexibility due to our programmable architecture, high levels of
semiconductor integration allowing reduced size, low power consumption and fast
time-to-market.
Our goal is to be a leading provider of system-level products for equipment
manufacturers serving the broadband communications markets. We intend to
achieve this goal by targeting complementary broadband communications markets,
strengthening and expanding our strategic relationships, extending our
technology leadership, leveraging our system-level expertise and pursuing
strategic acquisitions.
We outsource the manufacturing of our products which allows us to focus our
resources on design, development and marketing efforts within our target
markets. To date, we have shipped our products to 13 customers. Our largest
customers, based on revenue earned in the twelve months ended March 31, 2000,
are Sumitomo Electric Industries, NEC, Mitsubishi Electric, Lucent Technologies
and Copper Mountain Networks.
We were incorporated in February 1997. We have a limited operating history
and we have not reported an operating profit for any year since our
incorporation. We expect to continue to incur net losses for the foreseeable
future.
Our principal executive offices are located at 47211 Lakeview Boulevard,
Fremont, CA 94538 and our telephone number is (510) 771-3700.
1
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered in this offering............. 4,000,000 shares
Common stock offered in the private placement..... 700,000 shares to three
investors as follows:
500,000 to Creative
Technologies, Inc., 100,000
to NEC and 100,000 to the
Sterling Group.
Common stock to be outstanding after this offering
and the private placement........................ 30,469,077 shares
Use of proceeds................................... For general corporate
purposes and working
capital, including expected
operating expenses. See
"Use of Proceeds."
Nasdaq National Market symbol..................... CTLM
</TABLE>
The total number of outstanding shares of our common stock above is based
on:
. 10,318,841 shares of our common stock outstanding as of December 31,
1999; and
. the automatic conversion of all outstanding shares of preferred stock
upon completion of this offering into 15,450,236 additional shares of
common stock.
The total number of outstanding shares of our common stock above does not
include:
. 3,390,257 shares of common stock issuable upon the exercise of
outstanding stock options as of December 31, 1999 at a weighted average
exercise price of $1.09 per share;
. 26,750 shares of common stock issuable upon the exercise of outstanding
warrants as of December 31, 1999 at a weighted average exercise price of
$4.00 per share;
. 4,423,395 shares of common stock available for issuance under our 1997
Stock Plan following this offering; and
. 500,000 additional shares of common stock available for issuance under
our 2000 Employee Stock Purchase Plan immediately following this
offering.
Unless otherwise specifically stated, information throughout this
prospectus:
. reflects the conversion of all outstanding shares of preferred stock
into shares of common stock automatically upon completion of this
offering; and
. assumes no exercise of the underwriter's over-allotment option.
2
<PAGE>
Summary Consolidated Financial Information
<TABLE>
<CAPTION>
Period from Fiscal Year
February 21, 1997 Ending December 31,
(inception) to ---------------------
December 31, 1997 1998 1999
----------------- --------- ----------
(in thousands except per share data)
<S> <C> <C> <C>
Consolidated Statement of Operations
Data:
Total revenues....................... $ 300 $ 752 $ 3,744
Operating loss....................... $(2,102) $ (9,722) $ (20,205)
Net loss............................. $(1,937) $ (9,256) $ (19,173)
Deemed divided on Series B
convertible preferred stock......... $(2,800) $ -- $ --
------- --------- ----------
Net loss applicable to common
stockholders........................ $(4,737) $ (9,256) $ (19,173)
Historical basic and diluted net loss
per share applicable to common
stockholders........................ $ (0.59) $ (1.15) $ (2.17)
Shares used to compute basic and
diluted net loss per share
applicable to common stockholders... 8,000 8,056 8,842
Pro forma basic and diluted net loss
per share applicable to common
stockholders........................ $ (0.88)
==========
Shares used to compute pro forma
basic and diluted net loss per share
applicable to common stockholders... 21,755
==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents and short-term
investments.................................... $28,313 $28,313 $128,723
Working capital................................. $26,043 $26,043 $126,453
Total assets.................................... $35,587 $35,587 $135,997
Long-term debt and capital lease obligations,
less current portion........................... $ 549 $ 549 $ 549
Total stockholders' equity...................... $30,055 $30,055 $130,465
</TABLE>
See note 1 of notes to consolidated financial statements for an explanation
of the determination of the number of shares used in computing per share data.
The pro forma amounts above reflect the conversion of 15,450,236 shares of
preferred stock into the same number of shares of common stock upon the
completion of this offering.
The pro forma as adjusted amounts above give effect to the sale of 4,000,000
shares of common stock in this offering and the sale of 700,000 shares of
common stock in the private placement, in each case at an assumed offering
price of $23.00 per share, after deducting underwriting discounts and
commissions and estimated offering expenses.
In our discussion throughout this prospectus, references to the year ended
December 31, 1997 refer to the period from February 21, 1997 (inception)
through December 31, 1997.
3
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making a
decision to purchase our common stock. You may lose all or part of your
investment. If any of the following risks actually occur, our business,
financial condition or results of operations could be harmed. If that happens,
the trading price of our common stock could decline.
We commenced operations in April 1997, and our limited operating history
selling products to the broadband communications market makes it difficult to
evaluate our business and future prospects.
We commenced operations in April 1997 and did not begin to generate revenue
from shipment of products until the third quarter of 1999. We are still in the
early stages of our development, which makes it difficult to evaluate our
future prospects, and increases the risk that we will be unable to build a
sustainable business. You must consider our prospects in light of the risks and
difficulties we will encounter as an early stage company competing in a new and
rapidly evolving market. Many of these risks are described under the sub-
headings below. We may not successfully address any or all of these risks and
our business strategy may not be successful.
We have a history of losses, we expect future losses, and we may not achieve or
maintain profiability.
We have not reported an operating profit for any year since our
incorporation and have experienced net losses of approximately $1.9 million,
$9.3 million, and $19.2 million for the years ended December 31, 1997, 1998,
and 1999, respectively. We expect to continue to incur net losses for the
foreseeable future, and these losses may be substantial. Unless we are able to
generate significant revenues from future sales of our products, we will not be
able to build a sustainable business.
We continue to rapidly expand our operations, and our failure to manage growth
could harm our business.
We have rapidly and significantly expanded our operations, including
increasing the number of our employees from 71 in June 1999 to 149 currently.
This expansion is placing a significant strain on our managerial, operational
and financial resources. Further, Faraj Aalaei, our Chief Executive Officer,
has only recently been appointed to this position. As a result, he may not yet
be fully integrated into his new position. We expect that further significant
expansion will be required to address growth in our customer base and market
opportunities. Failure to manage our growth could harm our business. We cannot
assure you that we will be able to do any of the following, which we believe
are essential to successfully managing our growth:
. hire, train and manage additional qualified personnel;
. effectively manage multiple relationships with our customers, suppliers
and other third parties; and
. improve our existing and implement new operational, financial and
management information controls, reporting systems and procedures.
Competition for qualified personnel in the semiconductor industry is intense,
and if we are not successful in attracting and retaining these personnel, we
will not be able to execute our business plan.
Our future success will depend on the ability of our management to operate
effectively, both individually and as a group. Therefore, the future success of
our business will also depend on our ability to attract and retain high-caliber
personnel. The loss of the services of any of our key personnel, the inability
to attract or retain qualified personnel in the future or delays in hiring
required personnel, particularly engineers, could harm our business.
4
<PAGE>
Because competition for qualified personnel in the semiconductor and
telecommunications industries is intense, we may not be successful in
attracting and retaining such personnel. During 1999, we added 59 new employees
to our total work force, representing an increase of approximately 105% from
December 31, 1998. We expect to add additional personnel in the near future,
including direct sales and marketing personnel. There may be only a limited
number of people with the requisite skills to serve in those positions, and it
may become increasingly difficult to hire these people. In addition, we are
actively searching for research and development engineers, who are in short
supply. Our business will be harmed if we encounter delays in hiring these
additional engineers. Furthermore, competitors and others have in the past and
may in the future attempt to recruit our employees. We do not have employment
contracts with any of our key personnel nor do we maintain key person life
insurance on our key personnel.
We depend on third party foundries to manufacture, assemble and test our
products and we may not be able to obtain sufficient capacity to support our
business.
We do not own or operate a semiconductor fabrication facility. We rely on
third parties to manufacture our products. In addition, we generally do not
have contracts with our foundries guaranteeing the availability of capacity. We
may experience delays in the future and we cannot be sure that we will be able
to obtain semiconductors within the time frames and in the volumes required by
us at an affordable cost or at all. Any disruption in the availability of
semiconductors or any problems associated with the delivery, quality or cost of
the fabrication assembly and testing of our products could significantly hinder
our ability to deliver our products to our customers and would result in a
decrease in sales of our products.
We depend on sole source suppliers for several key components of our products.
We obtain certain parts, components and packaging used in the delivery of
our products from sole sources of supply. For example, we obtain certain
semiconductor wafers from Mitsubishi Electric. If we fail to obtain components
in sufficient quantities when required, and are unable to meet customer demand,
our business could be harmed, as our customers would consider purchasing
products from our competitors. We also rely on United Microeletronics
Corporation to manufacture our analog silicon wafers. Developing and
maintaining these strategic relationships with our vendors is critical for us
to be successful.
Any of our sole source suppliers may:
. enter into exclusive arrangements with our competitors;
. stop selling their products or components to us at commercially
reasonable prices;
. refuse to sell their products or components to us at any price; or
. may be subject to production disruptions such as earthquakes.
If we are unable to obtain sufficient quantities of sole-source components
or to develop alternative sources for components for any reason, our business
would be harmed. Furthermore, additional sole-source components may be
incorporated into our future products, thereby increasing our sole-source
supplier risks. If any of our sole-source manufacturers delay or halt
production of any of their components, our business would be harmed, and our
results of operations and financial condition would be adversely affected.
Sales of our products are dependent on the widespread adoption of broadband
access services, especially DSL. If the demand for broadband access service
does not increase as expected, we may not be able to generate substantial
sales.
Sales of our products depend on the increased use and widespread adoption of
broadband access services, and digital subscriber line or DSL services in
particular, and the ability of telecommunications service providers to market
and sell broadband access services. Our business would be harmed, and our
results of operations and financial condition would be adversely affected if
the use of broadband access services does not increase as
5
<PAGE>
anticipated. Certain critical factors will likely continue to affect the
development of the broadband access service market. These factors include:
. inconsistent quality and reliability of service;
. lack of availability of cost-effective, high-speed service;
. inability to integrate business applications on the Internet;
. lack of interoperability among multiple vendors' network equipment;
. congestion in service providers' networks; and
. inadequate security.
. domestic and foreign government regulation.
Because other broadband technologies may compete effectively with DSL services,
our products may not capture market share.
DSL services are competing with a variety of different broadband data
transmission technologies, including cable modems, satellite and other wireless
technologies. If any technology that is competing with DSL technology is more
reliable, faster, less expensive or has other advantages over DSL technology,
then the demand for our DSL products may decrease, which would have a negative
impact on our operating results.
The markets in which we compete are highly competitive and many of our
competitors are established and have greater resources than us.
The market for software and communications semiconductor solutions is
intensely competitive and characterized by rapid technological change, evolving
standards, short product life cycles and price erosion. We expect competition
to intensify as current competitors expand their product offerings and new
competitors enter the market. Given our early stage of development, there is a
substantial risk that we will not have the financial resources, technical
expertise or marketing and support capabilities to compete successfully.
We believe our principal competitors include or will include Alcatel
Microelectronics, Analog Devices, Conexant Systems, GlobeSpan, Lucent
Microelectronics, ST Microelectronics, and Texas Instruments. In addition,
there have been a number of announcements by other semiconductor companies
including IBM and Intel that they intend to enter the market segments adjacent
to or addressed by our products. These competitors have longer operating
histories, greater name recognition, larger installed customer bases and
significantly greater financial, technical and marketing resources. They may be
able to introduce new technologies, respond more quickly to changing customer
requirements or devote greater resources to the development, promotion and sale
of their products than we can. Further, in the event of a manufacturing
capacity shortage, these competitors may be able to manufacture products when
we are unable to do so.
Because of changing customer requirements and industry standards, we may not be
able to achieve broad market acceptance of our products.
Our success is dependent, in part, on our ability, in a timely and cost-
effective manner, to:
. successfully develop, introduce and market new and enhanced products at
competitive prices in order to meet changing customer needs;
. respond effectively to new technological changes or new product
announcements by others;
. effectively use and offer leading technologies; and
. maintain close working relationships with our key customers.
6
<PAGE>
We cannot be sure that we will be successful in these pursuits, that the
growth in demand will continue or that our products will achieve market
acceptance. Our failure to develop and introduce new products that are
compatible with industry standards and that satisfy customer requirements or
the failure of our products to achieve broad market acceptance could have a
negative impact on our ability to sell our products and our results of
operations.
Our current products are not interoperable with certain products offered by
suppliers to our customers and are subject to evolving industry standards. If
our products do not interoperate with our target customers' networks or an
industry standard that achieves market acceptance, customers may refuse to
purchase our products.
Our products do not inter-operate with the equipment of certain network
equipment vendors who supply our target customers. In some cases, these network
equipment vendors sell proprietary or non-interoperable systems to our target
customers with which our products will not function. In these cases, potential
customers who wish to purchase DSL products and who have purchased other
network equipment that does not function with our DSL products may not purchase
our products.
Also, the emergence of new industry standards, whether through adoption by
official standards committees or widespread use by our target customers, could
require us to redesign our products. If such standards become widespread and
our products do not meet these standards, our customers and potential customers
would not purchase our products. In this case, our business would be harmed,
and our financial condition and results of operations would be adversely
affected. The rapid development of new standards increases the risk that
competitors could develop products that would reduce the competitiveness of our
products or could result in greater competition and additional pricing
pressure. If we fail to develop and introduce new products or enhancements in
the face of new industry standards, our product sales would decrease, and our
business would be harmed.
Because our products are components of other equipment, if broadband equipment
manufacturers do not incorporate our products in their equipment, we may not be
able to generate sales of our products in volume quantities.
Our products are not sold directly to the end-user, rather they are
components of other products. As a result, we rely upon equipment manufacturers
to design our products into their equipment. We further rely on this equipment
to be successful. If equipment that incorporates our products is not accepted
in the marketplace, we may not achieve sales of our products in volume
quantities, which would have a negative impact on our results of operations.
Because manufacturers of communications equipment may be reluctant to change
their sources of components, if we do not achieve design wins with such
manufacturers, we may be unable to secure sales from these customers in the
future.
Once a manufacturer of communications equipment has designed a supplier's
semiconductor into its products, the manufacturer may be reluctant to change
its source of semiconductors due to the significant costs associated with
qualifying a new supplier. Accordingly, our failure to achieve design wins with
equipment manufacturers which have chosen a competitor's semiconductor could
create barriers to future sales opportunities with these manufacturers.
A design win from a customer is not a guarantee of future sales to that
customer.
Achieving a design win with a customer does not create a binding commitment
from that customer to purchase our products. Rather, a design win is solely an
expression of interest by potential customers in purchasing our products and is
not supported by binding commitments of any nature. Accordingly, a customer can
choose at any time to discontinue using our products in their designs or
product development efforts. Even
7
<PAGE>
if our products are chosen to be incorporated into a customer's products, we
still may not realize significant revenues from that customer if their products
are not commercially successful. Therefore, we cannot be sure that any design
win will result in purchase orders for our products, or that these purchase
orders will not be later canceled. Our inability to convert design wins into
actual sales and any cancellation of a purchase order could have a negative
impact on our financial condition and results of operations.
We depend on a few customers and if we lose any of them our sales and
operations will suffer.
We sell our DSL products primarily to network equipment manufacturers. For
the year ended December 31, 1999, sales to Sumitomo Electric accounted for
34.4% of our revenues and sales to NEC accounted for 21.1% of our revenues. We
expect to continue to be dependent upon a relatively small number of large
customers in future periods, although the specific customers may vary from
period to period. If we are not successful in maintaining relationships with
key customers, and winning new customers, our business and results of
operations will suffer.
We derive a substantial amount of our revenues from international sources, and
difficulties associated with international operations could harm our business.
A substantial portion of our revenues has been derived from customers
located outside of the United States. In 1999, 81.6% of our sales were to
customers located in Asia. If we are unable to successfully overcome the
difficulties associated with international operations and maintain and expand
our international operations our business would be harmed. These difficulties
include:
. difficulties staffing and managing foreign operations;
. changes in regulatory requirements;
. licenses, tariffs and other trade barriers;
. political and economic instability;
. difficulties obtaining governmental approvals for products; and
. compliance with a wide variety of complex foreign laws and treaties.
To date, our international sales and component purchases have been
denominated solely in U.S. dollars and, accordingly, we have not been exposed
to fluctuations in non-U.S. currency exchange rates. In the future, a portion
of our international sales may be denominated in currencies other than U.S.
dollars, which would expose us to gains and losses based upon exchange rate
fluctuations. Such gains and losses may contribute to fluctuations in our
operating results.
Our future success will depend in part on our ability to protect our
proprietary rights and the technologies used in our principal products, and if
we do not enforce and protect our intellectual property, our business will be
harmed.
We rely on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality provisions and other contractual provisions to protect
our proprietary rights. However, these measures afford only limited protection.
Our failure to adequately protect our proprietary rights may adversely affect
us. Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use trade secrets
or other information that we regard as proprietary.
Our means of protecting our proprietary rights in the U.S. or abroad may not
be adequate, and competitors may independently develop similar technologies. In
addition, the laws of some foreign countries do not protect our proprietary
rights as fully as do the laws of the U.S. Issued patents may not preserve our
proprietary position. Even if they do, competitors or others may develop
technologies similar to or superior to our own.
8
<PAGE>
Because our operating results from quarter to quarter will fluctuate, the price
of our stock may decline.
Our revenues, expenses and operating results have fluctuated in the past and
are likely to fluctuate significantly in the future on a quarterly and an
annual basis due to a number of factors, many of which are outside our control.
For example, our results of operations could be negatively affected by the
following:
. the timing and size of purchase orders from, and shipments to, our
customers;
. unexpected delays in introducing new or enhanced products, including
manufacturing delays;
. the volume and average cost of products manufactured; and
. the timing and size of expenses, including expenses of developing new
products and product improvements.
Because the sales cycle for our products typically lasts up to one year, and
may be subject to delays, it is difficult to forecast sales for any given
period.
If we fail to realize forecasted sales for a particular period, our stock
price would likely decline and could decline significantly. The sales cycle of
our products is lengthy and typically involves a detailed initial technical
evaluation of our products by our prospective customers, followed by the
design, construction and testing of prototypes incorporating our products. Only
after these steps are complete will we receive a purchase order from a customer
for volume shipments. This process generally takes from 9 to 12 months, and may
last longer. Given this lengthy sales cycle, it is difficult to accurately
predict when sales to a particular customer will ocurr.
In addition, we may experience unexpected delays in orders from customers,
which may prevent us from realizing forecasted sales for a particular period.
Our products are typically sold to equipment manufacturers, who incorporate our
products in the products that they in turn sell to consumers or to network
service providers. As a result, any delay by our customers, or by our
customers' customers, in the manufacture or distribution of their products,
will result in a delay for orders of our products. For example, in the fourth
quarter of 1999, we expected to receive an order from a customer for a shipment
of one of our products. Due to a temporary shortage of a particular component
of the customer's product, the customer was forced to delay the manufacture of
its product, and therefore delayed placing their purchase order with us.
Because there has been no prior market for our common stock, we cannot be sure
that our stock price will not decline after this offering.
Prior to this offering, you could not buy or sell our common stock on a
public market. The initial public offering price of our common stock will be
determined by negotiation among us and representatives of the underwriters and
may not be indicative of the price that will prevail in the open market after
this offering. In addition, the market price of our shares of common stock may
be highly volatile and could be subject to wide fluctuations. We cannot be
certain that an active trading market for our common stock will develop or be
sustained, or that the price of our stock will not decline after this offering.
Because the Nasdaq stock market is likely to experience extreme price and
volume fluctuations, the price of our stock may decline even if our business is
doing well.
The stock markets, and in particular the Nasdaq stock market, have
experienced extreme price and volume fluctuations that have affected and
continue to affect the market prices of equity securities of many technology
companies. These fluctuations often have been unrelated or disproportionate to
the operating performance of those companies. We also expect that the market
price of our common stock will fluctuate as a result of variations in our
quarterly operating results. These fluctuations may be exaggerated if the
trading volume of our common stock is low. In addition, due to the technology-
intensive and emerging nature of our business, the market price of our common
stock may rise and fall in response to:
. announcements of technological or competitive developments;
9
<PAGE>
. acquisitions or strategic alliances by us or our competitors;
. the gain or loss of a significant customer or order; and
. changes in estimates of our financial performance or changes in
recommendations by securities analysts.
Accordingly, market fluctuations, as well as general economic, political and
market conditions such as recessions, interest rate changes or international
currency fluctuations, may negatively impact the market price of our common
stock.
Because of likely fluctuations in the price of our stock we may be subject to
class action litigation, which could distract management and result in
substantial costs.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future.
Securities litigation could result in substantial costs and divert management's
attention and resources from our operations and sales of our products, which
would have a negative impact on our financial condition and results of
operations.
Because the book value per share of our stock is less than the initial offering
price, you will experience immediate dilution.
The initial public offering price is substantially higher than the current
book value per share of our outstanding common stock. As a result, investors
purchasing our common stock in this offering will incur immediate dilution of
approximately $18.72 per share, assuming an initial public offering price of
$23.00 per share, in the book value of our common stock from the price they pay
for our common stock. In addition, we have issued options to acquire common
stock at prices significantly below the initial public offering price. To the
extent these outstanding options are ultimately exercised, there will be
further dilution to investors in this offering. See "Dilution."
Because our principal stockholders and management may have the ability to
control stockholder votes, the premium over market price that an acquiror might
otherwise pay may be reduced and any merger or takeover may be delayed.
Immediately following the offering, our officers and directors and their
affiliates will own or control approximately 24.1% of our common stock
(assuming no purchases of shares of common stock in this offering by our
officers and directors and their affiliates). Accordingly, our officers,
directors and their affiliates, as a group, may have the ability to control the
election of a majority of the members of our board of directors and the outcome
of corporate actions requiring stockholder approval. This concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of us, or may impede a merger, consolidation, takeover or other
business combination involving us. This concentration of ownership could also
adversely affect our stock's market price or lessen any premium over market
price that an acquiror might otherwise pay.
Provisions of our charter documents and Delaware law could prevent or delay a
change in our control and may reduce the market price of our common stock.
Certain provisions of our certificate of incorporation and bylaws in effect
upon completion of this offering and the provisions of Delaware law could have
the effect of delaying, deferring or preventing our acquisition which could
cause our share price to decline. For example, authorized but unissued shares
of preferred stock which could be used to fend off a takeover attempt, our
stockholders may not take actions by written consent, our stockholders are
limited in their ability to make proposals at stockholder meetings and our
board of directors will be divided into three classes with three year
overlapping terms.
10
<PAGE>
The large number of shares eligible for public sale after this offering could
cause our stock price to decline.
The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of our common stock in
the market after this offering or the perception that such sales could occur.
These sales also might make it more difficult for us to sell equity securities
in the future at a time and price that we deem appropriate. Please see "Shares
Eligible for Future Sale" for a description of sales that may occur in the
future.
We may need to raise additional capital in the future, and if we are unable to
secure adequate funds on terms acceptable to us, we may be unable to execute
our business plan.
If the proceeds of this offering, together with our existing cash balances
and cash flow expected from future operations, are not sufficient to meet our
liquidity needs, we will need to raise additional funds. If adequate funds are
not available on acceptable terms or at all, we may not be able to take
advantage of market opportunities, develop or enhance new products, pursue
acquisitions that would complement our existing product offerings or enhance
our technical capabilities, execute our business plan or otherwise respond to
competitive pressures or unanticipated requirements.
11
<PAGE>
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," contains forward-looking statements.
These statements relate to future events or our future financial performance
and involve known and unknown risks, uncertainties and other factors that may
cause our or our industry's actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of
activity, performance or achievements expressed or implied by the forward-
looking statements. These risks and other factors include those listed under
"Risk Factors" and elsewhere in this prospectus. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "continue" or the negative of these terms or other
comparable terminology. These statements are only predictions. In evaluating
these statements, you should specifically consider various factors, including
the risks outlined under "Risk Factors."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
USE OF PROCEEDS
We expect to receive net proceeds of approximately $100.4 million from the
sale of the 4,000,000 shares of common stock in this offering and the sale of
700,000 shares of common stock in the private placement (or approximately
$113.2 million if the underwriters' over-allotment option is exercised in
full), at an assumed initial public offering price of $23.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses.
We expect to use the net proceeds from this offering for working capital and
general corporate purposes. We expect these purposes to include funding our
business operations, which are currently generating negative cash flow, hiring
additional engineering and technical personnel, and expanding our facilities.
We are not currently able to estimate the allocation of proceeds specifically.
Accordingly, our management will have considerable discretion in the
application of the net proceeds, and may apply the net proceeds in ways which
do not increase our operating results or our market value. You will not have
the opportunity, as part of your investment decision, to assess whether the
proceeds are being used appropriately. Pending application of the net proceeds,
we intend to invest the proceeds in interest-bearing investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, for use in the operation
and expansion of our business and do not anticipate paying any cash dividends
in the foreseeable future.
12
<PAGE>
CAPITALIZATION
The following table sets forth our actual capitalization as of December 31,
1999 on the following three bases:
. our actual capitalization derived from our financial statements as of
December 31, 1999;
. on a pro forma basis to give effect to the conversion of all shares of
preferred stock into 15,450,236 shares of common stock automatically
upon completion of this offering; and
. on an as adjusted basis to reflect (a) the sale of 4,000,000 shares of
our common stock in this offering at an assumed initial offering price
of $23.00 per share and the receipt by us of the estimated proceeds,
after deducting underwriting discounts and commissions and estimated
offering expenses and (b) the sale of 700,000 shares of common stock in
the private placements at an assumed price of $23.00 per share.
You should read this table in conjunction with our Financial Statements and
the accompanying Notes, Selected Financial Data, and Management's Discussion
and Analysis included elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands except share and
per share data)
<S> <C> <C> <C>
Current portion of long-term debt and capital
lease obligations............................. $ 710 $ 710 $ 710
-------- -------- --------
Long-term debt and other liabilities........... 621 621 621
-------- -------- --------
Stockholders' equity:
Preferred stock, $0.001 par value: none
authorized, none outstanding (actual);
10,000,000 authorized, none outstanding (pro
forma and pro forma as adjusted)(1)......... -- -- --
Convertible preferred stock, $0.001 par
value: 15,630,000 authorized, 15,450,236
outstanding (actual); none authorized, none
outstanding (pro forma and pro forma as
adjusted)................................... 15 -- --
Common stock, $0.001 par value: 32,000,000
authorized, 10,318,841 outstanding (actual);
100,000,000 authorized, 25,769,077
outstanding (pro forma); 100,000,000
authorized, 30,469,077 outstanding (pro
forma as adjusted)(1)....................... 10 26 30
Additional paid-in capital..................... 76,602 76,601 177,007
Stockholder notes receivable................... (430) (430) (430)
Accumulated other comprehensive income......... (25) (25) (25)
Deferred compensation.......................... (12,951) (12,951) (12,951)
Accumulated deficit............................ (33,166) (33,166) (33,166)
-------- -------- --------
Total stockholders' equity................... 30,055 30,055 130,465
-------- -------- --------
Total capitalization....................... $ 31,386 $ 31,386 $131,796
======== ======== ========
</TABLE>
- ---------------------
(1) Upon completion of this offering, our certificate of incorporation will be
amended to authorize 100,000,000 shares of common stock and 10,000,000
shares of undesignated preferred stock.
The data in the table above excludes:
. 3,390,257 shares of common stock issuable upon the exercise of
outstanding stock options as of December 31, 1999 at a weighted average
exercise price of $1.09 per share;
. 26,750 shares of common stock issuable upon the exercise of outstanding
warrants as of December 31, 1999 at a weighted average exercise price of
$4.00 per share;
. 4,423,395 shares of common stock available for issuance under our 1997
Stock Plan following this offering; and
. 500,000 additional shares of common stock available for issuance under
our 2000 employee stock purchase plan immediately following this
offering.
13
<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share of common
stock after this offering.
Our pro forma net tangible book value as of December 31, 1999 was $30.1
million or $1.17 per share of common stock. Net tangible book value per share
represents the amount of our total tangible assets less total liabilities,
divided by the pro forma number of 25,769,077 shares of common stock
outstanding after giving effect to the conversion of all outstanding shares of
preferred stock into common stock upon completion of this offering. Dilution in
net tangible book value per share represents the difference between the amount
per share paid by purchasers of shares of common stock in this offering and the
net tangible book value per share of common stock immediately after the
completion of this offering and the private placement. After giving effect to
the sale of the 4,000,000 shares of common stock in this offering and the
700,000 shares offered in the private placement at an assumed initial public
offering price of $23.00 per share, and after deducting underwriting discounts
and estimated offering expenses, our pro forma net tangible book value as of
December 31, 1999 would have been $130.5 million or approximately $4.28 per
share. This represents an immediate increase in net tangible book value of
$3.11 per share to existing stockholders and an immediate dilution of $18.72
per share to new investors, or approximately 81.4% of the assumed initial
public offering price of $23.00 per share. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $23.00
Pro forma net tangible book value per share at December 31, 1999
before the offering............................................ $1.17
Increase per share attributable to new investors in this
offering....................................................... $3.11
-----
Net tangible book value per share after this offering............. $ 4.28
------
Dilution per share to new investors............................... $18.72
======
</TABLE>
The following table shows on a pro forma basis after giving effect to this
offering, as of December 31, 1999, the number of shares of common stock
purchased from us, the total consideration paid to us, and the average price
per share paid by existing stockholders by investors participating in the
private placement, and by the investors purchasing shares of Common Stock in
this offering (at an assumed initial public offering price of $23.00 per share
before deducting the underwriting discounts and commissions and estimated
offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 25,769,077 84.6% $ 57,056,000 34.6% $ 2.21
Private placements...... 700,000 2.3% 16,100,000 9.8% $23.00
New investors in the
offering............... 4,000,000 13.1% 92,000,000 55.6% $23.00
---------- ---- ------------ ---- ------
Total................. 30,469,077 100% 165,156,000 100% $ 5.42
========== ==== ============ ==== ======
</TABLE>
The foregoing discussion and table are based on actual shares outstanding on
December 31, 1999 and assume no exercise of any stock options or warrants
outstanding as of such date. As of December 31, 1999, there were options and
warrants outstanding to purchase 3,390,257 and 26,750 shares of common stock at
a weighted average exercise price of $1.09 and $4.00 per share, respectively.
To the extent any of these options or warrants are exercised, there will be
further dilution to investors.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data below should be read in conjunction
with the consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus. The statement of operations data for the
period from February 21, 1997 (inception) to December 31, 1997 and for the
years ended December 31, 1998 and 1999 and the balance sheet data as of
December 31, 1998 and 1999 are derived from, and are qualified by reference to,
the audited consolidated financial statements and related notes appearing
elsewhere in this prospectus. The balance sheet data as of December 31, 1997
are derived from audited financial statements not appearing in this prospectus.
Historical results are not necessarily indicative of results that may be
expected for any future period.
<TABLE>
<CAPTION>
Period from Years ended
February 21, 1997 December 31,
(inception) to -----------------
December 31, 1997 1998 1999
----------------- ------- --------
(in thousands, except per share
data)
<S> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Product.................................. $ -- $ -- $ 2,509
Technology development................... 300 752 1,235
------- ------- --------
Total revenues........................... 300 752 3,744
Cost of revenues.......................... -- -- 3,101
------- ------- --------
Gross profit.............................. 300 752 643
Operating expenses:
Research and development................. 1,844 7,913 13,119
Sales and marketing...................... 341 1,466 3,699
General and administrative............... 217 1,095 4,030
------- ------- --------
Total operating expenses................. 2,402 10,474 20,848
------- ------- --------
Operating loss............................ (2,102) (9,722) (20,205)
Interest income, net...................... 165 466 1,032
------- ------- --------
Net loss.................................. (1,937) (9,256) (19,173)
Deemed dividend on Series B convertible
preferred stock.......................... (2,800) -- --
------- ------- --------
Net loss applicable to common
stockholders............................. $(4,737) $(9,256) $(19,173)
======= ======= ========
Historical basic and diluted net loss per
share applicable to common stockholders.. $ (0.59) $ (1.15) $ (2.17)
======= ======= ========
Shares used to compute basic and diluted
net loss per share applicable to common
stockholders............................. 8,000 8,056 8,842
======= ======= ========
Pro forma basic and diluted net loss per
share applicable to common stockholders.. $ (0.88)
========
Shares used to compute pro forma basic and
diluted net loss per share applicable to
common stockholders...................... 21,755
========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998 1999
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents and short-term investments... $13,645 $ 7,926 $28,313
Working capital........................................ $12,537 $ 6,686 $26,043
Total assets........................................... $16,339 $12,010 $35,587
Liabilities............................................ $ 2,183 $ 2,751 $ 5,532
Total stockholders' equity............................. $14,156 $ 9,259 $30,055
</TABLE>
See note 1 of notes to consolidated financial statements for an explanation
of the determination of the weighted average common and common equivalent
shares used to compute net loss per share.
The pro forma amounts above reflect the conversion of all outstanding shares
of preferred stock into 15,450,236 shares of common stock upon completion of
this offering.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We provide system-level products that enable broadband communications to the
home and business enterprise. We serve the DSL market and plan to leverage our
communications technology and expertise to serve the voice over packet and home
networking markets before the end of this year. Our current customers are
broadband access equipment vendors who manufacture DSL equipment for use in the
phone companies' communications infrastructure or DSL modems for Internet or
other network access in a home or small business.
We were incorporated on February 21, 1997 and commenced operations on April
1, 1997. Consequently, our results of operations for and as of the year ended
December 31, 1997 include organizational activities and operations for the
period from February 21, 1997 (inception) through December 31, 1997. In our
discussion below, references to the year ended December 31, 1997 refer to the
period from February 21, 1997 (inception) through December 31, 1997. During the
period from February 1997 through June 1999 we were a development stage company
focused on developing our initial products, recruiting personnel, building our
corporate infrastructure and raising capital, and therefore had no product
revenue. In 1999, we began shipping our CopperLite CO and CopperLite CPE
families of products and recorded our first significant product revenues in the
third quarter. We emerged from the development stage at that time. During 1999,
we also increased our investment in research and development, sales and
marketing, operations and our general and administrative infrastructure.
Our revenues currently are derived from sale of our DSL products which
include the CopperLite CO, CopperLite CPE and Optimizer families of products.
To date, we have generated a substantial portion of our revenues from a limited
number of customers. Our top two customers in 1999 were Sumitomo Electric and
NEC who each accounted for 34.4% and 21.1%, respectively, of our 1999 revenues.
While we are seeking to diversify our customer base, we cannot assure you that
these efforts will be successful.
Historically, we have received significant revenues under best efforts
technology development agreements. Revenues under these agreements represent
payments we received for the performance of contract engineering services.
Under the agreements, we generally received payments upon the completion of
contractual milestones. We are not required to refund any payments under the
contracts.
Our policy is to recognize revenue under technology development agreements
when applicable contractual milestones have been met, including deliverables,
and in any case, revenue recognized does not exceed the amount that would be
recognized using the percentage of completion method. In this regard, the
timing of technology development revenue depends on the timing of completion of
milestones under individual agreements. We believe that technology development
revenue will not be significant after 1999.
We have focused our initial sales and marketing efforts on Asian and North
American communications equipment manufacturers. During 1999, 81.6% of our
sales were to Asia. While we are developing our European sales organization and
are continuing to develop our North American sales organization, we expect that
the majority of our revenues will be derived from Asia for the foreseeable
future. We currently sell through our direct sales force in Japan, Singapore
and North America and through our representatives in Korea and Taiwan.
International revenues are denominated solely in U.S. dollars, which reduces
our exposure to foreign currency exchange risks.
We recognize product revenue at the time of shipment to customers when no
significant obligations remain. Allowances are provided for estimated returns
at the time of shipment. In circumstances where we have not shipped the final
version of our product, or when a customer has delayed its acceptance of our
product, we defer recognition of the revenue associated with the given product
at the time of shipment. This deferred revenue is recognized when the final
version of the product is delivered or upon acceptance by the customer. As of
December 31, 1999, we had $122,000 in deferred revenue which was comprised
primarily of prepayments from certain customers.
16
<PAGE>
It usually takes more than one year for us to realize volume shipments of
our products after we first contact a customer. We first work with customers to
achieve a design win, which may take six months or longer. Our customers then
complete the design, testing and evaluation of their systems and begin the
marketing process, a period which typically lasts an additional three to six
months or longer. As a result, a significant period of time may elapse between
our sales efforts and our realization of revenues, if any, from volume
purchases of our products by our customers. Our customers are not obligated by
long-term contracts to purchase our products and can generally cancel or
reschedule orders on short notice.
We outsource the fabrication, assembly and testing of our products.
Accordingly, a significant portion of our cost of revenues consists of payments
to our manufacturing partners. Costs of revenue also encompass our internal
manufacturing and operations functions and a portion of our information systems
and facilities costs.
Research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers,
prototype costs related to the fabrication of our silicon chips, and
depreciation associated with software development tools and amortization of
deferred compensation. We expense our research and development costs as they
are incurred. Several components of our research and development effort require
significant expenditures, the timing of which can cause significant quarterly
variability in our expenses. For example, we require a substantial number of
prototypes to build and test our complex products and therefore, incur
significant prototype costs. Because our research and development is key to our
future success, we intend to significantly increase our research and
development expenditures in future periods.
Sales and marketing expenses consist primarily of salaries, commissions, and
related expenses for personnel engaged in marketing, sales, customer service
and applications engineering support functions, costs associated with
promotional and other marketing expenses, as well as amortization of deferred
compensation. We intend to expand our direct and indirect sales operations
substantially, both domestically and internationally, in order to increase
market awareness, support customer requirements, and increase orders for our
products. We expect that sales and marketing expenses will increase over the
next year as we hire additional sales and marketing personnel, initiate
additional marketing programs to support our products and establish sales
offices in additional domestic and international locations. We intend to expand
our use of independent manufacturers' representatives. To date we have entered
into agreements with only a small number of representatives and we believe that
to be successful, we must reach agreement with additional representatives in
several countries. In addition, the complexity of our products and the
applications support necessary for successful interoperability and customer
specific applications requires highly trained customer service and support
personnel. We expect to significantly expand our customer service and support
organization to meet these requirements.
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, facilities, information
services, human resources, recruiting expenses, professional fees, other
corporate expenses, and amortization of deferred compensation. We expect
general and administrative expenses to increase as we add personnel and incur
additional costs related to the growth of our business and our operation as a
public company.
In connection with the grant of certain stock options and equity
compensation to our employees, technical advisors and directors, we have
recorded deferred compensation expense of $16.5 million. Deferred compensation
represents the difference between the grant price and the deemed fair value of
our common stock options granted during these periods. Deferred compensation
expense is being amortized using the graded vesting method, in accordance with
Statement of Financial Accounting Standards No. 123 and FASB Interpretation No.
28, over the vesting period of each respective option, generally four years.
Under the graded vesting method, each option grant is separated into portions
based on their vesting terms which results in acceleration of amortization
expense for the overall award. The accelerated amortization pattern results in
expensing approximately 59% of the total award in year 1, 25% in year 2, 12% in
year 3 and 4% in year 4. Unamortized deferred compensation is presented as a
reduction of stockholders' equity. See note 7 of notes to consolidated
financial statements for more information about the deferred compensation
expense.
17
<PAGE>
We have not reported an operating profit for any year since our
incorporation and have experienced net losses of approximately $1.9 million,
$9.3 million, and $19.2 million for the years ended December 31, 1997, 1998,
and 1999, respectively. We expect to continue to incur net losses for the
foreseeable future, and these losses may be substantial. Further, we expect to
incur substantial negative cash flow in the future.
Results of Operations
The following table sets forth, for the periods presented, certain data from
our consolidated statement of operations expressed as a percentage of total
revenues.
<TABLE>
<CAPTION>
Years Ended
Period From December
February 21, 1997 31,
(Inception) to -------------
December 31, 1997 1998 1999
----------------- ------ ----
<S> <C> <C> <C>
As a Percentage of Total Revenues:
Total revenues................................ 100 % 100 % 100 %
Cost of revenues.............................. 0 0 83
---- ------ ----
Gross profit.................................. 100 100 17
Operating expenses:
Research and development.................... 615 1,052 350
Sales and marketing......................... 114 195 99
General and administrative.................. 72 146 108
---- ------ ----
Total operating expenses.................. 801 1,393 557
Operating loss................................ (701) (1,293) (540)
Interest income............................... 71 77 34
Interest expense.............................. (16) (15) (6)
---- ------ ----
Net loss...................................... (646)% (1,231)% (512)%
==== ====== ====
</TABLE>
Years Ended December 31, 1997, 1998 and 1999
Revenues
In 1997 and 1998, all of our revenue was derived from technology development
efforts and services. We received payments from potential future customers to
develop our technologies in such a way that also provided for their
requirements. This revenue was received primarily as an incentive for our
continuing this development effort. We believe we will recognize little or no
technology development revenue for the foreseeable future.
Revenues increased from $300,000 in 1997 to $752,000 in 1998 and increased
to $3.7 million in 1999. The increase in 1998 was attributable to increased
technology development revenues. The increase in 1999 was attributable to a
further increase in technology development revenue to $1.2 million and the
initial shipments of our products which generated significant revenue beginning
in the third quarter of 1999.
Cost of Revenues
The costs associated with our technology development revenues are closely
related to the costs of our ongoing research and development activities.
Generally, the incremental costs of providing any deliverables under our
technology development arrangements are not easily distinguishable from the
costs of our ongoing activities. The total incremental costs of our technology
development revenues are generally not significant. All such costs related to
technology development revenues for each of the years ended December 31, 1997,
1998 and 1999 have been included in research and development in our statements
of operations. Cost of revenues, which reflects costs of product revenues, was
$3.1 million in 1999.
Research and Development Expenses
Research and development expenses increased from $1.8 million in 1997 to
$7.9 million in 1998 and increased to $13.1 million in 1999. The increases in
1998 and 1999 were due primarily to additions in engineering personnel,
increased usage of materials necessary to build prototypes, increases in
depreciation
18
<PAGE>
resulting from the additional purchases of laboratory equipment and software
development tools and an increase in amortization of deferred compensation.
Sales and Marketing Expenses
Sales and marketing expenses increased from $341,000 in 1997 to $1.5 million
in 1998 and increased further to $3.7 million in 1999. These increases were due
primarily to the addition of personnel, an increase in marketing activity such
as customer visits and attendance at trade shows and an increase in
amortization of deferred compensation.
General and Administrative Expenses
General and administrative expenses increased from $217,000 in 1997 to $1.1
million in 1998 and increased to $4.0 million in 1999. These increases were due
primarily to the addition of personnel in the accounting, human resources,
information services and facilities functions and an increase in amortization
of deferred compensation. The increase in 1999 was also due to our move to
larger facilities in September 1999. During 1999, we charged $150,000 to bad
debt expense to establish a reserve for unidentified potential bad debt
exposures. The amount was determined in consideration of the early stage of our
customer relationships.
Amortization of Deferred Compensation
During 1998 and 1999 we recorded a total of $16.5 million of deferred stock
compensation. Amortization of deferred stock compensation increased from zero
in 1997 to $69,000 in 1998 and increased to $3.5 million in 1999. Deferred
stock compensation is being amortized using the graded vesting method in
accordance with FAS 123 and FAS Interpretation 128, over the vesting period of
each respective option, generally four years. Under the graded vesting method,
each option grant is separated into portions based on their vesting terms which
results in acceleration of amortization expense for the overall award. The
accelerated amortization pattern results in expensing approximately 59% in year
1, 25% in year 2, 12% in year 3 and 4% in year 4.
Interest Income
Interest income increased from $214,000 in 1997 to $582,000 in 1998 and
increased to $1.3 million in 1999. These increases were due to higher cash and
cash equivalent balances resulting from successful preferred stock financings
in 1998 and 1999.
Interest Expense
Interest expense increased from $49,000 in 1997 to $116,000 in 1998 and
increased to $242,000 in 1999. These increases were due to higher average
outstanding debt balances during 1998 and outstanding balances under our
working capital line of credit during 1999.
Deemed Dividend
In connection with Series B3 convertible preferred stock financings in July
and September 1997, we issued rights to certain stockholders, which provided
for the purchase of 2,000,000 shares of Series B1 convertible preferred stock
at $2.00 per share and 800,000 shares of Series B2 convertible preferred stock
at $2.50 per share. The rights were immediately exercisable and expired
approximately one year after their initial grant. We recorded noncash deemed
dividends of $2.8 million for 1997, representing the fair value of the rights
issued, which reduced income available to common stockholders. No such
dividends were recorded in 1998 or 1999.
Quarterly Results of Operations
Our quarterly results of operations fluctuate from period-to-period
depending on factors such as the timing of significant expenditures for
prototype development, the success of our initial sales efforts, the timing of
significant design wins and orders, and period-to-period difficulties that may
be encountered with our manufacturing subcontractors. We believe that period-
to-period comparisons of our financial results should not be relied upon to
predict future results. We may experience significant fluctuations in period-
to-period operating results.
19
<PAGE>
The following table presents certain data from our statements of operations
and such data as a percentage of revenues for the four quarters ended December
31, 1999. This data has been derived from unaudited consolidated financial
statements. In our opinion these statements include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
information when read in conjunction with our annual audited consolidated
financial statements and related notes appearing elsewhere in this prospectus.
These operating results are not necessarily indicative of results of any future
period.
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------
Mar 31, Jun 30, Sep 30, Dec 31,
1999 1999 1999 1999
------- ------- ------- -------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Product................... $ 0 $ 0 $ 651 $ 1,858
Technology development.... 50 655 200 330
------- ------- ------- -------
Total revenues.......... 50 655 851 2,188
Cost of revenues............ 0 5 1,100 1,996
------- ------- ------- -------
Gross profit................ 50 650 (249) 192
Operating expenses:
Research and development.. 2,311 3,235 3,452 4,121
Sales and marketing....... 700 441 764 1,794
General and
administrative........... 498 714 1,117 1,701
------- ------- ------- -------
Total operating
expenses............... 3,509 4,390 5,333 7,616
------- ------- ------- -------
Operating loss.............. (3,459) (3,740) (5,582) (7,424)
Interest income, net........ 25 260 491 256
------- ------- ------- -------
Net loss.................... $(3,434) $(3,480) $(5,091) $(7,168)
======= ======= ======= =======
As a Percentage of Total
Revenues
Revenues:
Product................... 0% 0% 76% 85%
Technology development.... 100% 100% 24% 15%
------- ------- ------- -------
Total revenues.......... 100% 100% 100% 100%
Cost of revenues............ 0 1 129 91
------- ------- ------- -------
Gross profit................ 100 99 (29) 9
Operating expenses:
Research and development.. 4,622 494 406 188
Sales and marketing....... 1,400 67 90 82
General and
administrative........... 996 109 131 78
------- ------- ------- -------
Total operating
expenses............... 7,018 670 627 348
Operating loss.............. (6,918) (571) (656) (339)
Interest income, net........ 50 40 58 12
------- ------- ------- -------
Net loss.................... (6,868)% (531)% (598)% (328)%
======= ======= ======= =======
</TABLE>
Technology development revenues fluctuated during the four quarters ending
December 31, 1999 based primarily on the timing of contracts from our customers
for contract engineering services and completion of milestones under the
contracts. This portion of our business will diminish in the future and we
expect that technology development revenue will not be a significant portion of
our total revenue after 1999.
We commenced product shipments and recorded our first related revenue in the
third quarter of 1999. The increase in product revenues from the third quarter
of 1999 to the fourth quarter reflects increasing unit sales
20
<PAGE>
and deliveries to additional customers. Future product revenue will vary in
part on the timing of orders from our customers.
Costs of revenues in the third and fourth quarters of 1999 reflect the early
stage of our production efforts. Because a portion of our manufacturing costs
are fixed, low initial production volumes cause high per-unit allocation of
manufacturing overhead costs. As our production volumes increase, we expect
costs of revenue to decline as a percentage of revenue.
Operating expenses increased in each of the four quarters of 1999 as we
transitioned from a development stage company to our initial production and
customer deliveries. We also expanded sales and marketing and support
infrasture. The increase in sales and marketing expenses in the quarter ended
December 31, 1999 was also due to our attendance at several trade shows and an
increase in amortization of deferred compensation.
The increase in deferred stock compensation amortization for the quarter
ended December 31, 1999 was due to the hiring of a substantial number of new
employees, and the grants of stock options to these new employees.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through private
sales of approximately $55.8 million of convertible preferred stock, net of
offering costs. We also generated $829,000 from the exercise of stock options
and have secured additional financing through capital leases and secured debt.
Cash used for operations increased from $7.8 million in 1998 to $12.2
million in 1999. This increase was primarily due to an increase in our net loss
from $9.2 million in 1998 to $19.2 million in 1999.
Cash generated from financing activities increased from $4.8 million in 1998
to $35.6 million in 1999. This increase is due primarily to the sale of $35.6
million in convertible preferred stock in 1999.
Cash and cash equivalents, and short-term investments increased from $7.9
million on December 31, 1998 to $28.3 million on December 31, 1999. This
increase was due primarily to the receipt of $35.6 million from the sale of
preferred stock.
Accounts receivable were $915,000 on December 31, 1999, reflecting our first
significant product revenues. Our customers are billed at the time of shipment,
typically with payment terms of thirty days. Generally, customers have paid us
within the payment terms.
We maintain a $5.0 million revolving credit agreement with Mitsubishi
International to finance wafer inventory purchases. The interest rate under the
Agreement was based on the lender's internal interest rate, which was required
to be at least 1.00% below the prime rate on the date of invoice (7.25% at
December 31, 1999), generally thirty days after receipt of the wafers. The
credit agreement expires on January 31, 2001, subject to automatic extensions
thereafter from year to year. As of December 31, 1999, $2.0 million was
outstanding under the agreement.
We expect to devote substantial capital resources to continue our research
and development efforts, to hire and expand our sales, support, marketing, and
product development organizations, to expand marketing programs, to establish
additional facilities worldwide and for other general corporate activities. We
currently anticipate that the net proceeds from this offering, together with
our current cash, cash equivalents, and short term investments will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures for at least the next 12 months.
If the proceeds of this offering, together with our existing cash balances
and cash flow expected from future operations, are not sufficient to meet our
liquidity needs, we will need to raise additional funds. If adequate funds are
not available on acceptable terms or at all, we may not be able to take
advantage of market
21
<PAGE>
opportunities, develop or enhance new products, pursue acquisitions that would
complement our existing product offerings or enhance our technical
capabilities, execute our business plan or otherwise respond to competitive
pressures or unanticipated requirements.
Year 2000 Compliance
As of February 15, 2000, we had not experienced any significant disruptions
related to Year 2000 issues, nor do we expect to experience any Year 2000-
related disruptions in the operation of our systems. To our knowledge, none of
our customers have experienced any Year 2000-related issues with our products.
Additionally, to our knowledge, none of our manufacturing, assembly or testing
partners or our other suppliers have experienced any material Year 2000
problems. Although most Year 2000 problems should have become evident on
January 1, 2000, additional Year 2000-related problems may become evident only
after that date. For example, some software programs may have difficulty
resolving the so-called "century leap year" algorithm which will also occur
during the Year 2000. We will continue to monitor our mission critical computer
applications and those of our suppliers and vendors throughout the year, to
ensure that any late Year 2000 matters that may arise are promptly addressed.
We do not expect to incur any significant costs relating to Year 2000 matters.
Qualitative and Quantitative Disclosures About Market Risk
The primary objective of our investment activities is to preserve principal
while concurrently maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we may
invest in may be subject to market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate
at the then-prevailing rate and the prevailing interest rate later rises, the
current value of the principal amount of our investment will decline. To
minimize this risk in the future, we intend to maintain our portfolio of cash
equivalents and short-term investments in a variety of securities, including
commercial paper, money market funds, government and non-government debt
securities and certificates of deposit. In general, money market funds are not
subject to market risk because the interest paid on such funds fluctuates with
the prevailing interest rate. As of December 31, 1999, all of our investments
were in money market funds, or high quality commercial paper, government and
non-government debt securities and auction rate preferred stock. A hypothetical
100 basis point increase in interest rates would result in an approximate
$138,000 decrease in the fair value of our available-for-sale securities as of
December 31, 1999. See note 2 of the notes to the consolidated financial
statements.
Recent Accounting Pronouncements
In March 1998, the AICPA issued SOP No. 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP No. 98-1 requires
entities to capitalize certain costs related to internal-use software once
certain criteria have been met. We adopted SOP 98-1 for the fiscal year ending
December 31, 1999. The adoption did not have a material impact on our financial
position or results of operations.
In April 1998, the AICPA issued SOP No. 98-5, Reporting on the Costs of
Start-Up Activities. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were capitalized in the past must be written off when SOP No. 98-5 is
adopted. We adopted SOP 98-5 for the fiscal year ending December 31, 1999. The
adoption did not have a material impact on our financial position or results of
operations
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting methods for derivative financial instruments and hedging
activities related to those instruments, as well as other hedging activities.
Because we do not currently hold any derivative instruments and do not engage
in hedging activities, we expect that the adoption of SFAS No. 133 will not
have a material impact on our financial position, results of operations or cash
flows. We will be required to implement SFAS No. 133 for the year ending
December 31, 2001.
22
<PAGE>
BUSINESS
Centillium, CopperLite, CopperFlite and Optimizer are our common law
trademarks. This prospectus also makes reference to trademarks of other
companies.
Introduction
Centillium delivers technology that enables broadband communications to the
home and business enterprise. We provide broadband equipment vendors with
system-level products for the DSL market and are leveraging our core technology
and expertise to develop products for complementary markets which share common
technologies and customers. We plan to release products before the end of this
year that target the voice over packet and home networking markets. Our core
technology and expertise has enabled us to establish a viable long-term product
roadmap within these three complementary markets.
Industry Overview
Growing Demand for High-Speed Network Access Creating Last Mile Bottleneck
The volume of traffic transmitted over communications networks has grown
dramatically in recent years. Consumers are seeking low-cost, high-speed access
to Internet content and services that require transmission of large amounts of
data such as highly graphical Web sites, audio, video and high-speed data.
Businesses have even greater requirements for high-speed access in order to
implement electronic commerce strategies or Web-based business models, and to
provide telecommuting employees with the same capabilities they would
experience at the office.
As more consumers and businesses have begun to rely on the Internet and
communications networks, the demand for access to these networks has
accelerated. As a result, the number of devices and access lines leading into
these networks has undergone dramatic growth. International Data Corporation,
or IDC, estimates that in 1997, 15 million or 15% of United States' households
had two or more access lines and that this number will grow to 34 million, or
30% of United States' households by 2002. A significant number of these
additional access lines are being used to access the Internet and other
communications networks. According to IDC, today nearly 70 million, or 86%, of
home Internet users worldwide access the Internet via traditional analog
telephone lines. In addition, the demand for access is increasing as more and
more small businesses, self-employed individuals, and corporate telecommuters
are regularly accessing the Internet and other communications networks. IDC
estimates that there are 27 million households with at least one person doing
some business-related work from home. Many users are demanding the same access
speeds from their home offices that they experience at corporate locations.
To meet the demand for high-speed, broadband data transmission, network
service providers continue to upgrade the main transmission channels, or
backbone, of their networks with faster equipment. While this network backbone
is now capable of delivering data at very high speeds, an access bottleneck
continues to exist between the telephone companies' central offices and the end
users' homes or offices. These copper line connections between the central
office and the end user are commonly known as the last mile. The last mile
infrastructure was originally designed for low-speed analog voice traffic
rather than high-speed digital data transmission. As a result, access to the
Internet and private communications networks over the copper wire
infrastructure of the last mile has typically been limited to data transmission
rates of up to 56 Kbps using standard dial-up analog modems. At this rate,
several minutes may be required to access a media rich website, and several
hours may be required to transfer or download large files.
New Competition Driving Digital Subscriber Line Technologies as a Bottleneck
Solution
The local phone companies have continued to offer higher speed access
services based on older technologies. However, the historical pricing structure
has limited these services to larger businesses and has limited incentives for
phone companies to deploy alternative technologies. The competitive environment
started to change with the passage of the Federal Telecommunications Act of
1996 and was accelerated with the
23
<PAGE>
merger of AT&T and TCI. The Federal Telecommunications Act intensified the
competitive environment by requiring local phone companies to lease portions of
their networks, including the last mile, to other telecommunications service
providers. These changes in competitive structures coincided with the
maturation of digital subscriber line, or DSL, technology, enabling high-
bandwidth data networking over the existing last mile of copper infrastructure.
As a result, a number of companies, including Covad Communications,
MCI WorldCom, NorthPoint Communications, Rhythms NetConnections and Sprint, are
now deploying high-speed access services using DSL technologies to business and
residences over the copper infrastructure owned by the local phone companies.
In addition, AT&T has announced plans to offer broadband and interactive
services, including telephone services, on a broad scale over TCI's cable
systems over the next few years. In response to these competitive pressures,
and in an effort to increase revenues and maintain their existing customer
base, local phone companies are now also aggressively committing their
resources to deploy DSL services.
DSL enables data transmission speeds of 128 Kbps to 52 Mbps using the
existing local loop copper wire infrastructure. DSL delivers "always on"
availability, eliminating the tedious dial-up process associated with
traditional analog modem technologies. DSL is a point-to-point technology that
connects the end user to the local phone company's central office or to an
intermediate hub. DSL equipment is deployed at each end of the copper wire and
the transmission speed depends on the length and condition of the existing wire
as well as the capabilities of the DSL equipment.
High Speed Access Driving Demand for New Networking Technologies
As network access providers begin to deploy high-speed data access across
the last mile to residences and businesses, opportunities for additional
networking technologies have emerged. Two of these technologies are voice over
packet, which allows integrated transmission of voice and data, and home
networking, which enables users to share high bandwidth resources throughout
the home.
Voice Over Packet
Voice over packet enables the transmission of multiple voice channels as
well as data over a single copper line previously capable of transmitting only
one voice channel. Voice over packet technology compresses voice signals into
discrete packets of data which can be more efficiently transmitted. This
technology represents a substantial opportunity for small to medium sized
businesses to significantly reduce their costs for telephone services and for
residences to easily add additional phone numbers. Voice over packet allows
network access providers to offer both data and currently more lucrative voice
services to these businesses and residences. According to Dataquest, while
North American data services revenues from annual recurring retail
subscriptions are projected to grow at a rate of 27% from 1999 to 2003 and were
estimated to be $27 billion in 1999, revenues from telecommunications services
in North America in 1999 were estimated to be $207 billion.
Voice over packet also enables voice signals to be sent over communications
networks originally designed for data transmission, in addition to over
traditional telephone networks. Voice over packet uses one or more of the
wireline data transmission standards, which serve as the backbone of the
numerous data transport networks. As the cost of data transmission has
continued to decrease substantially below the cost of traditional voice
transmission, the opportunity for methods of seamlessly sending voice across
the different protocol-based data networks has become economically compelling.
Home Networking
As high speed access is more fully deployed, as the price of personal
computers continues to decline and as the availability of network enabled
devices and applications increases, opportunities are emerging for vendors to
offer cost effective home networking solutions. Home networking allows multiple
users to share high bandwidth resources throughout the home. This provides
consumers with cost savings from sharing hardware, software and high speed
Internet access, allowing a broader range of home computing applications,
24
<PAGE>
and increased convenience. According to Cahners In-Stat Group, the reasons
consumers cited for desiring to own a home network were:
. Internet access sharing;
. printer sharing;
. file sharing;
. connecting laptop to work;
. home control;
. multiplayer gaming;
. distributed video; and
. remote monitoring or security.
Emerging home networking technologies include both the Home Phoneline
Networking Association or HPNA standard, which uses the existing telephone
wiring of a home, and other standards based on wireless technology. Both of
these solutions eliminate the need to add additional network wiring throughout
the home.
The Challenges for Equipment Manufactures and Network Access Providers
The commitment of equipment manufacturers and network access providers to
solve the access bottleneck and develop the broadband access market has created
a number of opportunities and challenges. As the bandwidth bottleneck eases,
allowing greater data throughput at a lower cost, there is an emerging demand
for new cost and time-saving technologies, such as voice over packet and home
networking. However, the challenges of solving the bottleneck and providing
these emerging applications remain significant. These challenges include the
following:
Constantly evolving technology and networking standards. Communications
equipment manufacturers face significant challenges to ensure that their
products interoperate with counterpart products of other manufacturers based on
the same technology. Manufacturers often work together to create
interoperability standards for products based on new technologies. However,
changes in the market landscape or improvements in a given technology can cause
changes to these standards, often requiring existing equipment to be upgraded
or replaced.
Size constraints. The size of the components and systems necessary to enable
DSL is critical for several reasons. DSL equipment must physically fit within
the local telephone company's existing infrastructrure. For example,
residential phone lines often terminate at a digital loop carrier, which is a
fixed size box, holding equipment that aggregates a neighborhood's phone lines
onto a higher speed channel for transmission to the central office. When a
digital loop carrier is upgraded for DSL access, the physical size of the box
limits the amount of DSL equipment which can be installed without replacing the
digital loop carrier. In addition, high-speed modems for laptops and other
mobile high speed access equipment must meet ever smaller size constraints.
Power constraints. Low power consumption is critical for the addition of new
equipment within existing communications systems. Service providers' equipment
is often limited by a fixed level of available power, and any additions of
equipment must operate efficiently within those limitations. Also, consumers
desire high-speed modems which can be powered directly by their personal
computer or laptop, without the need for external power supplies. This requires
modems to function using low levels of power.
Shorter product life-cycles. The adoption of new communications technologies
is driving the need for more rapid introduction of new communications products.
In this rapidly evolving environment, communications equipment manufacturers
and their suppliers must have the flexibility to respond quickly in order to
maintain market leadership.
25
<PAGE>
To meet these challenges, manufacturers of broadband voice and data
communication equipment require vendors who provide "system-level" products.
System-level products integrate components into a single product that are
typically sold separately, such as digital integrated circuits, combined
digital and analog integrated circuits, and communications software. System-
level products allow equipment manufacturers to reduce the time it takes for
their products to reach the market and to focus their resources on adding
features which differentiate their products from those of their competitors.
Solution
We provide system-level products that enable broadband communications to the
home and business enterprise. Our products integrate our programmable digital
signal processor, our communications algorithms, our highly integrated mixed-
signal microchip, our highly integrated digital semiconductor and our related
software. We currently serve the DSL market and are leveraging our digital
signal processor, algorithms and systems expertise to develop products for
complementary markets. We have near-term plans to release products that target
the voice over packet and home networking markets. This expertise has enabled
us to establish a viable long-term product roadmap within these three
complementary markets. Key features of our solution include:
Flexibility due to programmable digital signal processor. Our products are
designed based on our software-upgradable, proprietary digital signal
processor, which performs the calculations necessary to encode or decode
digital data for transmission over a network. Our programmable digital signal
processor allows for implementation of communications algorithms in software,
as opposed to hardware that cannot be reprogrammed. As a result, our solution
allows remote upgrade of digital signal processor algorithms, eliminating the
need for costly hardware replacements and ensuring adaptability to evolving
industry standards and flexibility to meet evolving demand for new features.
The in-house expertise we have built while developing our programmable digital
signal processor enables us to quickly offer customization for each customer's
unique requirements throughout the life cycle of their products.
High level of semiconductor integration reduces size. Through highly
integrated design, we eliminate the need for peripheral components such as
additional microprocessors and external memory, which substantially reduces the
size of our customers' end-products. For example, one of our DSL products
supports eight ports, or phone lines, with just two integrated circuits,
compared to competing products which can require from 15 to 32 integrated
circuits to service the same number of ports. This reduced size allows our
customers' DSL infrastructure products to fit within the existing
communications infrastructure. Additionally, we believe our business card-sized
DSL modem is currently the smallest product of its type commercially available.
Low power consumption. According to TeleChoice, our DSL solution offers the
lowest per port power consumption in the industry. For our DSL modem products,
low power consumption means that the modem can be powered by a desktop or
laptop computer without an external power supply. For our DSL infrastructure
products, lower power consumption allows network access providers to support a
greater number of DSL lines within equipment supported by a fixed amount of
available power. Our products also feature built-in sleep-mode power management
to ensure operational efficiency.
System-level products deliver fast time-to-market. We believe our products
offer the most complete system-level solutions available to our target
customers. Instead of obtaining integrated circuits, software and algorithms
from different vendors and integrating the components themselves, our customers
can use our solutions to deliver their products with little additional time or
use of engineering resources. This complete solution provides manufacturers
with the competitive edge they need to ensure fast time-to-market while
retaining the flexibility to differentiate their products.
Strategy
Our objective is to be the leading provider of system-level products for
equipment manufacturers serving the broadband communications markets. Key
elements of our strategy include the following:
Target complementary high-growth broadband communications markets. Our
strategy is to focus on complementary, high-growth broadband communications
markets and to develop system-level solutions for
26
<PAGE>
applications in those markets. Our initial products are designed for the DSL
infrastructure and customer premises market. We are also leveraging our core
technologies to design and develop products for the voice over packet and the
home networking markets. By targeting these complementary markets, which share
common technologies and customers, we are able to more effectively utilize our
existing engineering, sales and marketing resources.
Strengthen and expand relationships with strategic customers. We have
established relationships with key equipment manufacturers, including
Accelerated Networks, Advanced Fibre Communications, Copper Mountain Networks,
Creative Technologies, Lucent Technologies, NEC and Sumitomo Electric
Industries. These companies are market and technology leaders within the
broadband communications markets. Although we do not have formal agreements
with any of these customers, selling products to these companies provides
references for our products which helps to secure future sales with these and
other manufacturers. Collaborating with these industry leaders also helps us to
enhance our technological capabilities. We believe these strategic
relationships are essential to our continued growth and the further development
and acceptance of our technologies.
Extend technology leadership. We have invested substantial resources to
establish our technology leadership. We believe we are the first company to
deliver a DSL infrastructure product which manages multiple ports and the first
to deliver a set of the two primary semiconductors for a DSL modem which
requires less than one watt of power. An important element of our technical
leadership is our programmable digital signal processor and associated
algorithms which are optimized for high bandwidth communications applications.
This core technology can be extended through the manipulation of algorithms and
software to develop multiple communications products for complementary markets.
Leverage system-level expertise. Many of our system-level engineers have
previous experience as employees of communication equipment manufacturers and
are therefore very familiar with the requirements of, and challenges faced by,
our customers. We combine this system-level engineering expertise with our
expertise in integrated circuit, digital signal processor, and software design
to develop products that allow our customers to optimize time-to-market,
performance, and systems cost.
Pursue strategic acquisitions. Our strategy is to enhance our growth
capability by pursuing selective acquisitions. This strategy allows us to more
rapidly obtain complementary technologies and engineering talent and to access
key markets and customer relationships. We believe completing selective
acquisitions will be important to remain competitive as a complete solutions
provider to manufacturers of broadband communications equipment.
Products
We currently target the DSL market with our DSL infrastructure and DSL
customer premises equipment products and we are leveraging our technology
expertise by developing products for markets that are complementary to the DSL
market. We have plans to release products before the end of this year that
target the voice over packet and home networking markets.
DSL
Each of our DSL products consists of two highly integrated semiconductor
devices which include a mixed-signal (analog and digital) semiconductor and a
digital semiconductor. The mixed-signal chip performs the functions of the
analog front end, which translates signals between analog and digital formats.
Our single chip analog front end device replaces the multiple components used
in competing solutions. Our digital chip incorporates our proprietary software
programmable digital signal processor, which provides the flexibility for
enhancements and upgrades. Based on this two-chip architecture our various DSL
products offer numerous capabilities and features.
27
<PAGE>
DSL Infrastructure
We offer two families of DSL infrastructure products: CopperLite CO and
CopperFlite CO. These products are deployed at the local telephone company's
central office, or CO, or in a residential neighborhood within the digital loop
carrier, or DLC. Our DSL infrastructure products consist of the following:
CopperLite CO
<TABLE>
<CAPTION>
Introduction
Product Key Features Target Applications Date
<C> <S> <C> <C>
CopperLite CO G.lite 3rd quarter 1999
8 ports
Voice over PCM DSLAM
Annex A Central office switch
Very low power required (600mW/port)
Remote terminal
- ------------------------------------------------------------------------------
-----------------------
Universal G.lite MDU 3rd quarter 1999
CopperLite CO 4 ports
Voice over PCM
Annex A & C
Very low power required (600mW/port)
</TABLE>
CopperFlite CO
<TABLE>
<CAPTION>
Product Key Features Target Applications Introduction Date
<C> <S> <C> <C>
Full Rate ADSL
CopperFlite CO (G.DMT & T1.413 issue 2) 1st quarter 2000
G.lite
4 ports
Voice over PCM DSLAM
Annex A Central office switch
Very low power required (950mW/port)
Remote terminal
- --------------------------------------------------------------------------------
----------------------
Full Rate ADSL MDU
Universal (G.DMT & T1.413 issue 2) 1st half 2000
CopperFlite CO G.lite
4 ports
Voice over PCM
Annex A & C
Very low power required (950mW/port)
</TABLE>
28
<PAGE>
DSL Customer Premises Equipment
We offer four families of DSL customer premises equipment, or CPE, products:
CopperLite CPE, CopperFlite CPE, Optimizer and Flite Optimizer. These products
are deployed as a modem for use with a personal computer or laptop or as a
subsystem for devices such as gateways, routers or integrated access devices,
all of which distribute network access for multiple appliances. Our DSL CPE
products consists of the following:
CopperLite CPE
<TABLE>
<CAPTION>
Introduction
Product Key Features Target Applications Date
<C> <S> <C> <C>
4th quarter
CopperLite CPE--UTOPIA G.lite Residential gateway 1998
Annex A Set-top box
- -----------------------------------------------------------------------------
---------------------
3rd quarter
Universal G.lite Bridge/router 1999
CopperLite CPE--UTOPIA Annex A & C Integrated access
device
</TABLE>
CopperFlite CPE
<TABLE>
<CAPTION>
Product Key Features Target Applications Introduction Date
<C> <S> <C> <C>
CopperFlite CPE--UTOPIA Full Rate ADSL 1st half 2000
(G.DMT & T1.413 issue 2) Residential gateway
G.lite Set-top box
Annex A Bridge/router
- -----------------------------------------------------------------------------
-----------------------
Universal Full Rate ADSL Integrated access 2nd half 2000
CopperFlite CPE--UTOPIA (G.DMT & T1.413 issue 2) device
G.lite
Annex A & C
</TABLE>
Optimizer
<TABLE>
<CAPTION>
Product Key Features Target Applications Introduction Date
<C> <S> <C> <C>
4th quarter
Optimizer--PCI G.lite 1999
Annex A
PCI, Card Bus or Mini PCI PCI card for
interfaces personal computers
and
Soft V.90 modem interface laptops
- -----------------------------------------------------------------------------
-----------------------
1st quarter
Universal G.lite 2000
Optimizer--PCI Annex A & C Mini-PCI card for
PCI, Card Bus or Mini PCI laptops
interfaces
Soft V.90 modem interface
- -------------------------------------------------------------------------------------------
3rd quarter
Optimizer--USB G.lite 1999
Annex A
Very low power required Set-top box
(USB powered) External modem
- -----------------------------------------------------------------------------
-----------------------
4th quarter
Universal G.lite 1999
Optimizer--USB Annex A & C
Very low power required
(USB powered)
</TABLE>
29
<PAGE>
Flite Optimizer
<TABLE>
<CAPTION>
Introduction
Product Key Features Target Applications Date
<C> <S> <C> <C>
Flite Full Rate ADSL (G.DMT & 1st half
Optimizer--PCI T1.413 issue 2)
G.lite 2000
Annex A
PCI, Card Bus or Mini PCI card for personal
PCI interfaces
Soft V.90 modem computers and
interface laptops
- --------------------------------------------------------------------------------
----------
Universal Full Rate ADSL (G.DMT & 2nd half
T1.413 issue 2)
Flite G.lite Mini PCI card for 2000
Optimizer--PCI laptops
Annex A & C
PCI, Card Bus or Mini
PCI interfaces
Soft V.90 modem
interface
- --------------------------------------------------------------------------------
Flite Full Rate ADSL (G.DMT & 1st half
Optimizer--USB T1.413 issue 2)
G.lite 2000
Annex A
Very low power required Set-top box
(USB powered)
- --------------------------------------------------------------------------------
----------
Universal Full Rate ADSL (G.DMT & External modem 2nd half
T1.413 issue 2)
Flite G.lite 2000
Optimizer--USB Annex A & C
Very low power required
(USB powered)
</TABLE>
The following are descriptions of several of the key product features which
have been listed above:
Full Rate ADSL. Asynchronous digital subscriber line, or ADSL, allows data
transmission rates of up to 8.2 Mbps from the network to a user, or downstream,
and generally at a lower rate of up to 1.0 Mbps from the user to the network,
or upstream. This tradeoff of allowing more data to flow downstream benefits
users since they typically download more data from the network than they send
upstream. Full rate is a version of ADSL which provides the highest data
transmission rate available for ADSL. Our full rate ADSL products conform to
the two most commonly used standard specifications for ADSL: G.DMT and T1.413
issue 2.
G.lite. G.lite is a version of ADSL which typically transmits data at slower
speeds than full rate ADSL, operating at speeds up to 1.5 Mbps downstream and
up to 512 Kbps upstream. G.lite's advantage over full rate ADSL is that the
technology requires no splitter at the user's premises to separate voice
signals from the data channel. The practical benefit is that no technician need
visit a user's home for installation.
Annex A and Annex C. Annex A and Annex C designate two of the three
different regional transmission standards used for all versions of ADSL. Annex
C is the ADSL standard used in Japan. Annex A is the standard used by the rest
of the world except for limited portions of Europe.
Voice over PCM. Voice over pulse code modulation, or PCM, is a technology
for delivering uncompressed voice channels over a single copper wire. Voice
over PCM does not qualify as voice over packet since the voice channel is
uncompressed. Additionally, voice over packet can accommodate substantially
more voice channels over one wire and can transmit voice over a network
originally designed to transmit data.
USB Powered. Our products consume very low levels of power which allows
power to be supplied directly from a computer's universal serial bus, rather
than from an external power source as most DSL products are powered today.
Soft V.90 Interface. The Soft V.90 interface feature enables our customers'
products to capture the capability of a traditional 56 kbps analog modem,
allowing a user to access the Internet where DSL is not available.
30
<PAGE>
The following are descriptions of a number of the target applications
referred to above for our DSL products:
Integrated access device / residential gateway. An integrated access device
and a residential gateway combine multiple voice and data channels for
transmission from a home or small business to the telephone company's central
office.
Set-top box. A set-top box processes transmissions from the traditional
cable television infrastructure and delivers digital signals which can include
voice, video or Internet access.
PCI card. A peripheral component interconnect card allows additional
components, such as a modem, to be added internally to a personal or laptop
computer.
Bridge / router. A bridge or router is a device that resides between network
segments and forwards data to its appropriate destination.
DSLAM. A digital subscriber line access multiplexer aggregates the data
traffic from a substantial number of home telephone lines for transmission
through a data network.
Central office switch. A central office switch is a large computer that
enables telephone subscribers to dial and make a connection with any other
subscriber in the telephone network.
Remote terminal. A remote terminal is a generic name for telecommunications
equipment that is located outside of the central office. Remote terminals are
typically connected to the central office by fiber optic links.
MDU. A multi-dwelling unit, or MDU, aggregates multiple subscriber lines in
an apartment complex or hotel, allowing multiple subscribers to access high
speed Internet services.
Voice Over Packet
We have near-term plans to offer products which enable voice transmissions
over packet data technologies. Voice over packet allows multiple telephone
channels to be compressed and transmitted simultaneously with data over a
single copper line which previously carried only one telephone channel. It also
allows voice transmissions to be delivered over networks originally designed to
deliver only data. Today's data networks are based on efficient, cost effective
transmission methodologies. Applying technology which allows the transmission
of voice over the more efficient data networks could potentially reduce the
cost of voice transmissions. These data networks use one of several packet
transmission protocols which are methods for organizing and addressing data for
transmission over the network. Our first product will allow voice transmissions
over a data network using the asynchronous transfer mode, or ATM, protocol.
Later products will allow voice transmission over a data network using
alternative protocols, such as Frame Relay or Internet Protocol.
<TABLE>
<CAPTION>
Introduction
Product Key Features Target Applications Date
<C> <S> <C> <C>
Siren CO--VoATM Voice over ATM Digital loop carrier 2nd half 2000
- -------------------------------------------------------------------
----------------------
Siren CO--VoX Voice over ATM Residential gateway 1st half 2001
Voice over Frame Relay Edge switch
Voice over Internet
Protocol Router
Multiservice Platform
DSLAM
- -----------------------------------------------------------------------------------------
Siren CPE Voice over ATM Integrated Access Device 2nd half 2000
Private Branch Exchange
Remote Access Server
Residential Gateway
</TABLE>
31
<PAGE>
The following are descriptions of several of the target applications for our
voice over packet products:
Edge switch. An edge switch manages the processing and delivery of data
between two different types of networks.
Router. A router is a device that resides between network segments and
forwards data to its appropriate destination.
Multi-service platform. Multi-service platform refers to communications
infrastructure equipment which aggregates or processes information for multiple
media applications. For example, a digital loop carrier which accommodates both
voice and DSL communications, could be considered a multi-service platform.
Private branch exchange. A private branch exchange is a computer server
which manages telephone calls typically in a medium to large size business.
Remote access server. A remote access server is a general term for a
computer that makes its data available to other computers through a network
connection.
Home Networking
We have near-term plans to offer products for the home networking market.
Home networking allows multiple users to share high bandwidth resources
throughout the home. This provides consumers with cost savings from sharing
hardware, software and high speed Internet access and allows a broader range of
home computing applications as well as increased convenience. Emerging home
networking technologies include the Home Phoneline Networking Association or
HPNA standard, which uses the existing telephone wiring of a home, and other
standards based on wireless technology. These solutions eliminate the need to
add additional network wiring throughout the home.
<TABLE>
<CAPTION>
Introduction
Product Key Features Target Applications Date
<C> <S> <C> <C>
HPNA--PCI Compliance with the HPNA PCI card for personal 2nd half 2000
standard PCI or Mini-PCI computers and laptops
interfaces Mini-PCI card for notebook
</TABLE>
Technology
Our primary competitive advantage is found in our technology expertise in
several key areas. These areas of expertise include our system-level knowledge,
our programmable DSP core, our signal processing algorithms, our digital chip
design capability, our mixed-signal chip design capability and our system-level
software. Together, these capabilities have enabled us to provide system-level
communications products which have:
. flexibility due to programmability;
. low power consumption; and
. small size.
System-level knowledge. Most of our system-level engineers have previous
experience as employees of communication equipment manufacturers and are
therefore very familiar with the requirements of and challenges faced by our
customers. We combine this system-level engineering expertise with our
expertise in integrated circuit, DSP, algorithm, and software design to develop
products that allow our customers to optimize time-to-market, performance, and
systems cost.
Software programmable DSP core. A cornerstone of our technology is our
internally developed, software programmable DSP core. A digital signal
processor, as it relates to communications applications, encodes
32
<PAGE>
digital data for transmission over bandwidth limited media such as copper
telephone lines, and recovers the encoded data at the receiving end. Our DSP is
optimized for communications applications and provides high processing
bandwidth with low power requirements. This DSP can be programmed for several
different applications such as DSL, voice over packet and home networking. We
currently use this core technology in every product line that is being
developed within our company. This DSP technology gives us the advantage of
field programmability and upgradability of devices for future standards.
Signal processing algorithms. A key component of our continued success is
the expertise that we have developed in the areas of communications algorithms.
Communications algorithms are the processes and techniques used to transform a
digital data stream into a specially-conditioned analog signal suitable for
transmission across copper telephone wires. Our signal processing engineers,
many of whom are PhDs, have a thorough understanding of and practical
experience in the process of transmitting and receiving a digital data stream
in analog form. We also have significant experience developing algorithms which
enable voice compression, echo cancellation and telephony signal processing.
This expertise has allowed our engineers to design highly efficient algorithms
which enable us to produce high performance, reprogrammable and low power
consuming products.
Digital chip design. We have digital chip design experts with many years of
experience in the area of high complexity and high speed digital chip
development. We perform both the logic design and the physical layout design
for our products. All of our chips are designed and manufactured using the
latest development tools and silicon process technologies. This design
expertise has enabled us to develop our high performance, low power consuming
digital chips.
Mixed-signal chip design. Our team of analog engineers has developed
numerous analog circuits for the communications industry and has substantial
experience in signal conversion techniques. This experience has enabled us to
develop our mixed-signal chip. This mixed-signal chip performs the functions of
the analog front end, which translates signals between analog and digital
formats. We believe our analog front end device contains the highest level of
integration in the industry, replacing the multiple components used in
competing DSL solutions and also supporting multiple telephone lines for DSL
infrastructure products.
System software. Our software engineers have expertise in developing code
that addresses the needs of network equipment manufacturers and service
providers. Our knowledge of network operation and architectures allows us to
write software that ensures that our products are interoperable with
communications equipment vendors' products. In addition, our understanding of
various operating systems and personal computer environments allows us to
create software that provides for simple installation and operation.
Customers
We have sold our products to the broadband access equipment vendors listed
below. We have recognized at least $15,000 in revenue during the twelve month
period ended March 31, 2000 from each of the customers listed.
<TABLE>
<S> <C> <C>
Market Sectors Company
DSL Infrastructure Advanced Fibre Communications Mitsubishi Electric
Copper Mountain Networks Promatory Communications
LG Information and Sumitomo Electric Industries
Communications
Lucent Technologies Sungmi Telecom Electronics
NEC
- ---------------------------------------------------------------------------------------
DSL Customer Askey Computer NEC
Premises Equipment CIS Technology Sumitomo Electric Industries
Creative Technologies Xpeed
</TABLE>
For the year ended December 31, 1999, Sumitomo Electric Industries and NEC
were our largest customers and accounted for 34.4% and 21.1%, respectively, of
our total revenue.
33
<PAGE>
We have achieved design wins, but have not yet received orders for product
shipments, from several additional companies, including Accelerated Networks,
Interspeed, and Aztech Systems. We count a design win after a company has
purchased one of our reference designs, sampled our products, and indicated an
interest in purchasing our products.
Sales and Marketing
Our sales and marketing strategy is to achieve design wins with technology
leaders in each of our targeted broadband communications markets by, among
other things, providing superior application and engineering support. We
believe that providing comprehensive product service and support is critical to
shortening our customers' design cycles and maintaining a competitive position
in our targeted markets. We market and sell our products through our direct
sales force and through our independent manufacturers' representatives. Our
sales managers are dedicated to principal customers to promote close
cooperation and communication. Representatives support the sales managers by
providing leads, nurturing customer relationships, closing design wins and
securing customer orders.
We manage a number of marketing programs designed to communicate our
capabilities and benefits to broadband access equipment manufacturers. Our Web
site is an important marketing tool where a wide range of information is
available including product information, white papers, application notes, press
releases, and contributed articles. In addition, we participate in industry
trade shows, technical conferences and technology seminars, conduct press tours
and publish technical articles in industry journals.
Research and Development
We have assembled a core team of experienced engineers and technologists,
many of whom are leaders in their particular field or discipline. Our engineers
and technologists have collectively co-authored 66 patents and 15 published
papers and hold 76 advanced degrees, including 17 PhDs. As of March 31, 2000,
we had 80 research and development employees. These employees are involved in
advancing our core technologies, as well as applying these core technologies to
product development activities in our targeted markets.
We believe that the achievement of higher levels of integration,
functionality and performance and the introduction of new products in our
target markets is essential to our growth. As a result, we plan to increase
research and development staffing levels in 2000 and 2001. Research and
development expense for 1997, 1998 and 1999 was approximately $1.8 million,
$7.9 million and $13.1 million respectively.
Operations and Manufacturing
We outsource the fabrication, assembly and testing of our semiconductor
devices. This fabless model allows us to focus our resources on the design,
development and marketing of our products. We manage the production of our
chips through our operations and manufacturing services group which is
comprised of six functions. These functions include technology engineering,
analog test engineering, digital test engineering, quality and reliability,
manufacturing and information systems and facilities.
We source our semiconductor fabrication from three of the world's largest
foundries: Mitsubishi Electric, United Microelectronics Corporation and Taiwan
Semiconductor Manufacturing Corporation. Our manufacturing strategy is to
qualify and utilize multiple facilities within a given foundry partner for the
fabrication of a given semiconductor device. This second source strategy seeks
to ensure production and performance consistency which is critical for our
products while maintaining multiple channels of supply.
The primary vendor for the assembly and testing of our products is ST
Assembly Test Services. We have qualified and utilized other vendors as a
second source for the packaging and testing of our products. Amkor/Anam Group
and Siliconware Precision Industries Company, Limited provide additional
assembly services and additional testing services are provided by Digital
Testing Services and Advanced Semiconductor Engineering.
34
<PAGE>
Competition
Although we produce system-level products, we primarily compete with vendors
of semiconductor devices for the DSL market. We believe that the principal
factors of competition for semiconductor vendors to these markets are product
capabilities, level of integration, performance and reliability, power
consumption, price, time-to-market, system cost, intellectual property,
customer support and reputation. We believe we compete favorably with respect
to each of these factors.
We compete with a number of major domestic and international suppliers of
semiconductors for both DSL central office and customer premises equipment and
with suppliers of semiconductors for equipment enabling voice over packet. Our
principal competitors that supply semiconductors for the DSL market include
Alcatel Microelectronics, Analog Devices, Conexant Systems, GlobeSpan, Lucent
Microelectronics, ST Microelectronics and Texas Instruments.
Many of our competitors operate their own fabrication facilities and have
longer operating histories and presence in key markets, greater name
recognition, access to larger customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution, technical and
other resources than us. As a result, our competitors may be able to adapt more
quickly to new or emerging technologies and changes in customer requirements or
devote greater resources to the promotion and sale of their products than us.
Current and potential competitors have established or may establish financial
or strategic relationships among themselves or with existing or potential
customers, resellers or other third parties. Accordingly, it is possible that
new competitors or alliances among competitors could emerge and rapidly acquire
significant market share. In addition, our competitors may in the future
develop technologies that more effectively address the transmission of digital
information through existing analog infrastructures at a lower cost. We cannot
assure you that we will be able to compete successfully against current or
potential competitors, or that competition will not have a material adverse
effect on our business, financial condition and results of operations.
Intellectual Property
We rely on a combination of copyright, patent, trademark, trade secret and
other intellectual property law, nondisclosure agreements and other protective
measures to protect our proprietary rights. We also utilize unpatented
proprietary know-how and trade secrets and employ various methods to protect
our trade secrets and know-how. To date, we have been granted two U.S. patents
and have an additional 12 U.S. patent applications pending and one additional
international patent application pending.
Although we employ a variety of intellectual property in the development and
manufacturing of our products, we believe that none of such intellectual
property is individually critical to our current operations. However, taken as
a whole, we believe our intellectual property rights are significant and that
the loss of all or a substantial portion of such rights could have a material
adverse effect on our results of operations. There can be no assurance that our
intellectual property protection measures will be sufficient to prevent
misappropriation of our technology. In addition, the laws of many foreign
countries do not protect our intellectual properties to the same extent as the
laws of the United States. From time to time, we may desire or be required to
renew or to obtain licenses from others in order to further develop and market
commercially viable products effectively. There can be no assurance that any
necessary licenses will be available on reasonable terms.
In December 1999 we entered into a license agreement with MIPS Technologies
to use their core processor. The agreement expires in December 2004. None of
our products currently shipping use the MIPS core processor, however we plan to
use the MIPS core processor in several of our future products.
Employees
As of March 31, 2000, we had a total of 149 employees, of whom 97 are
engineers. Seventy-eight of our employees have advanced degrees including 17
PhDs. None of our employees is represented by a labor union.
35
<PAGE>
We have not experienced any work stoppages, and we consider our relations with
our employees to be good. Our future performance depends in significant part
upon the continued service of our key personnel, none of whom is bound by an
employment agreement requiring service for any definite period of time. Our
future success also depends on our continued ability to attract, integrate,
retain and motivate highly qualified sales, technical and managerial personnel.
Competition for such qualified personnel is intense.
Facilities
Our principal executive and corporate offices are located in Fremont,
California, in approximately 40,000 square feet of leased office space under a
lease that expires in April 2004. In addition, under this lease we have the
option to lease an additional 17,500 square feet. We also have an option to
extend the term of this lease for an additional 5 years, through April 2009. We
believe our space is adequate for our current operations and that additional
leased space can be obtained on commercially reasonable terms if needed.
Legal Proceedings
We are not currently a party to any material legal proceedings.
36
<PAGE>
MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information with respect to our
executive officers and directors as of February 15, 2000.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Faraj Aalaei........................ 38 Chief Executive Officer and Director
Shahin Hedayat...................... 39 President and Director
Vice President and Chief Financial
John W. Luhtala..................... 57 Officer
Surendra B. Mandava................. 42 Vice President, Engineering
Jon S. Sherburne.................... 49 Vice President, Worldwide Sales
William F. Mackenzie................ 33 Vice President, Operations
Kamran Elahian(1)................... 45 Director and Chairman of the Board
Irwin Federman(1)................... 64 Director
Robert C. Hawk(2)................... 60 Director
Lip-Bu Tan(2)....................... 40 Director
</TABLE>
- ---------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Faraj Aalaei is our Chief Executive Officer and one of our co-founders. Mr.
Aalaei served as our Vice President, Marketing and Business Development, from
our inception in February 1997 until January 2000, when he was named Chief
Executive Officer. Prior to helping found our company, Mr. Aalaei was the
Director of Access Products at Fujitsu Network Communications, Inc., a designer
and manufacturer of fiber-optic transmission and broadband switching platforms,
from October 1993 to March 1997. Mr. Aalaei also designed advanced
telecommunications products at AT&T Bell Laboratories, a telecommunications
company, from May 1985 to October 1993. Mr. Aalaei received a B.S. in
Electrical Engineering from Wentworth Institute of Technology, an M.S. in
Electrical Engineering from the University of Massachusetts and an M.B.A. from
the University of New Hampshire.
Shahin Hedayat is our President and one of our co-founders. Mr. Hedayat
served as our Vice President, Engineering, Chief Technical Officer and a
Director from our inception in February 1997 until January 2000, when he was
named President. Mr. Hedayat has more than 15 years experience in the
semiconductor industry. From September 1985 to February 1997, Mr. Hedayat held
various positions at Cirrus Logic, including Vice President of Engineering for
Computer Telephony products. He was the architect of V.32bis and V.34 products,
which achieved multi-million unit shipments. Mr. Hedayat holds six U.S.
patents. Mr. Hedayat holds a B.S. and an M.S. in Electrical Engineering from
the University of Michigan at Ann Arbor.
John W. Luhtala joined us as Vice President and Chief Financial Officer in
December 1999. From January 1997 to December 1999, Mr. Luhtala was Senior Vice
President, Operations, and Chief Financial Officer at the Santa Cruz Operation
(SCO), a $223-million supplier of UNIX operating systems. From May 1996 to
December 1996, Mr. Luhtala was Chief Financial Officer and Vice President of
Mergers, Acquisitions, and Joint Ventures for SyQuest Technology, a $300-
million manufacturer of removable cartridge disk drives. Before SyQuest, Mr.
Luhtala spent nine years with Amdahl Corporation in various financial
management positions, including International Treasury Manager, Director of
Finance for Amdahl France, Assistant Controller, and Director of Finance for
Compatible Systems. Prior to Amdahl, Mr. Luhtala held various international and
domestic management positions with Sensormatic Electronics, US Leasing
International, and Richardson-Vicks. Mr. Luhtala holds a B.A. from Bradley
University, a J.D. from New York University and an M.B.A. from Stanford
University.
Surendra B. Mandava is one of our co-founders, and has served as our Vice
President, Engineering, since December 1999. He had served as our Director of
Design Engineering since we commenced operations in
37
<PAGE>
February 1997. From November 1992 to February 1997, Mr. Mandava held various
positions at Cirrus Logic, including Manager, Integrated Circuit Design. Mr.
Mandava holds a M.S. in Electrical Engineering from the Indian Institute of
Technology and a B.S. in Electronics & Communications from the Regional
Engineering College in Trichy, India.
Jon S. Sherburne has served as our Vice President for Worldwide Sales since
September 1999. From October 1997 to September 1999, Mr. Sherburne was Vice
President of Worldwide Sales at Maker Communications, Inc. From September 1988
to September 1997, Mr. Sherburne spent nine years with VLSI Technology in
various positions, including Director of Apple Worldwide Sales, Vice President
of North American Computer and Government Sales and Technology Centers, and
Vice President of Western U.S. Sales and Technology Centers. Prior to VLSI,
Sherburne held various management and engineering positions at Advanced Micro
Devices and Texas Instruments.
William F. Mackenzie has served as our Vice President, Operations and
Manufacturing Services since May 1998. Mr. Mackenzie was Corporate Director of
Customer Quality and Reliability Systems at LSI Logic from March 1996 to May
1998 and worked at LSI Canada as Director of Operations from August 1990 to
March 1996. Mr. Mackenzie also served as Manager of Process Engineering,
Motorola Semiconductors, Inc. in Scotland. Mr. Mackenzie holds a B.Sc. (Hon.)
in Applied Physics from the University of Strathclyde in Scotland.
Kamran Elahian is one of our co-founders and has served as Chairman of the
Board since we started operations in April 1997. Mr. Elahian has co-founded ten
Silicon Valley companies since 1981, including CAE Systems, a computer-aided
engineering software company, Cirrus Logic, a semiconductor company, and
Momenta Corporation, a pen-based computer company. Mr. Elahian is also co-
founder and chairman of NeoMagic, a multimedia accelerator IC company,
Planetweb, an Internet appliance software company, Actelis Networks, a
broadband communications system company, Cahoots, an Internet software company,
KangarooNet, a knowledge management software company and Schools Online, a non-
profit organization providing PCs and Internet connections to schools through
the U.S. and several other countries. In addition, Mr. Elahian is a general
partner in Global Catalyst Partners, a Palo Alto based venture capital fund.
Mr. Elahian holds a B.S. in Computer Science, a B.S. in Mathematics and an M.E.
in Computer Graphics from the University of Utah.
Irwin Federman has served on our Board of Directors since May 1998. Mr.
Federman has been a general partner of U.S. Venture Partners, a venture capital
firm, since April 1990. Mr. Federman serves on the boards of directors of
SanDisk Corporation, a solid-state storage system company, Komag, Inc., a
storage media manufacturer, MMC Networks, Inc., a network system component
company, Netro Corporation, a wireless communication equipment company,
CheckPoint Software Technologies, Ltd., a network security software company,
QuickLogic Corporation, a semiconductor company, and several privately-held
companies. He holds a B.S. in Economics from Brooklyn College and an honorary
Doctorate of Engineering Science from Santa Clara University.
Robert C. Hawk has served on our Board of Directors since November 1997. Mr.
Hawk is President of Hawk Communications, Inc., a telecommunications company,
and recently retired as President and Chief Executive Officer of U.S. West
Multimedia Communications, Inc., where he headed the cable, data and telephone
communications business from 1985 to 1996. Previously, he was President of the
Carrier Division of U.S. West. Mr. Hawk also served as Vice President of
Marketing and Strategic Planning for CXC Corporation, and as a director of
Advanced Systems Development for AT&T/American Bell, a telecommunications
company. Mr. Hawk currently serves on the boards of Xylan Corporation, PairGain
Technologies, Inc., Premisys Communications, Concord Communications, and
Radcom, Inc. Mr. Hawk holds a B.A. in Business Administration from the
University of Iowa and an M.B.A. from the University of San Francisco.
Lip-Bu Tan has served on our Board of Directors since April 1997. Since
1984, Mr. Tan has been a General Partner of the Walden Group and Chairman of
Walden International Investment Group. Mr. Tan is
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<PAGE>
currently a director of Creative Technologies Ltd., MediaRing.com, Inc.,
Integrated Silicon Solutions, Inc., and several privately-held companies. Mr.
Tan holds a B.S. in Physics from Nanyang University, Singapore, an M.S. in
Nuclear Engineering from the Massachusetts Institute of Technology and an
M.B.A. from the University of San Francisco.
Board of Directors
Our board of directors currently consists of six members. Each director
holds office until his or her term expires or until his or her successor is
duly elected and qualified. Upon completion of this offering, our amended and
restated certificate of incorporation and bylaws will provide for a classified
board of directors. In accordance with the terms of our certificate, our board
of directors will be divided into three classes whose terms will expire at
different times. The three classes will be comprised of the following
directors:
. Class I consists of Robert C. Hawk and Irwin Federman, who will serve
until the annual meeting of stockholders to be held in 2001;
. Class II consists of Kamran Elahian and Lip-Bu Tan, who will serve until
the annual meeting of stockholders to be held in 2002; and
. Class III consists of Faraj Aalaei and Shahin Hedayat, who will serve
until the annual meeting of stockholders to be held in 2003.
At each annual meeting of stockholders beginning with the 2001 annual
meeting, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election and until their successors have been duly
elected and qualified. Any additional directorships resulting from an increase
in the number of directors will be distributed among the three classes so that,
as nearly as possible, each class will consist of an equal number of directors.
Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Irwin Federman and Kamran Elahian. The audit
committee reviews our internal accounting procedures, consults with and reviews
the services provided by our independent accountants and makes recommendations
to the board of directors regarding the selection of independent accountants.
The compensation committee consists of Lip-Bu Tan and Robert Hawk. The
compensation committee reviews and recommends to the board of directors the
salaries, incentive compensation and benefits of our officers and employees and
administers our stock plans and employee benefit plans.
Compensation Committee Interlocks and Insider Participation
Our board of directors established the compensation committee in April 1999.
Prior to establishing the compensation committee, our board of directors as a
whole performed the functions delegated to the compensation committee. No
member of our compensation committee has served as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or
compensation committee. Since the formation of the compensation committee, none
of its members has been our officer or employee.
Director Compensation
Effective upon the closing of this offering, our non-employee directors will
be eligible to receive grants of options to purchase our common stock pursuant
to a fixed formula under our 1997 Stock Plan, as amended. Upon the closing of
this offering, each current non-employee director will automatically receive an
option to purchase 20,000 shares of our common stock. Each individual that
becomes a non-employee director following this offering will be granted an
option to purchase 20,000 shares of our common stock on the date that such
39
<PAGE>
person becomes a director. The shares subject to each of these options will
vest and become fully exercisable in equal annual installments over a four year
period following the date of grant. Additionally, beginning at our annual
meeting of stockholders to be held in 2001 and at each successive annual
stockholder meeting, each non-employee director who has previously served at
least six consecutive months prior thereto will receive an option to purchase
5,000 shares of our common stock. The shares subject to each of these options
will fully vest and become fully exercisable on the first anniversary of the
date of grant.
following the date of grant. The exercise price per share for all options
automatically granted to directors under our 1997 Stock Plan, as amended, will
be equal to the market price of our common stock on the date of grant and will
have a ten year term, but will generally terminate within a specified time
following the date the option holder ceases to be a director or consultant.
Employee directors are eligible to participate in our 2000 Employee Stock
Purchase Plan and to receive discretionary grants under our 1997 Stock Plan, as
amended.
Executive Compensation
Summary Compensation Table
The following table sets forth information regarding compensation for the
fiscal year ended December 31, 1999 that we paid for services rendered by our
current Chief Executive Officer, our other executive officers who earned more
than $100,000 during 1999 and our former Chief Executive Officer.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
---------------- ------------
Securities
Underlying
Name and Principal Position Salary Bonus Options
- --------------------------- -------- ------- ------------
<S> <C> <C> <C>
Faraj Aalaei(1)................................... $144,139 $20,000 --
Chief Executive Officer
Shahin Hedayat.................................... $145,022 -- --
President
William F. Mackenzie.............................. $148,822 -- 30,000
Vice President, Operations
Surendra B. Mandava............................... $127,771 -- --
Vice President, Engineering
Travis White(2)................................... $275,000 -- --
Former Chief Executive Officer
</TABLE>
- ---------------------
(1) Mr. Aalaei became our Chief Executive Officer in January 2000. All
information in this table relates to compensation paid to Mr. Aalaei during
1999 for his services as Vice President, Marketing and Business
Development.
(2) Mr. White was our Chief Executive Officer from April 1998 through January
2000. All information in this table relates to compensation paid to Mr.
White during 1999 for his services as Chief Executive Officer.
40
<PAGE>
Option Grants in 1999
During 1999 we granted options to purchase an aggregate of 2,106,600 shares
of our common stock to our employees, directors and consultants. All options
were granted under our 1997 Stock Plan at exercise prices equal to the fair
market value of our common stock on the date of grant, as determined in good
faith by our board of directors.
Of the executive officers named in the table above, only Mr. Mackenzie
received a grant of options during 1999. The following table sets forth
information relating to Mr. Mackenzie's grant, including the potential
realizable value of the grant at the end of the option term assuming that the
fair market value of our common stock appreciates from the midpoint of the
offering price at assumed rates of 5% and 10% over the option term. The assumed
5% and 10% rates of stock price appreciation are provided in accordance with
rules of the SEC and do not represent our estimate or projection of our future
common stock price.
<TABLE>
<CAPTION>
Potential Potential Realizable
Realizable Value at Assumed
Number of % of Total Value Based Annual Rates of
Securities Options upon midpoint Stock Appreciation
Underlying Granted to Exercise of the for Option Term
Option Employees Price Expiration Offering ---------------------
Name Grant During 1999 Per Share Date Price 5% 10%
- ---- ---------- ----------- --------- ---------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
William F. Mackenzie.... 30,000 1.4% $1.60 8/12/09 $642,000 $1,022,400 $1,578,900
</TABLE>
Aggregate Option Exercises in 1999 and Option Values at December 31, 1999
The following table sets forth information concerning stock options held by
the executive officers named in the summary compensation table above at
December 31, 1999. The value of unexercised in-the-money options is based on a
value of $3.00 per share, the fair market value of our common stock at December
31, 1999, as determined by our board, less the per share exercise price. All
options were granted under our 1997 Stock Plan.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options at
at December 31, 1999 December 31, 1999
Shares Acquired Value ------------------------------------ -------------------------
On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
--------------- -------- ----------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
William F. Mackenzie.... 65,625 -- 117,500 -- $ 305,500 --
21,875
Travis White............ 150,000 -- 506,757 -- $1,317,569 --
125,000
</TABLE>
The shares acquired by Messrs. Mackenzie and White during 1999 upon exercise
of options are subject to repurchase options by us which lapse as the shares
vest. There was no value realized by Messrs. Mackenzie or White upon exercise
of these options because the fair market value on the date of exercise had not
changed from the fair market value on the date of grant, as determined by our
board.
All options issued under our 1997 Stock Plan to our executive officers are
immediately exercisable upon grant, although the shares issued upon exercise
are subject to our right to repurchase them, which right lapses over time as
the shares vest. Therefore, all options held by Messrs. Mackenzie and White as
of December 31, 1999 were exercisable, subject to our repurchase option.
Benefit Plans
1997 Stock Plan
Our 1997 Stock Plan was adopted by the board of directors and our
stockholders in March 1997. In July 1997, the 1997 Stock Plan was amended to
increase the number of shares of common stock available for issuance under the
plan from 1,000,000 to 2,000,000. In March 1998, the 1997 Stock Plan was
amended to further increase the number of shares of common stock available for
issuance under the plan to 2,930,257. In
41
<PAGE>
May 1998, the 1997 Stock Plan was amended to further increase the number of
shares of common stock available for issuance under the plan to 5,430,257. The
1997 Stock Plan was further amended in December 1999 to increase the number of
shares available for issuance under the plan to 6,930,257 shares.
As of December 31, 1999, options to purchase an aggregate of 3,390,257
shares were outstanding, 2,190,098 shares of common stock had been purchased
pursuant to exercises of stock options and stock purchase rights and 1,353,652
shares were available for future grant.
In February 2000, our board of directors amended and restated the 1997 Stock
Plan to:
. Increase the number of shares of common stock available for issuance
under the plan to 10,000,000;
. Provide for the number of shares available for issuance under the plan
to be increased annually, on the first day of our fiscal year beginning
2001, by an additional amount equal to the lesser of 3.0 million shares,
5.0% of the number outstanding shares of common stock on the date of the
annual increase, or a lesser amount determined by our board of
directors; and
. Provide for the automatic grants of stock options to non-employee
directors. See "Management-- Board of Directors--Director Compensation."
We expect to our stockholders to approve these amendments in March 2000.
Our 1997 Stock Plan provides for the grant of incentive stock options (as
defined in Section 422 of the Internal Revenue Code) to employees and
nonstatutory stock options and stock purchase rights to employees, directors
and consultants. This plan may be administered by the board of directors or a
committee appointed by the board. The committee may make final and binding
determinations regarding the terms and conditions of the awards granted,
including the exercise price, the number of shares subject to the award and the
exercisability thereof, forms of agreement for use under the plan and
interpretation of plan terms.
The committee determines the exercise price of options granted under the
1997 Stock Plan, but with respect to non statutory stock options intended to
qualify as "performance based compensation" within the meaning of 162(m) of the
Internal Revenue Code, and all incentive stock options the exercise price must
at least equal the fair market value of our common stock on the date of grant.
However, for any employee holding more than 10% of the voting power of all
classes of our stock, the exercise price will be no less than 110% of the fair
market value. The committee determines the term of options granted under the
1997 Stock Plan, except the term of incentive stock options may not exceed ten
years
An optionee whose relationship with us or any related corporation ceases for
any reason, other than death or total and permanent disability, may generally
exercise options in the three-month period following such cessation, unless
such options terminate or expire sooner. The three-month period is generally
extended to twelve months for terminations due to death or total and permanent
disability. In the event of our merger with or into another corporation or the
sale of substantially all of our assets, the successor company may either
assume or substitute outstanding options or stock purchase rights. If any
options stock purchase rights are not assumed or substituted, the committee
will provide notice to each optionee that he or she has the right to exercise
the option, or stock purchase right as to all shares subject to the option or
stock purchase right for a period of 15 days from the date of such notice. The
1997 Stock Plan will terminate in 2010, unless sooner terminated by the board
of directors.
The price to be paid for the shares granted pursuant to stock purchase is
determined by the committee. We are generally granted a repurchase option
exercisable on the voluntary or involuntary termination of the purchaser's
employment with us for any reason, including death or disability. The
repurchase price shall be the original purchase price paid by the purchaser.
The repurchase option shall lapse at a rate determined by the committee. Once
the stock purchase right has been exercised, the purchaser shall have the
rights equivalent to those of a stockholder.
42
<PAGE>
Automatic option grants to non-employee directors. The 1997 Stock Plan
generally provides for an automatic initial grant of an option to purchase
20,000 shares of our common stock to each person who first becomes a non-
employee director on or after the effective date of this offering. After the
initial grant, each non-employee director will automatically be granted
subsequent options to purchase 5,000 shares of our common stock each year on
the date of our annual stockholder's meeting, if on such date he or she has
served on our board of directors for at least six months. Each initial option
grant and each subsequent option grant shall have a term of 10 years. Each
initial option grant will fully vest in equal annual installments over the four
year period from the grant date, and each subsequent option grant will fully
vest on the first anniversary of the grant date. The exercise price of all
options will be 100% of the fair market value per share of our common stock on
the date of grant.
2000 Employee Stock Purchase Plan
Our board of directors adopted our 2000 Employee Stock Purchase Plan in
February 2000. This plan provides our employees with an opportunity to purchase
our common stock through accumulated payroll deductions. A total of 500,000
shares of common stock has been reserved for issuance under the purchase plan.
In addition, the purchase plan provides for annual increases in the number of
shares available for issuance under the purchase plan on the first day of each
fiscal year, beginning in 2001, equal to the lesser of 1% of the outstanding
shares of common stock on the first day of the fiscal year or 400,000 shares or
such lesser amount as may be determined by the board. The board of directors or
a committee appointed by the board administers the purchase plan. The board or
its committee has full and exclusive authority to interpret the terms of the
purchase plan and determine eligibility.
Employees are eligible to participate if they are customarily employed by us
or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, an employee may not be granted an
option to purchase stock under the purchase plan if such an employee:
. immediately after grant owns stock possessing five percent or more of
the total combined voting power or value of all classes of our capital
stock, or
. whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate which exceeds $25,000 worth of stock for each
calendar year.
Our purchase plan is intended to qualify under Section 423 of the Internal
Revenue Code and contains consecutive six month offering periods. The offering
periods generally start on the first trading day on or after May 1 and November
1 of each year, except for the first such offering period which commences on
the first trading day on or after the effective date of this offering and ends
on the last trading day on or after October 31, 2000.
The purchase plan permits participants to purchase common stock through
payroll deductions of up to 10.0% of the participant's "compensation."
Compensation is defined as the participant's base straight time gross earnings
and commissions but excludes payments for overtime, shift premium payments,
incentive compensation, incentive payments, bonuses and other compensation. The
maximum number of shares a participant may purchase during a single offering
period is 5,000 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the purchase plan is generally 85% of the lower of the fair
market value of the common stock (i) at the beginning of the offering period or
(ii) at the end of the offering period. Participants may end their
participation at any time during an offering period, and they will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with us.
A participant may not transfer rights granted under the purchase plan other
than by will, the laws of descent and distribution or as otherwise provided
under the purchase plan.
43
<PAGE>
The purchase plan provides that, if we merge with or into another
corporation or sell substantially all of our assets, the successor corporation
will assume or substitute for each outstanding purchase right. If the successor
corporation refuses to assume or substitute for the outstanding purchase
rights, the offering period then in progress will be shortened, and a new
exercise date will be set.
The purchase plan will terminate in 2010. However, the board of directors
has the authority to amend or terminate the purchase plan, except that, subject
to some exceptions described in the purchase plan, no such action may adversely
affect any outstanding rights to purchase stock under the purchase plan.
401(k) Plan
In March 1997, we adopted a 401(k) Profit Sharing Plan and Trust covering
our eligible employees. The 401(k) Profit Sharing Plan and Trust excludes
nonresident alien employees. The 401(k) Profit Sharing Plan and Trust is
intended to qualify under Section 401(k) of the Internal Revenue Code, so that
contributions to the 401(k) Profit Sharing Plan and Trust by employees or by us
and the investment earnings thereon are not taxable to the employees until
withdrawn. If our 401(k) Profit Sharing Plan and Trust qualifies under Section
401(k) of the United States tax code, our contributions will be deductible by
us when made. Our employees may elect to reduce their current compensation by
up to the statutorily prescribed annual limit of $10,500 in 2000 and to have
those funds contributed to the 401(k) Profit Sharing Plan and Trust. The 401(k)
Profit Sharing Plan and Trust permits us, but does not require us, to make
additional matching contributions on behalf of all participants. To date, we
have not made any contributions to the 401(k) Profit Sharing Plan and Trust.
Limitations on Liability and Indemnification
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for the following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit indemnification. We have entered
into agreements to indemnify our directors, executive officers and controller,
in addition to indemnification provided for in our bylaws. These agreements,
among other things, provide for indemnification of our directors and executive
officers for certain expenses (including attorneys' fees), judgments, fines and
settlement amounts incurred by any such person in any action or proceeding,
including any action by or in our rights, arising out of such person's services
as a director or executive officer to us, any of our subsidiaries or any other
company or enterprise to which the person provides services at our request. We
believe that these provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers.
44
<PAGE>
RELATED PARTY TRANSACTIONS
Sales of Stock
Since our inception in February 1997, we have issued and sold shares of our
capital stock in private placement transactions as follows:
. 8,000,000 shares of restricted common stock at a price of $0.001 per
share in February 1997;
. 1,680,000 shares of Series A preferred stock at a price of $0.50 per
share in April 1997;
. 500,000 shares of Series B1 preferred stock at a price of $2.00 per
share in September 1997;
. 1,500,000 shares of Series B1 preferred stock at a price at $2.00 per
share in June 1998;
. 800,000 shares of Series B2 preferred stock at a price of $2.50 per
share July 1997;
. 972,250 shares of Series B3 preferred stock at $4.00 per share in July
1997;
. 1,151,482 shares of Series B3 at a price of $4.00 per share in September
1997;
. 1,127,000 shares of Series B3 preferred stock at a purchase price of
$4.00 per share in October 1997;
. 108,750 shares of Series B3 preferred stock at a price of $4.00 per
share in April 1998;
. 7,610,754 shares of Series C preferred stock at a price of $5.00 per
share in April 1999.
We recorded noncash deemed dividends of $2,800,000 for the year ended
December 31, 1997, to reflect the sale of the Series B1 and Series B2 preferred
stock for less than the $4.00 per share price paid for the Series B3 preferred
stock. See note 7 of the notes to the financial statements.
All shares of preferred stock will convert into common stock on a 1-for-1
basis on the closing of this offering.
The following table summarizes the shares of capital stock purchased by
executive officers, directors and 5% stockholders in these private placement
transactions, although this table does not necessarily reflect currently
outstanding amounts:
<TABLE>
<CAPTION>
Series A Series B1 Series B2 Series B3 Series C
Common Preferred Preferred Preferred Preferred Preferred
Name of Purchaser Stock Stock Stock Stock Stock Stock
----------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Kamran Elahian.......... 1,573,187 -- -- -- -- --
Shahin Hedayat.......... 2,510,493 -- -- -- -- --
Faraj Aalaei............ 1,305,440 -- -- -- -- --
Surendra B. Mandava..... 1,305,440 -- -- -- -- --
Anthony O'Toole......... 1,305,440 -- -- -- -- --
Robert C. Hawk.......... -- -- -- -- -- 15,000
Entities affiliated with
Walden International
Investment Group....... -- 500,000 1,000,000 -- 325,000 550,000
Entities affiliated with
U.S. Venture Partners.. -- 500,000 1,000,000 -- 250,000 550,000
Entities affiliated with
Vertex Management...... -- -- -- 800,000 500,000 380,000
GM Investment Management
Corp................... -- -- -- -- -- 1,600,000
</TABLE>
Affiliated Relationships
Mr. Tan, a member of our board of directors, is affiliated with Walden
International Investment Group. Mr. Federman, a member of our board of
directors, is affiliated with U.S. Venture Partners.
45
<PAGE>
Grants of Options
From our inception in February 1997 through December 31, 1999, we have
granted options to purchase our common stock to our directors and executive
officers as follows:
<TABLE>
<CAPTION>
Exercise
Date of Number of Price
Name Grant Options Per Share
---- -------- --------- ---------
<S> <C> <C> <C>
Robert C. Hawk.................................. 11/24/97 49,500 $0.40
William F. Mackenzie............................ 6/16/98 175,000 $0.40
8/12/99 30,000 $1.60
Jon Sherburne................................... 10/13/99 215,000 $2.00
John W. Luhtala................................. 12/9/99 175,000 $3.00
</TABLE>
Offers of Employment
John W. Luhtala, our Chief Financial Officer, is party to an offer letter
with us dated November 30, 1999. Under the terms of the offer letter, in the
event that we experience a change in control, following which Mr. Luhtala's
employment is terminated or his duties significantly reduced, the vesting of
Mr. Luhtala's stock options will be accelerated by one year.
Jon S. Sherburne, our Vice President for Worldwide Sales, is party to an
offer letter with us dated August 17, 1999. Under the terms of the offer
letter, in the event we experience a change in control, following which Mr.
Sherburne's employment is terminated or his duties significantly reduced, the
vesting of Mr. Sherburne's stock options will be accelerated by one year.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors
and executive officers. Such indemnification agreements will require us to
indemnify our directors and executive officers to the fullest extent permitted
by Delaware law.
Agreement with Former Chief Executive Officer
Travis White, our former Chief Executive Officer, resigned his position as
Chief Executive Officer in January 2000. Additionally, his employment will
terminate on March 31, 2000. In connection with the termination of Mr. White's
employment relationship with us, we entered into an Agreement and Mutual
Release with Mr. White on February 2, 2000. Under the terms of the agreement,
in exchange for a release by Mr. White of all potential claims against us, we
have agreed to pay Mr. White a total of $225,000 over the next year. As of Mr.
White's termination date, 211,064 options with an option price of $0.40 per
share will accelerate and be fully vested as provided by his original
employment agreement and in accordance with the terms of his original option
grant.
Future Agreements
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us
and our officers, directors, principal shareholders and their affiliates will
be approved by a majority of the board of directors, including a majority of
the independent, disinterested outside directors on the board of directors, and
will be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of December 31, 1999 and as
adjusted to reflect the sale of common stock offered hereby by the following:
. each stockholder known by us to own beneficially more than 5% of our
common stock;
. each of our executive officers named in the compensation table above;
. each of our directors; and
. all directors and executive officers as a group.
As of December 31, 1999, there were 25,769,077 shares of our common stock
outstanding, assuming that all outstanding preferred stock has been converted
into common stock. Except as otherwise indicated, we believe that the
beneficial owners of the common stock listed below, on the information
furnished by such owners, have sole voting power and investment power with
respect to such shares. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission. In computing the number of
shares beneficially owned by a person and the percent ownership of that person,
shares of common stock subject to options or warrants held by that person that
are currently exercisable or will become exercisable within 60 days after
December 31, 1999 are deemed outstanding, while such shares are not deemed
outstanding for purposes of computing percent ownership of any other person.
Unless otherwise indicated in the footnotes below, the persons and entities
named in the table have sole voting and investment power with respect to all
shares beneficially owned, subject to community property laws where applicable.
The address for those individuals for which an address is not otherwise
indicated is Centillium Communications, Inc., 47211 Lakeview Boulevard,
Fremont, CA 94538.
<TABLE>
<CAPTION>
Percentage of Shares
Shares Beneficially Beneficially Owned Percentage of Shares
Name or Group of Owned Prior Prior to the Beneficially Owned
Beneficial Owners to the Offering Offering After the Offering
----------------- ------------------- -------------------- --------------------
<S> <C> <C> <C>
5% Stockholders
Entities affiliated with
Walden International
Investment Group(1).... 2,375,000 9.2% 7.8%
750 Battery Street #700
San Francisco, CA 94111
Entities affiliated with
U.S. Venture
Partners(2)............ 2,300,000 8.9% 7.6%
2180 Sand Hill Road
Menlo Park, CA 04025
Entities affiliated with
Vertex Management(3)... 1,680,000 6.5% 5.5%
Three Lagoon Drive,
Suite 220
Redwood City, CA 94065
The Chase Manhattan
Bank, as Trustee for
the First Plaza Group
Trust.................. 1,600,000 6.2% 5.3%
767 Fifth Avenue
New York, NY 10153
Anthony O'Toole(4)...... 1,305,440 5.1% 4.3%
Directors and Executive
Officers
Shahin Hedayat.......... 2,510,493 9.7% 8.2%
Kamran Elahian.......... 1,573,187 6.1% 5.2%
Faraj Aalaei............ 1,305,440 5.1% 4.3%
Surendra B. Mandava..... 1,305,440 5.1% 4.3%
Jon Sherburne(5)........ 215,000 0.8% 0.7%
William F.
Mackenzie(6)........... 205,000 0.8% 0.7%
John W. Luhtala(7)...... 175,000 0.7% 0.6%
Robert C. Hawk(8)....... 64,500 0.3% 0.2%
All directors and
executive officers as a
group (8 persons)...... 7,354,060 28.4% 24.1%
</TABLE>
47
<PAGE>
- ---------------------
(1) Consists of 1,115,910 shares held by Pacven Walden Ventures III, L.P.,
675,000 shares held by Seed Ventures II, Ltd., 212,727 shares held by Asian
Ventures Capital Investment Corporation, 196,363 shares held by TWG
Investment LDC, 135,000 shares held by O,W&W Investments Ltd., and 40,000
shares held by OCBC, Wearnes & Walden Investments (Singapore) Ltd.
(2) Consists of 2,070,000 shares held by U.S. Ventures V, L.P., 115,000 shares
held by USVP V International, L.P., 62,900 shares held by 2180 Associates
Fund V, L.P., and 52,100 shares held by USVP V Entrepreneur Partners L.P.
(3) Consists of 650,000 shares held by Vertex Technology Fund Pte. Ltd, 650,000
shares held by Vertex Asia Limited, and 380,000 shares held by Vertex
Technology Fund II Limited.
(4) Mr. O'Toole is one of our co-founders, and is also currently one of our
employees.
(5) Consists of shares received on early exercise of stock options. These
shares are subject to a repurchase option by us which lapses as the shares
vest.
(6) Consists of 87,500 shares received on early exercise of stock options,
which shares are subject to a repurchase option by us which lapses as the
shares vest, and an additional 117,500 shares subject to options that are
immediately exercisable subject to a repurchase option by us which lapses
as the shares vest.
(7) Consists of shares subject to options that are immediately exercisable
subject to a repurchase option by us which lapses as the shares vest.
(8) Consists of 49,500 shares received on early exercise of stock options,
which shares are subject to a repurchase option by us which lapses as the
shares vest, and 15,000 shares of Series C preferred stock.
48
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our certificate of incorporation that becomes effective upon the closing of
this offering authorizes the issuance of up to 100,000,000 shares of common
stock, $0.001 par value, and authorizes the issuance of 10,000,000 shares of
undesignated preferred stock, $0.001 par value. From time to time, our board of
directors may establish the rights and preferences of the preferred stock. As
of December 31, 1999, 10,318,841 shares of common stock were issued and
outstanding and held by 135 stockholders, and 15,450,236 shares of preferred
stock were issued and outstanding and held by 164 stockholders. Upon the
closing of this offering, all outstanding shares of preferred stock will
convert into an aggregate of 15,450,236 shares of common stock. The following
description of our capital stock is, by necessity, not complete. We encourage
you to refer to our certificate of incorporation and bylaws, which are included
as exhibits to the registration statement of which this prospectus forms a
part, and applicable provisions of Delaware law for a more complete
description.
Common Stock
Each holder of common stock is entitled to one vote for each share held on
all matters to be voted upon by the stockholders and there are no cumulative
voting rights. Subject to preferences that may be applicable to any outstanding
preferred stock, holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared time to time by the board of directors
out of funds legally available for that purpose. See "Dividend Policy." In the
event of our liquidation, dissolution or winding up, the holders of common
stock are entitled to share in our assets remaining after the payment of
liabilities and the satisfaction of any liquidation preference granted to the
holders of any outstanding shares of preferred stock. Holders of common stock
have no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to the common stock. The
rights, preferences and privileges of the holders of common stock are subject
to, and may be adversely affected by the rights of the holders of shares of any
series of preferred stock that we may designate in the future.
Preferred Stock
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may
be greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things:
. restricting dividends on the common stock;
. diluting the voting power of the common stock;
. impairing the liquidation rights of the common stock; or
. delaying or preventing a change in control of our company without
further action by the stockholders.
Upon the closing of this offering, no shares of preferred stock will be
outstanding, and we have no present plans to issue any shares of preferred
stock.
Registration Rights of Certain Holders
After this offering, holders of shares of common stock and shares of common
stock issuable upon exercise of outstanding warrants (the "registrable
securities") or their transferees are entitled to certain rights with respect
to the registration of such shares under the Securities Act. These rights are
provided under the terms of an agreement between us and the holders of the
registrable securities. Beginning 180 days following the date of
49
<PAGE>
this prospectus, holders of at least 20% of the registrable securities may
require on no more than two occasions, that we use our best efforts to register
the registrable securities for public resale. We are obligated to register
these shares only if the outstanding registrable securities have an anticipated
public offering price of at least $25,000,000. Also, holders of registrable
securities may require, no more than once during any six-month period, that we
register their shares for public resale on Form S-3 or similar short-form
registration if the value of the securities to be registered is at least
$2,000,000. Furthermore, in the event we elect to register any of our shares of
common stock for purposes of effecting any public offering, the holders of
registrable securities are entitled to include their shares of common stock in
that registration, but we may reduce the number of shares proposed to be
registered in view of market conditions. These registration rights have been
waived with respect to this offering. We will bear all expenses in connection
with any registration, other than underwriting discounts and commissions. All
registration rights will terminate five years following the consummation of
this offering, or with respect to each holder of registrable securities, at
such time as the holder is entitled to sell all of then held shares in any 90-
day period under Rule 144 of the Securities Act.
Certain Charter and Bylaw Provisions and Delaware Law
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make the following more difficult:
. our acquisition by a tender offer;
. our acquisition by a proxy contest; or
. the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain types
of coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of us to
first negotiate with our board. We believe that the benefits of increased
protection of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure outweighs the
disadvantages of discouraging such proposals because negotiation of such
proposals could result in an improvement of their terms.
Classified Board
Our board of directors is divided into three classes. The directors in each
class will serve for a three-year term, with our stockholders electing one
class each year. This system of electing and removing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of us, because it generally makes it more difficult for
stockholders to replace a majority of the directors.
Restrictions on Persons Able to Call Stockholder Meetings
Under our bylaws, only the board of directors, the chairman of the board and
the president may call special meetings of stockholders.
Advance Notification of Stockholder Nominations and Proposals Required
Our bylaws establish advance notice procedures for stockholder proposals and
the nomination of candidates for election as directors, other than nominations
made by or at the direction of the board of directors or a committee of the
board.
Delaware Anti-takeover Law
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became
an interested
50
<PAGE>
stockholder, unless the business combination or the transaction in which the
person became an interested stockholder is approved in a prescribed manner.
Generally, a business combination includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. Generally, an interested stockholder is a person who, together
with its affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
Stockholder Action By Written Consent Eliminated
Our certificate of incorporation eliminates the right of stockholders to act
by written consent without a meeting.
Undesignated Preferred Stock
The authorization of undesignated preferred stock makes it possible for the
board of directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change our control.
These and other provisions may have the effect of deferring hostile takeovers
or delaying changes in our control or management.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Chase Mellon
Shareholder Services, L.L.C.
Nasdaq Stock Market National Market Listing
We have applied to have our common stock quoted on The Nasdaq Stock Market's
National Market under the symbol "CTLM."
51
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our stock.
Future sales of substantial amounts of our common stock in the public market
following this offering or the possibility of such sales occurring could
adversely affect market prices for our common stock or could impair our ability
to raise capital through an offering of equity securities. Furthermore, since
no shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale as described below, sales of
substantial amounts of our common stock in the public after these restrictions
lapse could adversely affect the prevailing market price and our ability to
raise equity capital in the future.
Upon completion of this offering, we will have 32,109,280 shares of common
stock outstanding (assuming conversion of all of the currently outstanding
shares of preferred stock) based on shares outstanding as of March 25, 2000 and
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options. Of these shares, all of the shares sold in this
offering will be freely transferable without restriction under the Securities
Act, unless these shares are purchased by "affiliates" as that term is used
under the Securities Act and the Regulations promulgated thereunder.
Of these shares, the remaining 27,440,430 shares as of March 25, 2000, which
were sold by us in reliance on exemptions from the registration requirements of
the Securities Act, are restricted securities within the meaning of Rule 144
under the Securities Act and become eligible for sale in the public market as
follows:
. no shares will be eligible for immediate sale on the date the
registration statement of which this prospectus is a part is declared
effective;
. no shares will be eligible for sale prior to 180 days from the date the
registration statement of which this prospectus is a part is declared
effective; and
. beginning 181 days after the effective date, 27,409,280 shares will
become eligible for sale, subject to the provisions of Rules 144 or 701,
upon the expiration of agreements not to sell such shares entered into
between the underwriters and such stockholders.
As of March 25, 2000, options to purchase a total of 2,870,240 shares of
common stock, all of which were issued under the 1997 Stock Plan, were
outstanding and exercisable. All of the shares subject to options are subject
to lock-up agreements. An additional 203,216 shares of common stock were
available as of March 25, 2000 for future option grants or direct issuances
under the 1997 Stock plan. Any shares subject to lock-up agreements may be
released at any time without notice by the underwriters.
In general, under Rule 144 as currently in effect, a person (or group of
persons whose shares are aggregated), including an affiliate, who has
beneficially owned restricted shares for at least one year is entitled to sell,
within any three-month period commencing 90 days after the date of completion
of this offering, a number of shares that does not exceed the greater of 1% of
the then outstanding shares of common stock (approximately 321,000 shares
immediately after this offering), or the average weekly trading volume in the
common stock during the four calendar weeks preceding such sale, subject to the
filing of a Form 144 with respect to such sale and certain other limitations
and restrictions. In addition, a person who is not deemed to have been our
affiliate at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least two years, would
be entitled to sell such shares without regard to the requirements described
above.
Any of our employees, officers or directors of or consultant who purchased
his or her shares prior to the date of completion of this offering or who holds
vested options as of that date pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701, which
permits non-affiliates to sell their Rule 701 shares without having to comply
with the public-information, holding-period, volume-limitation or notice
provisions of Rule 144 and permits affiliates to sell their Rule 701 shares
without having to comply with Rule 144's holding-period restrictions, in each
case commencing 90 days after the date
52
<PAGE>
of completion of this offering.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this prospectus, except
issuances pursuant to the exercise of employee stock options outstanding on the
date hereof.
Our officers, directors and stockholders have agreed that they will not
offer, sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock, enter into a
transaction which would have the same effect, or enter into any swap, hedge or
other arrangement that transfers, in whole or in part, any of the economic
consequences of ownership of our common stock, whether any such aforementioned
transaction is to be settled by delivery of our common stock or such other
securities, in cash or otherwise, or publicly disclose the intention to make
any such offer, sale, pledge or disposition, or to enter into any such
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
As soon as practicable after the effective date of the registration
statement of which this prospectus is a part, we intend to file a registration
statement on Form S-8 under the Securities Act to register shares of common
stock issuable under our 1997 Stock Plan and our 2000 Employee Stock Purchase
Plan, thus permitting the resale of such shares by non-affiliates in the public
market without restriction under the Securities Act. Such registration
statement will become effective immediately upon filing.
Prior to this offering, there has been no public market for our common
stock, and any sale of substantial amounts in the open market may adversely
affect the market price of our common stock offered hereby.
53
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated , 2000 we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, FleetBoston Robertson
Stephens Inc. and Salomon Smith Barney Inc. are acting as representatives, the
following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Credit Suisse First Boston Corporation.............................
FleetBoston Robertson Stephens Inc. ...............................
Salomon Smith Barney Inc. .........................................
---------
Total.......................................................... 4,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 600,000 additional shares at the initial public offering price
less the underwriting discounts and commissions. The option may be exercised
only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
Per Share Total
------------------- -------------------
Without With Without With
Over- Over- Over- Over-
allotment allotment allotment allotment
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Underwriting Discounts and
Commissions paid by us........... $ $ $ $
Expenses payable by us............ $ $ $ $
</TABLE>
The expenses of the offering that are payable by us are estimated to be
$1,250,000.
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We and our executive officers, directors and certain other of our security
holders have agreed not to offer, sell, contract to sell, announce an intention
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Securities and Exchange Commission a registration statement under the
Securities Act relating to, any shares of common stock or securities
convertible into or exchangeable or exercisable for any common stock without
the prior written consent of Credit Suisse First Boston Corporation for a
period of 180 days after the date of this prospectus.
54
<PAGE>
The underwriters have reserved for sale, at the initial public offering
price up to 200,000 shares of the common stock for employees, directors and
certain other persons associated with us who have expressed an interest in
purchasing common stock in this offering. The number of shares available for
sale to the general public in this offering will be reduced to the extent these
persons purchase the reserved shares. Any reserved shares not so purchased will
be offered by the underwriters to the general public on the same terms as the
other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be
required to make in that respect.
We have applied the shares of common stock quoted on The Nasdaq Stock
Market's National Market under the symbol "CTLM."
We and the underwriters have agreed to indemnify each other against
liabilities, including liabilities under the Securities Act.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include:
. the information in this prospectus and otherwise available to the
underwriters;
. the history and the prospects for the industry in which we will compete;
. the ability of our management;
. the prospects for our future earnings;
. the present state of our development and our current financial
condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies.
We cannot be sure that the initial public offering price will correspond to
the price at which the common stock will trade in the public market following
this offering or that on an active trading market for the common stock will
develop and continue after this offering.
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, and penalty bids in accordance with Regulation
M under the Exchange Act.
. Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
55
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom the
purchase confirmation is received that (i) the purchaser is entitled under
applicable provincial securities laws to purchase the common stock without the
benefit of a prospectus qualified under the securities laws, (ii) where
required by law, that the purchaser is purchasing as principal and not as
agent, and (iii) the purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or these persons. All or a substantial portion of the assets of
the issuer and these persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or these
persons in Canada or to enforce a judgment obtained in Canadian courts against
the issuer or these persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that the purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser in this offering. This report must be
in the form attached to British Columbia Securities Commission Blanket Order
BOR #95/17, a copy of which may be obtained from us. Only one report must be
filed in respect of common stock acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in the
common stock in their particular circumstances and with respect to the
eligibility of the common stock for investment by the purchaser under relevant
Canadian legislation.
56
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Legal matters will be passed upon for the underwriters by Brobeck,
Phleger & Harrison LLP, San Francisco, California. As of the date of this
prospectus, WS Investment Company 97A, an investment partnership composed of
certain current and former members of and persons associated with Wilson
Sonsini Goodrich & Rosati, Professional Corporation, and a current member of
Wilson Sonsini Goodrich & Rosati, Professional Corporation collectively own
150,000 shares of preferred stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1998 and 1999, and for the
period from February 21, 1997 (inception) through December 31, 1997, and for
the years ended December 31, 1998 and 1999. We have included our financial
statements and schedule in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington, D.C.,
a registration statement on Form S-1 under the Securities Act with respect to
the shares of common stock offered hereby. This prospectus does not contain all
the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and our common
stock, reference is made to the registration statement and to the exhibits and
schedules filed therewith. You may inspect a copy of the registration statement
without charge at the Public Reference Room of the SEC at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information about the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. You may obtain copies of all or any portion of the
registration statement from the Public Reference Room upon payment of
prescribed fees. The SEC maintains a Web site at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC.
57
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Stockholders' Equity........................... F-5
Consolidated Statements of Cash Flows..................................... F-7
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Centillium Communications, Inc.
We have audited the accompanying consolidated balance sheets of Centillium
Communications, Inc. as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the period from February 21, 1997 (inception) to December 31, 1997 and for
the years ended December 31, 1998 and 1999. 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. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Centillium
Communications, Inc. at December 31, 1998 and 1999, and the results of its
operations and its cash flows for the period from February 21, 1997
(inception) to December 31, 1997 and for the years ended December 31, 1998 and
1999, in conformity with accounting principles generally accepted in the
United States.
Ernst & Young LLP
San Jose, California
February 9, 2000
F-2
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
------------------ December 31,
1998 1999 1999
-------- -------- -------------
(Unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.................... $ 2,816 $ 3,202
Short-term investments....................... 5,110 25,111
Accounts receivable, net of allowance for
doubtful
accounts of $150 in 1999.................... -- 915
Inventories.................................. -- 1,211
Other current assets......................... 257 515
-------- --------
Total current assets....................... 8,183 30,954
Property and equipment, net.................... 3,784 4,531
Other assets................................... 43 102
-------- --------
Total assets............................. $ 12,010 $ 35,587
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities:
Working capital line of credit............... $ -- $ 2,044
Accounts payable............................. 128 810
Accrued payroll and related expenses......... 388 900
Accrued liabilities.......................... 171 325
Deferred revenue............................. 75 122
Capital lease obligations--current portion... 209 160
Current portion of long-term debt............ 526 550
-------- --------
Total current liabilities................ 1,497 4,911
Capital lease obligations--long-term portion... 169 --
Long-term debt................................. 1,066 549
Other liabilities.............................. 19 72
Commitments
Stockholders' equity:
Preferred Stock, $0.001 par value:
Authorized shares--None actual and 10,000,000
pro forma
Issued and outstanding shares--None actual and
pro forma -- -- $ --
Convertible preferred stock, $0.001 par value:
Authorized shares 15,630,000 actual and none
pro forma
Issued and outstanding shares 7,839,482 in
1998,
15,450,236 in 1999, and none pro forma
(aggregate liquidation preference of $58,332
at December 31, 1999)....................... 8 15 --
Common stock, $0.001 par value:
Authorized shares 32,000,000 actual and
100,000,000 pro forma
Issued and outstanding shares 8,505,600 in
1998, 10,318,841 in 1999, and 25,769,077 pro
forma....................................... 9 10 26
Additional paid-in capital..................... 23,683 76,602 76,601
Stockholder notes receivable................... -- (430) (430)
Accumulated other comprehensive income......... -- (25) (25)
Deferred compensation.......................... (448) (12,951) (12,951)
Accumulated deficit............................ (13,993) (33,166) (33,166)
-------- -------- --------
Total stockholders' equity............... 9,259 30,055 $ 30,055
-------- -------- ========
Total liabilities and stockholders'
equity.................................. $ 12,010 $ 35,587
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
Centillium Communications, Inc.
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Period From
February 21, Years Ended
1997 (Inception) December 31,
to December 31, -----------------
1997 1998 1999
---------------- ------- --------
<S> <C> <C> <C>
Product revenues........................... $ $ -- $ 2,509
Technology development revenues............ 300 752 1,235
------- ------- --------
Total revenues......................... 300 752 3,744
Cost of revenues........................... -- -- 3,101
------- ------- --------
Gross profit............................... 300 752 643
Operating expenses:
Research and development................. 1,844 7,913 13,119
Sales and marketing...................... 341 1,466 3,699
General and administrative............... 217 1,095 4,030
------- ------- --------
Total operating expenses............... 2,402 10,474 20,848
------- ------- --------
Operating loss............................. (2,102) (9,722) (20,205)
Interest income............................ 214 582 1,274
Interest expense........................... (49) (116) (242)
------- ------- --------
Net loss................................... (1,937) (9,256) (19,173)
Deemed dividend on Series B convertible
preferred stock........................... (2,800) -- --
------- ------- --------
Net loss applicable to common
stockholders.............................. $(4,737) $(9,256) $(19,173)
======= ======= ========
Historical basic and diluted net loss per
share applicable to common stockholders... $ (0.59) $ (1.15) $ (2.17)
======= ======= ========
Shares used to compute basic and diluted
net loss per share applicable to common
stockholders.............................. 8,000 8,056 8,842
======= ======= ========
Pro forma basic and diluted net loss per
share applicable to common stockholders... $ (0.88)
========
Shares used to compute pro forma basic and
diluted net loss per share applicable to
common stockholders....................... 21,755
========
</TABLE>
F-4
<PAGE>
Centillium Communications, Inc.
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Convertible Accumulated
Preferred Stock Common Stock Additional Stockholders' Other Total
---------------- ---------------- Paid-In Deferred Notes Accumulated Comprehensive Stockholders'
Shares Amount Shares Amount Capital Compensation Receivable Deficit Income Equity
--------- ------ --------- ------ ---------- ------------ ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash proceeds
from issuance
of common
stock.......... -- $ -- 8,000,000 $ 8 $ -- $ -- $ -- $ -- $ -- $ 8
Cash proceeds
from issuance
of Series A
convertible
preferred
stock, net of
issuance
costs.......... 1,680,000 2 -- -- 817 -- -- -- -- 819
Issuance of
warrants to
purchase Series
B3 convertible
preferred
stock.......... -- -- -- -- 24 -- -- -- -- 24
Issuance of
Series B3
convertible
preferred stock
and associated
rights for cash
and
stockholders
note
receivable, net
of issuance
costs.......... 3,250,732 3 -- -- 12,977 -- (728) -- -- 12,252
Noncash deemed
dividends to
Series B1 and
B2
stockholders... -- -- -- -- 2,800 -- -- (2,800) -- --
Cash proceeds
from exercise
of right to
purchase Series
B2 convertible
preferred
stock, net of
issuance
costs.......... 800,000 1 -- -- 1,993 -- -- -- -- 1,994
Cash proceeds
from exercise
of right to
purchase Series
B1 convertible
preferred
stock, net of
issuance
costs.......... 500,000 1 -- -- 995 -- -- -- -- 996
Exercise of
option to
purchase common
stock for
stockholders'
note
receivable..... -- -- 45,000 -- 18 -- (18) -- -- --
Noncash issuance
of common stock
for services
and other...... -- -- 5,000 -- -- -- -- -- -- --
Net loss and
comprehensive
net loss....... -- -- -- -- -- -- (1,937) -- (1,937)
--------- ---- --------- --- ------- ----- ----- ------- ---- -------
Balance at
December 31,
1997............ 6,230,732 7 8,050,000 8 19,624 -- (746) (4,737) -- 14,156
Cash proceeds
from payments
on
stockholders'
notes
receivable..... -- -- -- -- -- -- 746 -- -- 746
Noncash issuance
of common stock
for services
and other...... -- -- 29,850 -- 15 -- -- -- -- 15
Cash proceeds
from issuance
of Series B3
convertible
preferred
stock, net of
issuance
costs.......... 108,750 -- -- -- 434 -- -- -- -- 434
</TABLE>
F-5
<PAGE>
Centillium Communications, Inc.
Consolidated Statements of Stockholders' Equity--Continued
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Convertible Accumulated
Preferred Stock Common Stock Additional Stockholders' Other
----------------- ------------------ Paid-In Deferred Notes Accumulated Comprehensive
Shares Amount Shares Amount Capital Compensation Receivable Deficit Income
---------- ------ ---------- ------ ---------- ------------ ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
warrants to
purchase Series
B3 convertible
preferred
stock........... -- -- -- -- 11 -- -- -- --
Cash proceeds
from exercise of
rights to
purchase Series
B1 convertible
preferred stock,
net of issuance
costs........... 1,500,000 1 -- -- 2,998 -- -- -- --
Exercise of
options to
purchase common
stock for cash.. -- -- 425,750 1 84 -- -- -- --
Deferred
compensation
related to stock
option grants... -- -- -- -- 517 (517) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 69 -- -- --
Net loss and
comprehensive
net loss........ -- -- -- -- -- -- (9,256) --
---------- --- ---------- --- ------- -------- ----- -------- ----
Balance at
December 31,
1998............. 7,839,482 8 8,505,600 9 23,683 (448) -- (13,993) --
Noncash issuance
of common stock
for services and
other........... -- 97,643 -- 173 -- -- -- --
Cash proceeds
from issuance of
Series C
convertible
preferred stock,
net of issuance
costs........... 7,610,754 7 -- -- 35,568 -- -- -- --
Exercise of
options to
purchase common
stock for cash.. -- -- 1,719,348 1 1,149 -- (430) -- --
Repurchase of
unvested
shares.......... -- -- (3,750) -- (2) -- -- -- --
Deferred
compensation
related to stock
option grants... -- -- -- -- 16,031 (16,031) -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- 3,528 -- -- --
Net loss........ -- -- -- -- -- -- -- (19,173) --
Unrealized loss
on available
for-sale
investments..... -- -- -- -- -- -- -- -- (25)
Total
comprehensive
net loss........ -- -- -- -- -- -- -- -- --
---------- --- ---------- --- ------- -------- ----- -------- ----
Balance at
December 31,
1999............. 15,450,236 $15 10,318,841 $10 $76,602 $(12,951) $(430) $(33,166) $(25)
========== === ========== === ======= ======== ===== ======== ====
<CAPTION>
Total
Stockholders'
Equity
-------------
<S> <C>
Issuance of
warrants to
purchase Series
B3 convertible
preferred
stock........... 11
Cash proceeds
from exercise of
rights to
purchase Series
B1 convertible
preferred stock,
net of issuance
costs........... 2,999
Exercise of
options to
purchase common
stock for cash.. 85
Deferred
compensation
related to stock
option grants... --
Amortization of
deferred
compensation.... 69
Net loss and
comprehensive
net loss........ (9,256)
-------------
Balance at
December 31,
1998............. 9,259
Noncash issuance
of common stock
for services and
other........... 173
Cash proceeds
from issuance of
Series C
convertible
preferred stock,
net of issuance
costs........... 35,575
Exercise of
options to
purchase common
stock for cash.. 720
Repurchase of
unvested
shares.......... (2)
Deferred
compensation
related to stock
option grants... --
Amortization of
deferred
compensation.... 3,528
Net loss........ (19,173)
Unrealized loss
on available
for-sale
investments..... (25)
-------------
Total
comprehensive
net loss........ (19,198)
-------------
Balance at
December 31,
1999............. $30,055
=============
</TABLE>
F-6
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Period From Years Ended
February 21, 1997 December 31,
(Inception) to -----------------
December 31, 1997 1998 1999
----------------- ------- --------
<S> <C> <C> <C>
Operating activities
Net loss................................. $(1,937) $(9,256) $(19,173)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization expense.. 83 1,231 2,258
Amortization of deferred compensation.. -- 69 3,528
Amortization of warrants issued in
conjunction with debt and other....... 6 6 10
Issuance of common stock for services
and other............................. -- 15 173
Changes in operating assets and
liabilities:
Accounts receivable.................. -- -- (915)
Inventories ......................... -- -- (1,211)
Other current assets................. (352) 95 (258)
Other assets......................... (136) 93 (59)
Working capital line of credit....... -- -- 2,044
Accounts payable..................... 610 (482) 682
Accrued payroll and related
expenses............................ 187 201 512
Deferred revenue..................... -- 75 47
Accrued liabilities.................. 62 109 154
Other liabilities.................... -- 19 53
------- ------- --------
Net cash used in operating activities.... (1,477) (7,825) (12,155)
Investing activities
Purchases of short-term investments...... (4,013) (8,837) (27,626)
Sales and maturities of short-term
investments............................. -- 7,740 7,600
Purchases of property and equipment...... (1,732) (2,721) (3,005)
------- ------- --------
Net cash used in investing activities.... (5,745) (3,818) (23,031)
Financing activities
Principal payments on capital leases..... (55) (203) (223)
Proceeds from borrowings under long-term
debt obligations........................ -- 1,000 --
Principal payments on long-term debt
obligations............................. -- (234) (498)
Proceeds from issuance of common stock,
net of repurchases...................... 8 85 718
Proceeds from stockholders note
receivable.............................. -- 746 --
Proceeds from issuance of note payable... 840 -- --
Proceeds from issuance of preferred
stock................................... 16,061 3,433 35,575
------- ------- --------
Net cash provided by financing
activities.............................. 16,854 4,827 35,572
------- ------- --------
Net increase (decrease) in cash and cash
equivalents............................. 9,632 (6,816) 386
Cash and cash equivalents at beginning of
period.................................. -- 9,632 2,816
------- ------- --------
Cash and cash equivalents at end of
period.................................. $ 9,632 $ 2,816 $ 3,202
======= ======= ========
Supplemental disclosures of cash flow
information
Cash paid for interest................... $ 19 $ 111 $ 244
Supplemental disclosures of non-cash
transactions
Issuance of warrants in conjunction with
debt and other.......................... $ 24 $ 11 $ --
Property and equipment acquired under
capital lease........................... $ 557 $ 88 $ --
Noncash deemed dividends to Series B
stockholders............................ $ 2,800 $ -- $ --
Issuance of common stock for note
receivable.............................. $ 746 $ -- $ 430
Deferred compensation related to stock
option grants............................ $ -- $ 517 $ 16,031
</TABLE>
See accompanying notes.
F-7
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of Operations
Centillium Communications, Inc. (Centillium or the Company) was incorporated
in California on February 21, 1997 for the purpose of developing, producing,
and marketing semiconductor devices for equipment manufacturers serving the
broadband communications markets. The Company has focused initially on
developing products designed for the digital subscriber line (DSL) central
office and customer premises market. In December 1999, the Company
reincorporated in Delaware. Share amounts in the accompanying financial
statements have been restated to retroactively reflect the impact of the
reincorporation.
During the period from February 1997 through June 1999, Centillium was a
development stage company. Operating activities during this period were related
primarily to the design and development of our initial products, building our
corporate infrastructure, establishing relationships with customers and
suppliers, and raising capital. The Company began significant customer
shipments in the third quarter of 1999 and exited the development stage at that
time.
Centillium has incurred significant losses since inception and, as of
December 31, 1999, had an accumulated deficit of approximately $33,166,000
including a net loss for the year ended December 31, 1999 of $19,173,000.
Principles of Consolidation
The consolidated financial statements include all the accounts of the
Company and those of its wholly-owned subsidiary. All significant intercompany
accounts and transaction have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Revenues related to product sales are generally recognized when the products
are shipped to the customer, title has transferred and no significant
obligations remain. In circumstances where the customer has delayed its
acceptance of our product, we defer recognition of the revenue until
acceptance. Generally, the Company's customers do not have rights to return,
however our products are warranted to be free from defect for a period of one
year. A provision is made for warranty returns as shipments are made. To date,
such returns have not been material.
The Company has also performed research and product development work under
best efforts technology development agreements. Revenues under technology
development agreements are recognized when applicable contractual milestones
have been met, including deliverables, and in any case, does not exceed of the
amount that would be recognized using the percentage-of-completion method. Due
to technological risk factors, the costs of these development agreements are
expensed as incurred and were included in research and development expenses in
the accompanying statements of operations.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant
concentration of credit risk consist principally of cash, cash equivalents,
short-term investments, and accounts receivable. The Company
F-8
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
places its short-term investments in high-credit quality financial
institutions. The Company is exposed to credit risk in the event of default by
these institutions to the extent of the amount recorded on the balance sheet.
Accounts receivable are billed in U. S. currency derived from revenues earned
from customers primarily located in Japan and the United States. The Company
performs ongoing credit evaluations of its customers' financial condition and
generally does not require collateral, but obtains letters of credit or
prepayments as deemed necessary. The Company maintains reserves for potential
credit losses, and historically, such losses have been immaterial.
Customer Concentrations
The Company's customers, which account for more than 10% of revenues in each
respective year are as follows:
<TABLE>
<CAPTION>
Period From
February 21,
1997
(Inception) Years Ended
Through December 31,
December 31, ---------------
1997 1998 1999
------------ ------ ------
<S> <C> <C> <C>
Mitsubishi Electric......................... 50% 60% *
NEC......................................... -- 10% 21%
Sumitomo Electric........................... 50% 13% 34%
Sungmi Telecom Electronics.................. -- 15% *
</TABLE>
- ---------------------
* Represents less than 10% of revenues.
Cash Equivalents and Short-Term Investments
The Company invests its excess cash in money market accounts and debt
instruments and considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are recorded at cost, which approximates fair value.
Investments with an original maturity at the time of purchase of over three
months are classified as short-term investments. Under the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," management
classifies investments as available-for-sale at the time of purchase and
periodically reevaluates such designation. At December 31, 1998 and 1999, all
of the Company's investments in debt securities were classified as available-
for-sale with changes in market value recorded as unrealized gains and losses
in accumulated other comprehensive income until their disposition. Realized
gains and losses and declines in value judged to be other than temporary on
available-for-sale securities are included in interest income. The cost of
securities sold is based on the specific-identification method.
Inventories
Inventory is stated at the lower of cost (first in, first out) or market.
The components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1998 1999
----- -------
<S> <C> <C>
Inventories:
Work-in-process........................................... $ -- $ 486
Finished goods............................................ -- 725
----- -------
$ -- $1,211
===== =======
</TABLE>
F-9
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation.
Property and equipment are depreciated for financial reporting purposes using
the straight-line method over the assets' estimated useful lives of three
years. Leasehold improvements are amortized using the straight-line method over
the shorter of the useful lives of the assets or the terms of the leases.
Property and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Equipment and software..................................... $ 4,882 $ 7,567
Furniture and fixtures..................................... 165 352
Leasehold improvements..................................... 51 184
------- -------
5,098 8,103
Accumulated depreciation and amortization.................. (1,314) (3,572)
------- -------
Property and equipment, net................................ $ 3,784 $ 4,531
======= =======
</TABLE>
Development Costs
In accordance with Financial Accounting Standards Board Statement No. 86,
"Accounting for Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," costs incurred in the research and development of the software
embedded in our products are expensed as incurred until technological
feasibility has been established. The Company believes its current process for
developing software is essentially completed concurrently with the
establishment of technological feasibility which is evidenced by a working
model which includes the semiconductor device and embedded software;
accordingly, development costs incurred after the establishment of
technological feasibility have not been material and, therefore, have been
expensed.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was
not significant for the period from February 21, 1997 (inception) to December
31, 1997 or for the years ended December 31, 1998 and 1999.
Comprehensive Net Loss
During the year ended December 31, 1998, the Company adopted the Financial
Accounting Standard Board's Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards
for the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements. The Company's comprehensive
net loss was the same as its net loss for the period from February 21, 1997
(inception) to December 31, 1997 and for the year ended December 31, 1998.
Comprehensive loss for the year ended December 31, 1999 includes the net
unrealized loss on available-for-sale investments.
Net Loss Per Share
Basic and diluted net loss per common share is presented in conformity with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (FAS
128), for all periods presented. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 98, common stock and convertible
F-10
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
preferred stock issued or granted for nominal consideration prior to the
anticipated effective date of the Company's initial public offering must be
included in the calculation of basic and diluted net loss per common share as
if they had been outstanding for all periods presented.
In accordance with FAS 128, basic and diluted net loss per share have been
computed using the weighted average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Pro forma
basic and diluted net loss per share, as presented in the statements of
operations, have been computed as described above and also gives effect, under
Securities and Exchange Commission guidance, to the conversion of the
convertible preferred stock (using the if-converted method) from the original
date of issuance.
The following table presents the computation of basic and diluted and pro
forma basic and diluted net loss per share (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Period From
February 21, 1997 Years Ended
(Inception) December 31,
Through -----------------
December 31, 1997 1998 1999
----------------- ------- --------
<S> <C> <C> <C>
Net loss applicable to common
stockholders............................. $(4,737) $(9,256) $(19,173)
======= ======= ========
Basic and diluted:
Weighted average shares of common stock
outstanding............................ 8,001 8,205 9,363
Less weighted average shares subject to
repurchase(1).......................... 1 149 521
------- ------- --------
Weighted average shares used in
computing basic and diluted, net loss
per share applicable to common
stockholders........................... 8,000 8,056 8,842
======= ======= ========
Basic and diluted net loss per share
applicable to common stockholders........ $ (0.59) $ (1.15) $ (2.17)
======= ======= ========
Pro forma:
Shares used above....................... 8,842
Pro forma adjustment to reflect weighted
average effect of the assumed
conversion of convertible preferred
stock.................................. 12,913
--------
Shares used in computing pro forma basic
and diluted, net loss per share
applicable to common stockholders...... 21,755
========
Pro forma basic and diluted net loss per
share applicable to common
stockholders........................... $ (0.88)
========
</TABLE>
- ---------------------
(1) The weighted average period over which repurchase options lapse is
approximately 3.9 years, 2.9 years and 2.5 years for the period from
February 21, 1997 (inception) through December 31, 1997 and for the years
ended December 31, 1998 and 1999, respectively.
The Company has excluded all outstanding warrants, stock options, and shares
subject to repurchase by the Company from the calculation of basic and diluted
net loss per share because these securities are antidilutive for all periods
presented. Options and warrants to purchase 1,774,000, 3,385,007, and
3,417,007 shares of common stock have been excluded for the period from
February 21, 1997 (inception) through December 31, 1997 and for the years ended
December 31, 1998 and 1999, respectively.
Business Segment Information
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (FAS 131). FAS 131 superseded
F-11
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Statement of Financial Accounting Standards No. 14 "Financial Reporting for
Segments of a Business Enterprise" (FAS 14). FAS 131 establishes standards for
the way that public business enterprises report on information about operating
segments in annual financial statements and interim financial reports. FAS 131
also establishes standards for related disclosures about products and services,
geographic areas, and major customers.
Unaudited Pro Forma Stockholders' Equity
If the offering contemplated by the Company is consummated, each share of
convertible preferred stock outstanding will automatically be converted into
one share of common stock. Unaudited pro forma stockholders' equity at December
31, 1999, is adjusted for the assumed conversion of convertible preferred stock
based on the shares of convertible preferred stock outstanding at December 31,
1999 disclosed on the balance sheet, and the restatement of our certificate of
incorporation to reflect 100,000,000 authorized shares of common stock and
10,000,000 authorized shares of undesignated preferred stock.
Unaudited basic and diluted pro forma net loss per share, as presented in
the consolidated statements of operations, has been computed using the weighted
average number of common shares outstanding, adjusted to include the pro forma
effects of the conversion of the preferred stock to common stock as if such
conversion had occurred on January 1, 1999 for the year ended December 31,
1999, or at the date of original issuance, if later.
Stock-Based Compensation
As described in Note 7, the Company has elected to account for its employee
stock plan in accordance with Accounting Principles Board opinion No. 25,
"Accounting For Stock Issued to Employees" (APB opinion No. 25 ), and to adopt
the disclosure-only provisions as required under statement of Financial
Accounting Standards No. 123, "Accounting For Stock-Based Compensation" (FAS
123)
The Company accounts for stock issued to non-employees in accordance with
the provisions of FAS 123 and Emerging Issues Task Force Issue No. 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services."
New Accounting Pronouncements
In March 1998, the AICPA issued Statement of Position No. 98-1, "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP
98-1). SOP 98-1 requires entities to capitalize certain costs related to
internal-use software once certain criteria have been met. SOP 98-1 is
effective for years beginning after December 15, 1998. The Company adopted SOP
98-1 for the fiscal year ending December 31, 1999. The adoption of SOP 98-1 did
not have a material impact on the Company's financial position or results of
operations.
In April 1998, the AICPA issued Statement of Position No. 98-5, "Reporting
on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires that all
start-up costs related to new operations must be expensed as incurred. In
addition, all start-up costs that were capitalized in the past must be written
off when SOP 98-5 is adopted. The Company implemented SOP 98-5 on January 1,
1999. The adoption of SOP 98-5 did not have a material impact on its financial
position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (FAS 133). FAS 133 establishes accounting methods for
derivative financial instruments and hedging activities related to those
F-12
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
instruments as well as other hedging activities. The Company will be required
to implement FAS 133 for the fiscal year ending December 31, 2001. Because the
Company does not currently hold any derivative instruments and does not engage
in hedging activities, the Company does not expect that the adoption of FAS 133
will have a material impact on its financial position or results of operations.
Reclassifications
Certain prior year balances have been reclassified to conform to current
year presentation.
2. Cash Equivalents and Short-Term Investments
All debt securities held by the Company as of December 31, 1998 and 1999,
mature within one year. The estimated fair market values of cash equivalents
and short-term investments are based on quoted market prices. Cash equivalents
and short-term investments as of December 31, 1998 and 1999 were as follows (in
thousands):
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gain Loss Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Cash equivalents:
Money market funds................ $ 1,312 $ -- $ -- $ 1,312
Corporate debt securities......... 500 -- -- 500
------- ----- ----- -------
1,812 -- -- 1,812
------- ----- ----- -------
Short-term investments:
Corporate debt securities......... 2,910 -- -- 2,910
Obligations of U.S. government and
affiliated agencies.............. 1,000 -- -- 1,000
Auction rate preferred stock and
other............................ 1,200 -- -- 1,200
------- ----- ----- -------
5,110 -- -- 5,110
------- ----- ----- -------
Total cash equivalents and
short-term investments......... $ 6,922 $ -- $ -- $ 6,922
======= ===== ===== =======
<CAPTION>
December 31, 1999
-------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Market
Cost Gain Loss Value
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Cash equivalents:
Money market funds................ $ 970 $ -- $ -- $ 970
------- ----- ----- -------
Short-term investments:
Commercial paper.................. 7,945 -- (4) 7,941
Corporate debt securities......... 10,997 -- (11) 10,986
Obligations of U.S. government and
affiliated agencies.............. 5,994 -- (10) 5,984
Auction rate preferred stock and
other............................ 200 -- -- 200
------- ----- ----- -------
25,136 -- (25) 25,111
------- ----- ----- -------
Total cash equivalents and
short-term investments......... $26,106 $ -- $ (25) $26,081
======= ===== ===== =======
</TABLE>
Realized gains and losses are included in interest income and interest
expense, respectively, and were not significant for the period from February
21, 1997 (inception) to December 31, 1997 or for the years ended December 31,
1998 and 1999.
F-13
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Working Capital Line of Credit
The Company maintains a revolving credit agreement ("Credit Agreement") with
Mitsubishi International. The Credit Agreement is used to provide 90 day
extended credit terms to finance wafer inventory purchases. Borrowings of up to
$5,000,000 under the Credit Agreement are permitted. The interest rate under
the Agreement was based on the lender's internal interest rate, which was
required to be at least 1.00% below the prime rate on the date of invoice
(7.25% at December 31, 1999), generally thirty days after receipt of the
wafers. The Company also pays a commission of 2.00% on all purchases. The
Credit Agreement expires on January 31, 2001, subject to automatic extensions
thereafter from year to year unless either party gives a termination notice.
Under the terms of the Credit Agreement, Mitsubishi International maintains a
security interest in all inventory, cash and investments, and accounts and
notes receivable of the Company. The Credit Agreement contains standard events
of default which if triggered can permit Mitsubishi International to declare
all amounts outstanding under the Credit Agreement immediately due and payable.
Such events of default include failure to comply with the terms of the Credit
Agreement, bankruptcy and default and acceleration of any other indebtedness of
the Company. As of December 31, 1999, $2,044,000 was outstanding under the
agreement.
4. Deferred Revenue
During the year ended December 31, 1998, the Company entered into a
technology development agreement with a strategic partner that called for the
Company to receive cash payments from the strategic partner as the Company
reached certain milestones as defined under the technology development
agreement. At December 31, 1998 the Company recorded $75,000 of deferred
revenue related to milestones under the agreement that were pending acceptance
by the customer. Final acceptance of all milestones was received in 1999.
At December 31, 1999, the Company recorded $122,000 in deferred revenue
which related to advance payments for unfilled orders.
5. Long-Term Debt Obligations
In April 1998, the Company entered into an agreement with a bank and a
financial institution, which allows the Company to make multiple draws up to
$1,000,000 for the purchase of equipment. The facility bears interest at the
U.S. Treasury note yield plus 2.50% per annum (7.30% at December 31, 1999).
Draws under the facility are payable via principal and interest payments made
ratably over a forty-two month period from the initial draw date. The Company
had approximately $962,000 and $706,000 outstanding against the equipment
facility as of December 31, 1998 and 1999, respectively, and no remaining
amount was available as the aggregate draw under the facility had reached
$1,000,000 during the year ended 1999. At the end of the equipment facility's
term, the Company is obligated to make an additional payment of total facility
draws multiplied by 15% ($150,000 as of December 31, 1998 and 1999). The
Company is recording the additional payment as interest expense over the life
of the related long-term obligation. The Company has accrued approximately
$4,000 and $46,000 relating to this additional payment as of December 31, 1998
and 1999, respectively.
In conjunction with the equipment facility described above, the Company
issued a warrant to the bank and to the financial institution to purchase 1,800
and 9,450 shares, respectively, of the Company's Series B3 convertible
preferred stock at an exercise price of $4.00 per share. The warrants are
immediately exercisable and will expire at the later of 10 years after the date
of grant or five years after the closing of the Company's initial public
offering. The fair value is not material for reporting purposes.
F-14
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In September 1997, the Company negotiated a $1,000,000 term loan with a bank
to finance equipment purchases. The term loan bears interest at the bank's
prime rate plus 0.25% per annum (8.75% at December 31, 1999). The note is
payable via monthly interest payments until April 1998 at which time the
Company began making thirty-six equal monthly payments of principal and
interest. As of December 31, 1998 and 1999, the Company had approximately
$626,000 and $347,000 outstanding against the term loan, respectively.
In conjunction with the term loan described above, the Company issued a
warrant for the purchase of 5,000 shares of the Company's Series B3 convertible
preferred stock at an exercise price of $4.00 per share. The warrant is
immediately exercisable and will expire after September 25, 2002. The fair
value is not material for reporting purposes.
Outstanding borrowings under the long-term debt obligations are secured by
all of the Company's assets. The long-term debt obligations contain affirmative
and negative covenants and will, among other things, limit the Company's
ability to incur additional debt, pay cash dividends, or purchase or sell
certain assets. The obligations also require the Company to restrict certain
acquisitions, mergers, consolidations, or similar transactions.
Maturities under the Company's long-term debt obligations at December 31,
1999 are as follows (in thousands):
<TABLE>
<S> <C>
2000.................................................................. $550
2001.................................................................. $409
2002.................................................................. $140
</TABLE>
6. Commitments
The Company leases its primary facility under an operating lease that
expires in April 2004. Additionally, the Company leases certain software under
an operating lease that expires in September 2001. Rental expense was
approximately $57,000 for the period from February 21, 1997 (inception) to
December 31, 1997 and $341,000 and $642,000 for the years ended December 31,
1998 and 1999.
The Company leases certain equipment under a non-cancelable capital lease
agreement. Equipment under the agreement that was included in property and
equipment was approximately $644,000 and $636,000 at December 31, 1998 and
1999, respectively. The related accumulated amortization was approximately
$227,000 and $440,000 at December 31, 1998 and 1999, respectively. Amortization
expense related to assets under capital lease is included with depreciation
expense. In addition, the related equipment secures the capital lease, and the
Company is required to maintain liability and property damage insurance.
In July 1997, the Company issued a warrant in conjunction with the capital
lease agreement mentioned above. The warrant is immediately exercisable and
allows the holder to purchase 10,500 shares of the Company's Series B3
convertible preferred stock at an exercise price of $4.00 per share. The
warrant expires after June 30, 2004. The fair value assigned to the warrant is
not material for financial reporting purposes.
F-15
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under the Company's operating leases and
capital lease at December 31, 1999 are approximately as follows (in thousands):
<TABLE>
<CAPTION>
Operating Capital
Lease Lease
--------- -------
<S> <C> <C>
2000....................................................... $1,079 $165
2001....................................................... 1,236 --
2002....................................................... 960 --
2003....................................................... 1,008 --
2004....................................................... 437 --
------ ----
Total minimum payments..................................... $4,720 165
======
Less amount representing interest.......................... (5)
----
Total principal balance of capital lease obligation........ $160
====
</TABLE>
The Company does not own or operate a fabrication facility and substantially
all of its wafer requirements are currently supplied by foundries located in
Asia. The Company's purchase obligations to these foundries are based on wafer
supply agreements or noncancelable purchase orders. As of December 31, 1999,
the Company's noncancelable purchase obligation is $706,000.
7. Stockholders' Equity
Convertible Preferred Stock
Series A, B1, B2, B3, and C convertible preferred stockholders generally
have the same voting rights as common stockholders and will generally vote with
common stockholders as a single class except when electing members of the
Company's Board of Directors.
When electing directors, the holders of shares of Series B convertible
preferred stock, voting as a class, are entitled to elect two directors; the
holders of common stock, voting as a class, shall be entitled to elect
two directors; and the holders of all classes of capital stock, voting as a
single class (on an as-converted to common stock basis), shall be entitled to
elect any remaining directors.
In the event of any voluntary or involuntary liquidation of the Company,
Series A, B1, B2, B3, and C stockholders are entitled to a per share
liquidation preference of $0.50, $2.00, $2.50, $4.00, and $5.00, respectively,
plus accrued dividends, if any.
The holders of Series A, B1, B2, B3, and C convertible preferred shares are
entitled to noncumulative cash dividends of $0.04, $0.16, $0.20, $0.32, and
$0.40 per share, respectively, when and if declared by the Board of Directors.
No cash dividends have been declared through December 31, 1999. The following
is a summary of outstanding convertible preferred shares at December 31, 1999
(excludes outstanding Series B3 convertible preferred stock warrants):
<TABLE>
<CAPTION>
Convertible Preferred Shares
-----------------------------
Authorized Outstanding
-------------- --------------
<S> <C> <C>
Series A....................................... 1,680,000 1,680,000
Series B1...................................... 2,000,000 2,000,000
Series B2...................................... 800,000 800,000
Series B3...................................... 3,500,000 3,359,482
Series C....................................... 7,650,000 7,610,754
-------------- --------------
15,630,000 15,450,236
============== ==============
</TABLE>
F-16
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Each convertible preferred share is convertible at the option of the holder
into one share of common stock, subject to adjustments for future dilution. The
convertible preferred shares automatically convert into common stock at the
then applicable conversion rate upon the earlier of (a) the underwritten public
offering of the Company's common stock at an offering price of at least $8.00
per share of common stock with gross proceeds not less than $25,000,000 or (b)
the date on which the Company obtains the consent of at least two-thirds of the
then outstanding shares of Series A, B1, B2, B3, and C stockholders. The
Company has fully reserved shares of common stock for issuance upon the
conversion of Series A, B1, B2, B3, and C convertible preferred stock.
Convertible Preferred Stock Rights
In connection with Series B3 convertible preferred stock financings in July
and September 1997, the Company issued rights to certain stockholders which
provided for the purchase of 2,000,000 shares of Series B1 convertible
preferred stock at $2.00 per share and 800,000 shares of Series B2 convertible
preferred stock at $2.50 per share. The rights were immediately exercisable and
expired approximately one year after their initial grant. The Company recorded
noncash deemed dividends of $2,800,000 for the period from February 21, 1997
(inception) to December 31, 1997, representing the fair value of the rights
issued.
Common Stock Reserved
Common stock reserved is as follows at December 31, 1999:
<TABLE>
<S> <C>
Common stock options............................................ 3,390,257
Series B3 convertible preferred stock warrants.................. 26,750
Convertible preferred stock..................................... 15,450,236
----------
18,867,243
==========
</TABLE>
In March 1997, the Board of Directors approved a stock option plan that
authorized the grant of options to purchase up to 2,000,000 shares of the
Company's common stock. During the years ended December 31, 1998 and 1999
respectively, the Company's Board of Directors authorized an additional
3,430,257 shares and 1,500,000 shares of the Company's common stock for the
stock option plan. The plan is administered by the Board of Directors and
provides for incentive stock options or nonqualified stock options to be issued
to employees, directors, and consultants of the Company. Prices for incentive
stock options may not be less than the fair value of the common stock at the
date of grant. Prices for nonqualified stock options may not be less than 85%
of the fair value of the common stock at the date of grant. Options are
immediately exercisable and generally vest over a period of four years from the
date of grant. Any unvested stock issued is subject to repurchase by the
Company at the original issuance price upon termination of the option holder's
employment. Unexercised options expire ten years after the date of grant.
Deferred Compensation
During the years ended December 31, 1998 and 1999, the Company recorded
deferred compensation of approximately $517,000 and $16,031,000, respectively.
This deferred compensation represents the difference between the grant price
and the deemed fair value for financial statement reporting purposes of the
Company's common stock options granted during these periods. Deferred
compensation expense is being amortized using the graded vesting method, in
accordance with FAS 123 and FAS Interpretation No. 28, over the vesting period
of each respective option, generally four years. Under the graded vesting
method, each option grant is separated into portions based on their vesting
terms which results in acceleration of amortization expense for the overall
award. The accelerated amortization pattern results in expensing approximately
59% of the total award in year 1, 25% in year 2, 12% in year 3 and 4% in year
4.
F-17
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred compensation expense was allocated among the associated expense
categories as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
----- ------
<S> <C> <C>
Cost of sales................................................ $ -- $ 117
Research and development..................................... 29 1,511
Sales and marketing.......................................... 5 697
General and administrative................................... 35 1,203
----- ------
$ 69 $3,528
</TABLE>
The following is a summary of additional information with respect to the
stock option plan:
<TABLE>
<CAPTION>
Options Outstanding and
Exercisable
----------------------------
Options Number Weighted
Available of Average Exercise
for Grant Shares Price
---------- ---------- ----------------
<S> <C> <C> <C>
Options authorized................... 2,000,0000 -- $ --
Options granted...................... (1,803,500) 1,803,500 $0.25
Options exercised.................... -- (45,000) $0.40
---------- ---------- -----
Balance at December 31, 1997......... 196,500 1,758,500 $0.25
Options authorized................... 3,430,257 -- $ --
Options granted...................... (2,166,757) 2,166,757 $0.40
Options exercised.................... -- (425,750) $0.19
Options canceled..................... 141,250 (141,250) $0.35
---------- ---------- -----
Balance at December 31, 1998......... 1,601,250 3,358,257 $0.35
Options authorized................... 1,500,000 -- $ --
Options granted...................... (2,106,600) 2,106,600 $1.80
Options exercised.................... -- (1,719,348) $0.67
Options available due to repurchase
of unvested shares.................. 3,750 -- $0.40
Options canceled..................... 355,252 (355,252) $0.30
---------- ---------- -----
Balance at December 31, 1999......... 1,353,652 3,390,257 $1.09
========== ========== =====
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
-----------------------------------------
Number Weighted
Range of of Average Weighted Average
Exercise Prices Shares Exercise Price Contractual Life
--------------- --------- -------------- ----------------
<S> <C> <C> <C>
$0.05-$0.60........................ 1,990,407 $0.36 8.22
$1.00-$1.60........................ 639,250 $1.49 9.48
$1.80-$3.00........................ 760,600 $2.66 9.78
---------
3,390,257 $1.09 8.81
=========
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB Opinion No. 25), and
related interpretations in accounting for its employee stock options because,
as discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" (FAS 123), requires use of option valuation models that
were not developed for use in valuing employee stock options. Under APB Opinion
No. 25, when the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
F-18
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The option valuation models used to fair value options under FAS 123 were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected life of the option. Because the Company's employee stock options have
characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee
stock options.
Pro forma information regarding net loss is required by FAS 123, which also
requires that the information be determined as if the Company has accounted for
its employee stock options granted during the period from February 21, 1997
(inception) to December 31, 1997 and the years ended December 31, 1998 and 1999
under the fair value method of FAS 123. The fair value for these options was
estimated at the date of grant using the minimum value method with the
following weighted average assumptions: weighted average risk-free interest
rates of 6.02%, 5.14%, and 5.50% for the period from February 21, 1997
(inception) to December 31, 1997 and the years ended December 31, 1998 and
1999, respectively; no dividend yields or volatility factors of the expected
market price of the Company's common stock; a weighted average expected life of
the option of five years for the period from February 21, 1997 (inception) to
December 31, 1997 and for the year ended December 31, 1998; and a weighted
average expected life of the option of four years for the year ended December
31, 1999.
For purposes of FAS 123 pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. Had
compensation expense for the Company's stock option plan been determined on the
fair value at the grant dates for awards under the plan consistent with the
method of FAS 123, the Company's net loss would have been increased to the
following approximate FAS 123 pro forma amounts:
<TABLE>
<CAPTION>
Period From Years Ended
February 21, 1997 December 31,
(Inception) to -----------------
January 31, 1997 1998 1999
----------------- ------- --------
<S> <C> <C> <C>
FAS 123 Pro forma net loss applicable to
common stockholders...................... $(4,747) $(9,415) $(19,499)
FAS 123 Pro forma basic and diluted net
loss per share applicable to
common shareholders...................... $ (0.59) $ (1.17) $ (2.21)
</TABLE>
The options' weighted average grant date fair value, which is the value
assigned to the options under FAS 123, was approximately $0.05 for the period
from February 21, 1997 (inception) to December 31, 1997 and $0.24 and $0.36 for
the years ended December 31, 1998 and 1999, respectively.
The pro forma impact of options on the net losses for the period from
February 21, 1997 (inception) to December 31, 1997 and the years ended December
31, 1998 and 1999 is not representative of the effects on net income (loss) for
future years, as future years will include the effects of options vesting as
well as the impact of multiple years of stock option grants. The full effect of
FAS 123 will not be fully reflected until fiscal 2001.
Stockholders' Notes Receivable
In November 1999, the Company issued 215,000 shares of common stock in
connection with the exercise of an employee stock option at an exercise price
of $2.00 per share in return for a full recourse note receivable for $430,000.
The note bears interest at 6.00% per annum and is due October 2004. Under the
terms of the employee's employment agreement, payment may be required earlier
in connection with certain events including an initial public offering by the
Company or termination of the employee.
F-19
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Income Taxes
Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for the period from February
21, 1997 (inception) to December 31, 1997 and for the years ended December 31,
1998 and 1999.
The difference between the provision for income taxes and the amount
computed by applying the federal statutory income tax rate of 34% to income
before taxes is explained as follows:
<TABLE>
<CAPTION>
Inception
to 1997 1998 1999
--------- ------ ------
<S> <C> <C> <C>
Tax (benefit) at federal statutory rate............. (659) (3,147) (6,519)
Loss for which no tax benefit is currently
recognizable....................................... 659 3,147 6,519
---- ------ ------
Total tax provision............................... -0- -0- -0-
==== ====== ======
</TABLE>
As of December 31, 1999, the Company has $23,000,000 of net operating loss
carryforwards for federal and state purposes. The Company also has federal and
state research and development tax credit carryforwards of approximately
$900,000 and $600,000, respectively. The net operating losses and credit carry
forwards will expire at various dates beginning in the years 2005 through 2019,
if not utilized.
Utilization of the net operating losses may be subject to a substantial
annual limitation due to the ownership change limitations provided by the
Internal Revenue Code of 1986, as amended, and similar state provisions. The
annual limitation may result in the expiration of net operating losses and tax
credit carry forwards before full utilization.
Deferred taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred taxes consist of the following (in thousands):
<TABLE>
<CAPTION>
Period From
February 21,
1997
(Inception)
Through Years Ended
December 31, December 31,
------------ -----------------
1997 1998 1999
------------ ------- --------
<S> <C> <C> <C>
Deferred tax liabilities:
Other......................................... $ (217) $ (182) $ (197)
Deferred tax assets:
Net operating losses.......................... 950 4,310 9,100
Tax credit carryforwards...................... 240 950 1,296
Reserves and accruals......................... 37 142 1,797
------- ------- --------
Total deferred tax assets...................... 1,227 5,402 12,193
Valuation allowance........................... (1,010) (5,220) (11,996)
------- ------- --------
Net deferred tax assets........................ 217 182 197
Net deferred taxes............................. $ -- $ -- $ --
======= ======= ========
</TABLE>
Financial Accounting Standards Board Statement No. 109 provides for the
recognition of deferred tax assets if realization of such assets is more likely
than not. Based upon the weight of available evidence, which
F-20
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
includes the Company's historical operating performance and the reported
cumulative net losses to date, the Company has provided a full valuation
allowance against its deferred tax assets.
The valuation allowance increased by approximately $1,010,000, $4,210,000
and $6,776,000 for the period from February 21, 1997 (inception) through
December 31, 1997 and for the years ended December 31, 1998 and 1999,
respectively. The increase in the valuation allowance for all periods presented
is due to the requirement to provide a full valuation allowance against the
increasing deferred tax assets.
9. Business Segment Information
The Company operates in one business segment, the sale of products for the
DSL market, which it sells primarily to original equipment manufacturers and
companies in the communications industries.
The Chief Executive Officer has been identified as the Chief Operating
Decision Maker (CODM) because he has final authority over resource allocation
decisions and performance assessment. The CODM does not receive discrete
financial information about the individual components.
The Company's customers, who account for more than 10% of revenues in each
respective year, are as follows:
<TABLE>
<CAPTION>
Period From
February 21,
1997
(Inception)
Through Years Ended
December 31, December 31,
------------ ---------------
1997 1998 1999
------------ ------ ------
<S> <C> <C> <C>
Mitsubishi Electric........................... 50% 60% *
NEC........................................... -- 10% 21%
Sumitomo Electric............................. 50% 13% 34%
Sungmi Telecom Electronics.................... -- 15% *
</TABLE>
* Represents less than 10% of revenues.
Revenues by geographic region were as follows (in thousands):
<TABLE>
<CAPTION>
Period From
February 21,
1997 Years Ended
(Inception) to December 31,
December 31, -------------
1997 1998 1999
-------------- -------------
<S> <C> <C> <C>
Revenues:
United States................................... $ -- $ -- $ 686
Asia............................................ 300 752 3,055
Other........................................... -- -- 3
---- ----- -------
Total........................................... $300 $ 752 $ 3,744
==== ===== =======
</TABLE>
10. 401(k) Profit Sharing Plan and Trust
The Company has adopted a 401(k) Profit Sharing Plan and Trust that allows
eligible employees to make contributions subject to certain limitations. The
Company may make discretionary contributions based on profitability as
determined by the Board of Directors. There was no amount contributed by the
Company to the plan and for the period from February 21, 1997 (inception) to
December 31, 1997 and the years ended December 31, 1998 and 1999.
F-21
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Related Party Transactions
During the period from February 21, 1997 (inception) to December 31, 1997,
the Company recognized revenue of $300,000 in connection with two separate
technology development agreements with two separate Series B3 convertible
preferred stockholders. There were no amounts due or due from the Series B3
convertible preferred shareholders at December 31, 1997. During the year ended
December 31, 1998 and 1999, the Series B3 convertible preferred stockholders'
ownership interests were diluted as a result of subsequent Company financings
and are no longer considered related parties.
12. Subsequent Events
Initial Public Offering
In February 2000, the Board of Directors approved the filing of a
Registration Statement with the Securities and Exchange Commission permitting
the Company to sell common stock to the public. Upon completion of the initial
public offering, the Company's Certificate of Incorporation will be amended to
authorize 100,000,000 shares of common stock and 10,000,000 shares of preferred
stock.
1997 Stock Plan
In February 2000, the Board of Directors approved an increase in the number
of shares reserved for issuance under the 1997 Stock Plan by 3,069,743 shares.
In addition, the Board of Directors approved an automatic increase in the
number of shares reserved under the Plan on the first day of the Company's
fiscal year beginning on January 1, 2001 equal to the lesser of 3 million
shares or 5% of the Company's outstanding common stock on the date of the
annual increase, or a lesser number of shares determined by the Board of
Directors. The changes to the plan are subject to stockholder approval.
2000 Employee Stock Purchase Plan
In February 2000, the Board of Directors approved the 2000 Employee Stock
Purchase Plan (the Purchase Plan). A total of 500,000 shares of common stock
has been reserved for issuance under the Purchase Plan. In addition, the
Purchase Plan provides for automatic annual increases on the first day of each
of the Company's fiscal years beginning on January 1, 2001 equal to the lesser
of 400,000 shares or 1% of the Company's outstanding common stock on the date
of the annual increase, or a lesser number of shares determined by the Board of
Directors. The plan is subject to stockholder approval.
Officer Resignation
The Company's former Chief Executive Officer resigned from his position as
Chief Executive Officer in January 2000. In connection with his resignation,
the Company entered into an Agreement and Mutual Release on February 2, 2000.
Under the terms of the agreement, his employment will terminate on March 31,
2000. As of such termination date, approximately 211,000 options with an
exercise price of $0.40 per share will accelerate and be fully vested in
accordance with his original employment agreement. Additionally, the Company
will pay severance totalling $225,000.
F-22
<PAGE>
[Caption: "Empowering Broadband Networks" with Centillium logo]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses other than
underwriting discounts and commissions, payable by Centillium Communications,
Inc. in connection with the sale of common stock being registered. All amounts
are estimates except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 29,146
NASD filing fee.................................................. 11,540
Nasdaq National Market listing fee............................... 100,000
Printing and engraving costs..................................... 200,000
Legal fees and expenses.......................................... 400,000
Accounting fees and expenses..................................... 400,000
Blue Sky fees and expenses....................................... 3,000
Transfer Agent and Registrar fees................................ 20,000
Miscellaneous expenses........................................... 86,314
----------
Total.......................................................... $1,250,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article 13 of the Registrant's Amended and Restated Certificate of
Incorporation provides for the indemnification of directors to the fullest
extent permissible under Delaware law.
Article 12 of the Registrant's Amended and Restated Bylaws provides for the
indemnification of officers, directors and third parties acting on behalf of
the Registrant if such person acted in good faith and in a manner reasonably
believed to be in and not opposed to the best interest of the Registrant, and,
with respect to any criminal action or proceeding, the indemnified party had no
reason to believe his or her conduct was unlawful.
The Registrant has entered into indemnification agreements with its
directors and executive officers, in addition to indemnification provided for
in the Registrant's Amended and Restated Bylaws, and intends to enter into
indemnification agreements with any new directors and executive officers in the
future.
Item 15. Recent Sales of Unregistered Securities
During the last three years, we have issued unregistered securities to a
limited number of persons as described below:
. In April 1997, we sold in the aggregate 1,680,000 shares of unregistered
Series A Preferred Stock at a price per share of $0.50 to certain
investors for aggregate cash consideration of $840,000.
. In September 1997 and June 1998, we sold in the aggregate 2,000,000
shares of unregistered Series B1 Preferred Stock at a price per share of
$2.00 to certain investors for aggregate cash consideration of
$4,000,000.
. In July 1997, we sold in the aggregate 800,000 shares of unregistered
Series B2 Preferred Stock at a price per share of $2.50 to certain
investors for aggregate cash consideration of $2,000,000.
. In July 1997, September 1997, October 1997 and April 1998, we sold in
the aggregate 3,359,482 shares of unregistered Series B3 Preferred Stock
at a price per share of $4.00 to certain investors for aggregate cash
consideration of $13,437,928.
II-1
<PAGE>
. In April 1999, we sold in the aggregate 7,610,754 shares of unregistered
Series C Preferred Stock at a price per share of $5.00 to certain
investors for aggregate cash consideration of $38,053,770.
. In May 1997 we issued a warrant to Lighthouse Capital Partners II, L.P.
for 10,500 shares of Series B3 preferred stock at an exercise price of
$4.00 per share;
. In September 1997 we issued a warrant to Silicon Valley Bank for 5,000
shares of Series B3 preferred stock at an exercise price of $4.00 per
share;
. In April 1998 we issued a warrant to MMC/GATX Partnership No. 1 for
9,450 shares of Series B3 preferred stock at an exercise price of $4.00
per share; and
. In April 1998 we issued a warrant to Silicon Valley Bank for 1,800
shares of Series B3 preferred stock at an exercise price of $4.00 per
share.
We relied upon Section 4(2) of the Securities Act in each of the private
placement transactions listed above. Each investor who was not an accredited
investor represented to us that he or she had such knowledge and experience in
financial matters such that he or she was capable of evaluating the merits and
risks of the investments. The recipients of securities in each transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other
instruments issued in such transactions. All recipients either received
adequate information about Centillium or had access, through employment or
other relationships, to such information.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1** Underwriting Agreement
3.1(a)* Certificate of Incorporation of the Registrant, as currently in
effect
3.1(b) Amended and Restated Certificate of Incorporation of the Registrant
to be filed upon completion of the offering
4.1** Specimen certificate of common stock
4.2(a)* Bylaws of the Registrant as currently in effect
4.2(b) Bylaws of the Registrant as in effect upon completion of the offering
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1** Form of Indemnification Agreement between the Registrant and each of
its directors and officers
10.2 1997 Stock Plan
10.3 2000 Employee Stock Purchase Plan
10.4* Second Amended and Restated Investors' Rights Agreement dated as of
April 30, 1999 between the Registrant and the stockholders named
therein
10.5 Lease, dated August 16, 1999, between the Registrant and Renco
Investment Company
10.6** Trade Financing Agreement, dated February 1, 1999, between the
Registrant and Mitsubishi International Corporation, and amendment
dated November , 1999
10.7 Cooperation Agreement, dated March 2, 1998, between the Registrant
and Sungmi Telecom Electronics Co., Ltd.
10.8 Cooperation Agreement, dated November 30, 1997, between the
Registrant and Askey Computer Corporation
10.9 Cooperation Agreement, dated October 15, 1997, between the Registrant
and Sumitomo Electric Industries, Ltd.
10.10 Addendum to Cooperation Agreement, dated April 20, 1999, between the
Registrant and Sumitomo Electric Industries, Ltd.
10.11 Cooperation Agreement, dated April 3, 1998, between the Registrant
and NEC Corporation
10.12 Addendum to Cooperation Agreement, dated February 23, 1999, between
the Registrant and NEC Corporation
10.13 Co-Development Agreement, dated October 15, 1997, between the
Registrant and Mitsubishi Electric Corporation
10.14 Addendum to Co-Development Agreement, dated June 21, 1999, between
the Registrant and Mitsubishi Electric Corporation
10.15 Cooperation Agreement, dated August 25, 1997, between the Registrant
and Mitsubishi Electric Corporation
10.16 Wafer Supply Agreement, dated April 22, 1999, between the Registrant
and Mitsubishi Electronics America
10.17* Agreement and Mutual Release dated February 2, 2000 between the
Registrant and A. Travis White
10.18* Offer letter between the Registrant and John W. Luhtala dated
November 30, 1999
10.19* Offer letter between the Registrant and Jon S. Sherburne dated August
17, 1999
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
10.20 Technical Services Consulting Agreement, dated March 19, 1998, between
Registrant and Mitsubishi Corporation
10.21** Foundry Agreement, dated March 7, 2000, between Registrant and United
Microelectronics Corporation
10.22** Assembly and Test Services Agreement, dated February 28, 2000, between
Registrant and ST Assembly and Test Services, Ltd.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2** Consent of Counsel (see Exhibit 5.1)
24.1* Power of Attorney (see page II-5)
27.1* Financial Data Schedules
</TABLE>
- ---------------------
* Previously filed.
** To be filed by amendment.
(b) Financial Statement Schedules
<TABLE>
<CAPTION>
Schedule Page
-------- ----
<C> <S>
Schedule II--Valuation and Qualifying Accounts
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amendment to the Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fremont, State of California, on the 30th day of
March, 2000.
CENTILLIUM COMMUNICATIONS, INC.
*
By: _________________________________
Faraj Aalaei, Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<C> <S> <C>
* Chief Executive March 30, 2000
______________________________________ Officer and Director
Faraj Aalaei (Principal Executive
Officer)
/s/ John W. Luhtala Vice President and March 30, 2000
______________________________________ Chief Financial
John W. Luhtala Officer (Principal
Financial and
Accounting Officer)
* President and Director March 30, 2000
______________________________________
Shahin Hedayat
* Director March 30, 2000
______________________________________
Kamran Elahian
* Director March 30, 2000
______________________________________
Irwin Federman
* Director March 30, 2000
______________________________________
Robert C. Hawk
* Director March 30, 2000
______________________________________
Lip-Bu Tan
</TABLE>
By: /s/ John W. Luhtala
-------------------------------
John W. Luhtala Attorney-in-fact
II-5
<PAGE>
CENTILLIUM COMMUNICATIONS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Deductions Balance at
of Period Expenses Write-Offs End of Period
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for Doubtful
Accounts
Period from February 21, 1997
(Inception) to
December 31, 1997............ $ -- $ -- $ -- $ --
Year ended December 31, 1998.. $ -- $ -- $ -- $ --
Year ended December 31, 1999.. $ -- $ 150(1) $ -- $ 150
</TABLE>
- ---------------------
(1) The 1999 balance represents a reserve for unidentified bad debt exposures.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
1.1** Underwriting Agreement
3.1(a)* Certificate of Incorporation of the Registrant, as currently in
effect
3.1(b) Amended and Restated Certificate of Incorporation of the Registrant
to be filed upon completion of the offering
4.1** Specimen certificate of common stock
4.2(a)* Bylaws of the Registrant as currently in effect
4.2(b) Bylaws of the Registrant as in effect upon completion of the offering
5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation
10.1** Form of Indemnification Agreement between the Registrant and each of
its directors and officers
10.2 1997 Stock Plan
10.3 2000 Employee Stock Purchase Plan
10.4* Second Amended and Restated Investors' Rights Agreement dated as of
April 30, 1999 between the Registrant and the stockholders named
therein
10.5 Lease, dated August 16, 1999, between the Registrant and Renco
Investment Company
10.6** Trade Financing Agreement, dated February 1, 1999, between the
Registrant and Mitsubishi International Corporation, and amendment
dated November , 1999
10.7 Cooperation Agreement, dated March 2, 1998, between the Registrant
and Sungmi Telecom Electronics Co., Ltd.
10.8 Cooperation Agreement, dated November 30, 1997, between the
Registrant and Askey Computer Corporation
10.9 Cooperation Agreement, dated October 15, 1997, between the Registrant
and Sumitomo Electric Industries, Ltd.
10.10 Addendum to Cooperation Agreement, dated April 20, 1999, between the
Registrant and Sumitomo Electric Industries, Ltd.
10.11 Cooperation Agreement, dated April 3, 1998, between the Registrant
and NEC Corporation
10.12 Addendum to Cooperation Agreement, dated February 23, 1999, between
the Registrant and NEC Corporation
10.13 Co-Development Agreement, dated October 15, 1997, between the
Registrant and Mitsubishi Electric Corporation
10.14 Addendum to Co-Development Agreement, dated June 21, 1999, between
the Registrant and Mitsubishi Electric Corporation
10.15 Cooperation Agreement, dated August 25, 1997, between the Registrant
and Mitsubishi Electric Corporation
10.16 Wafer Supply Agreement, dated April 22, 1999, between the Registrant
and Mitsubishi Electronics America
10.17* Agreement and Mutual Release dated February 2, 2000 between the
Registrant and A. Travis White
10.18* Offer letter between the Registrant and John W. Luhtala dated
November 30, 1999
10.19* Offer letter between the Registrant and Jon S. Sherburne dated August
17, 1999
10.20 Technical Services Consulting Agreement, dated March 19, 1998,
between Registrant and Mitsubishi Corporation
10.21** Foundry Agreement, dated March 7, 2000, between Registrant and United
Microelectronics Corporation
10.22** Assembly and Test Services Agreement, dated February 28, 2000,
between Registrant and ST Assembly and Test Services, Ltd.
23.1 Consent of Ernst & Young LLP, Independent Auditors
23.2** Consent of Counsel (see Exhibit 5.1)
24.1* Power of Attorney (see page II-5)
27.1* Financial Data Schedules
</TABLE>
- -------------------
* Previously filed.
** To be filed by amendment.
<PAGE>
EXHIBIT 3.1(b)
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
CENTILLIUM COMMUNICATIONS, INC.
A Delaware Corporation
(Incorporated on November 15, 1999)
Arthur F. Schneiderman hereby certifies that:
1. He is the Secretary of Centillium Communications, Inc., a Delaware
Corporation (the "Corporation").
2. The Certificate of Incorporation of the Corporation, filed with the
Secretary of State of the State of Delaware on November 15, 1999, is hereby
amended and restated in its entirety to read as follows:
"FIRST: The name of the corporation is Centillium Communications, Inc.
(the "Corporation").
SECOND: The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, Delaware, 19801. The name of its registered
agent at such address is The Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or promoted
by the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of Delaware.
FOURTH: The Corporation is authorized to issue two classes of shares
designated, respectively, Common Stock, par value $0.001 per share (the "Common
Stock"), and Preferred Stock, par value $0.001 per share(the "Preferred Stock").
The Corporation is authorized to issue 100,000,000 shares of Common Stock and
10,000,000 shares of Preferred Stock.
The shares of Preferred Stock may be issued from time to time in one or
more series pursuant to a resolution or resolutions providing for such issue
duly adopted by the Board of Directors. The Board of Directors of the
Corporation is expressly authorized, by filing a certificate pursuant to the
applicable law of the State of Delaware, to: (i) establish from time to time
the number of shares to be included in each such series; (ii) fix the rights,
preferences, restrictions and designations of the shares of each such series,
including but not limited to the fixing or alteration of the dividend rights,
dividend rate, conversion rights, conversion rate, voting rights, rights and
terms of redemption (including sinking fund provisions), redemption price or
prices, voting rights and liquidation preferences of any series of Preferred
Stock for which no shares have been issued and are outstanding; (iii) increase
number of shares of any series at any time; and (iv) decrease the number
<PAGE>
of shares of any series prior or subsequent to the issue of shares of that
series, but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be so decreased, the shares
constituting such decrease shall resume the status which they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
FIFTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend,
or repeal the Bylaws of the Corporation.
SIXTH. Advance notice of new business and stockholder nominations for the
election of directors shall be given in the manner and to the extent provided in
the Bylaws of the Corporation. Election of directors need not be by written
ballot unless the Bylaws of the Corporation shall so provide.
SEVENTH: Meetings of stockholders may be held within or without the State
of Delaware, as the Bylaws may provide. No action that is required or permitted
to be taken by the stockholders of the Corporation at any annual or special
meeting of stockholders may be effected by written consent of stockholders in
lieu of a meeting of stockholders. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation. The directors of the
Corporation need not be elected by written ballot unless a stockholder demands
election by written ballot at the meeting and before voting begins, or unless
the Bylaws so provide
EIGHTH: At all elections of directors of the Corporation, each holder of
stock of any class or series of stock shall be entitled to as many votes as
shall equal the number of votes which such stockholder would be entitled to cast
for the election of directors with respect to his or her shares of stock
multiplied by the number of directors to be elected, and may cast all of such
votes for, or for any two or more of them as such stockholder may see fit.
NINTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon the
stockholders herein are granted subject to this right.
TENTH: Subject to the provisions of the General Corporation Law of the
State of Delaware, the number of Directors of the Corporation shall be
determined as provided by the Bylaws.
ELEVENTH: The Board of Directors shall be divided into three classes
consisting of as nearly equal numbers of directors as possible, and designated
Class I, Class II, and Class III. The term of office of Class I shall expire at
the first annual meeting of stockholders following the effectiveness of this
Article, and each third annual meeting of stockholders thereafter; the term of
office of Class II shall expire at the second annual meeting of stockholders
following the effectiveness of this Article, and each third annual meeting of
stockholders thereafter; and the term of office of Class III shall expire at the
third annual meeting of stockholders following the effectiveness of this
Article, and each third annual meeting of stockholders thereafter. Directors
added to the board of directors between annual meetings of stockholders by
reason of an increase in the
-2-
<PAGE>
number of directors shall belong to the class designated by the Board of
Directors; provided however that the number of board seats designated to belong
to Class I, Class II and Class III must be as nearly equal in number as
possible. Following the effectiveness of this Article, stockholders may effect
the removal of a director only for cause. This provision shall supersede any
provision to the contrary in the Corporation's Bylaws.
TWELFTH: The Corporation shall indemnify and hold harmless any director,
officer, employee or agent of the Corporation from and against any and all
expenses and liabilities that may be imposed upon or incurred by him in
connection with, or as a result of, any proceeding in which he may become
involved, as a part or otherwise, by reason of the fact that he is or was such a
director, officer, employee or agent of the Corporation, whether or not he
continues to be such at the time such expenses and liabilities shall have been
imposed or incurred, to the extent permitted by the laws of the State of
Delaware, as they may be amended from time to time.
THIRTEENTH: The liability of the directors of the Corporation for monetary
damages shall be eliminated to the fullest extent permissible under Delaware
law.
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of this Thirteenth Article shall be prospective
and shall not affect the rights under this Thirteenth Article in effect at the
time of the alleged occurrence of any act or omission to act giving rise to
liability or indemnification.
FOURTEENTH: The name and mailing address of the incorporator are:
Arthur F. Schneiderman, Esq.
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
3. The foregoing Restated Certificate of Incorporation has been duly
approved by the board of directors of the Corporation in accordance with the
provisions of Sections 242 and 245 of the Delaware General Corporation Law.
4. The foregoing Restated Certificate of Incorporation has been duly
approved by the required vote of the stockholders in accordance with the
Certificate of Incorporation and the provisions of Sections 242 and 245 of the
Delaware General Corporation Law.
-3-
<PAGE>
The undersigned hereby acknowledges that the foregoing Restated Certificate
of Incorporation is his act and deed and that the facts stated herein are true.
Executed at Palo Alto, CA, this ____ day of __________, 2000.
____________________________________
Arthur F. Schneiderman, Secretary
-4-
<PAGE>
EXHIBIT 4.2(b)
BYLAWS
OF
CENTILLIUM COMMUNICATIONS, INC
(a Delaware Corporation)
<PAGE>
BYLAWS OF
CENTILLIUM COMMUNICATIONS, INC.
(a Delaware Corporation)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES.................................................... 1
1.1 REGISTERED OFFICE...................................................... 1
1.2 OTHER OFFICES.......................................................... 1
ARTICLE II - MEETINGS OF STOCKHOLDERS............................................ 1
2.1 PLACE OF MEETINGS...................................................... 1
2.2 ANNUAL MEETING......................................................... 1
2.3 SPECIAL MEETING........................................................ 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS....................................... 2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS........ 2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE........................... 3
2.7 QUORUM................................................................. 3
2.8 ADJOURNED MEETING; NOTICE.............................................. 4
2.9 VOTING................................................................. 4
2.10 WAIVER OF NOTICE....................................................... 4
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING............................. 5
2.12 PROXIES................................................................ 5
2.13 ORGANIZATION........................................................... 5
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE.................................. 6
ARTICLE III - DIRECTORS.......................................................... 6
3.1 POWERS................................................................. 6
3.2 NUMBER OF DIRECTORS.................................................... 6
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS............................... 6
3.4 RESIGNATION AND VACANCIES.............................................. 7
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE............................... 7
3.6 REGULAR MEETINGS....................................................... 7
3.7 SPECIAL MEETINGS; NOTICE............................................... 7
3.8 QUORUM................................................................. 8
3.9 WAIVER OF NOTICE....................................................... 8
3.10 ADJOURNMENT............................................................ 8
3.11 NOTICE OF ADJOURNMENT.................................................. 8
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING...................... 8
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
---
<S> <C>
3.13 FEES AND COMPENSATION OF DIRECTORS.................................... 9
3.14 APPROVAL OF LOANS TO OFFICERS......................................... 9
ARTICLE IV - COMMITTEES......................................................... 9
4.1 COMMITTEES OF DIRECTORS............................................... 9
4.2 MEETINGS AND ACTION OF COMMITTEES..................................... 10
4.3 COMMITTEE MINUTES..................................................... 10
ARTICLE V - OFFICERS............................................................ 11
5.1 OFFICERS.............................................................. 11
5.2 ELECTION OF OFFICERS.................................................. 11
5.3 SUBORDINATE OFFICERS.................................................. 11
5.4 REMOVAL AND RESIGNATION OF OFFICERS................................... 11
5.5 VACANCIES IN OFFICES.................................................. 11
5.6 CHAIRMAN OF THE BOARD................................................. 12
5.7 PRESIDENT............................................................. 12
5.8 VICE PRESIDENTS....................................................... 12
5.9 SECRETARY............................................................. 12
5.10 CHIEF FINANCIAL OFFICER............................................... 13
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS...................................................... 13
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS............................. 13
6.2 INDEMNIFICATION OF OTHERS............................................. 14
6.3 INSURANCE............................................................. 14
ARTICLE VII - RECORDS AND REPORTS............................................... 15
7.1 MAINTENANCE AND INSPECTION OF RECORDS................................. 15
7.2 INSPECTION BY DIRECTORS............................................... 15
7.3 ANNUAL STATEMENT TO STOCKHOLDERS...................................... 15
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS........................ 15
7.5 CERTIFICATION AND INSPECTION OF BYLAWS................................ 16
ARTICLE VIII - GENERAL MATTERS.................................................. 16
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING................. 16
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS............................. 16
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED.................... 16
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES...................... 17
8.5 SPECIAL DESIGNATION ON CERTIFICATES................................... 17
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
Page
---
<S> <C>
8.6 LOST CERTIFICATES..................................................... 18
8.7 TRANSFER AGENTS AND REGISTRARS........................................ 18
8.8 CONSTRUCTION; DEFINITIONS............................................. 18
ARTICLE IX - AMENDMENTS........................................................ 18
9.1 AMENDMENTS BY STOCKHOLDERS AND DIRECTORS.............................. 18
9.2 SUPERMAJORITY VOTE.................................................... 19
</TABLE>
-iii-
<PAGE>
BYLAWS
------
OF
--
CENTILLIUM COMMUNICATIONS, INC.
------------------------------
(a Delaware Corporation)
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be fixed in the certificate
of incorporation of the corporation.
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of stockholders shall be held at any place within or outside the
State of Delaware designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the principal
executive office of the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the [third
Tuesday of May] in each year at [10:00 a.m]. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on the
next succeeding full business day. At the meeting, directors shall be elected,
and any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
---------------
Except as otherwise required by law, a special meeting of the stockholders
may be called only by the Board of Directors, the Chairman of the Board, or the
President; provided however, that if at any time no directors remain in office,
then a special meeting for the purpose of electing directors may be called in
accordance with the procedure set forth in the Bylaws. No business may be
transacted at such special meeting otherwise than as specified in the notice of
such meeting.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
--------------------------------
All notices of meetings of stockholders shall be sent or otherwise given in
accordance with Section 2.6 of these bylaws not less than ten (10) nor more than
sixty (60) days before the date of the meeting. The notice shall specify the
place, date and hour of the meeting and (i) in the case of a special meeting,
the purpose or purposes for which the meeting is called (no business other than
that specified in the notice may be transacted) or (ii) in the case of the
annual meeting, those matters which the board of directors, at the time of
giving the notice, intends to present for action by the stockholders (but any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
---------------------------------------------------------------
Subject to the rights of holders of any class or series of stock having a
preference over the Common Stock as to dividends or upon liquidation,
(a) nominations for the election of directors, and
(b) business proposed to be brought before any stockholder meeting
may be made by the board of directors or proxy committee appointed by the
board of directors or by any stockholder entitled to vote in the election of
directors generally if such nomination or business proposed is otherwise proper
business before such meeting. However, any such stockholder may nominate one or
more persons for election as directors at a meeting or propose business to be
brought before a meeting, or both, only if such stockholder has given timely
notice to the secretary of the corporation in proper written form of their
intent to make such nomination or nominations or to propose such business. To
be timely, such stockholder's notice must be delivered to or mailed and received
at the principal executive offices of the corporation not less than one hundred
twenty (120) calendar days in advance of the date of the corporation's proxy
statement released to stockholders in connection with the previous year's annual
meeting of stockholders; provided, however, that in the event that no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than thirty (30) days from the date contemplated at the time of
the previous year's proxy statement, notice by the stockholder to be timely must
be so received a reasonable time before the solicitation is made. To be in
proper form, a stockholder's notice to the secretary shall set forth:
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(i) the name and address of the stockholder who intends to
make the nominations or propose the business and, as the case may be, of the
person or persons to be nominated or of the business to be proposed;
(ii) a representation that the stockholder is a holder of
record of stock of the corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice;
(iii) if applicable, a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder;
(iv) such other information regarding each nominee or each
matter of business to be proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or intended
to be nominated, or the matter been proposed, or intended to be proposed by the
board of directors; and
(v) if applicable, the consent of each nominee to serve as
director of the corporation if so elected.
The chairman of the meeting shall refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of stockholders shall be given either
personally or by first-class mail or by telegraphic or other written
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the stockholder at the address of that stockholder
appearing on the books of the corporation or given by the stockholder to the
corporation for the purpose of notice. Notice shall be deemed to have been
given at the time when delivered personally or deposited in the mail or sent by
telegram or other means of written communication.
An affidavit of the mailing or other means of giving any notice of any
stockholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.7 QUORUM
------
The holders of a majority in voting power of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum is not present or
represented at any meeting of the stockholders, then either (i) the chairman of
the meeting or (ii) the stockholders entitled to
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vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting in accordance with Section 2.7 of these bylaws.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which, by express provision of the laws of the State of Delaware or
of the certificate of incorporation or these bylaws, a different vote is
required, in which case such express provision shall govern and control the
decision of the question.
If a quorum be initially present, the stockholders may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken is approved by a
majority of the stockholders initially constituting the quorum.
2.8 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time and place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.9 VOTING
------
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint
owners, and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation or
these bylaws, each stockholder shall be entitled to one vote for each share of
capital stock held by such stockholder with respect to any matter submitted to a
vote of the stockholders and stockholders shall not be entitled to cumulate
their votes in the election of directors.
2.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or
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special meeting of the stockholders need be specified in any written waiver of
notice unless so required by the certificate of incorporation or these bylaws.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING
------------------------------------------
For purposes of determining the stockholders entitled to notice of any
meeting or to vote thereat, the board of directors may fix, in advance, a record
date, which shall not precede the date upon which the resolution fixing the
record date is adopted by the board of directors and which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting, and in such event only stockholders of record on the date so fixed are
entitled to notice and to vote, notwithstanding any transfer of any shares on
the books of the corporation after the record date.
If the board of directors does not so fix a record date, the record date
for determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the business day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the business day next preceding the day on which the
meeting is held.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting
unless the board of directors fixes a new record date for the adjourned meeting,
but the board of directors shall fix a new record date if the meeting is
adjourned for more than thirty (30) days from the date set for the original
meeting.
The record date for any other purpose shall be as provided in Section 8.1
of these bylaws.
2.12 PROXIES
-------
Every person entitled to vote for directors, or on any other matter, shall
have the right to do so either in person or by one or more agents authorized by
a written proxy signed by the person and filed with the secretary of the
corporation, but no such proxy shall be voted or acted upon after three (3)
years from its date unless the proxy provides for a longer period. A proxy
shall be deemed signed if the stockholder's name is placed on the proxy (whether
by manual signature, typewriting, telegraphic transmission, telefacsimile or
otherwise) by the stockholder or the stockholder's attorney-in-fact. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Section 212(e) of the General Corporation Law of
Delaware.
2.13 ORGANIZATION
------------
The president, or in the absence of the president, the chairman of the
board, or, in the absence of the president and the chairman of the board, one of
the corporation's vice presidents, shall call the meeting of the stockholders to
order, and shall act as chairman of the meeting. In the absence of the
president, the chairman of the board, and all of the vice presidents, the
stockholders shall appoint a chairman for such meeting. The chairman of any
meeting of stockholders shall determine the order of business and the procedures
at the meeting, including such matters as the regulation of the manner of voting
and the conduct of business. The secretary of the corporation shall act as
secretary at any
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meetings of the stockholders, but in the absence of the secretary at any meeting
of the stockholders, the chairman of the meeting may appoint any person to act
as secretary of the meeting.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of the corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation and these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER OF DIRECTORS
-------------------
The board of directors shall consist of nine members. The board of
directors may increase or decrease the number of directors constituting the
board of directors upon the approval of a majority of the directors then in
office. The number of directors so determined shall be the authorized number of
directors of the corporation. No reduction of the authorized number of
directors shall have the effect of removing any director before that director's
term of office expires.
3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
----------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Each director, including a director elected or appointed to fill
a vacancy, shall hold office until the expiration of the term for which elected
and until a successor has been elected and qualified.
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3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
All vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; provided, that whenever the holders of any class or classes of stock
or series thereof are entitled to elect one or more directors by the provisions
of the certificate of incorporation, vacancies and newly created directorships
of such class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
Regular meetings of the board of directors may be held at any place within
or outside the State of Delaware that has been designated from time to time by
resolution of the board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the board may be held at any place within or outside the State of
Delaware that has been designated in the notice of the meeting or, if not stated
in the notice or if there is no notice, at the principal executive office of the
corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
3.6 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors. If any regular
meeting day shall fall on a legal holiday, then the meeting shall be held next
succeeding full business day.
3.7 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board of directors for any purpose or purposes may
be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time
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of the holding of the meeting. Any oral notice given personally or by telephone
may be communicated either to the director or to a person at the office of the
director who the person giving the notice has reason to believe will promptly
communicate it to the director. The notice need not specify the purpose or the
place of the meeting, if the meeting is to be held at the principal executive
office of the corporation.
3.8 QUORUM
------
A majority of the authorized number of directors shall constitute a quorum
for the transaction of business, except to adjourn as provided in Section 3.10
of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of the
certificate of incorporation and other applicable law.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, if any action taken is
approved by at least a majority of the required quorum for that meeting.
3.9 WAIVER OF NOTICE
----------------
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
3.10 ADJOURNMENT
-----------
A majority of the directors present, whether or not constituting a quorum,
may adjourn any meeting to another time and place.
3.11 NOTICE OF ADJOURNMENT
---------------------
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Any action required or permitted to be taken by the board of directors may
be taken without a meeting, provided that all members of the board individually
or collectively consent in writing to that action. Such action by written
consent shall have the same force and effect as a unanimous vote
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of the board of directors. Such written consent and any counterparts thereof
shall be filed with the minutes of the proceedings of the board.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Directors and members of committees may receive such compensation, if any,
for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or any of its
subsidiaries, including any officer or employee who is a director of the
corporation or any of its subsidiaries, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have and may exercise all
the powers and authority of the board, but no such committee shall have the
power of authority to:
(a) amend the certificate of incorporation (except that a committee
may, to the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the board of directors as provided in
Section 151(a) of the General Corporation Law of Delaware, fix the designations
and any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the corporation or the
conversion
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into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
corporation);
(b) adopt an agreement of merger or consolidation under Sections 251
or 252 of the General Corporation Law of Delaware;
(c) recommend to the stockholders the sale, lease or exchange of all
or substantially all of the corporation's property and assets;
(d) recommend to the stockholders a dissolution of the corporation or
a revocation of a dissolution; or
(e) amend the bylaws of the corporation; and, unless the board
resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
4.3 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
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ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of
the board of directors, a chairman of the board, one or more vice presidents,
one or more assistant secretaries, one or more assistant treasurers, and such
other officers as may be appointed in accordance with the provisions of Section
5.3 of these bylaws. Any number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws,
shall be chosen by the board, subject to the rights, if any, of an officer under
any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
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5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation, and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENTS
---------------
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
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The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.10 CHIEF FINANCIAL OFFICER
-----------------------
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables in
the name and to the credit of the corporation with such depositaries as may be
designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
--------------------------------------------------
AND OTHER AGENTS
----------------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware as the same now exists or may hereafter
be amended, indemnify any person against expenses (including attorneys' fees),
judgments, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action, suit,
or proceeding in which such person was or is a party or is threatened to be made
a party by reason of the fact that such person is or was a director or officer
of the corporation. For purposes of this Section 6.1, a "director" or "officer"
of the corporation shall mean any person (i) who is or was a director or officer
of the corporation, (ii) who is or was serving at the request of the corporation
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
The corporation shall be required to indemnify a director or officer in
connection with an action, suit, or proceeding (or part thereof) initiated by
such director or officer only if the initiation of such action, suit, or
proceeding (or part thereof) by the director or officer was authorized by the
Board of Directors of the corporation.
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The corporation shall pay the expenses (including attorney's fees) incurred
by a director or officer of the corporation entitled to indemnification
hereunder in defending any action, suit or proceeding referred to in this
Section 6.1 in advance of its final disposition; provided, however, that payment
of expenses incurred by a director or officer of the corporation in advance of
the final disposition of such action, suit or proceeding shall be made only upon
receipt of an undertaking by the director or officer to repay all amounts
advanced if it should ultimately be determined that the director of officer is
not entitled to be indemnified under this Section 6.1 or otherwise.
The rights conferred on any person by this Article shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the corporation's Certificate of Incorporation, these
bylaws, agreement, vote of the stockholders or disinterested directors or
otherwise.
Any repeal or modification of the foregoing provisions of this Article
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the maximum extent and in the
manner permitted by the General Corporation Law of Delaware as the same now
exists or may hereafter be amended, to indemnify any person (other than
directors and officers) against expenses (including attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred in
connection with any threatened, pending or completed action, suit, or
proceeding, in which such person was or is a party or is threatened to be made a
party by reason of the fact that such person is or was an employee or agent of
the corporation. For purposes of this Section 6.2, an "employee" or "agent" of
the corporation (other than a director or officer) shall mean any person (i) who
is or was an employee or agent of the corporation, (ii) who is or was serving at
the request of the corporation as an employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was an
employee or agent of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.3 INSURANCE
---------
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnify him or her
against such liability under the provisions of the General Corporation Law of
Delaware.
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<PAGE>
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books and other records of its business and properties.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS
-----------------------
Any director shall have the right to examine (and to make copies of) the
corporation's stock ledger, a list of its stockholders and its other books and
records for a purpose reasonably related to his or her position as a director.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, if any, the president, any vice president, the
chief financial officer, the secretary or any assistant secretary of this
corporation, or any other person authorized by the board of directors or the
president or a vice president, is authorized to vote, represent and exercise on
behalf of this corporation all rights incident to any and all shares of the
stock of any other corporation or corporations standing in the name of this
corporation. The authority herein granted may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
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<PAGE>
7.5 CERTIFICATION AND INSPECTION OF BYLAWS
--------------------------------------
The original or a copy of these bylaws, as amended or otherwise altered to
date, certified by the secretary, shall be kept at the corporation's principal
executive office and shall be open to inspection by the stockholders of the
corporation, at all reasonable times during office hours.
ARTICLE VIII
GENERAL MATTERS
---------------
8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING
-----------------------------------------------------
For purposes of determining the stockholders entitled to receive payment of
any dividend or other distribution or allotment of any rights or the
stockholders entitled to exercise any rights in respect of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) days before any such action. In that case, only
stockholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the General Corporation Law of Delaware.
If the board of directors does not so fix a record date, then the record
date for determining stockholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution.
8.2 CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS
-----------------------------------------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED
--------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
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<PAGE>
8.4 STOCK CERTIFICATES; TRANSFER; PARTLY PAID SHARES
------------------------------------------------
The shares of the corporation shall be represented by certificates,
provided that the board of directors of the corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply
to shares represented by a certificate until such certificate is surrendered to
the corporation. Notwithstanding the adoption of such a resolution by the board
of directors, every holder of stock represented by certificates and, upon
request, every holder of uncertificated shares, shall be entitled to have a
certificate signed by, or in the name of the corporation by, the chairman or
vice-chairman of the board of directors, or the president or vice-president, and
by the treasurer or an assistant treasurer, or the secretary or an assistant
secretary of such corporation representing the number of shares registered in
certificate form. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate has ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the date of issue.
Certificates for shares shall be of such form and device as the board of
directors may designate and shall state the name of the record holder of the
shares represented thereby; its number; date of issuance; the number of shares
for which it is issued; a summary statement or reference to the powers,
designations, preferences or other special rights of such stock and the
qualifications, limitations or restrictions of such preferences and/or rights,
if any; a statement or summary of liens, if any; a conspicuous notice of
restrictions upon transfer or registration of transfer, if any; a statement as
to any applicable voting trust agreement; if the shares be assessable, or, if
assessments are collectible by personal action, a plain statement of such facts.
Upon surrender to the secretary or transfer agent of the corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, or upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.5 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences and the relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on
-17-
<PAGE>
the face or back of the certificate that the corporation shall issue to
represent such class or series of stock; provided, however, that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements there may be set forth on the face or back of
the certificate that the corporation shall issue to represent such class or
series of stock a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, the designations, the preferences
and the relative, participating, optional or other special rights of each class
of stock or series thereof and the qualifications, limitations or restrictions
of such preferences and/or rights.
8.6 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.6, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require indemnification of the corporation secured by a bond or other
adequate security sufficient to protect the corporation against any claim that
may be made against it, including any expense or liability, on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
8.7 TRANSFER AGENTS AND REGISTRARS
------------------------------
The board of directors may appoint one or more transfer agents or transfer
clerks, and one or more registrars, each of which shall be an incorporated bank
or trust company -- either domestic or foreign, who shall be appointed at such
times and places as the requirements of the corporation may necessitate and the
board of directors may designate.
8.8 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the General Corporation Law of Delaware shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
ARTICLE IX
AMENDMENTS
----------
9.1 AMENDMENTS BY STOCKHOLDERS AND DIRECTORS
----------------------------------------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote or by the board of directors of
the corporation. The fact that such
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<PAGE>
power has been so conferred upon the directors shall not divest the stockholders
of the power, nor limit their power to adopt, amend or repeal bylaws.
Whenever an amendment or new bylaw is adopted, it shall be copied in the
book of bylaws with the original bylaws, in the appropriate place. If any bylaw
is repealed, the fact of repeal with the date of the meeting at which the repeal
was enacted or the filing of the operative written consent(s) shall be stated in
said book.
9.2 SUPERMAJORITY VOTE
------------------
Notwithstanding anything to the contrary in the bylaws, neither Section 2.3
(special meeting), Section 2.5 (advance notice of stockholder nominees and
stockholder business), nor this Section 9.2 (supermajority vote) of the bylaws
shall be repealed or amended, nor shall any provision inconsistent with the
aforementioned provisions be adopted and added to the bylaws except upon the
affirmative vote of not less than two-thirds of the shares of the corporation
issued and outstanding.
Amended and Restated Bylaws adopted by the Board of Directors of the
Corporation at Fremont, California, this 10th day of February, 2000.
-19-
<PAGE>
Exhibit 10.2
CENTILLIUM COMMUNICATIONS, INC.
1997 STOCK PLAN
(as amended and restated effective ________)
1. Purposes of the Plan. The purposes of this 1997 Stock Plan are:
--------------------
. to attract and retain the best available personnel for positions
of substantial responsibility,
. to provide additional incentive to Employees, Directors and
Consultants, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means Centillium Communications, Inc., a Delaware
-------
corporation.
(h) "Consultant" means any person, including an advisor, engaged by
----------
the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
--------
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
<PAGE>
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination, as reported in The Wall Street Journal or such other source as
the Administrator deems reliable; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Inside Director" means a Director who is an Employee.
---------------
(p) "IPO Effective Date" means the date upon which the Securities and
------------------
Exchange Commission declares the initial public offering of the Company's common
stock as effective.
(q) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(r) "Notice of Grant" means a written or electronic notice evidencing
---------------
certain terms and conditions of an individual Option or Stock Purchase Right
grant. The Notice of Grant is part of the Option Agreement.
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<PAGE>
(s) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(t) "Option" means a stock option granted pursuant to the Plan.
------
(u) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(v) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are surrendered in exchange for Options with a lower exercise price.
(w) "Optioned Stock" means the Common Stock subject to an Option or
--------------
Stock Purchase Right.
(x) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(y) "Outside Director" means a Director who is not an Employee.
----------------
(z) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(aa) "Plan" means this 1997 Stock Plan.
----
(bb) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of Stock Purchase Rights under Section 11 of the Plan.
(cc) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right. The Restricted Stock
Purchase Agreement is subject to the terms and conditions of the Plan and the
Notice of Grant.
(dd) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(ee) "Section 16(b)" means Section 16(b) of the Exchange Act.
-------------
(ff) "Service Provider" means an Employee, Director or Consultant.
----------------
(gg) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 14 of the Plan.
(hh) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ii) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
-3-
<PAGE>
3. Stock Subject to the Plan. Subject to the provisions of Section 14 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 10,000,000 Shares, plus an annual increase to be added on the
first day of the Company's fiscal year beginning in 2001, equal to the lesser of
(i) 3,000,000 shares, (ii) 5% of the outstanding shares on such date or (iii) a
lesser amount determined by the Board. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
--------
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. Different Committees with
------------------------------
respect to different groups of Service Providers may administer the Plan.
(ii) Section 162(m). To the extent that the Administrator
--------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
----------
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.
(iv) Other Administration. Other than as provided above, the
--------------------
Plan shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
-4-
<PAGE>
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting acceleration
or waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option or Stock Purchase Right or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 16(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by an Optionee
to have Shares withheld for this purpose shall be made in such form and under
such conditions as the Administrator may deem necessary or advisable;
(xii) to authorize any person to execute on behalf of the Company
any instrument required to effect the grant of an Option or Stock Purchase Right
previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
-5-
<PAGE>
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year of
the Company, Options to purchase more than 1,500,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 1,500,000
Shares, which shall not count against the limit set forth in subsection (i)
above.
(iii) The foregoing limitations shall be adjusted proportionately
in connection with any change in the Company's capitalization as described in
Section 14.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 14), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 20 of the Plan, the amendment and
------------
restatement of the Plan shall become effective upon the IPO Effective Date. It
shall continue in effect for a term of ten (10) years from the date of obtaining
stockholder approval of the Plan in 2000, unless terminated earlier under
Section 16 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock
-6-
<PAGE>
Option shall be five (5) years from the date of grant or such shorter term as
may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to
--------------
be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price of less than 100% of the Fair Market Value per Share
on the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions that must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
-7-
<PAGE>
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
The Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 14 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence
of a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the
-8-
<PAGE>
Administrator, the Option shall terminate, and the Shares covered by such Option
shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or inheritance,
but only to the extent that the Option is vested on the date of death. In the
absence of a specified time in the Option Agreement, the Option shall remain
exercisable for twelve (12) months following the Optionee's termination. If, at
the time of death, the Optionee is not vested as to his or her entire Option,
the Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or
administrator of the Optionee's estate or, if none, by the person(s) entitled to
exercise the Option under the Optionee's will or the laws of descent or
distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically, by means of a Notice of Grant, of the
terms, conditions and restrictions related to the offer, including the number of
Shares that the offeree shall be entitled to purchase, the price to be paid, and
the time within which the offeree must accept such offer. The offer shall be
accepted by execution of a Restricted Stock Purchase Agreement in the form
determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
-----------------
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by
-9-
<PAGE>
cancellation of any indebtedness of the purchaser to the Company. The repurchase
option shall lapse at a rate determined by the Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 14
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Formula Option Grants to Outside Directors. Outside Directors shall be
------------------------------------------
automatically granted Options each year in accordance with the following
provisions:
(a) All Options granted pursuant to this Section shall be
Nonstatutory Stock Options and, except as otherwise provided herein, shall be
subject to the other terms and conditions of the Plan.
(b) Each person who first becomes an Outside Director on or after the
IPO Effective Date, whether through election by the stockholders of the Company
or appointment by the Board to fill a vacancy, shall be automatically granted an
Option to purchase 20,000 Shares (the "First Option") on the date he or she
first becomes an Outside Director; provided, however, that an Inside Director
who ceases to be an Inside Director but who remains a Director shall not receive
a First Option.
(c) Each Outside Director shall be automatically granted an Option to
purchase 5,000 Shares (a "Subsequent Option") following each annual meeting of
the stockholders of the Company, except in the case of the first such annual
meeting after the IPO Effective Date if such annual meeting is held within six
(6) months of the IPO Effective Date, if as of such date, he or she shall
continue to serve on the Board and shall have served on the Board for at least
the preceding six (6) months.
(d) Notwithstanding the provisions of subsections (b) and (c) hereof,
any exercise of an Option granted before the Company has obtained stockholder
approval of the Plan in accordance with Section 20 hereof shall be conditioned
upon obtaining such stockholder approval of the Plan in accordance with Section
20 hereof.
-10-
<PAGE>
(e) The terms of each First Option granted pursuant to this Section
shall be as follows:
(i) the term of the First Option shall be ten (10) years.
(ii) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the First Option.
(iii) the First Option shall vest as to ______ of the Shares
subject to the First Option on the anniversary of its date of grant provided
that the Optionee continues to serve as a Director on such date.
(f) The terms of each Subsequent Option granted pursuant to this
Section shall be as follows:
(i) the term of the Subsequent Option shall be ten (10) years.
(ii) the exercise price per Share shall be 100% of the Fair
Market Value per Share on the date of grant of the Subsequent Option.
(iii) the Subsequent Option shall vest as to _____ of the Shares
subject to the Subsequent Option on each anniversary of its date of grant
provided that the Optionee continues to serve as a Director on such dates.
14. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
- ----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option or Stock
Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to
-11-
<PAGE>
such transaction as to all of the Optioned Stock covered thereby, including
Shares as to which the Option would not otherwise be exercisable. In addition,
the Administrator may provide that any Company repurchase option applicable to
any Shares purchased upon exercise of an Option or Stock Purchase Right shall
lapse as to all such Shares, provided the proposed dissolution or liquidation
takes place at the time and in the manner contemplated. To the extent it has not
been previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. With
respect to Options granted to an Outside Director pursuant to Section 13 that
are assumed or substituted for, if following such assumption or substitution the
Optionee's status as a Director or a director of the successor corporation, as
applicable, is terminated other than upon a voluntary resignation by the
Optionee, then the Optionee shall fully vest in and have the right to exercise
the Option as to all of the Optioned Stock, including Shares as to which it
would not otherwise be vested or exercisable.
In the event that the successor corporation refuses to assume or
substitute for the Option or Stock Purchase Right, the Optionee shall fully vest
in and have the right to exercise the Option or Stock Purchase Right as to all
of the Optioned Stock, including Shares as to which it would not otherwise be
vested or exercisable. If an Option or Stock Purchase Right becomes fully
vested and exercisable in lieu of assumption or substitution in the event of a
merger or sale of assets, the Administrator shall notify the Optionee in writing
or electronically that the Option or Stock Purchase Right shall be fully vested
and exercisable for a period of fifteen (15) days from the date of such notice,
and the Option or Stock Purchase Right shall terminate upon the expiration of
such period.
For the purposes of this paragraph, the Option or Stock Purchase
Right shall be considered assumed if, following the merger or sale of assets,
the option or right confers the right to purchase or receive, for each Share of
Optioned Stock subject to the Option or Stock Purchase Right immediately prior
to the merger or sale of assets, the consideration (whether stock, cash, or
other securities or property) received in the merger or sale of assets by
holders of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the type of
consideration chosen by the holders of a majority of the outstanding Shares);
provided, however, that if such consideration received in the merger or sale of
assets is not solely common stock of the successor corporation or its Parent,
the Administrator may, with the consent of the successor corporation, provide
for the consideration to be received upon the exercise of the Option or Stock
Purchase Right, for each Share of Optioned Stock subject to the Option or Stock
Purchase Right, to be solely common stock of the successor corporation or its
Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
15. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the
-12-
<PAGE>
determination shall be provided to each Optionee within a reasonable time after
the date of such grant.
16. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
17. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
18. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
19. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
20. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-13-
<PAGE>
Exhibit 10.3
CENTILLIUM COMMUNICATIONS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as
----
amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean Centillium Communications, Inc., a
-------
Delaware corporation, and any Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
------------
earnings and commissions, exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary that has
---------------------
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of
--------
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
---------------
Period.
(i) "Exercise Date" shall mean the last day of each Offering
-------------
Period.
(j) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
<PAGE>
(1) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system on
the date of such determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or;
(2) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or;
(3) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board; or
(4) For purposes of the Enrollment Date of the first
Offering Period under the Plan, the Fair Market Value shall be the initial price
to the public as set forth in the final prospectus included within the
registration statement in Form S-1 filed with the Securities and Exchange
Commission for the initial public offering of the Company's Common Stock (the
"Registration Statement").
(k) "Offering Period" shall mean a period of approximately six
---------------
(6) months during which an option granted pursuant to the Plan may be exercised,
commencing on the first Trading Day on or after May 1 and terminating on the
last Trading Day in the period ending the following October 31, or commencing on
the first Trading Day on or after November 1 and terminating on the last Trading
Day in the period ending the following April 30; provided, however, that the
first Offering Period under the Plan shall commence with the first Trading Day
on or after the date on which the Securities and Exchange Commission declares
the Company's Registration Statement effective and ending on the last Trading
Day on or before October 31, 2000, and the second Offering Period under the Plan
shall commence with the first Trading Day on or after November 1, 2000. The
duration of Offering Periods may be changed pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan.
----
(m) "Purchase Price" shall mean an amount equal to 85% of the
--------------
Fair Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower; provided, however, that the Purchase Price
may be adjusted by the Board pursuant to Section 20.
(n) "Reserves" shall mean the number of shares of Common Stock
--------
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
(o) "Subsidiary" shall mean a corporation, domestic or foreign,
----------
of which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
-2-
<PAGE>
(p) "Trading Day" shall mean a day on which national stock
-----------
exchanges and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding,
no Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive
----------------
Offering Periods with a new Offering Period commencing on the first Trading Day
on or after May 1 and November 1 each year, or on such other date as the Board
shall determine, and continuing thereafter until terminated in accordance with
Section 20 hereof; provided, however, that the first Offering Period under the
Plan shall commence with the first Trading Day on or after the date on which the
Securities and Exchange Commission declares the Company's Registration Statement
effective and ending on the last Trading Day on or before October 31, 2000 and
the second Offering Period under the Plan shall commence with the first Trading
Day on or after November 1, 2000. The Board shall have the power to change the
duration of Offering Periods (including the commencement dates thereof) with
respect to future offerings without stockholder approval if such change is
announced at least five (5) days prior to the scheduled beginning of the first
Offering Period to be affected thereafter.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount
-3-
<PAGE>
not exceeding ten percent (10%) of the Compensation which he or she receives on
each pay day during the Offering Period.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in
the Plan as provided in Section 10 hereof, or may increase or decrease the rate
of his or her payroll deductions during the Offering Period by completing or
filing with the Company a new subscription agreement authorizing a change in
payroll deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to zero percent (0%) at any
time during an Offering Period. Payroll deductions shall recommence at the rate
provided in such participant's subscription agreement at the beginning of the
first Offering Period which is scheduled to end in the following calendar year,
unless terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or
at the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period,
---------------
each eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Offering Period more than 5,000
shares (subject to any adjustment pursuant to Section 19), and provided further
that such purchase shall be subject to the limitations set forth in Sections
3(b) and 12 hereof. Exercise of the option shall occur as provided in Section 8
hereof, unless the participant has withdrawn pursuant to Section 10 hereof. The
Option shall expire on the last day of the Offering Period.
-4-
<PAGE>
8. Exercise of Option. Unless a participant withdraws from the Plan
------------------
as provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Offering Period, subject to earlier withdrawal by the participant as provided in
Section 10 hereof. Any other monies left over in a participant's account after
the Exercise Date shall be returned to the participant. During a participant's
lifetime, a participant's option to purchase shares hereunder is exercisable
only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
--------
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, the shares purchased upon exercise of his or
her option.
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of Exhibit B to this Plan. All of the participant's payroll
deductions credited to his or her account shall be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not
have any effect upon his or her eligibility to participate in any similar plan
which may hereafter be adopted by the Company or in succeeding Offering Periods
which commence after the termination of the Offering Period from which the
participant withdraws.
11. Termination of Employment. Upon a participant's ceasing to be an
-------------------------
Employee for any reason, he or she shall be deemed to have elected to withdraw
from the Plan and the payroll deductions credited to such participant's account
during the Offering Period but not yet used to exercise the option shall be
returned to such participant or, in the case of his or her death, to the person
or persons entitled thereto under Section 15 hereof, and such participant's
option shall be automatically terminated. The preceding sentence
notwithstanding, a participant who receives payment in lieu of notice of
termination of employment shall be treated as continuing to be an Employee for
the participant's customary number of hours per week of employment during the
period in which the participant is subject to such payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of
--------
a participant in the Plan.
13. Stock.
-----
-5-
<PAGE>
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 500,000 shares, plus an annual increase to be added on the first day of
the Company's fiscal year beginning in 2001 equal to the lesser of (i) 400,000
shares, (ii) 1% of the outstanding shares on such date, or (iii) a lesser amount
determined by the Board. If, on a given Exercise Date, the number of shares
with respect to which options are to be exercised exceeds the number of shares
then available under the Plan, the Company shall make a pro rata allocation of
the shares remaining available for purchase in as uniform a manner as shall be
practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall
be registered in the name of the participant or in the name of the participant
and his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
participant's account under the Plan in the event of such participant's death
subsequent to an Exercise Date on which the option is exercised but prior to
delivery to such participant of such shares and cash. In addition, a participant
may file a written designation of a beneficiary who is to receive any cash from
the participant's account under the Plan in the event of such participant's
death prior to exercise of the option. If a participant is married and the
designated beneficiary is not the spouse, spousal consent shall be required for
such designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
the Company, then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
-6-
<PAGE>
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the
------------
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each
-------
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution,
--------------------------------------------------------
Liquidation, Merger or Asset Sale.
- ---------------------------------
(a) Changes in Capitalization. Subject to any required action
-------------------------
by the stockholders of the Company, the Reserves, the maximum number of shares
each participant may purchase per Offering Period (pursuant to Section 7), as
well as the price per share and the number of shares of Common Stock covered by
each option under the Plan which has not yet been exercised shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of shares of Common Stock effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding and
conclusive. Except as expressly provided herein, no issuance by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of
--------------------
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, each outstanding option shall be
assumed or an equivalent option substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation
-7-
<PAGE>
refuses to assume or substitute for the option, the Offering Period then in
progress shall be shortened by setting a new Exercise Date (the "New Exercise
Date"). The New Exercise Date shall be before the date of the Company's proposed
sale or merger. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and
for any reason terminate or amend the Plan. Except as provided in Section 19
hereof, no such termination can affect options previously granted, provided that
an Offering Period may be terminated by the Board of Directors on any Exercise
Date if the Board determines that the termination of the Offering Period or the
Plan is in the best interests of the Company and its stockholders. Except as
provided in Section 19 and Section 20 hereof, no amendment may make any change
in any option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any other applicable law, regulation or stock exchange rule), the Company shall
obtain shareholder approval in such a manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether
any participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation
of the Plan may result in unfavorable financial accounting consequences, the
Board may, in its discretion and, to the extent necessary or desirable, modify
or amend the Plan to reduce or eliminate such accounting consequence including,
but not limited to:
(1) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(2) shortening any Offering Period so that Offering Period
ends on a new Exercise Date, including an Offering Period underway at the time
of the Board action; and
(3) allocating shares.
Such modifications or amendments shall not require stockholder
approval or the consent of any Plan participants.
-8-
<PAGE>
21. Notices. All notices or other communications by a participant to
-------
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued
----------------------------------
with respect to an option unless the exercise of such option and the issuance
and delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
23. Term of Plan. The Plan shall become effective upon the earlier
------------
to occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
-9-
<PAGE>
EXHIBIT A
---------
CENTILLIUM COMMUNICATIONS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
________ Original Application Enrollment Date: ___________
________ Change in Payroll Deduction Rate
________ Change of Beneficiary(ies)
1. ________________________________ hereby elects to participate in the
Centillium Communications, Inc. 2000 Employee Stock Purchase Plan (the
"Employee Stock Purchase Plan") and subscribes to purchase shares of the
Company's Common Stock in accordance with this Subscription Agreement and
the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from __ to 10%) during the
Offering Period in accordance with the Employee Stock Purchase Plan.
(Please note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is subject
to stockholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only): __________
______________________________.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares), I will be treated
for federal income tax purposes as having received ordinary income at the
time of such disposition in an amount equal to the excess of the fair
market value of the shares at the time such shares were purchased by me
over the price which I paid for the shares. I hereby agree to notify the
----------------------------
Company in writing within 30 days after the date of any disposition of
----------------------------------------------------------------------
shares and I will make adequate provision for Federal, state or other tax
-------------------------------------------------------------------------
withholding obligations, if any, which arise upon the disposition of the
------------------------------------------------------------------------
Common Stock. The Company may, but will not be obligated to, withhold from
------------
my compensation the amount necessary to meet any applicable withholding
obligation including any withholding necessary
<PAGE>
to make available to the Company any tax deductions or benefits
attributable to sale or early disposition of Common Stock by me. If I
dispose of such shares at any time after the expiration of the 2-year
holding period, I understand that I will be treated for federal income tax
purposes as having received income only at the time of such disposition,
and that such income will be taxed as ordinary income only to the extent of
an amount equal to the lesser of (1) the excess of the fair market value of
the shares at the time of such disposition over the purchase price which I
paid for the shares, or (2) 15% of the fair market value of the shares on
the first day of the Offering Period. The remainder of the gain, if any,
recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon my
eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print) ___________________________________________
(First) (Middle) (Last)
_________________________ ___________________________________________
Relationship
___________________________________________
(Address)
Employee's Social
Security Number: ___________________________________________
Employee's Address: ___________________________________________
___________________________________________
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<PAGE>
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated: ______________
_____________________________________________________
Signature of Employee
_____________________________________________________
Spouse's Signature (If beneficiary other than spouse)
-3-
<PAGE>
EXHIBIT B
---------
CENTILLIUM COMMUNICATIONS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Centillium
Communications, Inc. 2000 Employee Stock Purchase Plan which began on
___________, ______ (the "Enrollment Date") hereby notifies the Company that he
or she hereby withdraws from the Offering Period. He or she hereby directs the
Company to pay to the undersigned as promptly as practicable all the payroll
deductions credited to his or her account with respect to such Offering Period.
The undersigned understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to participate
in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
_____________________________________________
_____________________________________________
_____________________________________________
Signature:
_____________________________________________
Date: _______________________________________
<PAGE>
THIS LEASE, dated August 16, 1999 for reference purposes only, is made by and
between RENCO INVESTMENT COMPANY ("Landlord") and CENTILLIUM TECHNOLOGY, INC., a
California Corporation ("Tenant"), to be effective and binding upon the parties
as of the date the last of the designated signatories to this Lease shall have
executed this Lease (the "Effective Date of this Lease").
ARTICLE 1
REFERENCES
1.1 REFERENCES. All references in this Lease (subject to any further
clarifications contained in this Lease) to the following terms shall have the
following meaning or refer to the respective address, person, date, time period,
amount, percentage, calendar year or fiscal year as below set forth:
A. Tenant's Address for Notices: 47211 Lakeview Blvd., Fremont, CA 94538
B. Tenant's Representative: William F. Mackenzie, Vice President
Business Phone Number: 510-360-5060
Home Phone Number: 925 461 0541
Home Address: 3656 Kamp Drive, Pleasanton, CA 94588
C. Landlord's Address for Notices: 1285 Oakmead Parkway, Sunnyvale, CA 94086
D. Landlord's Representative: Gerald E. Hodnefield
Phone Number: (408) 730-5500
E. Intended Commencement Date: October 1, 1999
F. Intended Term: 55 Months
G. Lease Expiration Date: April 30, 2004
H. Tenant's Punchlist Period: Five business days from delivery of The
Premises to Tenant
I. First Month's Prepaid Rent: $50,000.00
J. Last Month's Prepaid Rent: None
K. Tenant's Security Deposit: $100,000.00
L. Late Charge Amount: Ten (10%) Percent of the late amount(s)
M. Tenants Liability Coverage: Three Million ($3,000,000) Dollar Single
Limit
N. Undesignated and nonexclusive number of Parking Spaces: 209
O. Leased Premises: That certain space which is a portion of that larger
building containing 93,748 square feet of leasable area referred to as RENCO 21,
(the "Project" or the "Property"), which space is shown outlined in red on the
Floor Plan attached hereto as Exhibit "B" consisting of approximately 57,567
square feet of leasable area measuring to the outside edge of the outside walls
and drip lines, including a prorata share of the electrical room and other
common spaces and, for purposes of this Lease, agreed between Landlord and
Tenant to contain said number of square feet. The Leased Premises are commonly
known by address as follows: 47211 Lakeview Blvd., Fremont California, 94538.
P. Base Monthly Rent: The term "Base Monthly Rent" shall mean the amount of
rent due and payable on the first day of each month of the Lease Term which for
purposes of this Lease is agreed to be the monthly sum of $50,000.00 for each
full month of the first year of the Lease Term, (as adjusted in paragraph #
13.16 of this Lease), $75,557.00 for each full month of the second year of the
Lease Term, $79,334.00 for each full month of the third year of the Lease Term,
$83,301.00 for each full month of the fourth year of the Lease Term, and
$87,466.00 for each full month of the last 7 months of the Lease Term. Any
partial month shall be prorated on the basis of a 30 day month.
Q. Permitted Use: The term "Permitted Use" shall mean that Landlord and
Tenant agree that Tenant shall use the Premises for: manufacture, assembly,
repair, sales, and distribution of electronic parts and components, and related
office and support functions and for no other use
R. Exhibits: The term "Exhibits" shall mean the Exhibits to this Lease
which are described as follows:
Exhibit "A" - Site Plan showing the "Project" (or "Property") and
delineating the Building in which the Leased Premises
are located.
Exhibit "B" - Floor Plan outlining the Leased Premises.
Exhibit "C" - Floor Plan showing space to be used by Tenant during the
first year of the Lease.
S. Addenda: The term "Addenda" shall mean the Addendum (or Addenda) to this
Lease which is (or are) described as follows:
ARTICLE 2
LEASED PREMISES, TERM AND POSSESSION
2.1 LEASE OF PREMISES: Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord that certain interior space described above as the Leased
Premises (or "Premises"). Landlord reserves the right to install, maintain, use
and replace ducts, wires, conduits and pipes leading through the Leased Premises
in locations which will not materially interfere with Tenant's use of the Leased
Premises. Tenant's use of the Leased Premises, together with the appurtenant
right to use the Common Areas shall be conditioned upon and be subject to the
continuing compliance by Tenant with (i) all the terms and conditions of the
Lease, (ii) all Laws governing the use of the Leased Premises and the Project,
(iii) all Private Restrictions, easements and other matters now of public record
respecting the use of the Leased Premises and the Project, and (iv) all
reasonable rules and regulations from time to time established by Landlord.
2.2 RIGHT TO USE COMMON AREAS: As an appurtenant right to Tenant's right to
the use of the Leased Premises, Tenant shall have the nonexclusive right to use
the Common Areas in conjunction with other tenants of the Project and their
invitees.
-1-
<PAGE>
2.3 LEASE COMMENCEMENT DATE AND LEASE TERM: The term of this Lease shall
begin, and the Lease Commencement Date shall be deemed to have occurred, on the
Intended Commencement Date (as set forth in Article 1.1 unless Landlord is
unable to deliver possession of the Leased Premises to Tenant on the Intended
Commencement Date, in which case the Lease Commencement Date shall be as
determined pursuant to Article 2.4 below.
2.4 DELIVERY OF POSSESSION: Landlord shall use its best efforts to deliver to
Tenant possession of the Leased Premises on or before the Intended Commencement
Date in its presently existing condition, broom clean and ready to occupy. If
Landlord is unable to so deliver possession of the Leased Premises to Tenant on
or before the Intended Commencement Date, for whatever reason, Landlord shall
not be in default under this Lease, nor shall this Lease be void, voidable or
cancelable by Tenant until the lapse of sixty days after the Intended
Commencement Date (the "delivery grace period") however, the Lease Commencement
Date shall not be deemed to have occurred until such date as Landlord notifies
Tenant that the Leased Premises are ready for occupancy. The term of the Lease
shall be extended by the delay time. If Landlord is unable to deliver possession
of the Leased Premises to Tenant within the described delivery grace period,
then Tenant's sole remedy shall be to cancel and terminate this Lease in which
case Landlord shall refund all of Tenants deposits (less costs incurred by
Landlord for commissions or interior improvements) provided the delay shall not
have been caused by Tenant, and in no event shall Landlord be liable to Tenant
for such delay. Tenant may not cancel this Lease at any time after the date
Landlord notifies Tenant the Leased Premises are Ready for Occupancy. (see
clause #13.14 of herein included)
2.5 ACCEPTANCE OF POSSESSION: Prior to the Commencement Date, Landlord agrees
to inspect, service, and repair (as required for good and normal working
operation) all HVAC, plumbing, electrical, lighting, elevator (if applicable)
and such other building service apparatus as exists in The Premises. In
addition, Landlord shall clean any carpet stains and restore any moulding
sealants. Upon the expiration of Tenant's Punchlist Period, Tenant shall be
conclusively deemed to have accepted the condition of the Leased Premises in
their then-existing condition as so delivered by Landlord to Tenant, except as
to those items reasonably set forth in the punchlist submitted to Landlord prior
to the expiration of said period. Landlord agrees to correct all items
reasonably set forth in Tenant's punchlist, provided that such punchlist was
submitted to Landlord within Tenant's Punchlist Period. Additionally, Landlord
agrees to place in good working order all man doors and roll-up truck doors
serving the Leased Premises to the extent that such items are not in good
operating condition as of the date Tenant accepts possession of the Leased
Premises; provided that, and only if, Tenant notifies Landlord in writing of
such failures or deficiencies within fifteen business days from the date Tenant
so accepts possession of the Leased Premises.
2.6 SURRENDER OF POSSESSION: Immediately prior to the expiration or sooner
termination of this Lease, Tenant shall remove all of Tenant's signs from the
exterior of the Building and shall remove all of Tenant's equipment, trade
fixtures, furniture, supplies, wall decorations and other personal property from
the Leased Premises, and shall vacate and surrender the Leased Premises to
Landlord in the same condition, broom clean and freshly repainted, as existed at
the Lease Commencement Date. Landlord, at Tenant's expense, shall retain a
mechanical contractor to service all heating, ventilation and air conditioning
equipment, and Tenant shall pay the cost to restore (or replace as required),
said equipment to good working order. Tenant shall repair all damage to the
Leased Premises caused by Tenant or by Tenant's removal of Tenant's property and
all damage to the exterior of the Building caused by Tenant's removal of
Tenant's signs. Tenant shall patch and refinish, to Landlord's reasonable
satisfaction, all penetrations made by Tenant or its employees to the floor,
walls or ceiling of the Leased Premises, whether such penetrations were made
with Landlord's approval or not. Tenant shall replace all stained or damaged
ceiling tiles or shall repair or replace, as necessary, all wall coverings and
clean or replace, as may be required, floor coverings to the reasonable
satisfaction of Landlord. Tenant shall replace all burned out light bulbs and
damaged or stained light lenses, and shall repaint all painted walls. Tenant
shall repair all damage caused by Tenant to the exterior surface of the Building
and the paved surfaces of the outside areas adjoining the Leased Premises and,
where necessary, replace or resurface same. Additionally, Tenant shall, prior to
the expiration or sooner termination of this Lease, remove any improvements
constructed or installed by Tenant which Landlord requests be so removed by
Tenant and repair all damage caused by such removal. If the Leased Premises are
not surrendered to Landlord in the condition required by this Article at the
expiration or sooner termination of this Lease, Landlord may, at Tenant's
expense, so remove Tenant's signs, property and/or improvements not so removed
and make such repairs and replacements not so made or hire, at Tenant's expense,
independent contractors to perform such work. Tenant shall be liable to Landlord
for all costs incurred by Landlord in returning the Leased Premises to the
required condition and Tenant shall be deemed to have impermissibly held over
until such time as such required work is completed. Tenant shall pay Base
Monthly Rent and Additional Rent in accordance with the terms of Section 13.2
(Holding Over) until such work is completed.
ARTICLE 3
RENT, LATE CHARGES AND SECURITY DEPOSITS
3.1 BASE MONTHLY RENT: Commencing on the Lease Commencement Date and
continuing throughout the Lease Term, Tenant shall pay to Landlord, without
prior written or oral demand in advance on the first day of each calendar month,
as base monthly rent, the amount set forth as "Base Monthly Rent" in Article 1
3.2 ADDITIONAL RENT: Commencing on the Lease Commencement Date and continuing
throughout the Lease Term, in addition to the Base Monthly Rent, Tenant shall
pay to Landlord as additional rent (the "Additional Rent") Tenant's
Proportionate Share of all Building Operating Expenses (as defined in Article
13). Payment shall be made by one of the following methods: Landlord may bill to
Tenant, on a periodic basis not more frequently than monthly, Tenant's
Proportionate Share of such expenses (or group of expenses) as paid or incurred
by Landlord, and Tenant shall pay such share of such expenses within ten days
after receipt of a written bill therefore from Landlord; and/or Landlord may
budget the annual projected expenses and bill to Tenant on a monthly basis, one-
twelfth of the annual amount. If Landlord elects the latter of the alternatives,
Landlord shall reconcile the budgeted amounts with the actual amounts on an
annual basis during the first quarter of the subsequent year and bill Tenant for
any additional amounts or credit Tenant any overpayments against future
Additional Rent amounts. (see clause #13.15 herein contained)
3.3 LATE CHARGE AND INTEREST ON RENT IN DEFAULT: Tenant acknowledges that the
late payment by Tenant of any monthly installment of Base Monthly Rent or any
Additional Rent will cause Landlord to incur certain costs and expense not
contemplated under this Lease, the exact amounts of which are extremely
difficult
-2-
<PAGE>
by Landlord from Tenant within eight (8) calendar days after the same becomes
due, Tenant shall immediately pay to Landlord a late charge in an amount equal
to ten percent of the amounts due and not so paid. Landlord and Tenant agree
that this late charge represents a reasonable estimate of such costs and
expenses and is fair compensation to Landlord for the anticipated loss Landlord
would suffer by reason of Tenant's failure to make timely payment. In no event
shall this provision for a late charge be deemed to grant to Tenant a grace
period or extension of time within which to pay any rental installment or
prevent Landlord from exercising any right or remedy available to Landlord upon
Tenant's failure to pay each rental installment due under this Lease when due.
If any rent remains delinquent for a period in excess of six calendar days,
then, in addition to such late charge, Tenant shall pay to Landlord interest on
any rent that is not so paid from said sixth day at the then maximum rate of
interest not prohibited by Law until paid.
3.4 PAYMENT OF RENT: All rent shall be paid without any abatement, deduction
or offset for any reason whatsoever, to Landlord at such address as Landlord may
designate from time to time. Tenant's obligation to pay Base Monthly Rent and
all Additional Rent shall be prorated at the commencement and expiration of the
Lease Term. The failure by Tenant to pay any Additional Rent as required
pursuant to this Lease when due shall be treated the same as a failure by Tenant
to pay Base Monthly Rent when due, and Landlord shall have the same rights and
remedies against Tenant as Landlord would have if Tenant failed to pay the Base
Monthly Rent when due.
3.5 SECURITY DEPOSIT: Upon signing this Lease, Tenant shall immediately
deposit with Landlord the amount set forth in Article 1 as the "Security
Deposit" as security for the performance by Tenant of the terms of this Lease
and not as prepayment of rent. Landlord may apply such portion or portions of
the Security Deposit as are reasonably necessary for the following purposes: (i)
to remedy any default by Tenant in the payment of Base Monthly Rent or
Additional Rent or a late charge or interest on defaulted rent; (ii) to repair
damage to the Leased Premises caused by Tenant; (iii) to clean and repair the
Leased Premises following their surrender to Landlord if not surrendered in the
condition required pursuant to the provisions of Article 2; and (iv) to remedy
any other default of Tenant to the extent permitted by Law including, without
limitation, paying in full on Tenant's behalf any sums claimed by materialmen or
contractors of Tenant to be owing to them by Tenant for work done or
improvements made at Tenant's request to the Leased Premises. Tenant shall not
be entitled to any interest on the Security Deposit. If Landlord transfers the
Building during the Lease Term, Landlord may pay the Security Deposit to any
subsequent owner in conformity with the California Civil Code, in which event
the transferring landlord shall be released from all liability for the return of
the Security Deposit. In no event shall the Security Deposit, or any portion
thereof, be considered prepaid rent. Landlord and Tenant each agree that upon
Tenant's having an audited Profit and Loss Statement showing a profit for each
of 2 fiscal quarters subsequent to the Commencement Date, Landlord shall, upon
written demand by Tenant, return a portion of the Security Deposit equal to the
difference between $100,000 and the Base Monthly Rent in place at the time of
the profitable quarter statement.
3.6 ADDITIONAL SECURITY DEPOSIT: In the event that the cash available to
Tenant (as shown on Tenants' Balance Sheet) at any time during the term of this
Lease becomes less than Ten Million Dollars, Tenant agrees to increase (upon
written demand by Landlord), Tenants Security Deposit to the sum of One Hundred
Thousand Dollars and such Security Deposit shall remain at that level for the
remainder of the Lease Term.
ARTICLE 4
USE OF LEASED PREMISES AND COMMON AREAS
4.1 PERMITTED USE: Tenant shall be entitled to use the Leased Premises solely
for the "Permitted Use" as set forth in Article 1 and for no other purpose
whatsoever. Subject to the limitations contained in this Article 4, Tenant shall
have the right to use the Common Areas, in conjunction with other tenants and
during normal business hours, solely for the purposes for which they were
intended and for no other purposes whatsoever. Tenant shall not have the right
to use the exterior surfaces of exterior walls.
4.2 GENERAL LIMITATIONS ON USE: Tenant shall not do or permit anything to be
done in or about the Leased Premises, the Building, the Common Areas or the
Project which does or could (i) interfere with the rights of other tenants or
occupants of the Building or the Project, (ii) jeopardize the structural
integrity of the Building or the Project, or (iii) cause damage to any part of
the Building or the Project. Tenant shall not operate any equipment within the
Leased Premises which does or could (i) injure, vibrate or shake the Leased
Premises or the Building, (ii) damage, overload, corrode, or impair the
efficient operation of any electrical, plumbing, sewer, heating, ventilating or
air conditioning systems within or servicing the Leased Premises or the Building
or (iii) damage or impair the efficient operation of the sprinkler system (if
any) within or servicing the Leased Premises or the Building. Tenant shall not
install any equipment or antennas on or make any penetrations of the exterior
walls or roof of the Building. Tenant shall not affix any equipment to or make
any penetrations or cuts in the floor, ceiling or walls of the Leased Premises.
Tenant shall not place any loads upon the floors, walls, ceiling or roof systems
which could endanger the structural integrity of the Building or damage its
floors, foundations or supporting structural components. Tenant shall not place
any explosive, flammable or harmful fluids, including Hazardous Materials in any
sanitary or storm sewer or place any waste materials in the storm drainage
systems of the Building or the Project. Tenant shall not drain or discharge any
fluids in the landscaped areas or across the paved areas of the Project. Tenant
shall not use any area located outside the Leased Premises for the storage of
its materials, supplies, inventory or equipment, and all such materials,
supplies, inventory and equipment shall at all times be stored within the Leased
Premises. Tenant shall not commit nor permit to be committed any waste in or
about the Leased Premises, the Common Areas or the Project.
4.3 NOISE AND EMISSIONS: All noise generated by Tenant in its use of the
Leased Premises shall be confined or muffled so that it does not interfere with
the businesses of or annoy other tenants of the Building or the Project. All
dust, fumes, odors and other emissions generated by Tenant's use of the Leased
Premises shall be sufficiently dissipated in accordance with sound environmental
practices and exhausted from the Leased Premises in such a manner so as not to
interfere with the businesses of or annoy other tenants of the Building or the
Project, or cause any damage to the Leased Premises or the Building or any
component part thereof or the property of other tenants of the Building or the
Project.
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4.4 TRASH DISPOSAL: Tenant shall provide trash and garbage disposal facilities
inside the Leased Premises for all of its trash, garbage and waste requirements
unless Landlord shall have provided fenced areas for "dumpsters" and shall cause
such trash, garbage and waste to be regularly removed from the Leased Premises
at Tenant's sole cost. Tenant shall keep all areas outside the Leased Premises
and all fire corridors and mechanical equipment rooms in or about the Leased
Premises free and clear of all trash, garbage, waste and boxes containing same
at all times.
4.5 PARKING: Tenant and its employees and invitees shall have the non-
exclusive right to use, only the number of parking spaces set forth in Article 1
as "Tenant's Number of Parking Spaces". Tenant shall not, at any time, use or
permit its employees or invitees to use more parking spaces than the number so
allocated to Tenant. Tenant shall not have the exclusive right to use any
specific parking space, and Landlord reserves the right to designate from time
to time the location of the parking spaces allocated for Tenant's use. In the
event Landlord elects or is required by any Law to limit or control parking
within the Project, whether by validation of parking tickets or any other
method, Tenant agrees to participate in such validation or other program as
reasonably established by Landlord. Tenant shall not, at any time, park or
permit to be parked any trucks or vehicles adjacent to entryways or loading
areas within the Project so as to interfere in any way with the use of such
areas, nor shall Tenant, at any time, park or permit the parking of Tenant's
trucks or other vehicles, or the trucks and vehicles of Tenant's suppliers or
others, in any portion of the Common Areas not designated by Landlord for such
use. Tenant shall not, at any time, park or permit to be parked any recreational
vehicles, inoperative vehicles or equipment on any portion of the common parking
area or other Common Areas of the Project. Tenant agrees to assume
responsibility for compliance by its employees and invitees with the parking
provisions contained herein. Tenant hereby authorizes Landlord, at Tenant's sole
expense, to tow away from the Project and store until redeemed by its owner any
vehicle belonging to Tenant or Tenant's employees parked in violation of these
provisions.
4.6 SIGNS: Tenant shall not place or install on or within any portion of the
Leased Premises, the Building, the Common Areas or the Project any sign (other
than a business identification sign first approved by Landlord in accordance
with this Article), advertisements, banners, placards or pictures which are
visible from the exterior of the Leased Premises. Tenant shall not place or
install on or within any portion of the Leased Premises, the Building, the
Common Areas or the Project any business identification sign which is visible
from the exterior of the Leased Premises until Landlord shall have first
approved in writing the location, size, content, design, method of attachment
and material to be used in the making of such sign. Any signs, once approved by
Landlord, shall be installed only in strict compliance with Landlord's approval,
at Tenant's expense, using a person first approved by Landlord to install same.
Landlord may remove any signs (not first approved in writing by Landlord),
advertisements, banners, placards or pictures so placed by Tenant on or within
the Leased Premises, the Building, the Common Areas or the Project and charge to
Tenant the cost of such removal, together with any costs incurred by Landlord to
repair any damage caused thereby, including any cost incurred to restore the
surface upon which such sign was so affixed to its original condition. Tenant
shall remove any such signs, repair any damage caused thereby, and restore the
surface upon which the sign was affixed to its original condition, all to
Landlord's reasonable satisfaction, upon the termination of this Lease.
4.7 LANDLORD'S RIGHT TO ENTER: Landlord and its agents shall have the right to
enter the Leased Premises during normal business hours and subject to Tenant's
reasonable security measures for the purpose of (i) inspecting the same; (ii)
supplying any services to be provided by Landlord to Tenant; (iii) showing the
Leased Premises to prospective purchasers, mortgagees or tenants: (iv) making
necessary alterations, additions or repairs; (v) performing any of Tenant's
obligations when Tenant has failed to do so after giving Tenant reasonable
written notice of its intent to do so; and (vi) posting notices of non-
responsibility or "For Lease" or "For Sale" signs. Additionally, Landlord shall
have the right to enter the Leased Premises without notice to Tenant at times of
emergency.
4.8 CONTROL OF COMMON AREAS: Landlord shall at all times have exclusive
control of the Common Areas including without limitation, the right to prohibit
mobile food and beverage or other vendors from entering the Property.
4.9 RULES AND REGULATIONS: Landlord shall have the right from time to time to
establish reasonable rules and regulations regarding the use of the Common
Areas. Upon delivery to Tenant of a copy of such reasonable rules and
regulations, Tenant shall comply with such rules and regulations.
4.10 OUTSIDE AREAS: No materials, pallets, supplies, tanks or containers
whether above or below ground level, equipment, finished products or semi-
finished products, raw materials, inoperable vehicles or articles of any nature
shall be stored upon or permitted to remain outside of the Leased Premises
except in fully fenced and screened areas outside the Building which have been
designed for such purpose and have been approved in writing by Landlord for such
use by Tenant.
4.11 HAZARDOUS MATERIALS: Landlord and Tenant agree that with respect to the
existence or use of Hazardous Materials (as defined as such under current laws
or regulations as may be amended from to time) on the Property, any handling,
transportation, storage, treatment, disposal or use of Hazardous Materials, in
any amount, by Tenant, Tenant's agents, or any other party associated with
Tenant must be absolutely and completely disclosed to and approved in writing by
Landlord prior to its arrival in the Premises. Landlord may uncontestably
withhold Landlord's approval at Landlord's sole discretion. Any withholding from
Landlord of information relating to Hazardous Materials used or stored by Tenant
shall constitute a material default under the terms of the Lease and shall be
cause for lease termination at Landlord's option. Any use or storage of any
disclosed Hazardous Materials in or about the Property, which use or storage
shall have been approved by Landlord, shall strictly comply with all applicable
Hazardous Materials laws. Tenant shall, upon request by Landlord, provide proof
of approvals by the governing authorities. Landlord's consent or approval once
given shall not constitute approval for any subsequent bringing of Hazardous
Materials onto the Premises or Project. Tenant shall indemnify, defend upon
demand with counsel reasonably acceptable to Landlord, and hold harmless
Landlord from and against any and all liabilities, losses, claims, damages, lost
profits, consequential damages, interest, penalties, fines, court costs,
remediation costs, investigation costs, and other expenses which result from or
arise in any manner whatsoever out of the use, storage, treatment,
transportation, release, or disposal of Hazardous Materials on or about the
Leased Premises or the Property
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contamination or deterioration to any extent of water, soil, or any part of the
Leased Premises, the Building, or the Project, then Tenant shall promptly take
any and all action necessary to remove said Hazardous Materials and to return
the Project (and any other property of whatever nature) to their condition
existing prior to the appearance of such Hazardous Materials. Landlord may at
any time and at Tenant's sole cost perform any tests or investigations
(including the installation of testing wells) it deems appropriate to determine
the presence of Hazardous Materials on the Project. The terms of this clause
shall survive the expiration or sooner termination of this Lease. In the event
that any containers of Hazardous Materials appear upon the Property or the
Premises, or materials are spilled upon the Property or the Premises, the
responsibility for which cannot be reasonably determined, Landlord is hereby
authorized to remove the containers or the spilled materials, and Tenant shall,
upon demand by Landlord, reimburse Landlord for any costs associated with such
removal and any repairs required by virtue of such removal. If such removal and
subsequent cost associated with such removal cannot be reasonably attributed to
a specific space within the Project, the costs shall be apportioned on a pro-
rata basis among all tenants in the Project.
ARTICLE 5
REPAIRS, MAINTENANCE, SERVICES AND UTILITIES
5.1 REPAIR AND MAINTENANCE: The parties shall have the following obligations
and responsibilities with respect to the repair and maintenance of the Leased
Premises, the Building and the Common Areas.
A. Tenant's Obligation: Tenant shall, at all times during the Lease
Term and at its sole cost and expense, regularly clean and continuously keep and
maintain in good order, condition and repair the Leased Premises and every part
thereof and all appurtenances thereto, including, without limiting the
generality of the foregoing, (i) all interior walls, floors and ceilings, (ii)
all windows, doors and skylights, (iii) all electrical wiring, conduits,
connectors and fixtures, (iv) all plumbing, pipes, sinks, toilets, faucets and
drains, (v) all lighting fixtures, bulbs and lamps, (vi) all heating,
ventilating and air conditioning equipment located within the Leased Premises or
located outside the Leased Premises (e.g. rooftop compressors) and serving the
Leased Premises and (vii) all entranceways to the Leased Premises. Tenant, if
requested to do so by Landlord, shall hire, at Tenant's sole cost and expense, a
licensed heating, ventilating and air conditioning contractor to regularly, and
periodically inspect (not less frequently than every three months) and perform
required maintenance on the heating, ventilating and air conditioning equipment
and systems serving the Leased Premises, or alternatively, Landlord may, at its
election, contract in its own name for such regular and periodic inspections of
and maintenance on such heating, ventilating and air conditioning equipment and
systems and charge to Tenant, as Additional Rent, the cost thereof. Tenant
shall, at its sole cost and expense, repair all damage to the Building, the
Common Areas or the Project caused by the activities of Tenant, its employees,
invitees or contractors promptly following written notice from Landlord to so
repair such damage. If Tenant shall fail to perform the required maintenance or
fail to make repairs required of it pursuant to this Article within a reasonable
period of time following notice from Landlord to do so, then Landlord may, at
its election and without waiving any other remedy it may otherwise have under
this Lease or at Law, perform such maintenance or make such repairs and charge
to Tenant, as Additional Rent, the costs so incurred by Landlord for same. All
glass within or a part of the Leased Premises, both interior and exterior, is at
the sole risk of Tenant and any broken glass shall promptly be replaced by
Tenant at Tenant's expense with glass of the same kind, size and quality.
B. Landlord's Obligation: Landlord shall, during the Lease Term or any
extensions thereof, repair the exterior structural parts of the Building
(including the foundation, concrete walls, and roof structure). Landlord shall,
also maintain in good condition and repair: the Common Areas, the roof membrane,
the exterior finishes including paint, the glazing, the landscaping, the paving
(including driving surfaces, curbs and gutters), and the electrical and plumbing
systems located outside the Leased Premises which service the Building. Landlord
shall charge Tenant, as Additional Rent, the costs incurred by Landlord in
making such repairs and maintenance.
5.2 SERVICES AND UTILITIES: The parties shall have the following
responsibilities and obligations with respect to obtaining and paying the cost
of providing the following utilities and other services to the Leased Premises.
A. Gas and Electricity: Tenant shall arrange, at its sole cost and
expense and in its own name, for the supply of gas and electricity to the Leased
Premises. Tenant shall be responsible for determining if the local supplier of
gas and/or electricity can supply the needs of Tenant and whether or not the
existing gas and/or electrical distribution systems within the Building and the
Leased Premises are adequate for Tenant's needs. Tenant shall pay all charges
for gas and electricity as so supplied to the Leased Premises.
B. Water: Landlord shall provide the Leased Premises with water for
lavatory and drinking purposes only. Tenant shall pay, as Additional Rent, the
cost to Landlord of providing water to the Leased Premises.
C. Security Service: Tenant acknowledges that Landlord is not
responsible for the security of the Leased Premises or the protection of
Tenant's property or Tenant's employees, invitees or contractors, and that to
the extent Tenant determines that such security or protection services are
advisable or necessary, Tenant shall arrange for and pay the costs of providing
same.
D. Trash Disposal: Tenant acknowledges that Landlord is not
responsible for the disposal of Tenant's waste, garbage or trash and that Tenant
shall arrange, in its own name and at its sole cost, for the regular and
periodic removal of such waste, garbage or trash from the Leased Premises. In no
event shall Landlord be required to provide trash bins for the disposal of
Tenant's waste, garbage or trash.
5.3 LIMITATION OF LANDLORD'S LIABILITY: Landlord shall not be liable to Tenant
for injury to Tenant, its employees, agents, invitees or contractors, damage to
Tenant's property or loss of Tenant's business or profits, nor shall Tenant be
entitled to terminate this Lease or to any reduction in or abatement of rent by
reason of (i) Landlord's failure to perform any maintenance or repairs to the
Project subject to the provisions of Article #12.3, or (ii) any failure,
interruption, rationing or other curtailment in the supply of water, electric
current, gas or other utility service to the Leased Premises, the Building or
the Project from whatever cause (other than Landlord's active negligence or
willful misconduct), or (iii) the unauthorized intrusion or entry into the
Leased Premises by third parties.
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ARTICLE 6
ALTERATIONS AND IMPROVEMENTS
6.1 BY TENANT: Tenant shall not make any alterations to or modifications of
the Leased Premises or construct any improvements to or within the Leased
Premises without Landlord's prior written approval, and then not until Landlord
shall have first approved, in writing, the plans and specifications therefore,
which approval shall not be unreasonably withheld. All such modifications,
alterations or improvements, once so approved, shall be made, constructed or
installed by Tenant at Tenant's expense, using a licensed contractor first
approved by Landlord, in substantial compliance with the Landlord-approved plans
and specifications therefore. All work undertaken by Tenant shall be done in
accordance with all Laws and in a good and workmanlike manner using new
materials of good quality that match or complement the original improvements
existing as of the Lease Commencement Date. Tenant shall not commence the making
of any such modifications or alterations or the construction of any such
improvements until (i) all required governmental approvals and permits shall
have been obtained, (ii) all requirements regarding insurance imposed by this
Lease have been satisfied, (iii) Tenant shall have given Landlord at least five
business days prior written notice of its intention to commence such work so
that Landlord may post and file notices of non-responsibility, and (iv) if
requested by Landlord, Tenant shall have obtained contingent liability and broad
form builder's risk insurance in an amount satisfactory to Landlord to cover any
perils relating to the proposed work not covered by insurance carried by Tenant
pursuant to Article 9. In no event shall Tenant make any modifications,
alterations or improvements to the Common Areas or any areas outside of the
Leased Premises. As used in this Article, the term "modifications, alterations
and/or improvements" shall include, without limitation, the installation of
additional electrical outlets, overhead lighting fixtures, drains, sinks,
partitions, doorways, or the like. As a part of granting Landlord's approval for
Tenant to make alterations or modifications Landlord may require Tenant to
increase the amount of it's Security Deposit to cover the cost of removing
Tenant's alterations or modifications and to restore the condition of the
Premises to it's prior condition. Tenant shall pay Landlord's reasonable costs
to inspect the construction of Tenant's alterations or modifications and to have
Landlord's architect revise Landlord's drawings to show the work performed by
Tenant.
6.2 OWNERSHIP OF IMPROVEMENTS: All modifications, alterations or improvements
made or added to the Leased Premises by Tenant (other than Tenant's inventory,
equipment, movable furniture, wall decorations and trade fixtures) shall be
deemed real property and a part of the Leased Premises, but shall remain the
property of Tenant during the Lease Term. Any such modifications, alterations or
improvements, once completed, shall not be altered or removed from the Leased
Premises during the Lease Term without Landlord's written approval first
obtained in accordance with the provisions of the Article above. At the
expiration or sooner termination of the Lease, all such modifications,
alterations and improvements (other than Tenant's inventory, equipment, movable
furniture, wall decorations and trade fixtures) shall automatically become the
property of Landlord and shall be surrendered to Landlord as a part of the
Leased Premise as required pursuant to Article 2, unless Landlord shall require
Tenant to remove any of such modifications, alterations or improvements, in
which case Tenant shall so remove same. Landlord shall have no obligation to
reimburse to Tenant all or any portion of the cost or value of any such
modifications, alterations or improvements so surrendered to Landlord. All
modifications, alterations or improvements which are installed or constructed on
or attached to the Leased Premises by Landlord at Landlord's expense shall be
deemed real property, and a part of the Leased Premises and shall be the
property of Landlord. All lighting, plumbing, electrical, heating, ventilating
and air conditioning fixtures, partitioning, window coverings, wall coverings
and floor coverings installed by Tenant shall be deemed improvements to the
Leased Premises and not trade fixtures of Tenant.
6.3 ALTERATIONS: Throughout the term of this Lease or any extensions thereof,
at its sole cost, Tenant shall make all modifications, alterations and
improvements to the Leased Premises that are required by any Law.
6.4 LIENS: Tenant shall keep the Leased Premises, the Building and the
Property free from any liens and shall pay when due all bills arising out of any
work performed, materials furnished, or obligations incurred by Tenant, its
agents, employees or contractors relating to the Leased Premises.
ARTICLE 7
ASSIGNMENT AND SUBLETTING BY TENANT
7.1 BY TENANT: Tenant shall not sublet the Leased Premises (or any portion
thereof) or assign or encumber its interest in this Lease, whether voluntarily
or by operation of Law, without Landlord's prior written consent first obtained
in accordance with the provisions of this Article 7. Any attempted subletting,
assignment or encumbrance without Landlord's prior written consent, at
Landlord's election, shall constitute a default by Tenant under the terms of
this Lease. The acceptance of rent by Landlord from any person or entity other
than Tenant, or the acceptance of rent by Landlord from Tenant with knowledge of
a violation of the provisions of this Article, shall not be deemed to be a
waiver by Landlord of any provision of this Article or this Lease or to be a
consent to any subletting by Tenant or any assignment or encumbrance of Tenant's
interest in this Lease.
7.2 MERGER OR REORGANIZATION: If Tenant is a corporation, any dissolution,
merger, consolidation or other reorganization of Tenant, or the sale or other
transfer in the aggregate over the Lease Term of a controlling percentage of the
capital stock of Tenant, shall be deemed a voluntary assignment of Tenant's
interest in this Lease. The phrase "controlling percentage" means the ownership
of and the right to vote stock possessing more than fifty percent of the total
combined voting power of all classes of Tenant's capital stock issued,
outstanding and entitled to vote for the election of directors. If Tenant is a
partnership, a withdrawal or change, whether voluntary, involuntary or by
operation of Law, of any general partner, or the dissolution of the partnership,
shall be deemed a voluntary assignment of Tenant's interest in this Lease.
7.3 LANDLORD'S ELECTION: If Tenant or Tenant's successors shall desire to
assign its interest under this Lease or to sublet the Leased Premises, Tenant
and Tenant's successors must first notify Landlord, in writing, of its intent to
so assign or sublet, at least thirty days in advance of the date it intends to
so assign its interest in this Lease or sublet the Leased Premises but not
sooner than sixty days in advance of such date, specifying in detail the terms
of such proposed assignment or subletting, including the name of the proposed
assignee or sublessee, the proposed assignee's or Sublessee's, intended use of
the Leased Premises, a current financial statement of such
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XXX regarding the proposed assignee or sublessee within which to do one of the
following: (a) terminate this Lease or, in the case of a sublease of less than
all of the Leased Premises, terminate this Lease as to that part of the Leased
Premises proposed to be so sublet, either (i) on the condition that the proposed
Transferee immediately enter into a direct lease of the Leased Premises with
Landlord (or, in the case of a partial sublease, a lease for the portion
proposed to be so sublet) on the same terms and conditions contained in Tenant's
(or Tenant's successors') notice, or (ii) so that Landlord is thereafter free to
lease the Leased Premises (or, in the case of a partial sublease, the portion
proposed to be so sublet) to whomever it pleases on whatever terms are
acceptable to Landlord. In the event Landlord elects to so terminate this Lease,
then (i) if such termination is conditioned upon the execution of a lease
between Landlord and the proposed Transferee, Tenant's and Tenant's successors'
obligations under this Lease shall not be terminated until such Transferee
executes a new lease with Landlord, enters into possession, and commences the
payment of rent, and (ii) if Landlord elects simply to terminate this Lease (or,
in the case of a partial sublease, terminate this Lease as to the portion to be
so sublet), the Lease shall so terminate in its entirety (or as to the space to
be so sublet) fifteen (15) days after Landlord has notified Tenant and Tenant's
successors in writing of such election. In the case of a partial termination of
the Lease, the Base Monthly Rent and Tenant's or Tenant's successors'
proportionate share shall be reduced to an amount which bears the same
relationship to the original amount thereof as the area of that part of the
Leased Premises which remains subject to the Lease bears to the original area of
the Leased Premises. Landlord and Tenant or Tenant's successors shall execute a
cancellation agreement with respect to the Lease to effect such termination or
partial termination, or (b) if Landlord shall not have elected to cancel and
terminate this Lease, to either (i) consent to such requested assignment or
subletting subject to Tenant's and Tenant's successors' compliance with the
conditions set forth in Article 7.4 below or (ii) refuse to so consent to such
requested assignment or subletting, provided that such consent shall not be
unreasonably refused. It shall not be unreasonable for Landlord to withhold its
consent to any proposed assignment or subletting if (i) the proposed assignee's
or subtenant's anticipated use of the Premises involves the storage, use or
disposal of a Hazardous Material; (ii) if the proposed assignee or subtenant has
been required by any prior landlord, lender or governmental authority to clean
up Hazardous Materials unlawfully discharged by the proposed assignee or
subtenant; or (iii) if the proposed assignee or subtenant is subject to
investigation or enforcement order or proceeding by any governmental authority
in connection with the use, disposal or storage of a Hazardous Material. Tenant
and Tenant's successors covenant and agree to supply to Landlord, upon request,
with all necessary or relevant information which Landlord may reasonably request
respecting such proposed assignment or subletting and/or the proposed assignee
or sublessee. Landlord's review period shall not commence until Landlord has
received all information requested by Landlord.
7.4 CONDITIONS TO LANDLORD'S CONSENT: If Landlord elects to consent, or shall
have been ordered to so consent by a court of competent jurisdiction, to such
requested assignment, subletting or encumbrance, such consent shall be expressly
conditioned upon the occurrence of each of the conditions below set forth, and
any purported assignment, subletting or encumbrance made or ordered prior to the
full and complete satisfaction of each of the following conditions shall be void
and, at the election of Landlord, which election may be exercised at any time
following such a purported assignment, subletting or encumbrance shall
constitute a material default by Tenant under this Lease giving Landlord the
absolute right to terminate this Lease. The conditions are as follows:
A. Landlord having approved in form and substance the assignment or
sublease agreement (or the encumbrance agreement), which approval shall not be
unreasonably withheld by Landlord if the requirements of this Article 7 are
otherwise complied with.
B. Each such sublessee or assignee having agreed, in writing
satisfactory to Landlord and its counsel and for the benefit of Landlord, to
assume, to be bound by, and to perform the obligations of this Lease to be
performed by Tenant (or, in the case of an encumbrance, each such encumbrancer
having similarly agreed to assume, be bound by and to perform Tenant's
obligations upon a foreclosure or transfer in lieu thereof).
C. Tenant having fully and completely performed all of its obligations
under the terms of this Lease through and including the date of the requested
consent, as well as through and including the date such assignment or subletting
is to become effective.
D. Tenant having reimbursed to Landlord all reasonable costs and
attorneys fees incurred by Landlord in conjunction with the processing and
documentation of any such requested subletting, assignment or encumbrance.
E. Tenant having delivered to Landlord a complete and fully-executed
duplicate original of such sublease agreement, assignment agreement or
encumbrance (as applicable) and all related agreements.
F. Tenant having paid, or having agreed in writing to pay as to future
payments, to Landlord one hundred percent of all assignment consideration or
excess rentals to be paid to Tenant or to any other on Tenant's behalf or for
Tenant's benefit for such assignment or subletting as follows:
(1) If Tenant assigns its interest under the Lease and if all or a
portion of the consideration for such assignment is to be paid by the assignee
at the time of the assignment, that Tenant shall have paid to Landlord and
Landlord shall have received an amount equal to one hundred percent of the
assignment consideration so paid or to be paid whichever is the greater) at the
time of the assignment by the assignee; or
(2) If Tenant assigns its interest under this Lease and if Tenant is
to receive all or a portion of the consideration for such assignment in future
installments, that Tenant and Tenant's assignee shall have entered into a
written agreement with and for the benefit of Landlord satisfactory to Landlord
and its counsel whereby Tenant and Tenant's assignee jointly agree to pay to
Landlord an amount equal to one hundred percent of all such future assignment
consideration installments to be paid by such assignee as and when such
assignment consideration is so paid.
(3) If Tenant subleases the Leased Premises, that Tenant and Tenant's
sublessee shall have entered into a written agreement with and for the benefit
of Landlord satisfactory to Landlord and its counsel whereby Tenant and Tenant's
sublessee jointly agree to pay to Landlord one hundred percent of all excess
rentals to be paid by such sublessee as and when such excess rentals are so
paid.
7.5 ASSIGNMENT CONSIDERATION AND EXCESS RENTALS DEFINED: For purposes of this
article, the term "Assignment Consideration" shall mean all consideration to be
paid by the Assignee as consideration for such assignment, and the term "Excess
Rentals" shall mean all consideration to be paid by the Sublessee in excess of
the rent to be paid by said Sublessee/Sublessor for the premises subleased for
the same period. It is specifically intended and agreed that this provision is
intended to be a one hundred percent profit sharing clause, such that neither
Tenant nor any successor to Tenant shall make any profit whatsoever as a result
of any transfer of an interest in the Lease or the Leased Premises or any other
property, as more particularly described herein.
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Assignment Considerations and/or "Excess Rentals" shall include all payments
made or to be made by any Assignee or Sublessee relating in any way to any
transfer of an interest in the Lease or the Leased Premises including, but not
limited to, any payment made with respect to property which would or shall
become Landlord's property upon the expiration or earlier termination of the
lease, whether such property was installed or paid for by Landlord or by Tenant
or Tenant's successors. In the event Tenant or Tenant's successors sublease a
portion of the Leased Premises, "Excess Rentals" shall be calculated by
subtracting the rent payable by the Sublessor for the portion of the Leased
Premises so sublet from all consideration to be paid by such Sublessee. Rent
payable by the Sublessor for the portion of the Leased Premises so sublet shall
be calculated by multiplying the Base Monthly Rent payable by the Sublessor for
the Leased Premises leased by such Sublessor by a fraction, the numerator of
which is the area in square feet subleased and the denominator of which is the
total floor area of the Leased Premises leased by such Sublessor also in square
feet. Tenant and Tenant's Successors agree that any Assignment Consideration
and/or Excess Rentals hereunder shall be the property of Landlord and not the
property of Tenant.
7.6 PAYMENTS: All payments required by this Article to be made to Landlord
shall be made in cash in full as and when they become due. At the time Tenant,
Tenant's assignee or sublessee makes each such payment to Landlord, Tenant or
Tenant's assignee or sublessee, as the case may be, shall deliver to Landlord an
itemized statement in reasonable detail showing the method by which the amount
due Landlord was calculated and certified by the party making such payment as
true and correct. Landlord may require that all payments of Excess Rentals
and/or Assignment Consideration to be made hereunder be made directly to
Landlord by such Transferee.
7.7 GOOD FAITH: The rights granted to Tenant by this Article are granted in
consideration of Tenant's express covenant that all pertinent allocations which
are made by Tenant between the rental value of the Leased Premises and the value
of any of Tenant's personal property which may be conveyed or leased
concurrently with and which may reasonably be considered a part of the same
transaction as the permitted assignment or subletting shall be made fairly,
honestly and in good faith. If Tenant shall breach this Covenant of Good Faith,
Landlord may immediately declare Tenant to be in default under the terms of this
Lease and terminate this Lease and/or exercise any other rights and remedies
Landlord would have under the terms of this Lease in the case of a material
default by Tenant under this Lease.
7.8 EFFECT OF LANDLORD'S CONSENT: No subletting, assignment or encumbrance,
even with the consent of Landlord, shall relieve Tenant of its personal and
primary obligation to pay rent and to perform all of the obligations to be
performed by Tenant hereunder. Consent by Landlord to one or more assignments or
encumbrances of Tenant's interest in this Lease or to one or more sublettings of
the Leased Premises shall not be deemed to be a consent to any subsequent
assignment, encumbrance or subletting. If Landlord shall have been ordered by a
court of competent jurisdiction to consent to a requested assignment or
subletting, or such an assignment or subletting shall have been ordered over the
objection of Landlord, such assignment or subletting shall not be binding
between the assignee (or sublessee) and Landlord until such time as all
conditions set forth in Article 7.4 above have been fully satisfied (to the
extent not then satisfied) by the assignee or sublessee, including, without
limitation, the payment to Landlord of all agreed assignment considerations
and/or excess rentals then due Landlord.
ARTICLE 8
LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY
8.1 LIMITATION ON LANDLORD'S LIABILITY AND RELEASE: Landlord shall not be
liable to Tenant for, and Tenant hereby releases Landlord and its partners and
officers from, any and all liability, whether in contract, tort or on any other
basis, for any injury to or any damage sustained by Tenant, its agents,
employees, contractors or invitees; any damage to Tenant's property; or any loss
to Tenant's business, loss of Tenant's profits or other financial loss of Tenant
resulting from or attributable to the condition of, the management of, the
maintenance of, or the protection of the Leased Premises or the failure of any
component of the Premises, the Building, the Project or the Common Areas,
including, without limitation, any such injury, damage or loss resulting from
(i) the failure, interruption, rationing or other curtailment or cessation in
the supply of electricity, water, gas or other utility service to the Project,
the Building or the Leased Premises; (ii) the vandalism or forcible entry into
the Building or the Leased Premises; (iii) the penetration of water into or onto
any portion of the Leased Premises through roof leaks or otherwise; (iv) the
failure to provide security and/or adequate lighting in or about the Project,
the Building or the Leased Premises; (v) the existence of any design or
construction defects within the Project, the Building or the Leased Premises;
(vi) the failure of any mechanical systems to function properly (such as the
HVAC systems); or (vii) the blockage of access to any portion of the Project,
the Building or the Leased Premises.
8.2 TENANT'S INDEMNIFICATION OF LANDLORD: Tenant shall defend Landlord, with
competent counsel reasonably satisfactory to Landlord, against any claims made
or legal actions filed or threatened by third parties against Landlord which
result from the death, bodily injury, personal injury, damage to property or
interference with contractual or other rights suffered by any third party,
(including other Tenants within the Project) which (i) occurred within the
Leased Premises or the Common Areas or (ii) resulted from Tenant's use or
occupancy of the Leased Premises or the Common Areas or (iii) resulted from
Tenant's activities in or about the Leased Premises, the Building or the
Project, and Tenant shall indemnify and hold Landlord, Landlord's principals,
employees and agents harmless from any loss (including loss of rents by reason
of vacant space which otherwise would have been leased but for such activities),
liabilities, penalties, or expense whatsoever (including all legal fees incurred
by Landlord with respect to defending such claims) resulting therefrom. The
terms of his indemnity agreement pertain to events which shall have occurred
during the term of this Lease but the indemnity shall survive the expiration or
sooner termination of this Lease.
ARTICLE 9
INSURANCE
9.1 TENANT'S INSURANCE: Tenant shall maintain insurance complying with all of
the following:
A. Tenant shall procure, pay for and keep in full force and effect, at all
times during the Lease Term, the following:
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occupancy of the Leased Premises or the Building, Outside Areas, Property, or
Common Areas or resulting from Tenant's activities in or about the Leased
Premises. Such insurance shall be on an occurrence basis with a combined single
limit of liability of not less than the amount of Tenant's Required Liability
Coverage (as set forth in Article 1). The policy or policies shall be endorsed
to name Landlord and such others as are designated by Landlord as additional
insureds and shall contain the following additional endorsement: "The insurance
afforded to the additional insureds is primary insurance. If the additional
insureds have other insurance which is applicable to the loss on a contributing,
excess or contingent basis, the amount of this insurance company's liability
under this policy shall not be reduced by the existence of such other insurance.
Any insurance carried by the additional insureds shall be excess and non
contributing with the insurance provided by the Tenant." The policy shall not be
canceled or reduced without at least 30 days written notice to additional
insureds. If the policy insures more than one location, it shall be endorsed to
show that the limits and aggregate apply per location. Tenant's policy shall
also contain the severability of interest and cross-liability endorsement or
clauses.
(2) Fire and property damage insurance in so-called Special Form plus
earthquake and flood insuring Tenant against loss from physical damage to
Tenant's personal property, inventory, stock, trade fixtures and improvements
within the Leased Premises with coverage for the full actual replacement cost
thereof;
(3) Plate-glass insurance, at actual replacement cost;
(4) Product Liability insurance (including without limitation Liquor
Liability insurance for liability arising out of the distribution, sale, or
consumption of food and/or beverages including alcoholic beverages at the Leased
Premises for not less than the Tenant's Required Liability Coverage as set forth
in Article 1;
(5) Workers' compensation insurance and any other employee benefit
insurance sufficient to comply with all Laws which policy shall be endorsed to
provide thirty (30) days written notice of cancellation to Landlord.
(6) Comprehensive Auto Liability insurance with a combined single
limit coverage of not less than the amount of Tenant's Required Liability
Coverage (as set forth in Article 1.1 M. Each policy of liability insurance
required to be carried by Tenant pursuant to this Article or actually carried by
Tenant with respect to the Leased Premises or the Property (i) shall be in a
form satisfactory to Landlord, (ii) Shall be provided by carriers admitted to do
business in the state of California, with a Best rating of "A/VI" or better
and/or acceptable to Landlord. Property insurance shall contain a waiver and/or
a permission to waive by the insurer any right of subrogation against Landlord,
its principals, employees, agents and contractors which might arise by reason of
any payment under such policy or by reason of any act or omission of Landlord,
its principals, employees, agents or contractors.
(7) Business Interruption Insurance which shall adequately compensate
Tenant for any losses incurred due to Tenant's inability to use the Premises
whether caused by the act or failure to act by Landlord or any other reason
Tenant shall have been denied the full and normal use of the Premises or any
portion thereof.
C. Prior to the time Tenant or any of its contractors enters the Leased
Premises, Tenant shall deliver to the Landlord with respect to each policy of
insurance required to be carried by Tenant pursuant to this Article, a
certificate of the insurer certifying, in a form reasonably satisfactory to the
Landlord, that the policy has been issued and premium paid providing the
coverage required by this Article and containing the provisions herein. Attached
to such a certificate shall be endorsements naming Landlord as additional
insured, and including the wording under primary insurance above. Landlord may
at any time and from time-to-time inspect and/or copy any and all insurance
policies required to be carried by Tenant pursuant to this article. If
Landlord's lender, insurance broker or advisor or counsel reasonably determines
at any time that the form or amount of coverage set forth in Article 9.1.(A) for
any policy of insurance Tenant is required to carry pursuant to this Article is
not adequate, then Tenant shall increase the amount of coverage for such
insurance to such greater amount or change the form as Landlord's lender,
insurance broker or advisor or counsel reasonably deems adequate (provided
however such increase level of coverage may not exceed the level of coverage for
such insurance commonly carried by comparable businesses similarly situated and
operating under similar circumstances).
D. The Commercial General Liability insurance carried by Tenant shall
specifically insure the performance by Tenant of the Indemnification provisions
set forth in Article 8.2 of this lease provided, however, nothing contained in
this Article 9 shall be construed to limit the liability of Tenant under the
Indemnification provisions set forth in said Article 8.2.
E. Notwithstanding anything contained herein to the contrary, all insurance
policies and coverages required under the terms of this Lease shall require a
minimum notice to Landlord of Thirty (30) days prior to a cancellation, change,
or revision of such coverages or providers.
F. In the event that Tenant shall not have acquired all of the insurance
coverages and policies as required above, by the Lease Commencement Date,
Landlord shall have the right but not the obligation to acquire such coverages
and policies on behalf of Tenant at Tenant's sole cost and expense, and Tenant
shall, upon demand by Landlord, reimburse to Landlord, all costs associated with
the premiums, acquisition, and administration of such coverages and policies,
and such costs shall be a Building Operating Expense.
9.2 LANDLORD'S INSURANCE: With respect to insurance maintained by Landlord:
A. Landlord shall maintain, as the minimum coverage required of it by this
Lease, property insurance insuring Landlord (and such others as Landlord may
designate) against loss from physical damage to the Building with coverage of
not less than one hundred percent of the full actual replacement cost thereof
and against loss of rents for a period of not less than twelve months. Such
property damage insurance, at Landlord's election but without any requirement on
Landlord's behalf to do so, (i) may be written in so-called Special Form,
excluding only those perils commonly excluded from such coverage by Landlord's
then property damage insurer; (ii) may provide coverage for physical damage to
the improvements so insured for up to the entire full actual replacement cost
thereof; (iii) may be endorsed to include (or separate policies which may be
carried to cover) loss or damage caused by any additional perils against which
Landlord may elect to insure, including earthquake and/or flood; (iv) may
provide coverage for loss of rents for a period of up to twelve months; and/or
(v) may contain "deductibles" per occurrence in an amount reasonably acceptable
to Landlord. Landlord shall not be required to cause such insurance to cover any
of Tenant's personal property, inventory and trade fixtures, or any
modifications, alterations or improvements made or constructed by Tenant to or
within the Leased Premises.
B. Landlord shall maintain Commercial General Liability insurance insuring
Landlord (and such others as are designated by Landlord) against liability for
personal injury, bodily injury, death, and damage to property occurring in, on
or about, or resulting from the use or occupancy of the Project, or any portion
thereof, with
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combined single limit coverage of at least Two Million Dollars. Landlord may
carry such greater coverage as Landlord or Landlord's Lender, insurance broker
or advisor or counsel may from time to time determine is reasonably necessary
for the adequate protection of Landlord and the Project.
C. Landlord may maintain any other insurance which in the opinion of its
lender, insurance broker or advisor, or legal counsel is reasonably prudent to
carry under the given circumstances.
9.3 MUTUAL WAIVER OF SUBROGATION: Landlord hereby releases Tenant, and Tenant
hereby releases Landlord and its respective partners and officers, agents,
employees and servants, from any and all liability for loss, damage or injury to
the property of the other in or about the Leased Premises which is caused by or
results from a peril or event or happening which would be covered by insurance
required to be carried under the terms of this Lease, or is covered by insurance
actually carried and in force at the time of the loss, by the party sustaining
such loss; provided, however, that such waiver shall be effective only to the
extent permitted by the insurance covering such loss and to the extent such
insurance is not prejudiced thereby.
ARTICLE 10
DAMAGE TO LEASED PREMISES
10.1 LANDLORD'S DUTY TO RESTORE: If the Leased Premises are damaged by any
peril after the Effective Date of this Lease, Landlord shall restore the Leased
Premises, as and when required by this Article, unless this Lease is terminated
by Landlord pursuant to Article 10.2 or by Tenant pursuant to Article 10.3. All
insurance proceeds available from the fire and property damage insurance carried
by Landlord shall be paid to and become the property of Landlord. If this Lease
is terminated pursuant to either Article 10.2 or 10.3, all insurance proceeds
available from insurance carried by Tenant which cover loss to property that is
Landlord's property or would become Landlord's property on termination of this
Lease shall be paid to and become the property of Landlord, and the remainder of
such proceeds shall be paid to and become the property of Tenant. If this Lease
is not terminated pursuant to either Article 10.2 or 10.3, all insurance
proceeds available from insurance carried by Tenant which cover loss to property
that is Landlord's property shall be paid to and become the property of
Landlord, and all proceeds available which cover loss to property which would
become the property of Landlord upon the termination of this Lease shall be paid
to and remain the property of Tenant provided that Tenant agrees to restore such
property. If this Lease is not so terminated, then upon receipt of the insurance
proceeds (if the loss is covered by insurance) and the issuance of all necessary
governmental permits, Landlord shall commence and diligently prosecute to
completion the restoration of the Leased Premises, to the extent then allowed by
Law, to substantially the same condition in which the Leased Premises existed as
of the Lease Commencement Date. Landlord's obligation to restore shall be
limited to the Leased Premises and interior improvements constructed by
Landlord. Landlord shall have no obligation to restore any other improvements to
the Leased Premises or any of Tenant's personal property, inventory or trade
fixtures. Upon completion of the restoration by Landlord, Tenant shall forthwith
replace or fully repair all of Tenant's personal property, inventory, trade
fixtures and other improvements constructed by Tenant to like or similar
condition as existed at the time of such damage or destruction.
10.2 LANDLORD'S RIGHT TO TERMINATE: Landlord shall have the option to
terminate this Lease in the event any of the following occurs, which option may
be exercised only by delivery to Tenant of a written notice of election to
terminate within thirty days after the date of such damage or destruction:
A. The Building is damaged by any peril covered by valid and
collectible insurance actually carried by Landlord and in force at the time of
such damage or destruction (an "insured peril") to such an extent that the
estimated cost to restore the Building exceeds the lesser of (i) the insurance
proceeds available from insurance actually carried by Landlord, or (ii) seventy-
five percent of the then actual estimated replacement cost thereof;
B. The Building is damaged by an uninsured peril.
D. The Building is damaged by any peril and, because of the Laws then
in force, the Building (i) can not be restored at reasonable cost or (ii) if
restored, can not be used for the same use being made thereof before such
damage.
10.3 TENANT'S RIGHT TO TERMINATE: If the Leased Premises are damaged by any
peril and Landlord does not elect to terminate this Lease or is not entitled to
terminate this Lease pursuant to this Article, then as soon as reasonably
practicable, Landlord shall furnish Tenant with the written opinion of
Landlord's architect or construction consultant as to when the restoration work
required of Landlord may be complete. Tenant shall have the option to terminate
this Lease in the event any of the following occurs, which option may be
exercised in the case of A or B below only by delivery to Landlord of a written
notice of election to terminate within seven days after Tenant receives from
Landlord the estimate of the time needed to complete such restoration:
A. The Leased Premises are damaged by any peril and, in the reasonable
opinion of Landlord's architect or construction consultant, the restoration of
the Leased Premises cannot be substantially completed within nine (9) months
after the date of such notice from Landlord; or
B. The Leased Premises are damaged by any peril within nine months of
the last day of the Lease Term and, in the reasonable opinion of Landlord's
architect or construction consultant, the restoration of the Leased Premises
cannot be substantially completed within ninety days after the date such
restoration is commenced.
10.4 TENANT'S WAIVER: Landlord and Tenant agree that the provisions of Article
10.3 above, captioned "Tenant's Right to Terminate", are intended to supersede
and replace the provisions contained in California Civil Code, Section 1932,
Subdivision 2, and California Civil Code, Section 1934, and accordingly, Tenant
hereby waives the provisions of said Civil Code Sections and the provisions of
any successor Code Sections or similar Laws hereinafter enacted.
10.5 ABATEMENT OF RENT: In the event of damage to the Leased Premises which
does not result in the termination of this Lease, the Base Monthly Rent (and any
Additional Rent) shall be temporarily abated during the period of restoration in
proportion to the degree to which Tenant's use of the Leased Premises is
impaired by such damage.
ARTICLE 11
CONDEMNATION
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[11.1 is missing, off of printed page]
11.2 TENANT'S RIGHT TO TERMINATE: Subject to Article 11.3, Tenant shall have
the option to terminate this Lease if, as a result of any taking by means of the
exercise of the power of eminent domain; thirty-three and one-third percent or
more of the Leased Premises is so taken and the part of the Leased Premises that
remains cannot, within a reasonable period of time, be made reasonably suitable
for the continued operation of the Tenant's business.
11.3 TEMPORARY TAKING: If any portion of the Leased Premises is temporarily
taken for one year or less, this Lease shall remain in effect. If more than 33%
of the Leased Premises is temporarily taken for a period which either exceeds
one year or which extends beyond the natural expiration of the Lease Term, then
Landlord and Tenant shall each independently have the option to terminate this
Lease, effective on the date possession is taken by the condemnor.
11.4 RESTORATION AND ABATEMENT OF RENT: If any part of the Leased Premises is
taken by condemnation and this Lease is not terminated, then Landlord shall
repair any damage occasioned thereby to the remainder of the Leased Premises to
a condition reasonably suitable for Tenant's continued operations, to the extent
practicable. As of the date possession is taken by the condemning authority, (i)
the Base Monthly Rent shall be reduced in the same proportion that the area of
that part of the Leased Premises so taken bears to the area of the Leased
Premises immediately prior to such taking, and (ii) Tenant's Proportionate Share
shall be appropriately adjusted.
11.5 DIVISION OF CONDEMNATION AWARD: Any award made for any condemnation of
the Project, the Building, the Common Areas or the Leased Premises, or any
portion thereof, shall belong to and be paid to Landlord, and Tenant hereby
assigns to Landlord all of its right, title and interest in any such award.
ARTICLE 12
DEFAULT AND REMEDIES
12.1 EVENTS OF TENANT'S DEFAULT: The occurrence of any of the following shall
constitute a default by Tenant: (a) failure to pay rent or other charges when
due; (b) failure to perform any other provision of this Lease within the time
periods provided.
12.2 LANDLORD'S REMEDIES: Landlord shall have the following remedies (which
are cumulative and not exclusive and are in addition to any remedies now or
later allowed by law) if Tenant is in default. Landlord may terminate Tenant's
right to possession of the Premises at any time. No act by Landlord other than
giving notice to Tenant shall terminate this Lease. Acts of maintenance, efforts
to relet the Premises, or the appointment of a receiver on Landlord's initiative
to protect Landlords interest under the terms of this Lease shall not constitute
a termination of Tenants right to possession. Upon termination of Tenant's right
to possession, Landlord has the right to recover from Tenant: (1) the worth of
the unpaid rent that had been earned at the time of termination of Tenant's
right to possession; (2) the worth of the amount of the unpaid rent that world
have been earned after the date of termination of Tenant's right to possession;
(3) any other amount, including but not limited to expenses incurred to relet
the premises, court, attorney and collection costs, necessary to compensate
Landlord for any all losses caused by Tenant's default. "The worth," as used in
this article, is to be computed by allowing interest at the maximum legal
interest rate permitted by law.
12.3 LANDLORD'S DEFAULT AND TENANT'S REMEDIES: In the event Landlord fails to
perform any of its obligations under this Lease, Landlord shall nevertheless not
be in default under the terms of this Lease until such time as Tenant shall have
first given Landlord written notice specifying the nature of such failure to
perform its obligations, and then only after Landlord shall have had a
reasonable period of time following its receipt of such notice within which to
perform such obligations. In the event of Landlord's default as above set forth,
then, and only then, Tenant may then proceed at law to compel Landlord to
perform its obligations and/or to recover damages proximately caused by such
failure to perform.
12.4 LIMITATION ON TENANT'S RECOURSE: Tenant agrees that the obligations of
Landlord under this Lease shall not constitute personal obligations of the
officers, directors, trustees, partners, joint venturers, members, owners,
stockholders, or other principals of any business entity which holds title to
the Project. Tenant shall have recourse only to the assets of the Project (as
shown on the Site Plan) for the satisfaction of such obligations and not to the
other assets of any individual owner such officers, directors, trustees,
partners, joint venturers, members, owners, stockholders or principals.
Additionally, if Landlord is a corporation, partnership or limited liability
corporation, then Tenant covenants and agrees:
A. No partner, stockholder, or officer of Landlord shall be sued or
named as a party in any suit or action brought by Tenant with respect to any
alleged breach of this Lease (except to the extent necessary to secure
jurisdiction over the entity and then only for that sole purpose);
B. No service of process shall be made against any partner,
stockholder, or officer of Landlord except for the sole purpose of securing
jurisdiction over the entity; and
C. No writ of execution shall be levied against the assets of any
partner or officer of Landlord other than to the extent of his interest in the
assets of the Project. Tenant further agrees that each of the foregoing
covenants and agreements shall be enforceable by Landlord and by any partner or
officer of Landlord and shall be applicable to any actual or alleged
misrepresentation or non-disclosure made respecting this Lease or the Leased
Premises or any actual or alleged failure, default or breach of any covenant or
agreement either expressly or implicitly contained in this Lease or imposed by
statute or at common law.
12.5 TENANT'S WAIVER: Landlord and Tenant agree that the provisions of Article
12.3 above are intended to supersede and replace the provisions of California
Civil Code 1932(l), 1941 and 1942, and accordingly, Tenant hereby waives the
provisions of Section 1932(l), 1941 and 1942 of the California Civil Code and/or
any similar or successor Law regarding Tenant's right to terminate this Lease or
to make repairs and deduct the expenses of such
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repairs from the rent due under this Lease. Tenant hereby waives any right of
redemption or relief from forfeiture under the Laws of the State of California,
or under any other present or future Law, in the event Tenant is evicted or
Landlord takes possession of the Leased Premises by reason of any default by
Tenant.
ARTICLE 13
GENERAL PROVISIONS
13.1 TAXES ON TENANT'S PROPERTY: Tenant shall pay before delinquency any and
all taxes, assessments, license fees, use fees, permit fees and public charges
of whatever nature or description levied, assessed or imposed against Tenant or
Landlord by a governmental agency arising out of, caused by reason of or based
upon Tenant's estate in this Lease, Tenant's ownership of property, improvements
made by Tenant to the Leased Premises, improvements made by Landlord for
Tenant's use within the Leased Premises, Tenant's use (or estimated use) of
public facilities or services or Tenant's consumption (or estimated consumption)
of public utilities, energy, water or other resources. On demand by Landlord,
Tenant shall furnish Landlord with satisfactory evidence of these payments. If
any such taxes, assessments, fees or public charges are levied against Landlord,
Landlord's property, the Building or the Project, or if the assessed value of
the Building or the Project is increased by the inclusion therein of a value
placed upon same, then Landlord, after giving written notice to Tenant, shall
have the right, regardless of the validity thereof, to pay such taxes,
assessment, fee or public charge and bill Tenant, as Additional Rent, the amount
of such taxes, assessment, fee or public charge so paid on Tenant's behalf.
Tenant shall, within ten days from the date it receives an invoice from Landlord
setting forth the amount of such taxes, assessment, fee or public charge so
levied, pay to Landlord, as Additional Rent, the amount set forth in said
invoice. Failure by Tenant to pay the amount so invoiced within said ten day
period shall be conclusively deemed a default by Tenant under this Lease. Tenant
shall have the right, and with Landlord's full cooperation if Tenant is not then
in default under the terms of this Lease, to bring suit in any court of
competent jurisdiction to recover from the taxing authority the amount of any
such taxes, assessment, fee or public charge so paid.
13.2 HOLDING OVER: This Lease shall terminate without further notice on the
Lease Expiration Date (as set forth in Article l). Any holding over after the
expiration of the Lease shall be deemed an unlawful detainer of the Leased
Premises unless Landlord has consented to same in writing. Any holding over by
Tenant with written permission of Landlord shall be construed to be a tenancy
from month to month, on the same terms and conditions herein specified insofar
as applicable, except that the Base Monthly Rent shall be increased to an amount
equal to one hundred fifty percent of the Base Monthly Rent payable during the
last full month immediately preceding such period of holding over.
13.3 SUBORDINATION TO MORTGAGES: This Lease is subject and subordinate to all
underlying ground leases and to all mortgages and deeds of trust which affect
the Building and are of public record as of the Effective Date of this Lease,
and to all renewals, modifications, consolidations, replacements and extensions
thereof. However, if the lessor under any such ground lease or any Lender
holding any such mortgage or deed of trust shall advise Landlord that it desires
or requires this Lease to be made prior and superior thereto, then, upon written
request of Landlord to Tenant, Tenant shall promptly execute, acknowledge and
deliver any and all documents or instruments which Landlord and such lessor or
Lender deem necessary or desirable to make this Lease prior thereto. Tenant
hereby consents to Landlord's ground leasing the land underlying the Building
and/or encumbering the Building as security for future loans on such terms as
Landlord shall desire, all of which future ground leases, mortgages or deeds of
trust shall be subject and subordinate to this Lease. However, if any lessor
under any such future ground lease or any Lender holding such future mortgage or
deed of trust shall desire or require that this Lease be made subject and
subordinate to such future ground lease, mortgage or deed of trust, then Tenant
agrees, within ten days after Landlord's written request therefore, to execute,
acknowledge and deliver to Landlord any and all documents or instruments
(including but not limited to the enclosed Exhibit D) as requested by Landlord
or such lessor or Lender as may be necessary or proper to assure the
subordination of this Lease to such future ground lease, mortgage or deed of
trust; but only if such lessor or Lender agrees to recognize Tenant's rights
under this Lease and not to disturb Tenant's quiet possession of the Leased
Premises so long as Tenant is not in default under this Lease. Tenant's failure
to execute and deliver such subordination agreement within ten days after
Landlord's request therefore shall be a material default by Tenant under this
Lease, and Landlord shall have all of the rights and remedies available to
Landlord as Landlord would otherwise have in the case of any other material
default by Tenant, including the right to terminate this Lease and sue for
damages proximately caused thereby, it being agreed and understood by Tenant
that Tenant's failure to so deliver such subordination agreement in a timely
manner could result in Landlord being unable to perform committed obligations to
other third parties which were made by Landlord in reliance upon this covenant
of Tenant. Landlord and Tenant intend that any statement delivered pursuant to
this Article may be relied upon by any Lender or purchaser or prospective Lender
or purchaser of the Building, the Project, or any interest therein.
13.4 TENANT'S ATTORNMENT UPON FORECLOSURE: Tenant shall, upon request, attorn
(i) to any purchaser of the Building at any foreclosure sale or private sale
conducted pursuant to any security instrument encumbering the Building, (ii) to
any grantee or transferee designated in any deed given in lieu of foreclosure of
any security interest encumbering the Building, or (iii) to the lessor under any
underlying ground lease of the land underlying the Building, should such ground
lease be terminated; provided that such purchaser, grantee or lessor recognizes
Tenant's rights under this Lease.
13.5 MORTGAGEE PROTECTION: In the event of any default on the part of
Landlord, Tenant will give notice by registered mail to any Lender or lessor
under any underlying ground lease who shall have requested, in writing, to
Tenant that it be provided with such notice, and Tenant shall offer such Lender
or lessor a reasonable opportunity to cure the default, including time to obtain
possession of the Leased Premises by power of sale or judicial foreclosure or
other appropriate legal proceedings if reasonably necessary to effect a cure.
13.6 ESTOPPEL CERTIFICATES: Tenant will, following any request(s) by Landlord,
promptly execute and deliver to Landlord an estoppel certificate (i) certifying
that this Lease is unmodified and in full force and effect, or, if modified,
stating the nature of such modification and certifying that this Lease, as so
modified, is in full force and effect, (ii) stating the date to which the rent
and other charges are paid in advance, if any, (iii) acknowledging that there
are not, to Tenant's knowledge, any uncured defaults on the part of Landlord
hereunder, or specifying such defaults if any are claimed, and (iv) certifying
such other information about this Lease as may be reasonably requested
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available to Landlord as Landlord would otherwise have in the case of any other
material default by Tenant, including the right to terminate this Lease and sue
for damages proximately caused thereby, it being agreed and understood by Tenant
that Tenant's failure to so deliver such estoppel certificate in a timely manner
could result in Landlord being unable to perform committed obligations to other
third parties which were made by Landlord in reliance upon this covenant of
Tenant. Landlord and Tenant intend that any statement delivered pursuant to this
Article may be relied upon by any Lender or purchaser or prospective Lender or
purchaser of the Building, the Project, or any interest therein.
13.7 TENANT'S FINANCIAL INFORMATION: Tenant shall, within ten business days
after Landlord's request therefore, deliver to Landlord a copy of a current
financial statement certified by Tenant in writing as to its accuracy) including
an income statement and balance sheet, and any such other information, including
but not limited to Tenant's tax returns, reasonably requested by Landlord
regarding Tenant's financial condition.
13.8 FORCE MAJEURE: The obligations of each of the parties under this Lease
(other than the obligation to pay money) shall be temporarily excused if such
party is prevented or delayed in performing such obligation by reason of any
strikes, lockouts or labor disputes; inability to obtain labor, materials, fuels
or reasonable substitutes therefore; governmental restrictions, regulations,
controls, action or inaction; civil commotion; inclement weather, fire or other
acts of God; or other causes (except financial inability) beyond the reasonable
control of the party obligated to perform (including acts or omissions of the
other party for a period equal to the period of any such prevention, delay or
stoppage.
13.9 NOTICES: Any notice required or desired to be given by a party regarding
this Lease shall be in writing and shall be personally served, or in lieu of
personal service may be given by depositing such notice in the United States
mail, postage prepaid, addressed to the other party at the address specified in
Article 1.1 above. Notices may also be given by electronic facsimile
transmission or commercial carrier and shall be deemed received on the date of
confirmation documented by the transmission or carrier.
13.10 ATTORNEYS' FEES: In the event any party shall bring any action,
arbitration proceeding or legal proceeding alleging a breach of any provision of
this Lease to recover rent, to terminate this Lease, or to enforce, protect,
determine or establish any term or covenant of this Lease or rights or duties
hereunder of either party, the prevailing party shall be entitled to recover
from the non-prevailing party as a part of such action or proceeding, or in a
separate action for that purpose brought within one year from the determination
of such proceeding, all reasonable expenses incurred by the prevailing party. In
the event that Landlord shall be required to retain counsel to enforce any
provision of this Lease; or if Tenant defaults under this Lease and thereafter
cures (or desires to cure) such default with Landlord's consent, Tenant shall
pay to Landlord all reasonable expenses so incurred by Landlord promptly upon
demand. Landlord may enforce this provision by requiring Tenant to pay such fees
and costs as a condition to curing its default.
13.11 DEFINITIONS: Any term that is given a special meaning by any provision
in this Lease shall, unless otherwise specifically stated, have such meaning
whenever used in this Lease or in any Addenda or amendment hereto. In addition
to the terms defined in Article 1, the following terms shall have the following
meanings:
A. REAL PROPERTY TAXES: The term "Real Property Tax" or "Real Property
Taxes" shall each mean (i) all taxes, assessments, levies and other charges of
any kind or nature whatsoever, general and special (including all installments
of principal and interest required to pay any general or special assessments for
public improvements and any increases resulting from reassessments caused by any
change in ownership or new construction), now or hereafter imposed by any
governmental or quasi-governmental authority or special district having the
direct or indirect power to tax or levy assessments, which are levied or
assessed for whatever reason against the Project or any portion thereof, or
Landlord's interest therein, or the fixtures, equipment and other property of
Landlord that is an integral part of the Project and located thereon, or
Landlord's business of owning, leasing or managing the Project or the gross
receipts, income or rentals from the Project; (ii) all charges, levies or fees
imposed by any governmental authority against Landlord by reason of or based
upon the use of or number of parking spaces within the Project, the amount of
public services or public utilities used or consumed (e.g. water, gas,
electricity, sewage or surface water disposal) at the Project, the number of
persons employed by tenants of the Project, the size (whether measured in area,
volume or number of tenants) or the value of the Project, or the type of use or
uses conducted within the Project; and (iii) all costs and fees (including
reasonable attorneys' fees) incurred by Landlord in contesting any Real Property
Tax and in negotiating with public authorities as to any Real Property Tax. If,
at any time during the Lease Term, the taxation or assessment of the Project
prevailing as of the Effective Date of this Lease shall be altered so that in
lieu of or in addition to any Real Property Tax described above there shall be
levied, assessed or imposed (whether by reason of a change in the method of
taxation or assessment, creation of a new tax or charge, or any other cause) an
alternate, substitute, or additional tax or charge (i) on the value, size, use
or occupancy of the Project or Landlord's interest therein or (ii) on or
measured by the gross receipts, income or rentals from the Project, or on
Landlord's business of owning, leasing or managing the Project or (iii) computed
in any manner with respect to the operation of the Project, then any such tax or
charge, however designated, shall be included within the meaning of the terms
"Real Property Taxes" for purposes of this Lease. If any Real Property Tax is
partly based upon property or rents unrelated to the Project, then only that
part of such Real Property Tax that is fairly allocable to the Project shall be
included within the meaning of the terms "Real Property Taxes". Notwithstanding
the foregoing, the term "Real Property Taxes" shall not include estate,
inheritance, transfer, gift or franchise taxes of Landlord or the federal or
state income tax imposed on Landlord's income from all sources.
B. LANDLORD'S INSURANCE COSTS: The term "Landlord's Insurance Costs"
shall mean the costs to Landlord to carry and maintain the policies of fire and
property damage insurance, including earthquake and flood, for the Project and
Landlord's general liability insurance carried by Landlord pursuant to Article
9, together with any deductible amounts paid by Landlord upon the occurrence of
any insured casualty or loss.
C. PROJECT MAINTENANCE COSTS: The term "Project Maintenance Costs"
shall mean all costs and expenses (except Landlord's Insurance Costs and Real
Property Taxes) paid or incurred by Landlord in protecting, operating,
maintaining, repairing and preserving the Project and all parts thereof,
including without limitation, (i) professional management fees equal to five
percent of the annualized Base Monthly Rent, (ii) the amortizing portion of any
costs incurred by Landlord in the making of any modifications, alterations or
improvements which are so amortized during the Lease Term, (iii) costs of
complying with ADA standards imposed
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upon Landlord, governmental regulations governing Tenant's use of Hazardous
Materials, and Landlord's costs of monitoring Tenant's use of Hazardous
Materials including fees charged by Landlord's consultants to periodically
inspect the Premises and the Property, all costs associated with the maintaining
and repairing of the parts of the drainage district, and (v) such other costs as
may be paid or incurred with respect to operating, maintaining and preserving
the Project, such as repairing replacing and resurfacing the exterior surfaces
of the buildings (including roofs), repairing, replacing, and resurfacing paved
areas, repairing structural parts of the buildings, cleaning, maintaining,
repairing, or replacing the interior of the Leased Premises both during the
Lease Term and upon the termination of the Lease, and maintaining, repairing or
replacing, when necessary electrical, plumbing, sewer, drainage, heating,
ventilating and air conditioning systems serving the buildings, providing
utilities to the common areas, maintenance, repair, replacement or installation
of lighting fixtures, directional or other signs and signals, irrigation or
drainage systems, trees, shrubs, materials, maintenance of all landscaped areas,
and any rental paid for machinery and equipment (if leased).
D. READY FOR OCCUPANCY: The term "Ready for Occupancy" shall mean the
date upon which (i) the Leased Premises are available for Tenant's occupancy in
a broom clean condition and (ii) the improvements, if any, to be made to the
Leased Premises by Landlord as a condition to Tenant's obligation to accept
possession of the Leased Premises have been substantially completed and the
building department of the City of Fremont shall have approved the construction
of the improvements as substantially complete or is willing to so approve the
construction of such improvements as substantially complete subject only to
compliance with specified conditions which are the responsibility of Tenant to
satisfy or is willing to allow Tenant to occupy subject to its receiving
assurances by either Landlord or Tenant that specified work will be completed.
E. TENANT'S PROPORTIONATE SHARE: The term "Tenant's Proportionate
Share" or "Tenant's Share", as used with respect to an item pertaining to the
Building, shall each mean that percentage obtained by dividing the leasable
square footage contained within the Leased Premises (as set forth in Article 1)
by the total leasable square footage contained within the Building as the same
from time to time exists or, as used with respect to an item pertaining to the
Project, shall each mean that percentage obtained by dividing the leasable
square footage contained within the Leased Premises (as set forth in Article 1)
by the total leasable square footage contained within the Project as the same
from time to time exists, unless, as to any given item, such a percentage
allocation unfairly burdens or benefits a given tenant(s), in which case
Landlord shall have the exclusive right to equitably and reasonably allocate
such item so as to not unfairly burden or benefit any given tenant(s).
Landlord's reasonable determination of any such special allocation shall be
final and binding upon Tenant.
F. BUILDING'S PROPORTIONATE SHARE: The term "Building's Proportionate
Share" or "Building's Share" shall each mean that percentage which is obtained
by dividing the leasable square footage contained in the Building by the
leasable square footage contained in all buildings located within the Project,
unless, as to any given item, such a percentage allocation unfairly burdens or
benefits a given building(s), in which case Landlord shall have the exclusive
right to reasonably and equitably allocate such item so as to not unfairly
burden or benefit any given building(s). Landlord's determination of any such
special allocation shall be final and binding upon Tenant.
G. BUILDING OPERATING EXPENSES: The term "Building Operating Expenses"
shall mean and include the Building's Proportionate Share of all Real Property
Taxes, all Insurance Costs including Landlord's general liability costs and any
insurance costs relating to Article [9.1 F] herein contained, all Project
Maintenance Costs, and an accounting fee equal to five percent of the combined
total of all such costs.
H. LAW: The term "Law" shall mean any judicial decision and any
statute, constitution, ordinance, resolution, regulation, rule, administrative
order, or other requirement of any municipal, county, state, federal, or other
governmental agency or authority having jurisdiction over the parties to this
Lease, the Leased Premises, the Building or the Project, or any of them in
effect either at the Effective Date of this Lease or at any time during the
Lease Term, including, without limitation, any regulation, order, or policy of
any quasi-official entity or body (e.g. a board of fire examiners or a public
utility or special district).
I. LENDER: The term "Lender" shall mean the holder of any note or
other evidence of indebtedness secured by the Project or any portion thereof.
J. PRIVATE RESTRICTIONS: The term "Private Restrictions" shall mean
all recorded covenants, conditions and restrictions, private agreements,
easements, and any other recorded instruments affecting the use of the Project,
as they may exist from time to time.
K. RENT: The term "rent" shall mean collectively Base Monthly Rent and
all Additional Rent, and all other amounts owed by Tenant to Landlord.
13.12 GENERAL WAIVERS: One party's consent to or approval of any act by the
other party, requiring the first party's consent or approval shall not be deemed
to waive or render unnecessary the first party's consent to or approval of any
subsequent similar act by the other party. No waiver of any provision hereof
shall be effective unless in writing and signed by the waiving party. The
receipt by Landlord of any rent or payment with or without knowledge of the
breach of any provision hereof shall not be deemed a waiver of any such breach.
No waiver of any provision of this Lease shall be deemed a continuing waiver
unless such waiver specifically states so in writing and is signed by both
Landlord and Tenant. No delay or omission in the exercise of any right or remedy
accruing to either party upon any breach by the other party under this Lease
shall impair such right or remedy or be construed as a waiver of any such breach
theretofore or thereafter occurring. The waiver by either party of any breach of
any provision of this Lease shall not be deemed to be a waiver of any subsequent
breach of the same or any other provisions herein contained.
13.13 MISCELLANEOUS: Should any provision of this Lease prove to be invalid or
illegal, such invalidity or illegality shall in no way affect; impair or
invalidate any other provision hereof, and such remaining provisions shall
remain in full force and effect. Time is of the essence with respect to the
performance of every provision of this Lease in which time of performance is a
factor. Any copy of this Lease which is executed by the parties shall be deemed
an original for all purposes. This Lease shall, subject to the provisions
regarding assignment, apply to and bind the respective heirs, successors,
executors, administrators and assigns of Landlord and Tenant. The term "party"
shall mean Landlord or Tenant as the context implies. If Tenant consists of more
than one person or entity, then all members of Tenant shall be jointly and
severally liable hereunder. This Lease shall be construed and enforced in
accordance with the Laws of the State of California. The language in all parts
of this Lease shall in all cases be construed as a whole according to its fair
meaning, and not strictly for or against either Landlord or Tenant. The captions
used in this Lease are for convenience only and shall not be considered in the
construction or interpretation of any provision hereof. When the context of this
Lease requires, the neuter gender includes the masculine, the feminine, a
partnership or corporation or joint venture, and the singular includes the
plural. The terms "must",
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specific provision is made therefore. Where Tenant is obligated not to perform
any act or is not permitted to perform any act, Tenant is also obligated to
restrain any others reasonably within its control, including agents, invitees,
contractors, subcontractors and employees, from performing said act. Landlord
shall not become or be deemed a partner or a joint venturer with Tenant by
reason of any of the provisions of this Lease.
13.14 POSSESSION PRIOR TO COMMENCEMENT DATE: Landlord agrees to allow Tenant
to take possession of the Premises upon the full execution of this Lease by all
parties hereto without payment of rent until the Commencement Date, for purposes
of fit-up and pre-move in tenant improvement construction, so long as Tenant
does not actually move into the Premises for purposes of conducting its business
therein until the Commencement Date.
13.15 BUILDING PORTION USE BY TENANT AND OPERATING EXPENSES IN FIRST YEAR OF
LEASE: It is hereby acknowledged by Tenant and Landlord that the business deal
herein incorporated, contemplates the use of only a portion of the Leased
Premises by Tenant during the first year of the Lease. Therefore, Tenant shall
be allowed the use of 40,000 square feet of contiguous space as mutually agreed
by Landlord and Tenant during this first year of the lease (as shown as outlined
in green on attached Exhibit C). In the event that Tenant elects to use more
than the designated 40,000 square feet of space during the first year of the
Lease, (Additional Space) Tenant shall pay to Landlord, additional Base Monthly
Rent based upon the quality of additional space taken by Tenant at the prorated
square foot price of $1.25 per square foot per month commencing on the first day
of the month following the taking of such space by Tenant.
13.16 PAYMENT FOR EXPENSES FOR SPACE ACTUALLY USED BY TENANT: Tenant shall pay
Additional Rent as noted in Clause #3.2 only on 40,000 square feet of space
during the first year of this Lease unless Tenant shall have elected to take
Additional Space as provided in 13.15 above, in which case Tenant shall pay
Additional Rent in direct proportion to the total space taken by Tenant,
including any Additional Space taken by Tenant during the first year of the
Lease Term. Subsequent to the first year of the Lease, Tenant shall pay
Additional Rent and any other costs related to the entire Leased Premises for
the remaining term of this Lease or extension thereof.
13.17 TERMINATION OF EXISTING LEASE OBLIGATION: It is hereby acknowledged by
Landlord and Tenant that Tenant has an existing lease obligation on a space
commonly known as Renco 60. This obligation is momorialized on that certain
Lease dated for reference as of February 8, 1998 between Tenant and PEN
ASSOCIATES NO.2 LLC, a Calif. ltd. liability company and LAKEHOUSE, LLC, a
Calif. ltd. liability company as Tenants in Common, for the premises commonly
known and referred to as 46535 and 46531 Fremont Blvd., Fremont, consisting in
total of approximately 21,195 square feet of space. Upon the Commencement Date
of this Lease, and upon the surrendering of said space to Landlord, Landlord
shall relieve Tenant of all liability regarding the above noted lease except for
Tenant's surrendering the aformentioned space under the surrender terms and in
the condition as required under the terms of its lease and for paying all of
the obligations as of the date of the surrender of that space to Landlord.
13.17 RIGHT OF FIRST REFUSAL FOR ADJACENT SPACE: In the event that Landlord
receives or makes a proposal from or to a third party for the occupancy by the
third party of the space in the Building adjacent to the Leased Premises,
Landlord shall immediately advise Tenant of the contents of the proposal and
shall provide Tenant a period of exactly five business days from Landlord's
notice to Tenant in which Tenant may agree to enter into a lease with Landlord
for the occupancy of the space subject to the proposal. In the event that Tenant
desires to enter into a lease for the adjacent space, Tenant must notify
Landlord in writing with five business days from Landlord's notice to Tenant,
irrevocably committing to enter into a lease for the adjacent space on the same
terms and conditions as contained in the third party proposal, and Tenant shall
upon providing notice to Landlord be bound by the terms of the third party
proposal. In the event that Tenant does not notify Landlord of its binding
commitment to lease the adjacent space in accordance with the terms of this
paragraph within the time period specified in this paragraph, Tenant shall lose
its right to lease the adjacent space and Landlord shall be free to lease the
adjacent space to the third party (or any other party) on terms substantially
similar to those contained in the proposal. Once the adjacent space has been
leased to a third party, Tenant shall no longer have any right to lease the
adjacent space. In the event that Tenant commits to lease the adjacent space,
this Lease shall be amended by including the terms of the third party proposal.
This right of first refusal shall be subject and subordinate to any prior rights
of other parties.
ARTICLE 14
CORPORATE AUTHORITY
14.1 CORPORATE AUTHORITY: If Tenant is a corporation, each individual
executing this Lease on behalf of said corporation represents and warrants that
Tenant is validly formed and duly authorized and existing, that Tenant is
qualified to do business in the State of California, that Tenant has the full
right and legal authority to enter into this Lease, that he or she is duly
authorized to execute and deliver this Lease on behalf of Tenant in accordance
with the bylaws and/or a board of directors' resolution of Tenant, and that this
Lease is binding upon Tenant in accordance with its terms.
14.2 ENTIRE AGREEMENT: This Lease, the Exhibits (as described in Article l)
and the Addenda (as described in Article 1), which Exhibits and Addenda are by
this reference incorporated herein, constitute the entire agreement between the
parties, and there are no other agreements, understandings or representations
between the parties relating to the lease by Landlord of the Leased Premises to
Tenant, except as expressed herein. No subsequent changes, modifications or
additions to this Lease shall be binding upon the parties unless in writing and
signed by both Landlord and Tenant.
14.3 LANDLORD'S REPRESENTATIONS: Tenant acknowledges that neither Landlord nor
any of its agents made any representations or warranties respecting the Project,
the Building or the Leased Premises, upon
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which Tenant relied in entering into this Lease, which are not expressly set
forth in this Lease. Tenant further acknowledges that neither Landlord nor any
of its agents made any representations as to (i) whether the Leased Premises may
be used for Tenant's intended use under existing Law or (ii) the suitability of
the Leased Premises for the conduct of Tenant's business of (iii) the exact
square footage of the Leased Premises, that Tenant relied solely upon its own
investigations respecting said matters and that upon its execution of this
Lease, accepts the leasable area as specified herein. Tenant expressly waives
any and all claims for damage by reason of any statement, representation,
warranty, promise or other agreement of Landlord or Landlord's agent(s), if any,
not contained in this Lease or in any Addenda hereto.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the
respective dates below set forth with the intent to be legally bound thereby as
of the Effective Date of this Lease.
AS LANDLORD: AS TENANT:
RENCO INVESTMENT COMPANY CENTILLIUM TECHNOLOGY, INC.
BY: /s/ Donald E. Vermeil BY: /s/ William F Mackenzie
---------------------------------- -------------------------------
TITLE: DONALD E. VERMEIL, TTEE TITLE: Vice President
REVOCABLE TRUST AGREEMENT
DATED 11/6/78, AS AMENDED
------------------------------ ----------------------------
BY: /s/ Richard T. Peery BY: /s/ Bruce Neuschwander
---------------------------------- -------------------------------
TITLE: RICHARD T. PEERY, TRUSTEE, UTA TITLE: Corporate Controller
DATED 7/20/77 (RICHARD T. PEERY ----------------------------
SEPARATE PROPERTY TRUST)
-------------------------------
DATE: 8/31/99 DATE: 8/25/99
-------------------------- -----------------------------
/s/ William N. Neidig
William N. Neidig, President
Riverside Interests, Inc.
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OPTION TO RENEW LEASE
---------------------
This Option to Renew Lease ("Option") is entered into by and between RENCO
INVESTMENT COMPANY, A California General Partnership, ("Landlord") and
CENTILLIUM TECHNOLOGY, INC. A California Corporation ("Tenant") to be effective
as of the date the last of the designated signatories to this Option shall have
executed this Option, with respect to the following described Lease (the
"Lease") for the following described premises (the "Leased Premises"):
"That certain Lease dated as of August 16, 1999, by and between Landlord
and Tenant for the lease of building space of approximately 57,567 total square
feet in that certain building project consisting of 93748 square feet, more or
less, the Tenant's portion of which is located at 47211 Lakeview Boulevard,
Fremont, Calif. and consists of approximately 57,567 square feet of space.
1. For and in consideration of Tenant entering into the Lease and other
valuable consideration, Landlord hereby grants to Tenant an option to renew the
Lease for an additional term of five (5) years (the "Renewal Term") commencing
on the expiration of the Lease (the "Renewal Commencement Date") and ending five
(5) years thereafter (Renewal Expiration Date").
2. The lease of the Leased Premises for the Renewal Term shall be on the same
terms and conditions as set forth in the Lease, except:
A. That the rental for the Leased Premises during the Renewal Term shall
be as set forth below in Paragraph 5, and
B. That the Security Deposit shall be increased to the rental amount
determined in Paragraph 5 (the "Increased Security Deposit Amount").
3. Provided that Tenant shall not have been in default under the Lease prior
to the exercise of this Option as defaults are defined in Section 4 below,
Tenant shall notify Landlord of Tenant's exercise of its right to renew the
Lease for Renewal Term only by giving to Landlord written notice not sooner than
seven (7) months prior to the Renewal Commencement Date and not later than five
(5) months prior to the Renewal Commencement Date (time is expressly of the
essence to Landlord). Any attempted exercise of this Option made other than
within the time period stated or in the manner stated shall be void and of no
force or effect.
4. This Option to Renew Lease is expressly conditioned upon Tenant having
performed each and every of its covenants under the Lease at all times during
the entire Lease Term in a timely fashion (time being made expressly of the
essence), with the full and complete understanding that if, at any time during
the Lease Term, Tenant shall fail to perform any of its covenants or obligations
under the Lease in a timely fashion, this Option shall terminate without notice
and be of no further effect irrespective of whether or not Tenant shall have
cured such breach. Tenant acknowledges that Tenant's promise to faithfully
perform each of its covenants and obligations under the Lease in a timely
fashion was material inducement to Landlord in granting to Tenant this Option to
Renew Lease.
For purposes of this Option to Renew Lease, Tenant shall be deemed to have
paid the Base Monthly Rent according to the terms of the Lease if Tenant shall
have paid such monthly rental within six (6) days of being notified by Landlord
of such rental being due and unpaid.
With respect to matters other than monies due Landlord, Tenant shall be
deemed to have performed according to the terms and conditions of the Lease if
Tenant shall have commenced a cure within ten (10) days of having been notified
of a default under such Lease and shall have completed such cure within thirty
(30) days thereafter or, in the event such a default is not curable within said
30 day period, Tenant shall have diligently pursued such cure to the reasonable
satisfaction of Landlord.
5. If Tenant shall have properly and timely exercised its right to extend the
term of the Lease and provided that Tenant shall not have been in default under
the terms of the Lease as of the Renewal Commencement Date, the term of the
Lease shall be so extended for such Renewal Term on the same terms and
conditions contained in the Lease; provided, however, the Base Monthly Rent for
each month of the first twelve (12) months Renewal Term shall be calculated as
follows: The new Base Monthly Rent of the Renewal Term shall be the greater of:
(i),the Base Monthly Rent being paid by Tenant to Landlord during the final full
month of the initial Lease Term, or (ii) the Then Market Rental Rate for the
Lease Premises.
6. For purposes of this Option to Renew Lease, the term "Then Monthly Market
Rental Rate" shall be determined by mutual agreement between Landlord and Tenant
or, in the event such agreement cannot be made within ten (10) days from the
date Tenant shall have exercised this Option, Landlord and Tenant shall each
appoint a real estate appraiser with at least five ( 5 ) years full-time
commercial/industrial appraisal experience in Santa Clara County to appraise and
determine the fair market monthly rental rate the Leased Premises, in their then
existing
<PAGE>
condition for the use specified in the Lease could be leased for, on the same
terms and conditions set forth in the Lease, to a qualified tenant ready,
willing and able to lease the Leased Premises for a term equal to the Renewal
Term. Notwithstanding the above, however, the appraisers shall take into
consideration the value of the Tenant in place, and the avoided costs of
retaining an existing Tenant in His/Her efforts to determine a fair and
representative "Then Monthly Market Rental Rate. If either party does not
appoint an appraiser within ten (10) days after the other party has given notice
of the name of its appraiser, the other party can then apply to the President of
the Santa Clara County Real Estate Board or the presiding Judge of the Superior
Court of that County for the selection of a second appraiser who meets the
qualifications stated above. The failing party shall bear the cost of appointing
the second appraiser and of paying the second appraiser's fee. The two
appraisers shall attempt to establish the Then Monthly Market Rental Rate for
the Leased Premises. If the two appraisers are unable to agree on the Then
Monthly Market Rental Rate for the Leased Premises within ten (10) days after
the second appraiser has been selected or appointed, then the two appraisers
shall attempt to select a third appraiser meeting the qualifications stated
above. If they fail to agree on a third appraiser, either party can follow the
above procedure for having an appraiser appointed by the Real Estate Board or a
judiciary. Each of the parties shall bear one-half (1/2) of the cost of
appointing the third appraiser and of paying the third appraiser's fee. Unless
the three appraisers are able to agree on the Then Monthly Market Rental Rate
for the Leased Premises within ten (10) days after the selection or appointment
of the third appraiser, the two appraisal amounts being calculated most closely
together, after having discarded the appraisal amount which most greatly varies
from the other two appraisal amounts, shall be added together then divided by
two (2). The resulting rental amount shall be defined as the Then Monthly Market
Rental Rate for the Leased Premises. In no event, however, shall the resulting
Then Monthly Market Rental Rate be less than the Base Monthly Rent paid during
the final full month of the initial Lease Term.
The Base Monthly Rent shall be adjusted upward (increased) at the end of
each year of the extended lease term by the additional amount of five (5%) of
the rent calculated for the prior period. Such increased rental amount shall be
effective during each subsequent Twelve (12) month period of the extended term.
7. This Option to Renew is subject and subordinate to all underlying ground
leases and to all mortgages and deeds of trust which affect the Building and are
of public record as of the Effective Date of this Option to Renew Lease, and to
all renewals, modifications, consolidations, replacements and extensions
thereof. However, if the lessor under any such ground lease or any Lender
holding any such mortgage or deed of trust shall advise Landlord that it desires
or requires this Option to Renew Lease to be made prior and superior thereto,
then, upon written request of Landlord to Tenant, Tenant shall promptly execute,
acknowledge and deliver any and all documents or instruments which Landlord and
such lessor or Lender deem necessary or desirable to make this Option to Renew
Lease prior thereto. Tenant hereby consents to Landlord's ground leasing the
land underlying the Building and/or encumbering the Building as security for
future loans on such terms as Landlord shall desire, all of which future ground
leases, mortgages or deeds of trust shall be subject and subordinate to this
Option to Renew Lease. However, if any lessor under any such future ground lease
or any Lender holding such future mortgage or deed of trust shall desire or
require that this Option to Renew Lease by made subject and subordinate to such
future ground lease, mortgage or deed of trust, then Tenant agrees, within ten
(10) days after Landlord's written request therefore, to execute, acknowledge
and deliver to Landlord any and all documents or instruments requested by
Landlord or such lessor or Lender as may be necessary or proper to assure the
subordination of this Option to Renew Lease to such future ground lease,
mortgage or deed of trust; but only if such lessor or Lender agrees to recognize
Tenant's rights under this Option to Renew Lease so long as Tenant is not in
default under the Lease, or this Option to Renew Lease.
IN WITNESS WHEREOF, the parties have executed this Option to Renew Lease on the
dates below set forth to be effective as of the date referenced above.
AS LANDLORD: AS TENANT:
RENCO INVESTMENT COMPANY CENTILLIUM TECHNOLOGY, INC.
A California General Partnership A California Corporation
BY: /s/ Donald E. Vermeil BY: William F Mackenzie
----------------------------- ------------------------------
DONALD E. VERMEIL, TTEE
REVOCABLE TRUST AGREEMENT
DATED 11/6/78, AS AMENDED
TITLE: __________________________ TITLE: Vice President, Operations
---------------------------
BY: /s/ Richard T. Peery BY: /s/ Bruce Neuschwander
----------------------------- ------------------------------
RICHARD T. PEERY, TRUSTEE,
UTA DATED
7/20/77 (RICHARD T. PEERY
SEPARATE PROPERTY TRUST)
TITLE: __________________________ TITLE: Corporate Controller
---------------------------
DATE: 8/31/99 DATE: 8/25/99
--------------------------- ----------------------------
/s/ William N. Neidig
William N. Neidig, President
Riverside Interests, Inc.
<PAGE>
[LOGO] CENTILLIUM TECHNOLOGY
- --------------------------------------------------------------------------------
46531 Fremont Bird
Fremont
CA 94538
USA
ADDENDUM 1
----------
(REFERENCE STANDARD MULTI-TENANT LEASE FORM DATED 8/20/99
---------------------------------------------------------
VERIFICATION
- ------------
2.5 ACCEPTANCE OF POSSESSION
Landlord agrees to bring the building up to "standard"; carpets cleaned,
all electrical supplies in working condition, HVAC in working condition,
window moldings/sealant, "broom clean"
2.1 LANDLORDS INSURANCE
Flood insurance is not necessary since the property is not on a flood zone,
however, the landlord may require flood insurance in the future
Earthquake insurance is included
ADDITIONAL ITEMS
- ----------------
Landlord will allow the following additions/enhancements to be made on the
building without having to restore them to original condition at the end of the
lease
. A creation of a laboratory, which includes but is not limited to an approx. 96
ft wall, air conditioning unit to cool the lab (likely roof mounted), two
doorways and anti-static flooring
. An antenna to receive internet connections approx. the size and weight of an
office chair
. Two walled offices
W.F. Mackenzie 8/30/99 B. Neuschwander 30 AUG 99
- ------------------------------- -------------------------------
Tenant - Centillium Technology Tenant - Centillium Technology
William F. Mackenzie Bruce Neuschwander
Vice President, Operations Corporate Controller
Renco Investment Company
- ------------------------
RICHARD T. PEERY, TRUSTEE, UTA DATED
7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY
TRUST
Landlord
/s/ William N. Neidig /s/ Donald E. Vermeil
William N. Neidig, President DONALD E. VERMEIL, TTEE
Riverside Interests, Inc. REVOCABLE TRUST AGREEMENT
DATED 11/6/78, AS AMENDED
Page 1 of 1
<PAGE>
EXHIBIT 10.7
Logo here of Centillium Technology
46824 LAKEVIEW BLVD
FREMONT, CA 94538
TEL 510 445 1640
FAX 510 445 1639
COOPERATION AGREEMENT BETWEEN
CENTILLIUM TECHNOLOGY CORPORATION
AND
SUNGMI TELECOM ELECTRONICS., LTD
This Cooperation Agreement (this "Agreement") is effective as of March 2nd,
1998 (the "Effective Date") by and between Centillium Technology Corporation, a
California corporation, having its principal place of business at 46824 Lakeview
Blvd, Fremont, Ca 94538, United States of America ("Centillium"), and Sungmi
Telecom Electronics Co., Ltd. a Korean Corporation with offices at 621-3,
Bakdal-Dong, Manan-Ku, Anyang-Shi, Kyunggido, 430-030, Korea ("Sungmi").
- WITNESSETH -
WHEREAS, Centillium has expertise in the area of telecommunications
integrated circuits, including those which utilize multilevel modulation
techniques to enable high speed communications over copper, also known as
Digital Subscriber Line (xDSL) Technology; and
WHEREAS, Sungmi has expertise in the area of telecommunications systems and
associated technologies; and
WHEREAS, the parties hereto believe that each will derive benefits from a
business relationship in which they will work cooperatively to define an
integrated circuit solution for the copper interface portion of transmission
systems (the "Interface Devices"); and
WHEREAS, Centillium will be in a position to provide Sungmi with early
models, system support, and loop environment engineering support in exchange for
Sungmi's commitment to use Centillium as its preferred vendor of the Interface
Devices for as long as Centillium Maintains competitive pricing; and
WHEREAS, the parties hereto wish to set forth in this Agreement the
guidelines of their cooperation.
NOW, THEREFORE, in consideration of the covenants herein contained, the
parties hereto agree as follows:
1 Overall Objective of Cooperation
(a) The objective of this cooperation is for both companies to work together
in developing the proper "Interface Device" technologies and systems that can
significantly develop the broadband telecommunications market. The first phase
of this activity includes product definition and joint marketing to telco
customers.
(b) Each of the parties hereto will act in a commercially reasonable fashion
to provide the resources necessary to accomplish the objectives set forth in
this Agreement. Each of the parties hereto acknowledge and agrees that there are
substantial technical,
<PAGE>
financial and commercial risks associated with a development activity of this
type and, therefore, that neither of the parties hereto can guarantee that any
of the development activities described in this Agreement or any subsequent
activities to be described in any future agreements will be completed
successfully.
(c) Both parties agree that the future phases of this agreement may include
the product development phase, and production phase. Both parties will work
together to develop a detail agreement covering the relationship agreement
between the two companies for future phases.
2. Scope of Cooperation
The parties' cooperation will be conducted in phases:
(a) Phase 1. Product Definition Phase
(i) The parties hereto will jointly approve specifications for an
integrated circuit solution for the Interface Devices.
(ii) The parties hereto will co-market the resultant solution to
the end customers (e.g., telcos).
(b) Phase 2: Prototyping Phase
(i) Sungmi will evaluate Centillium's first prototype of the
Interface Devices. Centillium will provide evaluation boards
to the Sungmi for this evaluation. Sungmi will provide a
written report on the evaluation. Sungmi agrees to provide
additional evaluation reports throughout the period of this
Agreement as subsequent iterations of the Interface Devices
are prototyped and forwarded to Sungmi for evaluation.
Prototypes of second and/or future iterations of the Interface
Devices will be provided free of charge unless they are custom
iterations for Sungmi in which case Centillium may charge a
fee to be mutually agreed upon by the parties hereto.
(c) Phase 3: Pre-production and Production Phase
(i) Sungmi will supply written acknowledgment that the Interface
Devices meet all the specifications listed in the Product
Specification agreed to by the parties. Upon acceptance of the
Interface Devices and upon acceptance of Centillium's pricing,
Sungmi will provide Centillium with a requirements forecast of
its delivery requirements covering the next twelve month
period for the Interface Devices to be purchased from
Centillium.
(ii) Sungmi will also assist Centillium in establishing standards
utilizing its modulation schemes and will support Centillium's
documentation efforts for the Interface Devices. If Centillium
produces devices based upon such standards, Centillium will
provide Sungmi with access to such devices (e.g., alpha and
beta test site) prior to the general
<PAGE>
commercial release of such devices.
(iii) Sungmi and Centillium agree that reasonable standard commercial
terms and conditions will apply to the sale of all devices to
Sungmi.
3. Payments
(a) Following the execution of this Agreement, Sungmi will pay
Centillium a non-recurring engineering (NRE) charge of US$215,000 to
offset costs associated with Centillium's development of the
Interface Devices, Development of the evaluation boards for the
Central Office (CO) and customer premise Modem. Application support
as well as limited special loop plant modeling that may be requested
by Sungmi. The US$215,000 payment shall be made according to the
following schedule:
(i) US$115,000 upon the signing of the Agreement
(ii) US$100,000 upon delivery of the prototype devices and the
evaluation board for the CO and the customer premise modem.
(b) Taxes
-----
(i) Taxes Generally. All taxes, charge, customs including but
---------------
not limited to duties charged in connection with concluding this agreement
and its fulfillment on the territory of the United States of America will
be paid by Centillium. All other taxes, charge, customs including but not
limited to duties charged in connection with the concluding of this
agreement and its fulfillment will be paid by Sungmi.
(ii) Withholding Taxes. All payments by Sungmi shall be made free
-----------------
and clear of, and without reduction for, any withholding taxes. Any such
taxes which are otherwise imposed on payments to Centillium shall be the
sole responsibility of Sungmi. Sungmi shall provide Centillium with
official receipts issued by the appropriate taxing authority or such other
evidence as is reasonably requested by Centillium to establish that such
taxes have been paid.
4. Technology Ownership and Licenses
(a) Nothing herein will be constructed as an express or implied license
(under patents or otherwise) of any kind.
(b) Centillium will have exclusive right to design and market Devices and
any improvements of modifications thereto resulting from the activities of this
Agreement.
(c) Any information disclosed by Sungmi to Centillium under this Agreement
with respect to direct support of the Devices (i.e., with respect to
----
characterization and performance of the Devices) may be freely used by
Centillium for the purpose of
<PAGE>
implementation of design and implementation of manufacturing and supporting
Devices sold to Centillium's customers, and other substantially similar
activities; the restrictions with regard to Confidential Information set forth
in Section 4 hereof will not apply to the specific information set forth above
but will apply to all other Sungmi information.
5. Confidential Information and Non-Disclosure
Any technical information and other business information disclosed
hereunder by either party hereto to the other will be held in strict confidence
by the receiving party from the date of disclosure until three years after the
date this agreement expires or terminates, using the same degree of care as the
receiving party uses for its own information of a similar kind, and will not be
transferred or divulged to any third-party or any employee who does not have the
requisite need to know. For purposes of interpreting this Agreement, employees
of Sungmi's affiliates, divisions or subsidiaries do not have the requisite need
to know to obtain access to Centillium confidential information disclosed to
Sungmi hereunder. Such confidentiality obligation will not apply to portions of
such technical information and other business information, if any, (a) which
were previously known to the other party hereto free of any confidentiality
obligation, (b) which are or become known to the public, provided that such
public knowledge is not attributable to a breach of this Agreement by the other
party hereto, (c) which the furnishing party explicitly agrees in writing need
not be kept confidential (either in this Agreement or separately), or (d) which
are received by the other party hereto rightfully from a third-party without a
restriction on disclosure. Further, Centillium agrees not to disclose to any
other party any of the specifics of Sungmi's system testing and results that
might specifically indicate a problem related to such system. However, if the
Devices are modified by Centillium to remedy a system problem, Centillium may
disclose such test imformation as may be necessary to support such modified
Devices, to the extent that such disclosure coincides with the availability of
the Modified Devices.
6. Intellectual Property Indemnification
(a) Limited Indemnity. Sungmi agrees that Centillium has the right to
-----------------
defend, or at its option to settle, and Centillium agrees, at its own expense,
to defend or at its option to settle, any third party claim, suit or proceeding
(collectively, Action) brought against Sungmi alleging any of the Interface
Devices infringe any intellectual property rights of any third party in
existence as of the effective date of this Agreement, subject to the limitations
hereinafter set forth. Centillium shall have sole control of any such Action or
settlement negotiations, and Centillium agrees to pay, subject to the
limitations hereinafter set forth, any final judgement entered against Sungmi on
such issue in any such Action defended by Centillium. Sungmi agrees that
Centillium will be relieved of the foregoing obligations unless Sungmi notifies
Centillium in writing of such Action within five (5) days after becoming aware
of such action, gives Centillium authority to proceed as contemplated herein,
and gives Centillium proper and full information and assistance to settle and/or
defend any such Action. If it is adjudicatively determined, or if Centillium
believes, that any of the Interface Devices, or any part thereof, infringe any
<PAGE>
intellectual property rights of any third party, or if the sale of use of the
Interface Devices, or any part thereof, is, as a result, enjoined, then
Centillium may, at its election, option and expense. (i) procure for Sungmi the
right under such intellectual property rights to sell or use, as appropriate,
the Interface Devices or such part thereof; (ii) replace the Interface Devices,
or part thereof, with other noninfringing suitable products or parts; (iii)
suitably modify the Interface Devices or part thereof; or (iv) remove the
Interface Devices, or part thereof, terminate distribution or sale thereof and
refund the payments paid by Sungmi for such Interface Devices less a reasonable
amount for use and damage. Centillium shall not be liable for any costs or
expenses incurred without its prior written authorization, or for any
installation costs of any replaced Interface Devises.
(b) Limitations. Notwithstanding the provisions of Section 6(a) above,
-----------
Centillium assumes no liability for infringement claims arising from (i)
combination of the Interface Devices or portions thereof with other devices not
provided by Centillium if such infringement would not have occurred but for such
combination, or (ii) the modification of the Interface Devices or portions
thereof unless such modification was made or authorized by Centillium, when such
infringement would not have occurred but for such modification.
(c) Disclaimer. Centillium's liability arising out of or relating to this
----------
Section 6 shall not exceed the aggregate amounts paid by Sungmi to Centillium
for the allegedly infringing Products that are the subject of the infringement
claim. The foregoing provisions of the Section 6 state the entire liability and
obligation of Centillium and the exclusive remedy of Sungmi with respect to any
alleged infringement of any intellectual property rights by the Products or any
part thereof.
(d) Limitation of Liability. In no event shall Centillium's liability
-----------------------
arising out of or relating to this Agreement exceed the aggregate amounts paid
by Sungmi to Centillium hereunder, including but not limited to liability under
Section 6. In no event shall either party be liable for lost profits, cost of
procurement of substitute goods, or any other special, reliance, incidental, or
consequential damages, however caused and under any theory of liability whether
based in contract, tort (including negligence), products liability, or
otherwise. The foregoing limitations shall apply regardless of whether such
party has been advised of the possibility of such damages and notwithstanding
the failure of essential purpose of any limited remedy stated herein.
7. Term
This Agreement will expire Four (4) years after the Effective Date
unless extended in writing by mutual parties.
8. Governing Law
The construction, interpretation and performance of this Agreement will
be governed by the laws of the State of California without reference to its
conflict of laws and principals. The United Nations Convention on Contracts for
the International Sale of
<PAGE>
Goods will not apply to the sale of Devices hereunder.
9. Entire Agreement
This Agreement sets forth the entire agreement and understanding between
the parties hereto with respect to its subject matter. It merges all
discussions between them and voids and replaces each and every other agreement
or understanding which may heretofore have existed between Centillium and Sungmi
regarding such subject matter. Notwithstanding the foregoing, the Nondisclosure
Agreement between the parties hereto, dated September 1997, as amended, will be
deemed incorporated herein by reference, provided that each party hereto will
be permitted to use any information disclosed thereunder to the extent permitted
in this Agreement.
10. Publicity
(a) Neither party hereto will disclose the existence or content of this
Agreement without the other's prior written consent, which will not be
unreasonably withheld. Each party will submit to the other all proposed
publicity material relating to the disclosure of this Agreement or the
relationship of the parties hereto.
(b) This Section 10 will not prohibit disclosure by a party if such
disclosure is required by a court of competent jurisdiction, law or regulation.
IN WITNESS WHEREOF, each of Centillium Technology Corporation and Sungmi
have executed this Agreement, in duplicate originals, by their respective
officers hereunto duly authorized, the day and year first above written.
Centillium Technology Corp. Sungmi Telecom Electronics Co., Ltd.
- -------------------------- -----------------------------------
By /s/ Faraj Aalaei By /s/ S. S. Lee
----------------- -----------------------
Name Faraj Aalaei Name Sung Seop Lee
--------------- ---------------------
Title V.P. Marketing Title Managing Director
-------------- --------------------
<PAGE>
EXHIBIT 10.8
CORPORATION AGREEMENT BETWEEN
CENTILLIUM TECHNOLOGY CORPORATION
AND
Askey Computer Corporation
This Corporation Agreement (this "Agreement") is effective as of
November 30th, 1997 (the "Effective Date") by and between Centillium Technology
Corporation, a California corporation, having its principal place of business at
46824 Lakeview Blvd, Fremont, Ca. 94538, Untied States of America
("Centillium"), and Askey Computer Corporation., a Taiwan corporation having its
principal place of business at 2F, No. 2, Lane 497, Chung-Cheng Rd., Hsin-Tien,
Taipei, 23136 Taiwan, R.O.C. ("ASKEY").
- WITNESSETH -
WHEREAS, Centillium has expertise in the area of telecommunications
integrated circuits, including those which utilize multilevel modulation
techniques to enable high speed communications over copper, also known as
Digital Subscriber Line (xDSL) Technology; and
WHEREAS, ASKEY has expertise in the area of CPE modems and associated
technologies; and
WHEREAS, the parties hereto believe that each will derive benefits from
a business relationship in which they will work cooperatively to define an
integrated circuit solution for the copper interface portion of transmission
systems (the "Interface Devices"); and
WHEREAS, Centillium will be in a position to provide ASKEY with early
models, system support, and loop environment engineering support in exchange for
ASKEY's commitment to use Centillium as it's preferred vendor of the Interface
Devices for as long as Centillium maintains competitive pricing; and
WHEREAS, the parties hereto wish to set forth in this Agreement the
guidelines of their cooperation.
NOW, THEREFORE, in consideration of the covenants herein contained, the
parties agree as follows:
1. Overall Objective of Cooperation
(a) The objective of this cooperation is for both companies to work
together in developing the proper "Interface Device" technologies and systems
that can significantly develop the broadband telecommunications market. The
first phase of this activity includes product definition and joint marketing to
telco customers.
(b) Each of the parties hereto will act in a commercially reasonable
fashion to provide the resources necessary to accomplish the objectives set
forth in this Agreement.
<PAGE>
Each of the parties hereto acknowledge and agrees that there are substantial
technical, financial and commercial risks associated with a development activity
of this type and therefore, that neither of the parties hereto can guarantee
that any of the development activities described in this Agreement or any
subsequent activities to be described in any future agreements will be completed
successfully.
(c) Both parties agree that the future phases of this agreement may
include the product development phase, and production phase. Both parties will
work together to develop a detail agreement covering the relationship agreement
between the two companies for future phases.
2. Scope of Cooperation
The parties cooperation will be conducted in phases:
(a) Phase 1: Product Definition Phase
(i) The parties hereto jointly approve specifications for an
integrated circuit solution for the Interface Devices.
(ii) The parties hereto will co-market the resultant solution to the
end customers (e.g., telcos).
(b) Phase 2: Prototyping Phase
(i) ASKEY will evaluate Centillium's first prototype of the
Interface Devices. Centillium will provide evaluation boards to
the ASKEY for this evaluation. ASKEY will provide a written
report on the evaluation. ASKEY agrees to provide additional
evaluation reports throughout the period of this Agreement as
subsequent iterations of the Interface Devices are prototyped
and forwarded to ASKEY for evaluation. Prototypes of second
and/or future iterations of the Interface Devices will be
provided free of charge unless they are custom iterations for
ASKEY in which case Centillium may charge a fee to be mutually
agreed upon by the parties hereto.
(c) Phase 3: Pre-Production and Production Phase
(i) ASKEY will supply written acknowledgment that the Interface
Devices meet all the specifications listed in the Product
Specification agreed to by the parties. Upon acceptance of the
Interface Devices and upon acceptance of Centillium's pricing,
ASKEY will provide Centillium with a requirements forecast of
its delivery requirements covering the next twelve month period
for the Interface Devices to be purchased from Centillium.
(ii) ASKEY will also assist Centillium in establishing standards
utilizing its modulation schemes and will support Centillium's
documentation efforts for the Interface Devices. If Centillium
produces devices based upon such standards, Centillium will
provide ASKEY with access to
<PAGE>
such devices (e.g., alpha and beta test site) prior to the general
commercial release of such devices.
(iii) ASKEY and Centillium agree that reasonable standard
commercial terms and conditions will apply to the sale of all devices
to ASKEY.
3. Technology Ownership and Licenses
(a) Nothing herein will be constructed as an express or implied
license (under patents or otherwise) of any kind.
(b) Centillium will have exclusive right to design and market Devices
and any improvements or modifications thereto resulting from the activities of
this Agreement.
(c) Any information disclosed by ASKEY to Centillium under this
Agreement with respect to direct support of the Devices (i.e., with respect to
characterization and performance of the Devices) may be freely used by
Centillium for the purpose of implementation of design and implementation of
manufacturing and supporting Devices sold to Centillium's customers, and other
substantially similar activities; the restrictions with regard to Confidential
Information set forth in Section 4 hereof will not apply to the specific
information set forth above but will apply to all other ASKEY information.
4. Confidential Information and Non-Disclosure
Any technical information and other business information disclosed
hereunder by either party hereto to the other will be held in strict confidence
by the receiving party from the date of disclosure until three years after the
date this agreement expires or terminates, using the same degree of care as the
receiving party uses for its own information of a similar kind, and will not be
transferred or divulged to any third-party or any employee who does not have the
requisite need to know. For purposes of interpreting this Agreement, employees
of ASKEY's affiliates, divisions or subsidiaries do not have the requisite need
to know to obtain access to Centillium confidential information disclosed to
ASKEY hereunder. Such confidentiality obligation will not apply to portions of
such technical information and other business information, if any, (a) which
were previously known to the other party hereto free of any confidentiality
obligation, (b) which are or become known to the public, provided that such
public knowledge is not attributable to a breach of this Agreement by the other
party hereto; (c) which the furnishing party explicitly agrees in writing need
not be kept confidential (either in this Agreement or separately), or (d) which
are received by the other party hereto rightfully from a third-party without a
restriction on disclosure. Further, Centillium agrees not to disclose to any
other party any of the specifics of ASKEY's system testing and results that
might specifically indicate a problem related to such system. However, if the
Devices are modified by Centillium to remedy a system problem, Centillium may
disclose such test information as may be necessary to support such modified
Devices, to the extent that such disclosure coincidences with the availability
of the Modified Devices.
<PAGE>
5. Term
This Agreement will expire Four (4) years after the Effective Date unless
extended in writing by mutual parties.
6. Governing Law
The construction, interpretation and performance of this Agreement will be
governed by the laws of the State of California without reference to its
conflict of laws and principals. The United Nations Convention on Contracts for
the International Sale of Goods will not apply to the sale of Devices hereunder.
7. Entire Agreement
This Agreement sets forth the entire agreement and understanding between
the parties hereto with respect to its subject matter. It mergers all
discussions between them and voids and replaces each and every other agreement
or understanding which may heretofore have existed between Centillium and ASKEY
regarding such subject matter. Notwithstanding the foregoing, the Nondisclosure
Agreement between the parties hereto, dated xxxx, as amended, will be permitted
to use any information disclosed thereunder to the extent permitted in this
Agreement.
8. Publicity
(a) Neither party hereto will disclose the existence or content of this
Agreement without the other's prior written consent, which will not be
unreasonably withheld. Each party will submit to the other all proposed
publicity material relating to the disclosure of this Agreement or the
relationship of the parties hereto.
(b) This Section 8 will not prohibit disclosure by a party if such
disclosure is required by a court of competent jurisdiction, law or regulation.
IN WITNESS WHEREOF, each of Centillium Technology Corporation and Advances
Fiber Communications Inc. have executed this Agreement, in duplicate originals,
by their respective officers hereunto duly authorize, the day and year first
above written.
Centillium Technology Corporation Askey Computer Corporation
- --------------------------------- --------------------------
By: /s/ Faraj Aalaei By: /s/ Robert Lin
----------------------------- -----------------------------
Name: Faraj Aalaei Name: Robert Lin
----------------------------- -----------------------------
Title: V.P. Marketing Title: General Manager
----------------------------- -----------------------------
<PAGE>
EXHIBIT 10.9
COOPERATION AGREEMENT BETWEEN
CENTILLIUM TECHNOLOGY CORPORATION
AND
SUMITOMO ELECTRIC INDUSTRIES
This Cooperation Agreement (this "Agreement") is effective as of October
15, 1997 (the "Effective Date") by and between Centillium Technology
Corporation, a California corporation, having its principal place of business at
46824 Lakeview Blvd, Fremont, Ca. 94538, United States of America
("Centillium"), and Sumitomo Electric Industries, Ltd., a Japanese Corporation
with its principal offices at 5-33 Kitahama 4-chome, Chuo-ku, Osaka, Japan
("Sumitomo").
- WITNESSETH -
WHEREAS, Centillium has expertise in the area of telecommunications
integrated circuits, including those which utilize multilevel modulation
techniques to enable high speed communications over copper, also known as
Digital Subscriber Line (xDSL) Technology; and
WHEREAS, Sumitomo has expertise in the area of telecommunications systems
and associated technologies; and
WHEREAS, the parties hereto believe that each will derive benefit from a
business relationship in which they will work cooperatively to define an
integrated circuit solution for the copper interface portion of transmission
systems (the "Interface Devices"), The Interface Devices shall consist of
Digital Signal Processor ("DSP") and software, and are capable of addressing the
main markets for xDSL which includes the Internet access market, single pair
HDSL and FITL short reach DSL. The basic specification of the Interface Devices
shall be described in the Attachment A to be provided by Centillium; and
WHEREAS, Centillium will be in a position to provide Sumitomo with early
models, system support, and loop environment engineering support in exchange for
Sumitomo's commitment to use Centillium as its preferred vendor of the Interface
Devices for as long as Centillium maintains competitive terms and conditions;
and
WHEREAS, the parties hereto wish to set forth in this Agreement the
guidelines of their cooperation.
NOW, THEREFORE, in consideration of the covenants herein contained, the
parties hereto agree as follows:
1. Overall Objective of Cooperation
(a) The objective of this cooperation is for both companies to work
together in developing the proper "Interface Device" technologies and systems
that can significantly develop the broadband telecommunications market. The
first phase of this activity includes product definition and joint marketing to
telco customers.
<PAGE>
(b) Each of the parties hereto will act in a commercially reasonable
fashion to provide the resources necessary to accomplish the objectives set
forth in this Agreement. Each of the parties hereto acknowledge and agrees that
there are substantial technical, financial and commercial risks associated with
a development activity of this type and, therefore, that neither of the parties
hereto can guarantee that any of the development activities described in this
Agreement or any subsequent activities to be described in any future agreements
will be completed successfully.
(c) Both parties agree that the future phases of this agreement may
include the product development phase, and production phase. Both parties will
work together to develop a detail agreement covering the relationship agreement
between the two companies for future phases.
2. Scope of Cooperation
The parties' cooperation will be conducted in phases:
(a) Phase 1: Product Definition Phase
(i) The parties hereto will jointly approve specifications for an
integrated circuit solution for the Interface Devices.
(ii) The parties hereto will co-market the resultant solution to the
end customers (e.g., telcos).
(b) Phase 2: Prototyping Phase (Target Date: July 1998)
(i) Sumitomo will evaluate Centillium's first prototype of the
Interface Devices. Centillium will provide, without additional
payment, except those stipulated in Article 3, reasonable
quantities of evaluation boards to the Sumitomo for this
evaluation. Sumitomo will provide a written report on the
evaluation. Sumitomo agrees to provide additional evaluation
reports throughout the period of this Agreement as subsequent
iterations of the Interface Devices are prototyped and forwarded
to Sumitomo for evaluation. Prototypes of second and/or future
iterations of the Interface Devices will be provided free of
charge unless they are custom iterations for Sumitomo in which
case Centillium may charge a fee to be mutually agreed upon by
the parties hereto.
(ii) Upon request made by Sumitomo simultaneously with the evaluation
reports stated above. Centillium shall incorporate into software
portion of the Interface Devices the modules created by Sumitomo
for Japanese market specifications. Sumitomo may dispatch
reasonable numbers of its engineers to Centillium's facilities
in order to create such modules by using the development
environment of Centillium.
(iii) In order to cover the NRE costs incurred by Centillium in
regards to the abovementioned activities for Japanese Market
specifications.
<PAGE>
Centillium and Sumitomo shall mutually agree on payments in
addition to the $250,000 as described in Article 2 below by
Sumitomo to Centillium. This shall be done simultaneously with
definition of the scope of the work for these activities by
Centillium.
(iv) As the result of the co-development activities stated in item
(b)(ii) and b(iii), technology, software and other intellectual
property of Sumitomo may be incorporated in the Interface
Devices. In such a case, Centillium and Sumitomo shall agree on
a reasonable discount schedule offered to Sumitomo, which
applies only to Interface Devices sold to Sumitomo. Centillium
shall have a royalty free exclusive license to this Sumitomo's
technology for manufacturing, using and selling the Interface
Devices to all Centillium's other customers. Such license will
be terminated upon the occurrence of the event described in item
6 in the Agreement. Both parties acknowledge that Sumitomo has
been conducting certain activities with Analog Devices
Corporation as to ADSL, ANSI T1.413, DMT implementation (the
"ADSL project").
Sumitomo hereby confirms to Centillium that Sumitomo is not
cooperating with Analog Devices with respect to any other
projects than the "ADSL Project". Sumitomo also confirms that it
will not cooperate with any other entity on any other project
involving Sumitomo's DSL technology that may result in products
similar to the Interface Devices as set forth in the beginning
of this Agreement, software and other intellectual property of
Sumitomo (the "Sumitomo IP") related to the co-development
activities in item (b)(ii) and (b)(iii) hereof. In furtherance
of, and not in limitation to, Section 5 hereof any other
agreement between Sumitomo and Centillium. Sumitomo will not
disclose any of Centillium's confidential information to Analog
Devices. Further, Sumitomo will not disclose any Sumitomo IP to
Analog Devices other than such Sumitomo IP necessary for the
ADSL Project. [As used herein, the ADSL Project shall not mean
any modification, derivation or extension thereof not currently
contemplated.
(c) Phase 3: Pre-production and Production Phase (Target Date: September
1998)
(i) Sumitomo will supply written acknowledgment that the Interface
Devices meet all the specifications listed in the Product
Specification agreed to by the parties. Upon the execution of
the supply agreement between Centillium and Sumitomo stipulated
in Section 6, Sumitomo will provide Centillium with a
requirements forecast of its delivery requirements covering the
next twelve month period for the Interface Devices to be
purchased from Centillium.
(ii) Sumitomo will also assist Centillium in establishing standards
utilizing Centillium's modulation schemes and will support
Centillium's
<PAGE>
documentation efforts for the Interface Devices. If Centillium
produces devices based upon such standards, Centillium will
provide Sumitomo with access to such devices (e.g., alpha and
beta test site) prior to the general commercial release of such
devices.
(iii) Sumitomo and Centillium agree that reasonable standard
commercial terms and conditions will apply to the sale of all
devices to Sumitomo.
3. Payments
(a) Following the execution of this Agreement Sumitomo will pay Centillium
a non-recurring engineering (NRE) charge of $250,000 to offset costs
associated with Centillium's development of the Interface Devices.
Development of the evaluation boards for the Central Office (CO) and
customer premise Modem. Application support as well as limited special
loop plant modeling that may be requested by Sumitomo. The $250,000
payment shall be made according to the following schedule:
(i) $150,000 upon the signing of the Agreement
(ii) $100,000 upon acceptance by Sumitomo of the prototype devices
and the evaluation board for the CO and the customer premise
modem-not to exceed ninety (90) days after the delivery of the
abovementioned by Centillium. Acceptance by Sumitomo shall not
be unreasonably withheld. If Centillium receives no rejection
within ninety (90) days, the Interfaces Devices shall be deemed
accepted and the payment shall be immediately due.
(b) This $250,000 is not part of the additional payments specified in
2(b)(iii) above.
4. Technology Ownership and Licenses
(a) Nothing herein will be constructed as an express or implied license
(under patents or otherwise) of any kind.
(b) Centillium will have exclusive right to design and market Devices and
any improvements of modifications thereto resulting from the activities of this
Agreement.
(c) Any information disclosed by Sumitomo to Centillium under this
Agreement with respect to direct support of the Devices (i.e., with respect to
---
characterization and performance of the Devices) may be freely used by
Centillium for the purpose of implementation of design and implementation of
manufacturing and supporting Devices sold to Centillium's customers, and other
substantially similar activities Notwithstanding the confidential obligations in
section 5 hereof. Centillium may, with Sumitomo's prior consent, disclose the
specific information set forth above. Such consent shall not be un-reasonably
withheld.
<PAGE>
5. Confidential Information and Non-Disclosure
Any technical information and other business information disclosed
hereunder by either party hereto to the other will be held in strict confidence
by the receiving party from the date of disclosure until three years after the
date this agreement expires or terminates, using the same degree of care as the
receiving party uses for its own information of a similar kind, and will not be
transferred or divulged to any third-party or any employee who does not have the
requisite need to know. For purposes of interpreting this Agreement, employees
of Sumitomo's affiliates, divisions or subsidiaries do not have the requisite
need to know to obtain access to Centillium confidential information disclosed
to Sumitomo hereunder. Such confidentiality obligation will not apply to
portions of such technical information and other business information, if any,
(a) which were previously known to the other party hereto free of any
confidentiality obligation, (b) which are or become known to the public,
provided that such public knowledge is not attributable to a breach of this
Agreement by the other party hereto, (c) which the furnishing party explicitly
agrees in writing need not be kept confidential (either in this Agreement or
separately), or (d) which are received by the other party hereto rightfully from
a third-party without a restriction on disclosure. Further, Centillium agrees
not to disclose to any other party any of the specifics of Sumitomo's system
testing and results that might specifically indicate a problem related to such
system. However, if the Devices, are modified by Centillium to remedy a system
problem, Centillium may disclose such test information as may be necessary to
support such modified Devices, to the extent that such disclosure coincides with
the availability of the Modified Devices.
6. Supply Agreement of Interface Devices
Centillium and Sumitomo agree to execute the supply agreement of Interface
Devices purchased by SEI from Centillium simultaneously with written
acknowledgement of Sumitomo that the Interface Devices meet all the
specifications listed in the product specification agreed to by both parties.
Such Supply Agreement shall include the following statement.
(i) Centillium may elect at any time during the term of this
Agreement, to discontinue the manufacture of the Interface
Devices, provided that Centillium shall continue to supply to
Sumitomo upgrade version of the Interface Devices, if any upgrade
exist. If Centillium makes the election described in the
foregoing sentence, it shall provide Sumitomo twelve (12) months
prior written notice and the opportunity to make a life time
supply purchase. Sumitomo may place orders for an amount of
Interface Devices not to exceed three (3) times the pre-notice
production rate at any time during such twelve (12) months for
delivery up to eighteen (18) months after receipt of notice. The
supply of any upgrade version shall be subject to the terms of a
new Supply Agreement reasonably acceptable to both parties.
(ii) Centillium shall place into escrow both of the source code and
object
<PAGE>
code of the software utilized for Interface Devices, and all the
necessary data to manufacture the Interface Devices ("Escrowed
Items"). If Centillium ceases the manufacture of the Interface
Devices and Centillium is unable to provide Sumitomo with the
purchase right similar to the one stated in (6)(1), for the
reason of voluntary or involuntary bankruptcy. Escrowed items
shall be disclosed to Sumitomo. In such a case, Centillium shall
grant to Sumitomo a royalty free, non-exclusive license of the
relevant know-how and patents owned by Centillium for the purpose
of production of the Interface Devices.
7. Term
This Agreement will expire Four (4) years after the Effective Date unless
extended in writing by mutual parties.
8. Governing Law
The construction, interpretation and performance of this Agreement will be
governed by the laws of the State of California without reference to its
conflict of laws and principals. The United Nations Convention on Contracts for
the International Sale of Goods will not apply to the sale of Devices hereunder.
9. Entire Agreement
This Agreement sets forth the entire agreement and understanding between
the parties hereto with respect to its subject matter. It merges all
discussions between them and voids and replaces each and every other agreement
or understanding which may heretofore have existed between Centillium and
Sumitomo regarding such subject matter. Notwithstanding the foregoing, the
Nondisclosure Agreement between the parties hereto, dated August 27, 1997, as
amended, will be deemed incorporated herein by reference, provided that each
party hereto will be permitted to use any information disclosed thereunder to
the extent permitted in this Agreement.
10. Publicity
(a) Neither party hereto will disclose the existence or content of this
Agreement without the other's prior written consent, which will not be
unreasonably withheld. Each party will submit to the other all proposed
publicity material relating to the disclosure of this Agreement or the
relationship of the parties hereto.
(b) This Section 9 will not prohibit disclosure by a party if such
disclosure is required by a court of competent jurisdiction, law or regulation.
IN WITNESS WHEREOF, each of Centillium Technology Corporation, and Sumitomo
Electric Industries Ltd. have executed this Agreement, in duplicate originals,
by their respective officers hereunto duly authorize, the day and year first
above written.
<PAGE>
CENTILLIUM TECHNOLOGY CORP. Sumitomo Electric Industries, Ltd.
- -------------------------- ----------------------------------
Faraj Aalaei: Hideo Takahashi
- ------------- ---------------
VP Planning and Business Development General Manager, Systems and Electronics
- ------------------------------------ ----------------------------------------
R&D
---
/s/ Faraj Aalaei /s/ Hideo Takahashi
- ---------------------------- ---------------------------
10/13/97 10/24/97
<PAGE>
EXHIBIT 10.10
Addendum to Cooperation Agreement
---------------------------------
This Addendum to the Cooperation Agreement ("Addendum") made effective as of
April 20/th/, 1999 by and between Sumitomo Electric Industries, Ltd., a Japanese
corporation with its principal offices at 5-33. Kitahama 4-chome, Chuo-ku,
Osaka, 541-0041 Japan ("Sumitomo"), and Centillium Technology Corporation, a
corporation organized under the of laws the state of california, U.S.A. and
having an address at 46531 Fremont Blvd, Fremont, California, 94538, U.S.A.
("Centillium").
WITNESSETH:
WHEREAS, both parties executed COOPERATION AGREEMENT BETWEEN CENTILLIUM
TECHNOLOGY CORPORATION AND SUMITOMO ELECTRIC INDUSTRIES" effective as of October
15, 1997 ("Agreement"),
WHEREAS, Centillium has developed, in accordance with Item 2(b)(ii) of the
Agreement, chip sets and software applied for the Japanese ADSL market which is
called G.992.2 Annex C ("Annex C"), and
WHEREAS, both parties desire to reduce to writing in whole, the verbal
agreements made between the parties on the NRE charges as set forth in Item
2(b)(iii) of the Agreement, which will be paid to Centillium by Sumitomo in
connection with development and support of Annex C.
NOW, THEREFORE, for the supplement purpose of the Agreement, both parties agree
as follows:
1. Definition
- ---------------
(1) "Chip Sets" shall mean digital and analog versions of the chip sets to be
developed by Centillium hereunder which meets the specifications of G.992.2
Annex A ("Annex A") and Annex C.
(2) "Software" shall mean the software to be developed by Centillium hereunder
to meet G.992.2 Annex C, which shall be incorporated into the software
portion of the Chip Sets.
(3) "Sample" means the Chip Sets and the Software to be released by Centillium
to allow Sumitomo to perform engineering evaluation thereof. Sample Chip
Sets should support the majority of the features and capabilities specified
in the product data sheet. Sample Software should also support the majority
of the features and capabilities specified in the Annex C specifications,
and shall be tested by the digital and analog versions of the Chip Sets;
however a certain features and/or performance objectives may not be
supported by the Sample. All of the deviations compared to a fully
functional product shall be documented and maintained in an Errata Sheet.
The specification of the Sample shall be attached hereto as Attachment B.
(4) "Pre-production Version" means the Chip Sets/Software generally identical
to the Production Version. Pre-production status conveys that Centillium is
not quite ready to accept sizable production orders. The specification of
the Pre-Production Version shall be attached hereto as Attachment C.
<PAGE>
(5) "Production Version" means the Chip Set/Software which are production
worthy and are fully compliant to all of the features and performance
claims specified in the Annex C specification. The specification of the
Product Version shall be attached hereto as Attachment D.
(6) "Deliverable" means each of the Sample, Pre-production Version and
Production Version of the Chip Sets and Software to be provided to Sumitomo
for evaluation purpose only in accordance with the delivery schedule as set
forth in Item 2(1) below.
2. Delivery
- -------------
(1) Centillium shall provide Sumitomo with Deliverables in accordance with the
following delivery schedule:
- --------------------------------------------------------------------------------
Deliverable Delivery Date
-----------------------------------------------------------------
Sample Pre-production Version Production Version
- --------------------------------------------------------------------------------
Chip Sets March 15, 1999 April 15, 1999 May 15, 1999
- --------------------------------------------------------------------------------
Software April 1, 1999 May 1, 1999 June 1, 1999
- --------------------------------------------------------------------------------
(2) Sumitomo shall evaluate whether such Deliverable complies with the
mandatory, required features of the Annex C specifications within thirty
(30) days after receipt of each Deliverable. Either written acceptance of a
Deliverable or failure to provide notice of rejection within thirty (30)
day period provided above shall constitute acceptance ("Acceptance") by
Sumitomo of such Deliverable. If Sumitomo rejects any Deliverable,
Centillium shall make best efforts to submit the corrected Deliverable to
Sumitomo promptly.
(3) In the event of Centillium's delay or failure in delivery of the
Deliverables which conform to the Annex C specifications, both parties
shall work cooperatively to solve the problem.
3. Payments
- -------------
(1) For the services rendered and to partially cover the expenses incurred by
Centillium in development of Annex C solution, Sumitomo agrees to pay
Centillium the sum of 330,000 U.S. Dollars ($330,000). The payments shall
be made in accordance to the following schedule:
a) $230,000: payable upon Delivery of the Sample of the Chip Sets and
Software
b) $100,000: payable upon Acceptance of Production Versions of the Chip
Sets and Software.
4. Price of Products
- ----------------------
(1) Centillium shall supply Sumitomo with the Chip Sets incorporating Software
("Products"), pursuant to the terms and conditions of a separate Product
purchase agreement to be agreed upon between the parties.
(2) Considering that Sumitomo partially bears the expenses incurred by
Centillium in development of Annex C solution, Centillium agrees to grant
Sumitomo the most favored customer status for annex C products. This status
ensures Sumitomo will get the same level of pricing that Centillium offers
to its most valued customers for Annex C.
<PAGE>
(3) In order to confirm whether the Item 4(2) above is properly performed.
Sumitomo shall have a right to audit, at Sumitomo's expense, Centillium's
pricing condition with a third party purchasing any chip sets from
Centillium. Such audit shall be not more often than once per year and shall
be made by an independent certified public accountant acceptable to both
parties, and Sumitomo may only have access to the result as to whether
Centillium complies with the Item 4(2) or not. If an audit discloses
Centillium's non-compliance with the Item 4(2), Sumitomo may claim
Centillium for the total amount of difference, between Sumitomo's actual
purchase price and the price to be calculated under Item 4(2).
5. Others
- -----------
(1) This Addendum shall be included as an addendum to the Agreement. All other
provisions of the Agreement shall remain in full force.
(2) This Addendum constitutes the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Addendum to be executed
by their duly authorized officers or representatives.
Sumitomo Electric Industries, Ltd. Centillium Technology Corporation
By: /s/ Toru Murase By: /s/ Faraj Aalaei
- ----------------------------------------- --------------------------------------
Print Name: Toru Murase Print Name: Faraj Aalaei
- ----------------------------------------- --------------------------------------
Title: Manager, Access Systems Group Title: V.P.
Systems & Electronics R & D Center Planning and Business
Development
- ----------------------------------------- --------------------------------------
Date: Date: 4/20/99
- ----------------------------------------- --------------------------------------
<PAGE>
Attachment B The Specification of the Sample
--------------------------------------------
- New Analog + New Digital Chips
- 4 ports
- Stable and good performing DBM
- Latest Host I/F
- Passing Data
<PAGE>
Attachment C The Specification of the Pre-Production Version
------------------------------------------------------------
In addition to the Sample:
- Fast Retrain
- G.hs
- Power Management (L0.L3)
<PAGE>
Attachment D The Specification of the Production Version
--------------------------------------------------------
- Fully compliant to all of the features and performance claims specified
in the product data sheet.
<PAGE>
EXHIBIT 10.11
COOPERATION AGREEMENT BETWEEN
CENTILLIUM TECHNOLOGY CORPORATION
AND
NEC CORPORATION
This Cooperation Agreement (this "Agreement") is effective as of April 3,
1998 (the "Effective Date") by and between Centillium Technology Corporation, a
California corporation having its principal place of business at 46824 Lakeview
Blvd. Fremont, CA 94538 United States of America ("Centillium") and NEC
Corporation, a Japanese Corporation with offices at 1131, Hinode, Abiko, Chiba
270-11 Japan ("NEC").
- WITNESSETH -
WHEREAS, Centillium has expertise in the area of telecommunications
integrated circuits, including those which utilize multilevel modulation
techniques to enable high speed communications over copper, also known as
Digital Subscriber Line (xDSL) Technology; and
WHEREAS, NEC has expertise in the area of telecommunications systems and
associated technologies; and
WHEREAS, the parties hereto believe that each will derive benefits from a
business relationship in which they will work cooperatively to define an
integrated circuit solution for the copper interface portion of transmission
systems (the "G.lite Devices") and a specialized interface device for the
Japanese loop environment (the "JDSL Devices", the G.lite Devices and the JDSL
Devices collectively, the "Devices"); and
WHEREAS, Centillium will be in a position to provide NEC with early models,
system support, and loop environment engineering support in exchange for NEC's
commitment to use Centillium as its preferred vendor of the G.lite Devices and
JDSL Devices for as long as Centillium maintains competitive terms and
conditions and
WHEREAS, the parties hereto wish to set forth in this Agreement the
guidelines of their cooperation.
NOW, THEREFORE, in consideration of the covenants herein contained, the
parties hereto agree as follows
1. Overall Objective of Cooperation
(a) The objective of this cooperation is for both companies to work
together in developing the proper G.lite and JDSL Devices,
technologies and systems that can significantly develop the broadband
telecommunications market. The first phase of this activity includes
product definition and joint marketing to telco customers. The basic
specification of the G.lite Devices shall be described in the
Attachment A hereto.
NEC
- ------------------------
Centillium
- ------------------------
<PAGE>
(b) For the purpose of interpreting this Agreement, as used throughout
this Agreement "JDSL Devices" refers to those G.lite Devices
specifically designed to operate over the Japanese loop environment
and "G.lite Devices" refers to the Centillium's offering for markets
outside Japan.
(c) Each of the parties hereto will act in good faith and in a
commercially reasonable fashion to provide the resources necessary to
accomplish the objectives set forth in this Agreement. Each of the
parties hereto acknowledges and agrees that there are substantial
technical, financial and commercial risks associated with a
development activity of this type and, therefore, that neither of the
parties hereto can guarantee that any of the development activities
described in this Agreement or any subsequent activities to be
described in any future agreements will be completed successfully.
(d) All future obligations of the parties which are to be set forth in
future agreements are subject to the execution of definitive
agreements.
2. Scope of Cooperation
The parties' cooperation under this Agreement will be conducted in
following phases:
(a) Phase 1 Product Definition Phase
(i) The parties hereto will work in good faith to jointly approve
specifications for an integrated circuit solution for the JDSL
Devices.
(ii) The parties hereto will co-market the resultant solution to the
end customers (e.g., telcos) pursuant to separate agreements
mutually agreeable to the parties.
(b) Phase 2 Prototyping Phase (Due Date September 1998)
(i) NEC will evaluate Centillium's first prototype, when available,
of the G.lite and JDSL Devices. Centillium will provide to NEC,
without additional payments from NEC (other than those stipulated
in Article 3), 12 evaluation boards for G.lite Devices (the
"Evaluation Boards") to NEC. The Evaluation Boards shall not be
used, sold or modified in any manner or for any purpose other
than as contemplated in this Agreement. NEC will provide a
written report on the evaluation. NEC agrees to provide
additional evaluation reports throughout the period of this
Agreement as subsequent iterations of the G.lite and JDSL Devices
are prototyped and forwarded to NEC for evaluation. Prototypes of
second and/or future iterations of the G.lite and JDSL Devices
will be provided free of charge unless they are custom iterations
for NEC in which case Centillium may charge a fee to be mutually
agreed upon by the parties hereto.
(ii) Upon request made by NEC, within a reasonable time period after
the evaluation report stated above, and subject to the execution
of an agreement mutually agreeable to the parties (a "Scope of
Work Agreement") and payment of fees set forth in Article
2(b)(iii) below, Centillium shall incorporate into
NEC
- -------------------------
Centillium
- -------------------------
<PAGE>
software portion of the JDSL Devices the modules created by NEC
for Japanese market specifications.
(iii) In order to cover the additional NRE costs (the "Additional NRE
Cost") incurred by Centillium in regards to the activities to be
set forth in the Scope of Work Agreement, as described in
Article 2(b)(ii) above for Japanese market specifications for
JDSL Devices. Centillium and NEC shall mutually agree in good
faith on payments in addition to the $250,000 as described in
Article 3 below by NEC to Centillium. Agreement on the amount of
Additional NRE Cost shall be determined by Centillium and NEC,
and shall be incorporated in the Scope of Work Agreement.
(iv) As a result of the co-development activities stated in Articles
2(b)(ii) and b(iii), and if so requested by NEC and accepted by
Centillium, technology, software and other intellectual property
of NEC may be incorporated in the JDSL Devices. In such case,
Centillium and NEC shall use their best efforts to agree on a
reasonable royalty fee which shall be paid by Centillium to NEC
under the terms and conditions to be separately agreed upon in
writing. Centillium shall have a royalty based non-exclusive
license to this NEC's technology for manufacturing, using and
selling the JDSL Devices to all Centillium's other customers.
(c) Phase 3 Pre-production and Production Phase (Due Date February and
April 1999 respectively)
(i) NEC will supply written acknowledgment that the G.lite and JDSL
Devices meet all the specifications agreed upon during the
Product Definition phase of this Agreement described in Article
2(a). Upon the execution of the Supply Agreement between
Centillium and NEC stipulated in Section 7, and subject to the
terms of the definitive Supply Agreement agreed upon by the
parties, the parties anticipate that NEC will provide Centillium
with a nonbinding forecast of its delivery requirements covering
the next twelve (12) month period for the G.lite and JDSL Devices
to be purchased from Centillium. Such forecast shall become
binding three (3) months prior to delivery. The details of Order
Acceptance methods and forecast will be included in the Supply
Agreement to be executed per Section 7 in the future.
(ii) NEC will use its commercially reasonable efforts to also assist
Centillium in establishing standards utilizing Centillium's
modulation schemes and will support Centillium's documentation
efforts for the G.lite and JDSL Devices. If Centillium produces
devices based upon such standards, Centillium will provide NEC
with access to such devices (e.g., alpha and beta test site)
prior to the general commercial release of such devices subject
to mutually agreeable terms.
NEC
- -------------------------
Centillium
- -------------------------
<PAGE>
(d) Production facilities
As for the manufacturing of Devices Centillium will use the
manufacturing facilities of its semiconductor manufacturing partners
which Centillium may choose in its own discretion from time to time.
These manufacturing facilities are strictly used as sub-contractors
for Centillium (i.e. foundry). Centillium's foundry partners do not
have the right to design, sell, distribute, improve and use
Centillium's products.
(e) Performance
NEC expects that Centillium shall meet its reasonable delivery and
quality control criterion as agreed upon between the two parties in
their Supply Agreement. In the event that Centillium is unable to meet
NEC's quality and delivery requirements, and subject to procedures
outlined in Article 4, Centillium agrees to negotiate in good faith to
use NEC's production capabilities as an alternate source of foundry as
described above in Article 2(d). The terms of the foundry agreement
shall be reasonably similar to Centillium's existing foundry
agreements at that time.
3. Payments
(a) Following the execution of this Agreement, NEC will pay Centillium a
non-recurring engineering (NRE) charge of $250,000 to partially offset
costs associated with (i) Centillium's development of the G.lite
Devices, (ii) development and delivery of the Evaluation Boards for
the Central Office (CO), (iii) Evaluation boards for Customer premise
modem and application support, and (iv) limited special loop plant
modeling that may be requested by NEC. The $250,000 payment shall be
made according to the following schedule.
(I) $150,000 within 45 days after the signing of the Agreement.
(II) $100,000 within 45 days after the acceptance by NEC of the
prototype Devices and the Evaluation Boards for the CO and the
customer premise modem in accordance with the specifications
agreed upon pursuant to Article 2(a), not to exceed ninety (90)
days after the delivery by Centillium. All deliveries under this
Agreement shall be FOB Centillium's principal office. Acceptance
by NEC shall not be unreasonably withheld. If Centillium receives
no rejection within ninety (90) days, the Devices and Evaluation
Boards shall be deemed accepted.
(b) This $250,000 is not part of the Additional NRE Cost to be agreed upon
between the parties under Article 2(b)(iii) above. However, this
$250,000 shall be deemed to cover any and all compensation due to
Centillium from NEC in connection with the provisions of this
Agreement covering the G.lite Devices.
(c) In the event that any development by Centillium hereunder is not
completed in accordance with the schedule in Article 2 above and
subject to procedures outlined in Section 4 below, NEC may terminate
this Agreement and Centillium shall refund to NEC forthwith fifty
NEC
- ------------------------
Centillium
- ------------------------
<PAGE>
(50%) of any payments made by NEC prior to such termination.
Centillium shall not be liable to NEC for any other amounts.
4. Relationship Management
The parties hereto agree that during the course of development and the
supply relationship performance issues may arise in the area of development,
manufacturing quality and delivery schedules. The parties agree that in such
events the following procedure is followed
(a) The dissatisfied party shall notify the affected party about such
issues in writing.
(b) The affected party shall have 3 months from the time of the
notification to resolve the issues or present a plan acceptable to the
dissatisfied party.
(c) If the dissatisfied party is not satisfied with the resolution within
6 months from the time of notification, they may pursue remedy
according to Section 9 herein.
5. Technology Ownership and Licenses
(a) Unless otherwise specifically provided for in this Agreement, nothing
herein will be constructed as an express or implied license (under patents or
otherwise) of any kind.
(b) Centillium will have exclusive right to design and market the Devices
and any improvements or modifications thereto resulting from the activities of
this Agreement. Centillium warrants that the G.lite and JDSL Devices shall not
infringe or misappropriate any patent, copyright, trade secret or other
intellectual property rights of any third party. The Supply Contract stipulated
in Section 7 below will provide an indemnity to the effect that Centillium will
use its best efforts to obtain a license to or design around any intellectual
property right Centillium is found to have infringed, and will indemnify NEC and
hold NEC harmless from any and all damages, liabilities, costs, losses and
expenses incurred by NEC as a result of or arising from any third party claim
that the G.lite and JDSL Devices purchased by NEC under the Supply Contract.
Details of the indemnity conditions shall be set forth in the Supply Contract.
(c) Any information disclosed by NEC to Centillium under this Agreement
with respect to direct support of the G.lite and JDSL Devices (the "Device
Specific Information") (i.e., with respect to characterization and performance
of the G.lite and JDSL Devices) shall remain the property of NEC. Such Device
Specific Information may be freely used by Centillium, without charge, for the
purpose of implementation of design and implementation of manufacturing and
supporting G.lite and JDSL Devices sold to Centillium's customers, and other
substantially similar activities. Notwithstanding the confidential obligations
in section 6 hereof, Centillium may, with NEC's prior written consent, disclose
the Device Specific Information set forth above. Such consent shall not be
unreasonably withheld. If Device Specific Information contains NEC's
intellectual property, then such intellectual property shall be treated as a
license from NEC to Centillium under Article 2(b)(iv) above. Any information
referenced in this (c) is provided "AS IS" NEC specifically disclaims any
warranties, express or implied, including, without limitation, the warranties of
merchantability and fitness for a particular purpose.
NEC
- ------------------------
Centillium
- ------------------------
<PAGE>
6. Confidential Information and Non-Disclosure
Any technical information and other business information which is disclosed
hereunder by either party hereto to the other in written or other tangible form
and clearly marked with a legend it as confidential, or which is identified as
confidential at the time of oral disclosure and within fourteen (14) days after
the oral disclosure is provided in written or other tangible form to the
receiving party with such legend will be held in strict confidence by the
receiving party from the date of disclosure until three (3) years after the date
this agreement expires or terminates, using the same degree of care as the
receiving party uses for its own information of a similar kind, and will not be
transferred or divulged to any third-party or any employee who does not have the
requisite need to know. For purposes of interpreting this Agreement, employees
of NEC's affiliates, divisions or subsidiaries do not have the requisite need to
know to obtain access to Centillium confidential information disclosed to NEC
hereunder. Such confidentiality obligation will not apply to portions of such
technical information and other business information, if any, (a) which were
previously known to the other party hereto free of any confidentiality
obligation, (b) which are or become known to the public, provided that such
public knowledge is not attributable to a breach of this Agreement by the
receiving party, (c) which the furnishing party explicitly agrees in writing
need not be kept confidential (either in this Agreement or separately), (d)
which are received by the receiving party rightfully from a third-party without
a restriction on disclosure. Further, Centillium agrees not to disclose to any
other party any of the specifics of NEC's system testing and results that might
specifically indicate a problem related to such system. However, if the G.lite
or JDSL Devices are modified by Centillium to remedy a system problem,
Centillium may disclose such test information as may be necessary to support
such modified G.lite or JDSL Devices to the extent that such disclosure
coincides with the availability of the modified G.lite or JDSL Devices.
7. Supply Agreement of G.lite and JDSL Devices
(I) Centillium and NEC agree to negotiate in good faith to enter into a
Supply Agreement of G.lite and JDSL Devices in which Centillium agrees
to continue to sell the G.lite and JDSL Devices (including those
designed for Japanese market) to NEC for at least a seven (7) year
period. The parties will seek to execute such Supply Agreement within
a reasonable time after written acknowledgement of NEC that the
Devices meet all the specifications listed in the product
specification agreed to by both parties.
(II) NEC and Centillium agree that reasonable standard commercial terms and
conditions will apply to the sale of all devices to NEC.
8. Term
(a) This Agreement will expire four (4) years after the Effective Date
unless extended in writing by mutual parties.
(b) If either party hereto files a petition in bankruptcy or makes a
general assignment for the benefit of creditors or otherwise
acknowledges insolvency or if either party is adjudged a bankrupt or
goes or is placed
NEC
- -------------------------
Centillium
- -------------------------
<PAGE>
into a complete liquidation, or if a receiver is appointed for the
benefit of either party, the other party hereto may terminate this
Agreement and/or any existing individual contract immediately.
9. Governing Law
(a) The construction, interpretation and performance of this Agreement
will be governed by the laws of the State of California without
reference to its conflict of laws and principals. The United Nations
Convention on Contracts for the International Sale of Goods will not
apply to the sale of Devices hereunder.
(b) The parties hereto shall endeavor to settle amicably all disputes,
controversies or differences which may arise between them out of or in
relation to or in connection with this Agreement by mutual
consultation. In the event that the parties fail to reach an amicable
settlement within sixty (60) days after receiving notice from the
other that such disputes, controversies or differences exist, such
disputes, controversies or differences shall be finally settled by
arbitration in Tokyo, Japan if the defendant is NEC, and in Fremont,
California, U.S.A. if the defendant is Centillium, in accordance with
the arbitration rules of the International Chamber of Commerce. The
award of arbitration shall be final and binding upon the parties
hereto and shall not be subject to appeal to any court, and shall not
be entered in any court of competent jurisdiction for execution
forthwith.
10. Entire Agreement
This Agreement sets forth the entire agreement and understanding between
the parties hereto with respect to its subject matter. It merges all discussions
between them and voids and replaces each and every other agreement (including
the Mutual Nondisclosure Agreement between the parties dated November 11, 1997)
or understanding which may heretofore have existed between Centillium and NEC
regarding such subject matter. Any and all information which has been disclosed
under the Mutual nondisclosure Agreement shall be regarded as such disclosed
under 6 above.
11. Publicity
(a) Neither party hereto will disclose the existence or content of this
Agreement without the other's prior written consent, which will not be
unreasonably withheld. Each party will submit to the other all proposed
publicity material relating to the disclosure of this Agreement or the
relationship of the parties hereto.
(b) This Section 11 will not prohibit disclosure by a party if such
disclosure is required by a court of competent jurisdiction, law or regulation.
12. Limitation of Liability
IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY INDIRECT, SPECIAL OR
CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT,
INCLUDING, BUT NOT LIMITED TO ANY LOSS OF PROFIT OR REVENUE, EVEN IF IT HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
NEC
- -------------------------
Centillium
- -------------------------
<PAGE>
13. Independent Contractor
Nothing in this Agreement shall be construed as creating a partnership
between the parties or as constituting either party as the agent of the other
party for any purpose whatsoever and neither party shall have the authority or
power to bind the other party or to contract in the name of or create a
liability against the other party in any way or for any purpose.
IN WITNESS WHEREOF, each of Centillium Technology Corporation and NEC
Corporation have executed this Agreement, in duplicate originals, by their
respective officers hereunto duly authorize the day and year first above
written.
CENTILLIUM TECHNOLOGY CORP. NEC CORPORATION,
- ---------------------------------------- ----------------
Data Communications Division
Faraj Aalaer Kerri Inoue
- ---------------------------------------- -----------------------------
/s/ Faraj Aalaer /s/ Kerri Inoue
V.P. Planning and Business Development Assistant General Manager
- ---------------------------------------- -----------------------------
5/27/98 5/27/98
- ---------------------------------------- -----------------------------
NEC
- -------------------------
Centillium
- -------------------------
<PAGE>
EXHIBIT 10.12
Addendum to Cooperation Agreement
---------------------------------
This Addendum to the Cooperation Agreement (the "Addendum Agreement") is
dated and effective as of February 23rd, 1999 and is by and between NEC
Corporation, a corporation organized under the laws of Japan, and having an
address at 1131 Hinode, Abiko, Chiba 270-11 Japan ("NEC"), and Centillium
Technology Corporation, a corporation organized under the laws of the state of
California, U.S.A., and having an address at 46531 Fremont Blvd. Fremont,
California, 94538, U.S.A. ("Centillium").
The purpose of this Addendum Agreement is to be included as an addendum to the
COOPERATION AGREEMENT BETWEEN CENTILLIUM TECHNOLOGY CORPORATION AND NEC
CORPORATION" signed on May 28, 1998 (the "Cooperation Agreement").
1. The parties agree to cooperate to define an integrated circuit solution for
the copper interface portion of transmission systems which fully comply
with G.992.2 Annex C standard ("Annex C").
2. The parties shall work in good faith to jointly approve specifications for
Annex C ("Specifications") not later than end of March, 1999. This
Specification shall not exceed the mandatory requirements of Annex C.
3. Centillium shall deliver each one of the digital chipset and the analog
chipset incorporating Annex C and the software corresponding to Annex C
("Annex C Products") to NEC in accordance with the following schedule.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
Prototype Pre-Production Production
--------------------------------------------------------------------------
<S> <C> <C> <C>
Digital Chipset
March 19, 1999 May 1st, 1999 June 1, 1999
Analog Chipset
--------------------------------------------------------------------------
Software April 1, 1999 May 1, 1999 June 1, 1999
--------------------------------------------------------------------------
</TABLE>
4. Upon receipt of the prototype form or the pre-production form of the Annex
C Products, NEC shall conduct the evaluation of such Annex C Product, and
shall provide Centillium with the report with respect to the result of such
evaluation.
5. Upon receipt of the production form of the Annex C Products, NEC shall
conduct the acceptance test whether such Annex C Products conform to the
Specifications set forth in Section 2 above or whether such Annex C
Products corresponding to Annex C, and provide Centillium with the results
of such acceptance test in writing within 30 days after receipt of the
production form of the software.
NEC
- ---------------------------
Centillium
- ---------------------------
<PAGE>
In the event that the production form of the Annex C Product fails to pass
the acceptance test conducted by NEC, Centillium shall confirm the problem
and propose plan to fix within 30 days from the day of receiving the notice
of acceptance test's result from NEC, and provide solution to NEC within
120 days from the same day set forth. If the non-conformity is not resolved
within such period, then NEC will have the option (i) to make Centillium
correct non conformity in such Annex C Products without additional payment
by NEC until such Products pass such test or (ii) to terminate this
Addendum Agreement. In latter case, NEC shall have no obligation to pay to
Centillium the amount set forth in Section 6B.
6. For the services rendered and to partially cover the expenses incurred by
Centillium in development of Annex C, NEC agrees to pay Centillium the sum
of 330,000 U.S. Dollars. The payments shall be made in accordance with the
following schedule.
A. $200,000 within 45 days after the signing of this Addendum Agreement.
B. $130,000 within 45 days after the acceptance of the production form of
the software.
7. The parties agree to negotiate in good faith to enter into a Supply
Agreement of Annex C Products in which Centillium agrees to continue to
sell Annex C Products to NEC at least 7 year period. The parties will seek
to execute such Supply Agreement within a reasonable time after the
acceptance of the production form of the Annex C Products. The terms and
conditions of such Supply Agreement shall be reasonable, and the purchase
prices shall be no less favorable than those charged to any third party.
8. All other provisions of the aforementioned Cooperation Agreement is hereby
incorporated into this agreement.
9. This Addendum Agreement together with the Cooperation Agreement constitute
the full and entire understanding and agreement between the parties with
regard to the subjects hereof and thereof.
CENTILLIUM TECHNOLOGY CORP. NEC Corporation
- --------------------------- ---------------
Data Communications Division
Faraj Aalaei Masamu Sengoku
- -------------------------------------- -------------------------
/s/ Faraj Aalaei /s/ Masamu Sengoku
V.P. Planning and Business Development Assistant General Manager
- -------------------------------------- -------------------------
4/21/99 4/21 1999
- -------------------------------------- -------------------------
NEC
- ------------------------
Centillium
- ------------------------
<PAGE>
EXHIBIT 10.13
Co-Development Agreement Between
Centillium Technology Corporation
And
Mitsubishi Electric Corporation
This Co-Development Agreement (this "Agreement") is effective as of October 15.
1997 (the "Effective Date") by and between Centillium Technology Corporation. a
California corporation, having its principal place of business at 46824 Lakeview
Blvd, Fremont Ca 94538. United States of America ("Centillium"), and
Mitsubishi Electric Corporation. Communication Systems Business Division a
Japan corporation, having its principal place of business at 8-1-1. Tsukaguchi-
Honmachi, Amagasaki City, Hyogo 661. Japan ("Mitsubishi").
- WITNESSETH -
WHEREAS, Centillium has expertise in the area of telecommunications
integrated circuits, including those which utilize multilevel modulation
techniques to enable high speed communications over copper, also known as
Digital Subscriber Line (xDSL) Technology; and
WHEREAS, Mitsubishi has expertise in the area of telecommunications systems
and associated technologies; and
WHEREAS, the parties hereto believe that each will derive benefits from a
business relationship in which they will work cooperatively to use Centillium's
integrated circuit solution for the copper interface portion of transmission
systems (the "CopperBullet") to develop Line Cards that can plug into
Mitsubishi's xDSL ATM Access System ("System"); and
WHEREAS, Centillium will be in a position to provide Mitsubishi with Line
Card design support and testing in exchange for Non Recurring Engineering (NRE)
payments; and
WHEREAS the parties hereto wish to set forth in this Agreement the
guidelines of their cooperation.
NOW, THEREFORE, in consideration of the covenants herein contained, the
parties hereto agree as follows:
1. General Description of responsibility:
It is contemplated by this agreement that Centillium and Mitsubishi will
cooperate in the development of a DSL line card for Mitsubishi's System. The
following roles are defined to better manage the product development
A.) Project Leader and System Integrator: Mitsubishi assumes the role of the
primary project leadership. Once the development of the Line Card is
completed, Mitsubishi will have the sole responsibility to integrate the
Line Card functionality with the functionality of the rest of the System.
B.) Line Card Development Support: Centillium will provide design services and
support for the development of the xDSL Line Card.
<PAGE>
C) CPE modem Design: Centillium shall develop the Customer Premise Equipment
(CPE) for the purpose of prototype testing of the Line Cards. At the
conclusion of the development phase. Centillium shall provide Mitsubishi
its CPE reference design documents. Mitsubishi and its subsidiaries shall
be granted a non-exclusive right to manufacture and sell the CPE modems
containing Centillium's CopperBullet Device.
2. A) Milestones:
For the purpose of the management of the project, a number of milestones
are listed in Attachment A. The completed result of each milestone should
be shared between both parties in a timely manner
B) deliverables:
The following list specifies the deliverables for this project. The parties
recognize that the performance of each side may be impacted by the timely
delivery of the other party's respective deliverables.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Deliverable Item Responsible Due Date
- ----------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
1 Line Card detail Specification Mitsubishi 11/28/97
Document
- ----------------------------------------------------------------------------------------------------------
2 Final Line Card detail specification Mitsubishi 2/1/98
Doc.
- ----------------------------------------------------------------------------------------------------------
3 Paper copy and Netlist file of the Centillium 2/19/98
circuit Design Schemetic including,
Protection design. Splitter (filter)
design. CB Interface design to
MicroController, and transmit driver
design.
- ----------------------------------------------------------------------------------------------------------
4 Paper copy of Mitsubishi's part of the Mitsubishi 2/6/98
Line Card schemetic which should
include all of the functions not
covered by Centillium's schematic,
including power. Microcontroller
circuit, backplane interface, etc.
- ----------------------------------------------------------------------------------------------------------
5 Copper Bullet Pin Assignment Centillium 2/2/98
- ----------------------------------------------------------------------------------------------------------
6 Paper copy of the Combined schematics Mitsubishi 3/5/98
from Items 3 and 4 above
- ----------------------------------------------------------------------------------------------------------
7 Design Review Mitsubishi and 3/9/98
Centillium
- ----------------------------------------------------------------------------------------------------------
8 Schematic Approval Mitsubishi & 3/16/98
Centillium
- ----------------------------------------------------------------------------------------------------------
9 Component placement and signal routing Centillium 3/16/98
guidelines
- ----------------------------------------------------------------------------------------------------------
10 Five Dummy Packages of CopperBullet Centillium 4/30/98
which includes Centillium logo but it
does not contain any silicon die.
- ----------------------------------------------------------------------------------------------------------
11 Twenty (20) CopperBullet engineering Centillium 6/15/98
samples delivery
- ----------------------------------------------------------------------------------------------------------
12 Release 1 of CopperBullet SW Centillium 7/1/98
- ----------------------------------------------------------------------------------------------------------
13 Written report of testing Release 1 Mitsubishi 8/3/98
CopperBullet
- ----------------------------------------------------------------------------------------------------------
14 Release 2 of CopperBullet SW Centillium 8/4/98
- ----------------------------------------------------------------------------------------------------------
15 Written Report of testing Release 2 Mitsubishi 9/9/98
CopperBullet
- ----------------------------------------------------------------------------------------------------------
16 Final Release of CopperBullet SW Centillium 9/15/98
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
17 Modem Design architecture and Centillium & 2/13/98
functionality Approval Mitsubishi
- ----------------------------------------------------------------------------------------------------------
18 Functional 2 Modems delivery Centillium 7/1/98
- ----------------------------------------------------------------------------------------------------------
19 Functional 3 Modems delivery Centillium 7/31/98
- ----------------------------------------------------------------------------------------------------------
</TABLE>
3. NRE Payment:
Mitsubishi shall pay to Centillium a net NRE payment of $500.000 in
consideration of engineering services. This payment is non refundable and
shall be made according to the following schedule.
A. $150,000 U.S. Dollars within 60 days of the signing of this
Agreement
B. $250,000 U.S. Dollars within 60 days from successful completion
of Schematic Approval as specified in Section 2B. Deliverable number 8
This approval shall not be unreasonably withheld.
C. $100,000 U.S. Dollars within 60 days after the delivery of the
CPE modem specified as Deliverable "Functional Modem Delivery" in
Section 2B Deliverable number 19
4. Manufacturing:
A.) Line Cards: Mitsubishi shall have the sole responsibility for the
manufacturing of the Line Cards.
B.) CPE Modem: Centillium shall manufacture a quantity of five (5)
CPE modems for use by Mitsubishi. A limited additional number of
modems may be purchased by Mitsubishi from Centillium.
5. Technology, Ownership and Licenses
(a) Nothing herein will be constructed as an express or implied
license (under patents or otherwise) of any kind unless otherwise
specified in this agreement.
(b) Any information disclosed by Mitsubishi to Centillium under this
Agreement with respect to direct support of the DSL Line Cards (i.e.
with respect to characterization and performance of the DSL Line Cards)
may be freely used by Centillium for the purpose of implementation of
design and implementation of manufacturing and supporting its DSL
solutions sold to Centillium's customers, and other substantially
similar activities the restrictions with regard to Confidential
Information set forth in Section 6 hereof will not apply to the
specific information set forth above but will apply to all other
Mitsubishi information.
(c) Mitsubishi and its subsidiaries shall have the right to use,
copy, modify all design documents of the Line Card to be provided under
this Agreement for the purpose of developing, manufacturing or having a
third party manufacture the Line Cards.
(d) Mitsubishi and its subsidiaries shall have the right to use, copy
the CopperBullet Device Driver software as long as it is used in
combination with CopperBullet Device.
<PAGE>
6. Confidential Information and Non-Disclosure
Any technical information and other business information disclosed
hereunder by either party hereto to the other will be held in strict confidence
by the receiving party from the date of disclosure until three years after the
date this agreement expires or terminates, using the same degree of care as the
receiving party uses for its own information of a similar kind, and will not be
transferred or divulged to any third-party or any employee who does not have the
requisite need to know.
a) For purposes of interpreting this Agreement, employees of Mitsubishi's
affiliates, divisions or subsidiaries do not have the requisite need to
know to obtain access to Centillium Confidential Information disclosed to
Mitsubishi hereunder. Such confidentiality obligation will not apply to
portions of such technical information and other business information, if
any, (a) which were previously known to the other party hereto free of any
confidentiality obligation, (b) which are or become known to the public,
provided that such public knowledge is not attributable to a breach of this
Agreement by the other party hereto, (c) which the furnishing party,
explicitly agrees in writing need not be kept confidential (either in this
Agreement or separately), (d) which are received by the other party hereto
rightfully from a third-party without a restriction on disclosure.
b) Further, Centillium agrees not to disclose to any other party any of the
specifics of Mitsubishi's system testing and results that might
specifically indicate a problem related to such System. However, if the
CopperBullet are modified by Centillium to remedy a system problem,
Centillium may disclose such test information as may be necessary to
support such modified CopperBullet, to the extent that such disclosure
coincides with the availability of the modified CopperBullet.
c) Certain employees of Mitsubishi who are temporarily assigned to Mitsubishi
Wireless Communications in Duluth, Ga. USA. but are responsible for this
project, and employees of Mitsubishi's affiliates, with the exception of
Mitsubishi Electric Corporation semiconductor groups, who are directly
involved in the design of the Mitsubishi System are deemed to have the need
to know
7 Marketing
A) Centillium agrees that Mitsubishi may disclose to the public their use of
Centillium Technology DSL solution at the Supercom show in or about June of
1998
B) Centillium shall provide reasonable amount of marketing support to
Mitsubishi at the Supercom 98 show to help with Centillium's DSL technology
explanation. This support shall be in the form of attending limited
meetings with Mitsubishi's customers at Mitsubishi's booth.
8. Governing Law
The construction, interpretation and performance of this Agreement will be
governed by the laws of the State of California without reference to its
conflict of laws and principals. The United Nations Convention on Contracts for
the International Sale of Goods will not apply to the sale of CopperBullet
hereunder.
<PAGE>
9. Resolution of Disputes
All disputes, controversies or differences which may arise between the
parties hereto, out of or in relation to or in connection with this Agreement.
whether during or after its term shall be finally resolved by arbitration in
accordance with the Rules of Conciliation and Arbitration of the International
Chamber of Commerce on the basis of the provisions of Section 8 herein. The
arbitration shall be held (a) in Tokyo, Japan in case of an arbitration claim
filed by Centillium and (b) in Fremont California, USA in case of an arbitration
claim filed by Mitsubishi. The arbitration panel shall consist of three (3)
arbitrators appointed in accordance with the said Rules. All arbitration
proceedings shall be conducted in English language.
10. Entire Agreement
This Agreement sets forth the entire agreement and understanding between
the parties hereto with respect to its subject matter. It merges all discussions
between them and voids and replaces each and every, other agreement or
understanding which may heretofore have existed between Centillium and
Mitsubishi regarding such subject matter. Notwithstanding the foregoing, the
Nondisclosure Agreement between the parties hereto, dated June, 1997, as
amended, will be deemed incorporated herein by reference, provided that each
party, hereto will be permitted to use any information disclosed thereunder to
the extent permitted in this Agreement.
11. Publicity
Neither parry hereto will disclose the existence or content of this
Agreement without the other's prior written consent, which will not be
unreasonably withheld. Each party will submit to the other all proposed
publicity material relating to the disclosure of this Agreement or the
relationship of the parties hereto.
IN WITNESS WHEREOF, each of Centillium Technology Corporation and
Mitsubishi Electric Corporation have executed this Agreement in duplicate
originals, by their respective officers hereunto duly authorize, the day and
year first above written.
Centillium Technology Corporation Mitsubishi Electric Corporation
- --------------------------------- -------------------------------
By /s/ Faraj Aalaei, VP Planning By /s/ Teruhiko Moriyama
----------------------------- ----------------------
Faraj Aalaei, VP Planning Teruhiko Moriyama, General Manager
- ------------------------- ----------------------------------
Date: Nov, 10, 1997 Date Nov, 7, 1997
------------- ------------
<PAGE>
[IMPLEMENTATION CHART APPEARS HERE SETTING FORTH VARIOUS TASKS
AND TARGET START AND COMPLETION DATES FOR SAID TASKS]
ID Task Name Durat Start Finish
1 Preliminary Line Card Specs 20d Mon 11/3/97 Fri 11/28/97
2 Modem Design Architecter 10d Mon 2/2/98 Fri 2/13/98
3 LC Schematic Capture/Design 72d Mon 12/1/97 Tue 3/10/98
4 Centellium Schematic/Design 55d Mon 12/1/97 Fri 2/13/98
5 Protection Design 10d Mon 12/1/97 Fri 12/12/97
6 Splitter (Filler) Design 15d Mon 12/15/97 Fri 1/2/98
7 Copper Bullet Interface Design 12d Mon 1/5/98 Tue 1/20/98
8 Transmit Driver Design 12d Wed 1/21/98 Thu 2/5/98
9 Final Version of Line Card Specs 1d Fri 1/30/98 Sun 2/1/98
10 Internal Design Review 2d Mon 2/2/98 Tue 2/3/98
11 Possible Schematic Changes 5d Wed 2/4/98 Tue 2/10/98
12 [Illegible] Schematics to Melco 3d Wed 2/11/98 Fri 2/13/98
13 Melco Schematic Design 72d Mon 12/1/97 Tue 3/10/98
14 Best of the Line Card Design 50d Mon 12/1/97 Fri 2/6/98
15 Copper Bullet Assignment [Illegible] 1d Mon 2/2/98 Mon 2/2/98
16 Continuing [Illegible] Schematics 10d Mon 2/16/98 Fri 2/27/98
17 Design Review 2d Mon 3/2/98 Tue 3/3/98
18 Possible Schematic Changes 5d Wed 3/4/98 Tue 3/10/98
19 Mechanical Reference Drawing 20d Tue 1/20/98 Mon 2/16/98
20 Layout 24d Wed 3/11/98 Mon 4/13/98
21 [Illegible] Placement 7d Wed 3/11/98 Mon 3/19/98
22 [Illegible] Routing 15d Fri 3/20/98 Mon 4/9/98
<PAGE>
[IMPLEMENTATION CHART APPEARS HERE SETTING FORTH ADDITIONAL TASKS
AND TARGET START AND COMPLETION DATES FOR SAID TASKS]
<TABLE>
<CAPTION>
ID Task Name Durat Start Finish
<S> <C> <C> <C> <C>
23 Layout Design Review 2d Fri 4/10/98 Mon 4/13/98
24 Fabrication and Assembly of the LC 30d Tue 4/14/98 Mon 5/25/98
25 Melco's Supercom Demo System 1d Fri 6/5/98 Fri 6/5/98
26 Unit Test without Copper Bullet 40d Tue 4/14/98 Mon 6/8/98
27 Unit Test Specs 10d Tue 4/14/98 Mon 4/27/98
28 Unit Test Results 10d Tue 5/26/98 Mon 6/8/98
29 Copper Bullet Foundry to Melco 1d Mon 6/15/98 Mon 6/16/98
30 Modem Schematic/Design 1d Mon 4/6/98 Mon 4/6/98
31 Modem Layout/Assembly CAD 1 1d Fri 5/15/98 Fri 5/15/98
32 Two Modem Done/Ready for Melco 1d Wed 7/1/98 Wed 7/1/98
33 Three more Modem Ready for Melco 1d Fri 7/31/98 Fri 7/31/98
34 Prototype Phase (Line Card) 23d Mon 6/1/98 Wed 7/1/98
35 Test Evaluation of Release 1 SW 22d Mon 6/1/98 Tue 6/30/98
36 Release 1 SW to Melco 1d Wed 7/1/98 Wed 7/1/98
37 Pre-Production Phase (Line Card) 32d Mon 8/3/98 Tue 9/15/98
38 Melco's Feedback on RLS 1 SW 1d Mon 8/3/98 Mon 8/3/98
39 Release 2 SW to Melco 1d Tue 8/4/98 Tue 8/4/98
40 End to End System Test (LC & Modem) 25d Wed 8/5/98 Tues 9/8/98
41 Melco's Feedbacks on RLS 2 SW 1d Wed 9/9/98 Wed 9/9/98
42 Final SW Release to Melco 1d Tue 9/15/98 Tue 9/15/98
</TABLE>
<PAGE>
EXHIBIT 10.14
Addendum to Co-Development Agreement
------------------------------------
This Addendum to the Co-Development Agreement (the "Addendum Agreement")
is dated and effective as of June 21, 1999 and is by and between Mitsubishi
Electric Corporation acting through its Communication Systems Business Division,
a corporation registered and organized under the laws of Japan, having its
office at 8-1-1, Tsukaguchi-Honmachi, Amagasaki City, Hyogo 661, Japan.
("Mitsubishi"), and Centillium Technology Corporation, a corporation organized
under the laws of the state of California. U.S.A., and having an address at
46531 Fremont Blvd, Fremont, California. 94538, U.S.A. ("Centillium").
The purpose of this Addendum Agreement is to be included as an addendum to the
Co-Development Agreement Between Centillium Technology Corporation and
Mitsubishi Electric Corporation signed on October 15th, 1997 (the "Co-
Development Agreement").
1. This Addendum Agreement reduces to writing in whole, all the verbal
agreements made between both parties in connection with development and
support of G.992.2 Annex C.
2. Centillium agrees to make available to Mitsubishi, the CopperLite Annex C
product at prices to be agreed upon between both parties. Centillium's Annex
C products for Central office are known by system part number of CT-
L40DC04&CT-L40AC04 and its Annex C CPE products are known by system part
number of CT-L40DT01 & CTL40AT01. Each system part number is comprised of an
analog device, digital devices and two software components for Annex C. Both
these software components are required for operations of annex C. A detail
description is shown in table below.
<TABLE>
- ---------------------------------------------------------------------------
<S> <C>
Digital CPE Rev AC-4 ports CT-L41DT01-IL-AC
- ---------------------------------------------------------------------------
Analog CO Rev BB -4 ports CT-L41AC04-1M-BB
- ---------------------------------------------------------------------------
Annex A - Software CT-L21FC04
- ---------------------------------------------------------------------------
Annex C - Software CT-L41FC04
- ---------------------------------------------------------------------------
(C) CPE
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Digital CO Rev AC -4ports CT-L41DC04-IG-AC
- ---------------------------------------------------------------------------
Analog CPE RevBB -4ports CT-L41AT01-IT-BB
- ---------------------------------------------------------------------------
Annex A - Software CT-L21FT01
- ---------------------------------------------------------------------------
Annex C - Software CT-L41FT01
- ---------------------------------------------------------------------------
</TABLE>
<PAGE>
3. The expected availability of Annex C solution is as shown in table below:
----------------------------------------------------------------------------
Item Delivery Date Deliverable Remarks
----------------------------------------------------------------------------
1 Upon signing Data related to Performance & Data Sheet
Chip Set (Rls.5) (Annex A data Sheet.
Differences for Annex C)
----------------------------------------------------------------------------
2 July/15 Firmware for Annex C
(Rls.5)
----------------------------------------------------------------------------
3 TBD E/S(CO,CPE) 10 sets/each Mitsubishi requests delivery
on July 15.
----------------------------------------------------------------------------
4 Sep/1 Rls 6 Firmware & Design
Reference
----------------------------------------------------------------------------
Centillium shall make its best effort to meet the above schedule regarding
availability of the products subject to G.992.Annex C, including completion
of this development.
4. For the services rendered and to partially cover the expenses incurred by
Centillium in development of Annex C solution. Mitsubishi agrees to pay
Centillium the sum of 200,000 U.S. Dollars as follows:
1) Upon signature of this addendum by both parties
US$100,000
2) At the time of Centillium's submission of Rls 6 Firmware & Design
Reference
US$100,000
[_] This development fee shall cover the above deliverables item 1),2),3),4) and
updated software for release six and onward.
5. All other provisions of the aforementioned Co-Development is hereby
incorporated into this agreement.
6. This Addendum together with the Co-Development Between Centillium Technology
Corporation and Mitsubishi Electric Corporation constitutes the
understanding and agreement between the parties with regard to the subjects
hereof and thereof. The full and entire understanding for sales and purchase
of Annex A&C products shall be included in the business agreement for sales
and purchase.
Mitsubishi Electric Corporation Centillium Technology Corporation
/s/ Teruhiko Moriyama /s/ Faraj Aalaei
- ------------------------------------- ------------------------------------
Name: Teruhiko Moriyama Name: Faraj Aalaei
Title: General Manager Title: Vice President
Date: 8-24-99 Date: 8-17-99
<PAGE>
EXHIBIT 10.15
COOPERATION AGREEMENT BETWEEN
CENTILLIUM TECHNOLOGY CORPORATION
AND
MITSUBISHI ELECTRIC CORPORATION
This Cooperation Agreement (this "Agreement") is effective as of August 25,
1997 (the "Effective Date") by and between Centillium Technology Corporation, a
California corporation, having its principal place of business at 46824 Lakeview
Blvd., Fremont, Ca, 94538, United States of America ("Centillium"), and
Mitsubishi Electric Corporation, Communication Systems Business Division, a
Japan corporation, having its principal place of business at 8-1-1, Tsukaguchi-
Honmachi, Amagasaki City, Hyogo 661, Japan, ("MITSUBISHI ELECTRIC").
- WITNESSETH -
WHEREAS, Centillium has expertise in the area of telecommunications
integrated circuits, including those which utilize multilevel modulation
techniques to enable high speed communications over copper, also known as
Digital Subscriber Line (xDSL) Technology; and
WHEREAS, MITSUBISHI ELECTRIC has expertise in the area of
telecommunications systems and associated technologies; and
WHEREAS, the parties hereto believe that each will derive benefits from a
business relationship in which they will work cooperatively to define an
integrated circuit solution for the copper interface portion of transmission
systems (the "Interface Devices"); and
WHEREAS, Centillium will be in a position to provide MITSUBISHI ELECTRIC
with early models, system support, and loop environment engineering support in
exchange for MITSUBISHI ELECTRIC's commitment to use Centillium as its preferred
vendor of the Interface Devices for its products; and
WHEREAS, the parties hereto wish to set forth in this Agreement the
guidelines of their cooperation.
NOW, THEREFORE, in consideration of the covenants herein contained, the
parties hereto agree as follows:
1. Overall Objective of Cooperation
(a) The objective of this cooperation is for both companies to work
together in developing the proper "Interface Device" technologies and systems
that can significantly develop the broadband telecommunications market. The
first phase of this activity includes product definition and joint marketing to
telco customers.
(b) Each of the parties hereto will act in a commercially reasonable
fashion to provide the resources necessary to accomplish the objectives set
forth in this Agreement.
<PAGE>
Each of the parties hereto acknowledge and agrees that there are substantial
technical, financial and commercial risks associated with a development activity
of this type and, therefore, that neither of the parties hereto can guarantee
that any of the development activities described in this Agreement or any
subsequent activities to be described in any future agreements will be completed
successfully.
(c) Both parties agree that the future phases of this Agreement, including
those described in section 2 below, may include a product development phase, and
production phase. Both parties will work together to in good faith to develop a
detailed agreement covering the relationship agreement between the two companies
for future phases.
2. Scope of Cooperation
The parties' cooperation will be conducted in phases:
(a) Phase 1: Product Definition Phase
(i) The parties hereto will jointly approve specifications for
an integrated circuit solution for the Interface Devices.
(ii) Centillium provide assistance to MITSUBISHI ELECTRIC in
marketing their DSL solution which utilizes Centillium's
Interface Devices to telcos.
(b) Phase 2: Prototyping Phase
(i) MITSUBISHI ELECTRIC will evaluate Centillium's first
prototype of the Interface Devices. Centillium will provide
evaluation boards to the MITSUBISHI ELECTRIC for this evaluation.
MITSUBISHI ELECTRIC will provide a written report on the
evaluation. MITSUBISHI ELECTRIC agrees to provide additional
evaluation reports throughout the term of this Agreement as
subsequent iterations of the Interface Devices are prototyped and
forwarded to MITSUBISHI ELECTRIC for evaluation. Prototypes of
second and/or future iterations of the Interface Devices will be
provided free of charge unless they are custom iterations for
MITSUBISHI ELECTRIC in which case Centillium may charge a fee to
be mutually agreed upon by the parties hereto.
(c) Phase 3: Pre-production and Production Phase
(i) MITSUBISHI ELECTRIC will supply written acknowledgment
that the Interface Devices meet all the specifications listed
in the Product Specification agreed to by the parties. Upon
acceptance of the Interface Devices and upon acceptance of
Centillium's pricing, MITSUBISHI ELECTRIC will provide
Centillium with a requirements forecast of its delivery
requirements covering the next six month period for the
Interface Devices to be purchased from Centillium.
<PAGE>
(ii) MITSUBISHI ELECTRIC will also assist Centillium in
establishing standards utilizing the its modulation schemes
and will support Centillium's documentation efforts for the
Interface Devices by reviewing and providing feedback to
Centillium. If Centillium produces devices based upon such
standards, Centillium will provide Mitsubishi Electric with
access to such devices (e.g., alpha and beta test site) prior
to the general commercial release of such devices.
(iii) MITSUBISHI ELECTRIC and Centillium agree that
reasonable standard commercial terms and conditions will apply
to the sale of all devices to MITSUBISHI ELECTRIC.
3. Technology Ownership and Licenses
(a) Nothing herein will be constructed as an express or implied license
(under patents or otherwise) of any kind.
(b) Centillium will have exclusive right to design and market Interface
Devices and any improvements or modifications thereto resulting from the
activities of this Agreement.
(c) Any information disclosed by MITSUBISHI ELECTRIC to Centillium under
this Agreement with respect to direct support of the Interface Devices (i.e.,
----
with respect to characterization and performance of the Interface Devices) may
be freely used by Centillium for the purpose of implementation of design and
implementation of manufacturing and supporting Interface Devices sold to
Centillium's customers, and other substantially similar activities; the
restrictions with regard to Confidential Information set forth in Section 4
hereof will not apply to the specific information set forth above but will apply
to all other MITSUBISHI ELECTRIC information.
4. Confidential Information and Non-Disclosure
Any technical information and other business information disclosed
hereunder by either party hereto to the other will be held in strict confidence
by the receiving party from the date of disclosure until three years after the
date this agreement expires or terminates, using the same degree of care as the
receiving party uses for its own information of a similar kind, and will not be
transferred or divulged to any third-party or any employee who does not have the
requisite need to know.
a) For purposes of interpreting this Agreement, employees of MITSUBISHI
ELECTRIC affiliates, divisions or subsidiaries do not have the requisite
need to know to obtain access to Centillium Confidential Information
disclosed to MITSUBISHI ELECTRIC hereunder. Such confidentiality obligation
will not apply to portions of such technical information and other business
information, if any, (a) which were previously known to the other party
hereto free of any confidentiality obligation, (b) which are or become
known to the public, provided that such public knowledge is not
attributable to a breach of this Agreement by the other party hereto, (c)
which the furnishing party explicitly agrees in writing need not be kept
<PAGE>
confidential (either in this Agreement or separately), (d) which are
received by the other party hereto rightfully from a third-party without a
restriction on disclosure.
b) Further, Centillium agrees not to disclose to any other party any of the
specifics of MITSUBISHI ELECTRIC's system testing and results that might
specifically indicate a problem related to such system. However, if the
Interface Devices are modified by Centillium to remedy a system problem,
Centillium may disclose such test information as may be necessary to
support such modified Interface Devices, to the extent that such disclosure
coincides with the availability of the modified Interface Devices.
5. Term
This Agreement will expire four (4) years after the Effective Date unless
extended in writing by mutual parties.
6. Governing Law.
The construction, interpretation and performance of this Agreement will be
governed by the laws of the State of California without reference to its
conflict of laws and principals. The United Nations Convention on Contracts for
the International Sale of Goods will not apply to the sale of Interface Devices
hereunder.
7. Entire Agreement
This Agreement sets forth the entire agreement and understanding between
the parties hereto with respect to its subject matter. It merges all discussions
between them and voids and replaces each and every other agreement or
understanding which may heretofore have existed between Centillium and
MITSUBISHI ELECTRIC regarding such subject matter. Notwithstanding the
foregoing, the Nondisclosure Agreement between the parties hereto, dated June,
1997, as amended, will be deemed incorporated herein by reference, provided that
each party hereto will be permitted to use any information disclosed thereunder
to the extent permitted in this Agreement.
8. Publicity
Neither party hereto will disclose the existence or content of this
Agreement without the other's prior written consent, which will not be
unreasonably withheld. Each party will submit to the other all proposed
publicity material relating to the disclosure of this Agreement or the
relationship of the parties hereto.
9. Resolution of Disputes.
All disputes, controversies or differences which may arise between the
parties hereto, out of or in relation to or in connection with this Agreement,
whether during or after its term, shall be finally resolved by arbitration in
accordance with the Rules of Conciliation and Arbitration of the International
Chamber of Commerce. The arbitration shall be held (a) in Tokyo, Japan in case
of an arbitration claim filed by Centillium and (b) in California, USA in case
of an arbitration claim filed by Melco. The arbitration panel shall consist of
three (3) arbitrators appointed in accordance with the said Rules. All
arbitration proceedings shall be conducted in English language.
<PAGE>
IN WITNESS WHEREOF, each of CENTILLIUM TECHNOLOGY CORPORATION and
MITSUBISHI ELECTRIC Corporation have executed this Agreement, in duplicate
originals, by their respective officers hereunto duly authorize, the day and
year first above written.
CENTILLIUM TECHNOLOGY CORPORATION Communication
- --------------------------------- -------------
Business Division of
--------------------
MITSUBISHI ELECTRIC
--------------------
Corporation
-----------
By /s/ Kamran Elahian By /s/ Teruhiko Moriyama
--------------------------------- ---------------------------------
Name Kamaran Elahian Name Teruhiko Moriyama
------------------------------- -------------------------------
General Manager Telecom Network
Title Chairman CEO Title Systems Business Center
------------------------------ -------------------------------
<PAGE>
EXHIBIT 10.16
CONFIDENTIAL
WAFER SUPPLY AGREEMENT
This Wafer Supply Agreement (the "Agreement"), is dated and effective as of
April 22, 1999 (the "Effective Date"), by and between Mitsubishi Electronics
America, a Delaware corporation, having its principal place of business at 1050
East Arques Avenue, Sunnyvale, CA 94086-4601 ("MELA"), and Centillium
Communications, Inc., a California corporation with offices at 47211 Lakeview
Blvd, Fremont, California, 94538("Centillium").
RECITALS
WHEREAS, Centillium Communications, Inc. Corporation desires to purchase
from MELA and MELA desires to supply to Centillium Communications, Inc.
Corporation silicon wafers on the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the parties agree as follows:
PART I
DEFINITIONS
1.1 "Fabrication Cycle Time" means the period of time required to
----------------------
manufacture the Products, commencing upon wafer start and ending on the day when
MELA first delivers the ordered quantity of Products. The Fabrication Cycle Time
for Prototype Production and Volume Production shall be as set forth in Exhibit
B. Fabrication Cycle Time does not include local national holidays and other
factory holidays and shutdowns.
1.2 "Lead Time" means the period of time, in calendar days, from the
---------
placement of a particular order of a Product until the date of first delivery of
the ordered quantity of the Product.
1.3 "Process" means the wafer manufacturing process (es) used by MELCO as
-------
identified in Exhibit A and any other manufacturing processes included within
the scope of this Agreement in accordance with Section 3.2.
1.4 "Products" means semiconductor chips containing any memory, I/Os,
--------
logic or analog elements manufactured hereunder. The Parties may, from time to
time, agree to add other product(s) or design cores to the definition and scope
of products.
1.5 "Prototype Production" has the meaning given in Section 3.8(a).
--------------------
1.6 "Volume Production" has that meaning given in Section 3.8(b).
-----------------
1.7 "Wafers" means processed silicon wafers containing finished die for
------
the Products manufactured by MELCO and sold to Centillium Communications, Inc..
Page 1 of 30
<PAGE>
CONFIDENTIAL
1.8 "MELCO" means MELA's ultimate parent company, Mitsubishi Electric
Corporation.
1.9 "Affiliate" means any corporation or business entity which is owned or
controlled by, owns or controls, or is under common ownership or control with, a
party. For purposes of this definition, "control" of a corporation or business
entity shall mean the right to exercise, directly or indirectly, more than
fifty, percent (50%) of the voting rights attributable to the shares of the
corporation or business entity or the power to direct or cause the direction of
the management or policies of the corporation or business entity.
Page 2 of 30
<PAGE>
CONFIDENTIAL
PART II
INTELLECTUAL PROPERTY RIGHTS
2.1 Technical Information. All intellectual property and related rights in
---------------------
and to technical information of either party including an affiliate or either
party, which is provided to the other party in the course of the development of
the Product(s) shall continue to belong to such providing party. This
information shall be considered confidential and covered by a separate Non
Disclosure Agreement.
2.2 Patents. All intellectual property and related rights in and to all
-------
inventions made by Centillium Communications, Inc. and patents resulting
therefrom shall belong to Centillium Communications, Inc.. All intellectual
property and related rights in and to all inventions made by MELA and its
affiliates efforts and patents resulting therefrom shall belong to MELA and its
affiliates. All intellectual property and related rights in and to all
inventions jointly made by Centillium Communications, Inc. and MELA in the
course of the development efforts and patents resulting therefrom shall be
jointly owned by both companies. The parties shall confer with each other before
filing any patent claiming a joint invention. Each party shall promptly disclose
any such potentially patentable and jointly owned inventions to the other party;
and the parties will jointly establish whether such disclosed inventions are
sole or joint inventorship. Patents on sole inventions shall be filed at the
discretion and expense of the respective party. For jointly owned inventions,
the parties will jointly establish whether it would be advantageous to file, and
if so, how and where any jointly owned patent applications will be filed. The
reasonable expense of such jointly owned applications and patents shall be borne
equally by the parties. If one party declines to participate or fails to assume
any expense obligations in a timely manner, it shall relinquish to the other
party its right, title and interest in and to such jointly developed application
and patent. Any licensing of jointly owned inventions shall be at the discretion
of either joint owner, without the need for the consent of the joint owner, and
without any necessity of accounting for, sharing royalties with, or making any
other payment to the other joint owner. However, all such licensing of jointly
owned inventions shall be non-exclusive. MELA and Centillium will each have the
rights to utilize the intellectual property rights jointly developed hereunder,
if any, without further charge or cost to the other party. All intellectual
property rights granted to either party under this agreement shall extend to
such party's corporate parent, affiliates, and subsidiaries.
2.3 Product Rights; Maskworks. Notwithstanding Section 2.2, all worldwide
-------------------------
title to and interest in mask works developed under this Agreement pursuant to
Centillium designs shall be owned by Centillium Communications, Inc. Masks will
be shipped to Centillium Communications, Inc. after discontinuance of
production. However once the masks are returned to Centillium, they will not be
re-used by MELCO for the re-start of Production. In case Centillium would want
MELA to re-start Production MELCO will make new masks at additional NRE. This
Agreement shall not be construed as granting or conferring any intellectual
property rights of MELA or Centillium Communications, Inc. specified in Part II
of this Agreement or with respect to the Products except as explicitly specified
herein.
Page 3 of 30
<PAGE>
CONFIDENTIAL
2.4 Process. Subject to Sections 2.1, 2.2 and 2.3 above, MELA shall own
-------
all intellectual property and related rights in and to the jointly developed
Process.
Page 4 of 30
<PAGE>
CONFIDENTIAL
PART III
WAFER SUPPLY
3.1 Wafer Manufacturing. On the terms and conditions of this Agreement,
-------------------
MELA will: (i)have MELCO manufacture processed Wafers; and (ii) sell processed
Wafers to Centillium Communications, Inc.. Centillium Communications, Inc. will
take ownership of the silicon after all processing has been completed and
electrical test results meet specification, see exhibit C. MELA will manufacture
all Wafers at its "Saijo" manufacturing facility. If MELCO or MELA desires to
change the location at which it manufacturers wafers, MELA shall first obtain
Centillium Communications, Inc. written consent such consent is not to be
unreasonably withheld.
3.2 Processes. MELA shall have MELCO manufacture the Wafers using the
---------
Process set forth in Exhibit A. If MELCO moves to a new or different Process,
MELCO will provide 120 days notice before the actual change and receive
authorization, which shall not be unreasonably withheld, from Centillium
Communications, Inc. within 30 days after MELA's notification of Centillium
Communications, Inc. MELCO will provide Centillium Communications, Inc. with all
information regarding such new processes (other than proprietary information
belonging to third parties) in order that Centillium Communications, Inc. can
ensure that MELCO can continue to manufacture wafers pursuant to this Agreement.
MELA will treat Centillium Communications, Inc. as a Key Account and as such
will continue to provide early access to newly developed processes during the
period this agreement is in force.
3.3 Qualification and Quality Control.
(a) Qualification. Centillium Communications, Inc. and MELA will
-------------
cooperate fully to qualify jointly each Product for which Wafers will be
manufactured hereunder ("Qualification"). Accordingly, the parties will
cooperate to implement a Qualification procedure pursuant to which the parties
will agree on parameters to monitor product quality and reliability. After
qualification, Centillium Communications, Inc. will notify MELA when Volume
Production will commence. Processes will be capable of meeting *3200 PPM early
mortality (without Burn-in) and *200FITS with the data normalized to 85C
junction temperature and containing 2 million gates of 50% logic and 50% SRAM.
These are target PPM and FITS are not a commitment by MELA. HTOL data will be
provided to Centillium Communications on a quarterly basis detailing; Number of
Lots, Number of devices, Number of passes/fails (time when failed), HTOL
criteria (temperature, time, conditions).
(b) Changes. After Qualification of any Product, MELA shall not make
-------
any major and/or critical Process change which will impact the performance,
reliability or construction of the Products, without Centillium Communications,
Inc.'s prior written consent, which consent shall not be unreasonably withheld.
MELA shall notify Centillium Communications, Inc. in writing in advance of major
Process changes, including but not limited to any changes which may:
(i) degrade Product quality or reliability;
* Less than
Page 5 of 30
<PAGE>
CONFIDENTIAL
(ii) result in failure of the Product to meet Centillium
Technology's specifications;
(iii) substantially slow lead times
(iv) change Process control variables, ranges or method;
(v) result in Product mask revisions or changes to Wafer sort
programs;
(c) Problem Notification. MELA will notify Centillium Communications,
--------------------
Inc. promptly (within 72 hours) upon discovering major Process problems in its
manufacturing lines that may affect the delivery capability of Wafers or Wafer
yields.
(d) Yield Improvement Help. MELA will notify Centillium
----------------------
Communications, Inc. of yield trends on a quarterly basis and what action is
being performed to resolve the issues.
3.4 Forecasts.
(a) Twelve-month Rolling Forecasts. Each week Centillium
------------------------------
Communications, Inc. will provide MELA a rolling forecast ("Forecast") of the
number of Wafers, which Centillium Communications, Inc. intends to purchase
weekly during the next twelve (12) months. The Forecast will be based on "Wafers
out," i.e., on deliveries expected to be made by MELA each week. Upon execution
of the Agreement, the parties will agree upon an initial twelve month Forecast.
MELA shall supply at least the number of wafers agreed to by the parties in the
initial Forecast and each subsequent weekly Forecast.
(b) Forecast Acknowledgment. All Forecasts shall be mutually agreed
-----------------------
upon by the parties, and MELA will treat Centillium Communications, Inc. as a
Key Account.
(c) Required Orders. Upon mutual agreement by the parties regarding
---------------
the initial Forecast, Centillium shall issue a "blanket" purchase order for
those units identified in the initial Forecast and each subsequent weekly
Forecast issued in accordance with this Agreement. The parties shall agree on
the Forecast by the end of every week of the Centillium Communications, Inc.
calendar month. Authorization for payment against the forecast will be given
upon the determination of the yield, within 15 days of the shipment date
pursuant to Section 4.2.
For example, Centillium Communications, Inc. will issue a blanket P.O.
covering at least a 12 month forecast. Centillium Communications, Inc. must
submit a rolling 12 month forecast with weekly requirements, and if the forecast
is provided at the end of the week between April 26-30, 1999, and if the silicon
is shipped to Centillium Communications, Inc. from MELA on July 1 the payment
authorization will be given within 15 days i.e. on or before July 16.
NOTE: The forecast is for production orders only. The ramp-up-plan, pre-
qualification for the first product shall be mutually agreed between Centillium
Communications, Inc. and MELA.
(d) Limited Quantity Adjustments.
Page 6 of 30
<PAGE>
CONFIDENTIAL
(i) For low volume production (*500 wafers/month) MELA agrees to use
commercially reasonable efforts to meet the Centillium Communications, Inc.
weekly forecast requirements.
(ii) Centillium Communications, Inc. may for high volume production (**500
wafers/month) increase or decrease Forecast quantities during the fourth and
fifth calendar month following the date of the Forecast by no more than twenty
percent (20%) and beyond the fifth calendar month following the date of the
Forecast by no more than thirty percent (30%). For months one through three
following the date of the Forecast, MELA shall use commercially reasonable
efforts to meet any upside requests made by Centillium, however, if Centillium
wants to decrease Forecast quantities Centillium may decrease up to 10% of the
first three months subject to payment of the cancellation charges in Section
3.8(c). However, during months one through three Centillium may, at no charge,
push back delivery, by no more than sixty (60) days, of up to ten percent (10%)
of the Forecast demand in any month.
For example
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
500 1000 750 2000 3000 2000 1000 500 1000 300 3000 4000
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
If Centillium Communications, Inc. submits the above forecast in March.
Then the Forecast for
i. April, May, June (1-3 month) Mela shall try to meet any upside
made by Centillium; however, if Centillium decreases forecast
quantities, this quantity may be decreased by 10%.
II. Jul, Aug (4-5 month) may increase or decrease by 20% per month
III. Sep (**5 month) and beyond may increase or decrease by 30% per
month
3.5 Demand. Centillium Communications, Inc. shall not be under any
------
obligation to purchase wafers hereunder except as otherwise provided by Sections
3.4 or 3.8.
3.6 Purchase Order Process. All purchases under this Agreement will be
----------------------
initiated by a blanket purchase order and the forecast process as stated in
section 3.4. Forecast shall state unit quantities, unit descriptions, requested
delivery, dates and shipping instructions. This Agreement any prices agreed upon
by the parties pursuant to this Agreement, unit quantities, unit descriptions,
requested delivery dates and shipping instructions, shall constitute the
complete agreement between the parties with respect to the purchase and sale of
the Products and shall supercede all prior oral or written agreements,
representations and other communications between the parties relating to the
subject matter of this Agreement. This Agreement shall also supercede any
standard terms and conditions or pre-printed terms and conditions found on any
Purchase Order issued under this Agreement.
3.7 Order (Forecast) Acknowledgment. MELA agrees to accept Centillium's
-------------------------------
blanket purchase order to the extent it conforms to the mutually agreed upon
Forecasts, as outlined in Section 3.4, above.
* Less than
** Greater than
Page 7 of 30
<PAGE>
CONFIDENTIAL
3.8 Prototype and Volume Production Lots. Centillium Communications, Inc.
------------------------------------
shall order Products in either Prototype Production lots or Volume Production
lots as follows:
(a) Prototype Lots. Centillium Communications, Inc. may order Wafers
--------------
in prototype lots ("Prototype Production") whenever Centillium Communications,
Inc.: (i) seeks a Qualification in accordance with Section 3.3(a); (ii) seeks to
make any engineering changes, including without limitation changes to improve
Product functionality and Wafer yield; or (iii) elects, at Centillium
Communications, Inc. risk, to purchase Wafers in volume prior to Qualification.
A Prototype Production lot shall contain the number of Wafers specified in
Exhibit B. Centillium Communications, Inc. may order multiple Prototype
Production lots of the same Wafer. Centillium Communications, Inc. may require
MELA to hold Prototype Production at "gate" or "contact" intermediate stages of
production. Centillium Communications, Inc. should not hold lots longer than
ninety (90) days in such an intermediate stage. During Prototype and Production,
MELA will provide e-test data as specified in Exhibit G. Centillium
Communications, Inc. may request process splits (i.e., examine Wafers at a
particular step in fabrication) in order for Centillium Communications, Inc. to
evaluate variations within the specifications for each process.
(b) Volume Production Lots. Upon Qualification of any particular
----------------------
Product, Centillium Communications, Inc. may order that Product only in volume
production lot ("Volume Production"). A Volume Production lot shall contain the
number of Wafers specified in Exhibit B. Centillium has the right to request
finished wafers are held at MELA for 60 days, prior to shipment. In the case of
pre-qualification ramp up Centillium may request lots of a different lot size
are processed.
(c) Cancellation. Centillium Communications, Inc. may cancel product
----------------
purchase order(s) or any portions thereof for any reason by notifying MELA in
writing prior to the scheduled delivery date on the purchaser order(s), provided
that Centillium Communications, Inc. pays the fees specified in this Section
3.8(c). Cancellation shall be effective upon MELA's receipt of the written
cancellation notice from Centillium Communications, Inc., or upon the date
specified in such cancellation notice if later than the date of receipt. MELA
shall cease all work on such cancelled purchase order quantities in accordance
with the cancellation notice; provided that Centillium Communications, Inc.
shall pay a cancellation charge calculated in the manner provided below
("Cancellation Charge"). MELA will invoice Cancellation Charges, if any,
immediately upon cancellation and Centillium Communications, Inc. will pay the
Cancellation Charge within thirty (30) days after receipt of invoice. The
foregoing rights shall be MELA's sole remedies for any cancellation of a
purchase order or failure to order quantities specified in a Forecast. The
Cancellation Charge shall be calculated as a percentage of the Wafer price, as
specified in Exhibit D otherwise payable based upon the number of weeks between
the date Centillium Communications, Inc. submits the cancellation notice and the
delivery date of the wafers as set forth in the then most current Report (as
defined in Section 3.9(b). Such rate is as follows
Prior to delivery date Monies due
* 2 weeks 100%
* 3 weeks 80%
* 5 weeks 60%
* Less than
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* 7 weeks 40%
*= 9 weeks 20%
** 9 weeks No cancellation charge
Forecast will be given on a weekly basis, broken down into weekly quantities.
At Centillium Communications, Inc. request MELA shall deliver all work-in-
process to Centillium Communications, Inc. or destroy all such work-in-process
and provide written certification of destruction to Centillium Communications,
Inc.. Notwithstanding the foregoing, there shall not be any cancellation change
if Centillium Communications, Inc. cancels an order before wafers are physically
started.
(d) Delivery Commitments. MELA will deliver wafers to the carrier for
------------------------
shipment, within one (1) day. MELA will use reasonable efforts to distribute the
manufacture of wafers evenly throughout each month (i.e., start and complete
Wafers linearly). Upon Centillium Communications, Inc. request, before
Centillium Communications, Inc. product qualification, MELA will hold Products
during their manufacture in accordance with terms to be agreed upon by the
parties. If wafers are requested to be held by Centillium Communications, Inc.
during manufacture, the foregoing delivery commitments will be extended by the
number of days that the Wafers are held.
(e) Work-in-Process Reporting. MELA will provide Centillium Communications,
-----------------------------
Inc. with work-in-process reports ("Reports") on a periodic basis, for at least
10 process steps. Reports shall be sent to Centillium Communications, Inc. via
email. The Reports shall include all of the information in Exhibit H. The format
of the report will be comma delaminated (excel") and frequency of the reports
shall be at least bi-monthly up to 500 wafers and weekly thereafter. This report
will be used by Centillium for information purpose only and not as an official
confirmation of delivery by MELA. If the wafer demand per design becomes very
small, the frequency of this report will be re negotiated
(f) Shipping. All Wafers shall be delivered to Centillium Communications,
------------
Inc. or its designated airport, pre-alerts are required to be sent from MELA to
Centillium Communications freight forwarder at least 24 hrs in advance and shall
be suitably packed for shipment in MELA's standard containers, marked for
shipment as specified in Centillium Communications, Inc. purchase order, and
delivered to a carrier or forwarding agent chosen by Centillium Communications,
Inc. However, should Centillium Communications, Inc. fail to designate a
carrier, forwarding agent or type of conveyance, MELA shall make such
designation in conformance with its standard shipping practices. Shipment will
be "ex works (EXW) fabrication location" according to the Incoterms 1990.
3.9 Test and Inspection.
* Less than
** Greater than
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(a) By MELA. MELA will supply to Centillium Communications, Inc., with
-------
each Wafer shipment, process control monitor ("PCM") test results and visual
quality inspection results as agreed by the parties.
(b) Reports. MELA will supply Centillium Communications, Inc. with
-------
reliability and statistical quality data on the MELA standard processes, which
is made for the same product line, at regular intervals to be agreed upon but no
less than once a quarter. The format and the contents of these report(s) are to
be mutually agreed upon. Upon reasonable notice, MELA will allow Centillium
Communications, Inc. on-site inspection at reasonable intervals to ensure that
MELA follows the reliability and testing procedures set forth in this Agreement.
(c) By Centillium Communications, Inc. Wafers manufactured using the
---------------------------------
Process set forth in Exhibit A shall be subject to incoming inspection,
electrical testing and reliability testing by Centillium Communications, Inc. in
accordance with the acceptance criteria set forth in Exhibit C hereto. Wafers
manufactured under other Processes (jointly defined by the parties in accordance
with Section 3.2) shall be subject to incoming inspection, electrical testing
and reliability testing by Centillium Communications, Inc. in accordance with
updated acceptance criteria which the parties agree to negotiate in good faith
promptly at or prior to the implementation of any such other Process. Wafers
meeting applicable initial acceptance criteria or updated acceptance criteria
will be deemed accepted by Centillium Communications, Inc., if wafers do not
meet this criteria Centillium Communications will notify MELA within 72 hrs.
Centillium Communications will provide a monthly test report to MELA
(d) Test Failure. If any Wafer or lot of Wafers fails incoming
------------
inspection or test, and if test failure is caused by any defect in the Process
used by MELA, or any other design core provided by MELA, Centillium
Communications, Inc. may reject such lot or Wafer in writing as soon as possible
but at least within forty-five (45) days after delivery and return such lot or
Wafer to MELA, at MELA's expense, for a full refund. Centillium Communications,
Inc. will explain the reasons for wishing to reject a lot and MELA will be
entitled to examine any lot that Centillium Communications, Inc. wishes to
reject. The parties will seek in good faith to resolve any disagreement as to
whether a lot is conforming. After mutual agreement for return shipment,
Centillium Communications, Inc. shall use reasonable commercial efforts to use
MELA original packing, but in any event shall use commercially reasonable
packaging, and supply all identifying shipping documents in order to avoid any
deterioration of the goods.
(e) Low Line Yield on Volume Production. If the output per lot (i.e.,
-----------------------------------
good die/wafer yield, which meets the inspection and test criteria, is less than
yield defined in Exhibit E and if Centillium Communications, Inc. so requests,
MELA will explain the reasons for the low line yield. Lots or Wafers with sort
yields below a yield defined in Exhibit E may not be shipped unless Centillium
Communications, Inc. prior approval is obtained.
(f) Yield Based Adjustments. Wafer prices shall be adjusted if the
-----------------------
average Yield (as defined below) per Wafer Lot (as defined below) is outside the
allowance range ("Allowance Range," as further defined below). The Allowance
Range and standard yields are defined in exhibit D which will be mutually agreed
upon by the parties but in any event an Allowance Range will be
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defined and shall not be less than 20% of the standard yield defined in Exhibit
D. A price adjustment shall be determined according To an adjusted Wafer value
that is equal to the actual price adjusted by the percentage change from the
averse tot yield, subject to the Allowance Range. For example
(i) If the average Yield rate is 70% in the case of a Product with
an average lot yield of 80%, there shall be no value adjustment
(ii) If the average Yield rate is 50% for that Product and the
current price is $1,000, the adjusted value shall be ((average lot yield-
(allowable yield deviation)) - yield rate)% * 1000= ((80-(20))-50)%*1000= $
100.00 to Centillium.
(iii) If the yield is 95% in the above example, then (95-
(80+10))%*1000 = $ 50.00 to MELA.
(iv) The Established Standard Yield will be reviewed in every
quarterly strategic business review and mutually agreed upon to apply for the
following quarter and placed in Exhibit D.
(v) Centillium Communications, Inc. shall have the option of
obtaining a credit or prompt refund of the amount of any adjustments. For the
purposes of this Section 3.8(f), the following definitions apply:
"Wafer Lot" see Exhibit C.
"Yield" shall mean electrically good dice divided by the number of full die
locations on the Wafer (i.e., excluding locations which are not complete due to
the curved edge of the Wafer so long as MELA uses best efforts to optimize the
use and coverage of silicon on a Wafer)
NOTE: This section will take effect after 200 wafers of qualified product
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PART IV
COMPENSATION
4.1 Purchase Price. The price of the Wafers shall be determined from time
--------------
to time by agreement. The price shall be adjusted according to Section 3.9(f).
The fixed price for any quarter will be reviewed during the last month of the
previous quarter and mutually agreed to by the parties in good faith. For
example, the Q2 (May - July) price will be finalized by March. If an agreement
cannot be made, the current price will continue to be valid for the products
already ordered.
4.2 Payment. MELA will invoice Centillium Communications, Inc. or its
-------
designees acceptable to MELA (the "payer"), for example Mitsubishi International
Corn oration (MIC), as specified in the relevant Purchase Order. Nothing in this
section shall be construed to release or discharge Centillium of its payment
obligation to MELA, and as such Centillium guarantees payment of all sums by
designees which MELA has agreed to invoice. Except as otherwise agreed in
writing by the parties, the payer shall authorize payment to MELA the net
purchase price, after yield adjustment, in US dollars within (15) days of
shipment from MELA. Once payment is authorized actual payment will occur within
(30) days of shipment. Past due invoices of MELA to the payer shall bear
interest at the rate of 1.5% per month, however, this payment can be delayed
without charge if a quality or other process issue causes a delay but not in
excess of the maximum lawful rate, until paid in full. If the due date of the
invoice of MELA is not a business day, the payer shall pay MELA on the next
business day following such due date. MELA may submit invoices for Wafers not
earlier than the date of Wafer shipment to Centillium Communications, Inc.
Payment shall be in United States dollars unless otherwise agreed. For masks
tooled by MELA hereunder, MELA may submit mask-tooling invoices with the
prototype lot.
4.3 Taxes. Purchase prices shall be inclusive of all taxes and customs
-----
duties, and MELA shall pay and be liable for all taxes and duties imposed by any
Taxing jurisdiction in "Country of Origin" or at the location of fabrication.
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PART V
WARRANTY AND DISCLAIMER; LIABILITY
5.1 LIMITED WARRANTY. Products sold by MELA are warranted to conform to
----------------
specifications therefor at the time of delivery to Centillium and to remain free
from defects in workmanship and material for a period of twelve(12) months from
the date of shipment by MELA. Any products which fail to meet either such
warranty shall, at MELA's option, either be repaired or replaced by MELA at no
charge to Centillium or MELA shall issue a credit therefor in the amount paid by
Centillium on the said invoice. MELA's warranty obligation shall be limited
solely to such repair, replacement or credit. Such obligation shall be
conditioned upon receipt by MELA of notice of any alleged non-conformance to
specifications within thirty (30) days after delivery to Centillium and of any
alleged defect in material or workmanship within thirty (30) days after
discovery. Products which MELA consents or directs in writing to be returned
shall be returned to MELA, freight prepaid, F.O.B. MELA's facility in Sunnyvale,
California or other destination directed by MELA. Without limitation, MELA shall
be responsible for any costs associated with the removal of the Products from
items into which such Products have been integrated by Centillium (or other
third parties), MELA's warranty shall only apply if the products have not been
altered or repaired other than with authorization from MELA and according to its
approved procedures, the products have not been subjects to misuse, abuse,
improper installation, misapplication, maintenance, neglect or accident, the
products have not been damaged by excessive physical or electrical stress and
the products have not had their serial numbers, or other markings, if any,
altered, defaced or removed. All Products or parts determined to be defective
shall become the property of MELA upon replacement, and MELA reserves the right
to utilize refurbished parts to repair or replace the warranted products.
Warranty repairs or warranty replacements shall be subject to this warranty for
the longer of (a) ninety (90) days following shipment of the repaired/replaced
products, or (b) the remainder of the original warranty for the defective
product which has been repaired or replaced.
THE FOREGOING WARRANTY IS EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, EXPRESS
OR IMPLIED, INCLUDEING BUT NOT LIMITED TO ANYIMPLIED WARRANTY OK
MERCHANTABILITY, FITNESS FOR ANY PARTICULAR PURPOSE, COURSE OF DEALING OR USAGE
OF TRADE. MELA SHALL HAVE NO RESPONSIBILITY FOR ANY PARTICULAR APPLICATION MADE
OF ANY PRODUCT.
LIMITATION OF LIABILITY. UNDER NO CIRCUMSTANCE SHALL MELA OR ANY OF ITS
- -------------------------
AFFILIATES BE LIABLE TO CENTILLIUM OR ANY OTHER PERSON OR ENTITY FOR ANY
SPECIAL, PUNITIVE, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER BASED
UPON LOST GOODWILL, LOST PROFITS, WORK STOPAGE, PRODUCT FAILURE, IMPAIRMENT OF
OTHER GOODS OR OTHERWISE AND WHETHER ARISING OUT OF BREACH OF WARRANTY, BREACH
OF CONTRACT, NEGLIGENCE, TORT OR OTHERWISE.
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PART VI
INTELLECTUAL PROPERTY INDEMNITY
6.1 Indemnification by Centillium Communications. Inc.. Centillium
--------------------------------------------------
Communications, Inc. agrees to defend MELA and its Affiliates against any third-
party actions or claims arising out of the manufacture, use, sale, offer for
sale, or importation of Products and brought against MELA and its Affiliates to
the extent based upon a claim that Centillium's specifications; technology; or
information made available to MELA, or the product thereof infringes any
worldwide patent, trademark or copyright, trade secret or similar intellectual
property right of any third party, and Centillium Communications, Inc. agrees to
purchase any work-in-process for Products and to pay any settlement mounts or
damages awarded against MELA and its Affiliates (including reasonable attorneys
fees and court costs) to the extent based upon such a claim; provided that MELA
and its Affiliates provides Centillium Communications, Inc. (i) prompt notice
thereof, (ii) reasonable assistance in connection with the defense thereof (at
Centillium Communications, Inc.'s expense excluding MELA and its Affiliates
employee expense), and (iii) full control of the defense and settlement thereof.
Centillium Communications, Inc. shall not settle any such claim in a manner that
has a material adverse effect on MELA and its Affiliates without MELA and its
Affiliates prior written consent. Centillium Communications, Inc. agrees to keep
MELA and its Affiliates apprised of the progress of any action or claims covered
by this Section 6.1. Notwithstanding the foregoing, Centillium Communications,
Inc.'s obligation to indemnify MELA and its Affiliates under this Section 6.1
shall not apply to any actions or claims described in Section 6.2 below.
6.2 Indemnification by MELA.
-----------------------
(a) MELA agrees to defend Centillium Communications, Inc. and/or its
Associated Companies against any third-party actions or claims arising out of
the manufacture, use, sale, offer for sale, or importation of Products and
brought against Centillium Communications, Inc. and/or its Associated Companies
to the extent based upon a claim that the use of any Process used by MELA or any
technology or information provided by MELA under this Agreement infringes or
misappropriates (directly or indirectly, such as, without limitation, through
the sale or importation of a wafer manufactured by any such Process) any
worldwide patent, copyright, trade secret or other intellectual property right
of any third party, and agrees to pay any settlement amounts or damages awarded
against Centillium Communications, Inc. and/or its Associated Companies
(including reasonable attorneys fees and court costs) to the extent based upon
such a claim; provided that Centillium Communications, Inc. and/or its
Associated Companies provides MELA (i) reasonably prompt notice thereof, (ii)
reasonable assistance in connection with the defense thereof (at MELA's expense
excluding Centillium Communications, Inc. and/or Associated Company employee
expense), and (iii) allows MELA full control of the defense and settlement
thereof. MELA shall not settle any such claim in a manner that has a material
adverse effect on Centillium Communications, Inc. without Centillium
Communications, Inc.'s prior written consent. MELA agrees to keep Centillium
apprised of the progress of any action covered by this Section 6.2.
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(b) MELA shall at all times have the right to: (i) obtain appropriate
licenses to, or (ii) modify, the Process provided that the resulting Product
complies with the specifications set forth in Exhibit F and subject to
Centillium Communications, Inc.'s right to approve such changes in advance, such
pre-approval not to be unreasonably withheld.
(c) Exclusions. MELA shall not be obligated to indemnify and hold
----------
harmless Centillium Communications, Inc. where the infringement is caused by:
(i) the use of Products by Centillium Communications, Inc. in combination with
other circuits components, components, devices or products if both the
infringement would not have occurred but for such combination and could have
been avoided by a different commercially viable combination and such combination
is not reasonably necessary to use the Product for its intended purpose; (ii)
use of the Products by Centillium Communications, Inc. and/or its Associated
Companies in applications or environments for which Products were not designed;
or (iii) modifications to the Products by Centillium Communications, Inc. and/or
is Associated Companies if such infringement would have been avoided absent such
modifications, unless such modifications were authorized by MELA.
6.3 Entire Liability. THE FOREGOING STATES EACH PARTY'S ENTIRE LIABILITY
----------------
AND OBLIGATION (EXPRESS, STATUTORY, IMPLIED OR OTHERWISE) UNDER THIS AGREEMENT
WITH RESPECT TO INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY. IN NO EVENT
SHALL MELA'S LIABILITY PURSUANT TO SECTION 6.2 ARISING OUT OF ANY INFRINGEMENT
CLAIM EXCEED THE AMOUNT PAID OR PAYABLE BY CENTILLIUM COMMUNICATIONS, INC.
HEREUNDER FOR THE PRODUCTS THAT ARE THE SUBJECT OF SUCH CLAIM.
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PART VII
GENERAL PROVISIONS
7.1 Confidentiality. (5 years)
(a) Confidential Information. "Confidential Information" means any
------------------------
technical data, trade secret, know-how, or other information disclosed by any
party (including the Associated Companies) hereunder, either directly or
indirectly, in writing, orally, by drawing or by inspections, and which shall be
marked by the disclosing party as "Confidential" or "Proprietary". If such
information is disclosed orally, through demonstration or by inspection, in
order to be deemed Confidential Information, it must be specifically designated
as being of a confidential nature at the time of disclosure and confirmed in
writing to be received by the receiving party within ten (10) days of such
disclosure.
(b) Exclusions. Notwithstanding the foregoing, Confidential
Information shall not include information which:
is known to the receiving party at the time of disclosure or becomes known
to the receiving party without breach of this Agreement;
is or becomes publicly known through no wrongful act of the receiving party
or any affiliate of the receiving party;
is rightfully received from a third party (excluding the Associated
Companies) without restriction on disclosure;
is independently developed by the receiving party or any of its affiliates
by persons who had no access to the information;
is furnished to any third party by the disclosing party without restriction
on its disclosure; or
is approved for release upon a prior written consent of the disclosing
party.
(c) Compelled Disclosure. Notwithstanding the foregoing, a receiving
--------------------
party may disclose Confidential Information if such Confidential Information is
disclosed pursuant to judicial order, requirement of a governmental agency or by
operation of law; provided, however, that the receiving party shall provide
prior notice to the disclosing party and thereafter use reasonable commercial
efforts to assist the disclosing party in preventing or controlling such
compelled disclosure.
(d) Nondisclosure. The receiving party agrees that it will not
-------------
disclose any Confidential Information to any third party unless that third party
agrees to be bound to the confidentiality obligations stated in this part VII
and will not use Confidential Information of the disclosing party for any
purpose other than for the performance of obligations hereunder during the term
of this Agreement. The receiving party further agrees that Confidential
Information shall remain the sole property of the disclosing party and that it
will take all reasonable precautions to
Page 16 of 30
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CONFIDENTIAL
prevent any unauthorized disclosure of Confidential information by its employees
and independent contractors. No license shall be granted by the disclosing party
to the receiving party with respect to Confidential Information disclosed
hereunder unless otherwise expressly provided herein. Each party will disclose
the other's Confidential Information only to those of its employees and
personnel of Affiliates that have a need to know and who are informed that such
information is confidential.
(e) Return of Confidential Information. After expiration or
----------------------------------
termination of this Agreement upon the request of the disclosing party the
receiving party will promptly return all Confidential Information furnished
hereunder and all copies thereof, and the receiving party will certify that al
such confidential information has been returned or destroyed.
(f) Publicity. The parties agree that all publicity and public
---------
announcements concerning the formation and existence of this Agreement shall be
jointly planned and coordinated by and among the parties. Neither party shall
disclose any of the provisions of this Agreement, the existence of this
Agreement, nor that the parties are doing business with one another to any third
party without the prior written consent of the other party. Centillium
Communications, Inc. will be responsible for all communications with Centillium
Communications, Inc.'s customers concerning the subject matter hereof, and MELA
agrees to forward to Centillium Communications, Inc. any communications it
receives from Centillium Communications, Inc.'s customers. Notwithstanding the
foregoing, any party may disclose information concerning this Agreement as
required by the rules, orders, regulations, subpoenas or directives of a court,
government or governmental agency, after giving prior notice to the other
parties and either party may disclose this Agreement to its attorneys,
accountants or like consultants that have a need to know or to potential
investors or potential acquiring companies.
(g) Remedy for Breach of Confidentiality. If a party breaches any of
------------------------------------
its obligations with respect to confidentiality and unauthorized use of
Confidential Information hereunder, the non-breaching party shall be entitled to
equitable relief to protect its interest therein, including but not limited to
injunctive relief, as well as money damages.
7.2 Term and Termination. This Agreement shall remain in force for five (5)
--------------------
years from the time the first product is released to production by Centillium
Communications, inc. unless it is terminated earlier as provided in this
Agreement. At the end of five (5) years, this Agreement will be extended for
another one (1) year under the same terms and conditions provided herein unless
either party gives notice of termination twelve (12) months prior to the
expiration date. Notwithstanding the foregoing, all existing orders and the
provisions of Part V, VI, and Section 7.6 of Part VII (Export Controls) shall
survive any termination or expiration of this Agreement. The obligations of
confidentiality under Article 7.1 of Part VII shall last during the specific
period set forth in Article 7.1 of Part VII.
(a) Subject to Section 7.2(b), either party may terminate this
Agreement with immediate effect, at its sole discretion, upon giving written
notice to the other party, in case:
the other party, defaults in the performance of any material obligation
hereunder, and if any such default is not corrected within ninety (90) days
after the defaulting party receives written notice of such default from the non-
defaulting party,
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the business of the other party as a commercial enterprise ceases, or
The other party files a petition in bankruptcy, or is adjudicated bankrupt,
or makes a general assignment for the benefit of creditors, or becomes
insolvent, or is otherwise unable to meet its business obligations for a period
of three (3) consecutive months.
(b) In the event that MELA terminates this Agreement pursuant to
Section 7.2(a) above, MELA agrees to upon request negotiate in good faith with
Centillium customers for the continued supply of Wafers. Centillium
Communications, Inc. agrees to provide MELA with a list of such customers
reasonably prior to the occurrence of the events specified in Section 7.2(a)
above.
7.3 Force Majeure. The parties shall not be liable to one another for
-------------
failure to perform any part of this Agreement except for any payment obligation
when such failure is due to fire, flood, strikes, labor troubles or other
industrial disturbances, inevitable accidents, war (declared or undeclared),
embargoes, blockades, legal restrictions, governmental regulations or orders,
riots, insurrections, year 2000 computer problems or any cause beyond the
control of such party. However, the party so prevented from performance shall
use commercially reasonable efforts to resume performance, and the parties shall
proceed under this Agreement when the causes of such nonperformance have ceased
or have been eliminated.
7.4 Assignment. The parties shall not assign or transfer this Agreement, in
----------
whole or in part, or any right or obligation hereunder to any third party
without the prior written consent of the other party, provided that either party
shall have the right to assign this Agreement to an entity that acquires all or
substantially all of its assets, without the consent of the other party.
7.5 Governing Law; Disputes.
------------------------
(a) Except as hereinafter provided, all disputes or controversies
arising out of or in any manner relating to this Agreement which the parties do
not resolve in good faith within ten days after either party notifies the other
of its desire to arbitrate such disputes or controversies shall be settled by
arbitration by a single arbitrator in accordance with the then standard
prevailing commercial rules, as modified or supplemented by this article, of the
American Arbitration Association("AAA"). The arbitration shall be held in Santa
Clara County, California. The arbitration award shall be in writing and shall
specify the factual and legal bases of such award. The arbitration award shall
be final and binding, and a judgment consistent therewith may be entered by any
court of competent jurisdiction. The parties agree that the arbitration award
shall be treated confidentially, and the parties shall not, except as otherwise
required by law or court or, disclose the arbitration award to any third party,
excluding personnel I their affiliated companies and their attorneys and
accountants with a need to know, provided that such recipients agree to be bound
by the same restrictions as are contained in this Agreement. The arbitrator
shall not have the power to render an award of punitive damages. To the extent
of any conflict, this article shall supersede and control AAA rules.
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(b) Nothing in this article shall be construed to preclude or in any
way prohibit either party from: (1) seeking any provisional remedy, such as an
injunction or a temporary, restraining order; or (2) instituting or prosecuting
to judgment any lawsuit in any court of competent jurisdiction to collect any
money due.
(c) Except as provided in this subsection, neither party shall have
the right to take depositions or obtain discovery of documents or other
information. After the appointment of the arbitrator, the parties shall agree on
(1) a reasonable number of and schedule for depositions which the parties may
take and (2) a reasonable scope and schedule for the production of documents or
other information which is relevant to the subject matter of the arbitration. If
the parties cannot reach agreement on the number of depositions, the scope, of
production of documents or other information and the schedule therefor, the
arbitrator shall make such determination(s). All discovery shall be completed no
later than thirty (30) days prior to the arbitration hearing. The arbitrator
shall have the power to enforce any discovery agreed upon by the parties or
other wise required to be taken sanctions and penalties as can be or may be
imposed in like circumstance in a civil actions by a California Superior Court,
except the power to order the arrest or imprisonment of a person.
(d) No later than thirty (30) days prior to the arbitration hearing,
each party shall produce to the other party and the arbitrator lists of the
witnesses, documents and other information which such party intends to use at
the arbitration hearing.
7.6 Export Controls. MELA and Centillium Communications, Inc. acknowledge
---------------
that they are each subject to regulation by agencies of the U.S. and "Country of
Origin" Governments, including the U.S. Department of Commerce, which prohibit
export or diversion of certain products and technology to certain countries. Any
and all obligations of the parties to provide technical information, technical
assistance, any media in which any of the foregoing is contained, training and
related technical data (collectively, "Data") shall be subject in all respect to
such United States and "California" laws and regulation as shall from time to
time govern the license and delivery of technology and products abroad by
persons subject to the jurisdiction of the United States, including the Export
Administration Act of 1979, as amended, any successor legislation, and the
Export Administration Regulations issued by the Department of Commerce,
International Trade Administration, Bureau of Export Administration.
Without in any way limiting the provisions of this Agreement, the parties
agree that unless prior written authorization is obtained from the Bureau of
Export Administration or unless the Export Administration Regulations explicitly
permit the reexport without such written authorization, neither party will
export, reexport, or transship, directly or indirectly, the Products or any
technical data disclosed or provided to MELA, or the direct product of such
technical data, to country groups Q, S, W, Y, or Z (as defined in the Export
Administration Regulations and which currently consist of Albania, Bulgaria,
Cambodia, Cuba, the Czech Republic, Estonia, Laos, Latvia, Libya, Lithuania,
Mongolian People's Republic, North Korea, Poland, Romania, the geographic area
of the former Union of Soviet Socialist Republics, the Slovak Republic and
Vietnam, or to the People's Republic of China (excluding Taiwan), Haiti, Iran,
Iraq, Syria, Yugoslavia (Serbia and Montenegro), or to any
Page 19 of 30
<PAGE>
CONFIDENTIAL
other country, as to which the U.S. Governments have placed an embargo against
the shipment of products, which is in effect during the term of this Agreement.
7.7 Notice. Any notice required or permitted to be given under this
------
Agreement shall be delivered (i) by hand, (ii) by registered or certified mail,
postage prepaid, return receipt requested, to the address of the other party
first set forth above, or to such other address as a party may designated by
written notice in accordance with this Section 7.7 by overnight courier, or
(iii) by electronic transmission with conforming letter mailed under the
conditions described in (ii). Notice so given shall be deemed effective when
received, or if not received by reason of fault of addressee, when delivered.
If to MELA, to:
MELA
Product Manager
Mitsubishi Electronics America
1050 East Arques Ave
Sunnyvale, CA 94086-4601
If to Centillium Communications, Inc., to:
Vice President of Operations and Manufacturing
Centillium Communications, Inc.
46531 Fremont Blvd
California, 94538
7.8 Relationship of Parties. The relationship between Centillium
-----------------------
Communications, Inc. and MELA under this Agreement is that of independent
contractors and neither shall be, nor represent itself to be, the joint
venturer, franchiser, franchisee, partner, broker, employee, servant agent, or
representative of the other for any purpose whatsoever. No party is granted any
right or authority to assume or create any obligation or responsibility, express
or implied, on behalf of, or in the name of, another party or to bind another in
any matter or thing whatsoever.
7.9 Waiver. Should any of the parties fail to exercise or enforce any
------
provision of this Agreement or to waive any rights in respect thereto, such
waiver or failure shall not be construed as constituting a continuing waiver or
a waiver of any other right.
7.10 Severability. In the event that any provision or provisions of this
------------
Agreement shall be held to be unenforceable, the parties shall renegotiate those
provisions in good faith to be valid, enforceable substitute provisions which
provisions shall reflect as closely as possible the intent of the original
provisions of this Agreement. If the parties fail to negotiate a substitute
provision, this Agreement will continue in full force and effect without said.
7.11 Entire Agreement. This Agreement, including the Exhibits referred to
----------------
herein, contains the entire understanding of the parties, and supersedes any
prior agreement between or among the parties with respect to its subject matter.
In case of any conflicts between this Agreement
Page 20 of 30
<PAGE>
CONFIDENTIAL
and any purchase orders, acceptances, correspondence, memorandum, listing sheets
and other documents forming part of any order for Products, this Agreement shall
govern. This Agreement shall not be amended or modified except by written
instrument signed by the duty authorized representatives of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
by their duly authorized representatives or officers, effective as of the
Effective Date.
Mitsubishi Electronics America, Inc. Centillium Communications, Inc.
By: /s/ Dwain R. Aidala By: /s/ W F Mackenzie
----------------------- -----------------------------
Name: Dwain Aidala Name: William F Mackenzie
--------------------- ---------------------------
Title: Sr. VP & GM. Systems Integration Title: VP Operations and Mnfg.
--------------------------------- --------------------------
Division, Electronics Device Group Services
- ---------------------------------- --------
Page 21 of 30
<PAGE>
CONFIDENTIAL
EXHIBITS
--------
A - Initial Process(es)
B - Production Information
C - Acceptance Criteria
D - Acceptable Yields
E - Yield Scrap Criteria
F - Specifications
G - E-test parameters
H - Work in Progress (WIP) reporting format
Page 22 of 30
<PAGE>
CONFIDENTIAL
EXHIBIT A
---------
INITIAL PROCESS (ES)
MELCO STANDARD "C-Si-J8" as modified for Centillium Communications, Inc.
(Vtn=0.5/V, Vtp=-0.70/V, Idsn=570A/um, Idsp=260mA/um).
Page 23 of 30
<PAGE>
CONFIDENTIAL
EXHIBIT B
---------
PRODUCTION INFORMATION
Fabrication Cycle Times
- -----------------------
Prototype: 32 days Cycle Time from mask generation to Centillium
Communications, Inc. provided Centillium Communications, Inc.
releases design database to MELCO 3 days before tape out. 25
days from Metal 1 to Centillium Communications, Inc.
Volume: 77 days at Centillium Communications, Inc. dock after P.O.
acceptance 30 days from Metal 1 to Centillium Communications,
Inc.(pre-qualification)
Wafers Per Lot
- --------------
Prototype: 12
Volume: 25
Page 24 of 30
<PAGE>
CONFIDENTIAL
EXHIBIT C
---------
Acceptance Criteria: Wafers
1. 5 wafers out of a lot
2. 5 sites per wafer
3. If 5 out of 5 sites pass electrical test (ET) specification pass on
product
4. If 4 out of 5 sites pass electrical test specification choose one
more wafer.
5. If this passes electrical tests pass on lot
6. If this fails 100% test lot - inform Centillium after
disposition
7. If 3 or less sites pass electrical specifications, 100% test lot -
inform Centillium after disposition
8. No more than 3 probe marks on any I/O pad which is not on test
structure
9. No visual defects seen under 50x magnification which covers 20% of
wafer
Page 25 of 30
<PAGE>
CONFIDENTIAL
EXHIBIT D
---------
ACCEPTABLE YIELDS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Time Ave. Lot Yield Allowance Range (+/- 20%)
- -------------------------------------------------------------------------------
<S> <C> <C>
CT-L21DC08 60% +/- 20%
- -------------------------------------------------------------------------------
CT-L21DC04 65% +/- 20%
- -------------------------------------------------------------------------------
CT-L21DC01 70% +/- 20%
- -------------------------------------------------------------------------------
CT-L22DT01 Undetermined (85%) +10%/-20%
- -------------------------------------------------------------------------------
</TABLE>
Note: Yield based on first 200 wafers
WAFER COST (US$)
----------------
* 500 wafers $2450
** 500 wafers Not to exceed $2280
MASK COST (US$)
---------------
Masks (NRE), 12 wafers (6 held pre-metals and 6 shipped) and superhot cycle-time
. $150,000 per design
* = less than
** = greater than
Page 26 of 30
<PAGE>
CONFIDENTIAL
EXHIBIT E
YIELD CRITERIA
Scrap Yield 20% of Standard yield in Exhibit D
Page 27 of 30
<PAGE>
CONFIDENTIAL
EXHIBIT F
SPECIFICATIONS
SPC monitoring of wafer fabrication site CSP-OPQR-16
Reliability process monitoring program CSP-OPQR-17
Packing and Transportation of wafers CSP-OPSH-1
Visual wafer inspection criteria CSP-OPQR-18
Page 28 of 30
<PAGE>
CONFIDENTIAL
EXHIBIT G
E-TEST PROCESS MONITORS (Minimum)
Threshold Voltages (3.3 & 2.5V process) - Vthn/Vthp
Drive Currents (3.3 & 2.5V process)- Idsn/Idsp
Ring Oscillator Frequency
Resistance - Metal, Via, Contacts, silicides
Breakdown voltages
Page 29 of 30
<PAGE>
CONFIDENTIAL
EXHIBIT H
---------
WORK IN PROCESS (WIP) REPORTING FORMAT (MINIMUM DATA SET)
MELCO DATA MELA DATA
------------ ---------
1. MELCO fabrication location 1. Requested Ship Date
2. Date and time file sent (PST) 2. Forecast Ship date
3. Customer or MELCO Devices Number 3. Ship confirmation date
4. Process Stage (10 defined locations 5 at metals 5 pre-metals)
5. Lot number
6. Wafer quantity into process stage
- ------------------------------------------------------------------------
Centillium Mitsubishi Quantity Due date to Centillium
Part # Part # Centillium request Dock
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
- ------------------------------------------------------------------
Lot # # of Wafers Wafer start WIP Wafer
Date location Completion
date
- ------------------------------------------------------------------
- ------------------------------------------------------------------
- -------- ---------------------------------------------------------
Shaded areas are provided by MELA
Page 30 of 30
<PAGE>
EXHIBIT 10.20
AGREEMENT
This Agreement made and entered into this 19th day of March, 1998, by and
between Centillium Technology Corporation, a corporation duly organized and
existing under the laws of California and having its registered office at 46824
Lakeview Blvd., Fremont, California 94538, USA ("Centillium") and Mitsubishi
Corporation, a corporation duly organized and existing under the laws of Japan
and having its registered head office at 6-3, Marunouchi 2-chome, Chiyoda-ku,
Tokyo, Japan ("MC"):
Whereas Centillium is engaged in developing semiconductors to be used for
digital subscriber line system which enable subscribers enjoy higher speed data
transmission over existing metallic telephone lines ("x-DSL Technology"),
Whereas, MC find Nippon Telegram and Telephone Co., Ltd., a company incorporated
under the laws of Japan having its principal office at 19-2 Nishi-Shinjuku 3-
chome, Shinjuku-ku, Tokyo, Japan ("NTT") is interested in receiving consultation
service of obtaining technical information including (1) simulation data of
several x-DSL Technologies under the circumstances of Japanese unique
environment including public telecommunication system and telecommunication
cable structure and distribution and (2) appropriate transmission interface
specification to be used for such unique environment,
Whereas, MC is interested in providing such technical information with NTT by
executing a contract separately ("NTT/MC Contract", an English translation of
NTT/MC Contract is incorporated herein as Attachment 1), and is interested in
making Centillium engaged in gathering and summarizing such technical
information, which shall be used as the deliverables of the NTT/MC Contract.
Now therefore, Centillium agrees to provide MC with technical services for
obtaining technical information including (1) simulation data of several x-DSL
Technologies under the circumstances of Japanese unique environment including
public telecommunication system and telecommunication cable structure and
distribution and (2) appropriate transmission interface specification to be used
for such unique environment ("Technical Services"), substantially in accordance
with Centillium's proposal ("Proposal"), which is incorporated herein as
Attachment 2, for MC's providing the information resulted from such Technical
Services with NTT, subject to the following terms and conditions.
1. TERM:
This Agreement will continue until the final result presentation to NTT,
defined by item VI. of the Proposal incorporated herein, which is being
expected to be held by
<PAGE>
the end of April, 1998.
2. PAYMENT:
In consideration of the Proposal incorporated herein, MC agrees to pay
Centillium the fixed amount of Two Hundred and Two Thousand (202,000) US
dollars, upon the presentation of invoices as follows: One hundred and One
Thousand (101,000) US dollars upon execution of the Contract and One
hundred and One Thousand (101,000) US dollars upon the final result
presentation to NTT as defined in item VI of the Proposal.
All payments to Centillium by MC shall be made after MC's receipt of
payments to be made by NTT by following payment schedule defined in the
NTT/MC Contract incorporated herein; telegraphic bank transfer within 45
days after (1) execution of the NTT/MC Contract and (2) NTT's confirmation
of MC's completion of its obligation defined in item VI. of the Proposal.
3. CENTILLIUM'S OBLIGATION:
a. Centillium agrees to render services defined in the Proposal by
providing Deliverables defined in the item III. of the Proposal with MC
for its completion of their consultation defined in the NTT/MC Contract
incorporated herein.
b. Centillium agrees to submit a copy of written report in around a
month later after execution of this Agreement to inform MC of
Centillium's progress of its services as an interim report ("Interim
Report"), which will be presented to NTT by MC, as defined in item VI.
of the Proposal incorporated herein.
c. Centillium agrees to complete submit a copy of written report which
contain data and information defined in item III. 1.-3. in the Proposal
("Final Report"), and simulation software program in floppy disk(s)
("Software") to MC for its completing its obligation defined in the
NTT/MC Contract by the end of April, 1998.
d. Centillium agrees to make its staff available for the meeting to be held
at NTT headquarter in Tokyo in around the end of April for verbal
explanation of the report above and responding any questions to be
raised by NTT during the meeting.
4. DELIVERABLES AND USE OF RESULTS BY MC:
a. Centillium agrees that MC can pass the Interim Report, Final Report and
Software to NTT as all or a part of deliverables defined in the NTT/MC
Contract.
<PAGE>
b. Centillium agrees that the copyright of the both Interim Report and
Final Report shall belong to NTT upon completion of our payment defined
in Article 2 of this Agreement. Centillium, however, have the same
rights on idea, know-how and data which are base of the Interim Report
and Final Report.
c. Centillium agrees that it shall not have the right to modify the Interim
Report and Final Report after transfer of the copyright.
d. The copyright of the software simulation program to be delivered to NTT
shall belong to Centillium. NTT, however, shall be able to have a
license to use the software for its own use only.
e. Centillium shall hold MC harmless from any claim or dispute which may
arise from or in connection with infringement of any patent, utility
model, design, trademark or any other industrial property rights or
copyrights in connection with the Deliverables as defined in the
Proposal incorporated herein, Centillium shall indemnify, reimburse and
compensate MC for all losses and damages including costs, expenses and
charges for defensive actions by MC, if Centillium should incur them as
a result of such claim or dispute.
f. Centillium agrees no claim, requests (such as license fee and any
restriction of use of the name Centillium) and legal actions shall be
made to MC and NTT about their use and handling of the Deliverables
defined in the Proposal.
g. Centillium agrees that execution of this Agreement shall not mean any
commitment and/or obligation for purchasing any products to be produced
by Centillium by MC and NTT as well.
5. EARLY TERMINATION:
MC shall have the right to terminate this contract upon thirty (30) days'
prior written notice. In the event of this early termination, Centillium
agrees to provide MC with all reports, materials, or other deliverable
items available as of the date of termination. If MC has failed to pay any
invoice submitted by Centillium within thirty (30) days of receipt,
Centillium may terminate this Agreement.
6. SETTLEMENT OF DISPUTE:
Any controversy or claim arising out of or relating to this Agreement, or
the breach thereof, shall be settled by arbitration in New York, N.Y.,
U.S.A. in accordance with the Commercial Arbitration Rules of the American
Arbitration Association, and judgement upon the award rendered by the
Arbitrator(s) may be entered in any Court having jurisdiction thereof.
<PAGE>
7. GENERAL:
This Agreement, and Proposal incorporated herein, represent the entire
Agreement of the parties, and may be modified or amended only by mutual
Agreement in writing. This Agreement shall be governed by and is to be
construed in accordance with the laws of Japan.
Centillium Technology Corporation
By: /s/ Faraj Aalaei
---------------------------
Faraj Aalaei
Title: Vice President
Date: 19 March, 1998
Mitsubishi Corporation
By: /s/ Mitsuo Miyachi
----------------------------
Mitsuo Miyachi
Title: Manager,
Semiconductor Business Unit
Information Systems and Services Division B
Date: 19 March, 1998
<PAGE>
Attachment 1.
Contract for Consultation (English translation of Japanese NTT/MC contract)
NTT and MC have agreed following terms and conditions about MC's consultation on
transmission characteristics of xDSL.
(contract)
Article 1. NTT asks MC's consultation about theoretical compatibility of xDSL
technology within an environment of Japanese loop (ISDN) and MC accepts such
request.
(period)
Article 2. The period of this consultation is:
from March 19, 1998
until May 29, 1998
(consultation)
Article 3. The consultation to be made by MC to NTT shall be defined by the
proposal dated 28/Jan/98 which was presented to NTT by MC ("Proposal"). The
delivery terms, quantity and specification shall be followed by the Proposal.
(2) The Deliverables shall be a written report which contain data and
information defined in III.1-3 in the Proposal ("Report"), simulation software
programs as defined in III.4. of the Proposal.
(3) if there are any discrepancy between the Proposal and this Contract, this
Contract should be respected than the Proposal.
(fee)
Article 4. NTT agreed to pay (Yen)28,500,000- as a fee for this consultation
plus 5% of consumption tax to MC.
2. The cost for travel and accommodation for pursuing this consultation shall be
not be paid in addition to above cost.
(transfer of rights)
Article 5. It is not allowed for MC to transfer its rights and obligations to be
raised by this contract to any third party. This article shall, however, not be
applied if MC obtain written
<PAGE>
acceptance from NTT.
(sub-contracting)
Article 6. In case MC sub-contract either all or a part of this consultation to
any third party, MC shall have to obtain NTT's acceptance beforehand.
(2) NTT shall be able to check whether or not above subcontracting shall be
acceptable for NTT.
(definition of completion)
Article 7. NTT shall check the contents of the report whether or not the
contents meet specification defined in the Proposal within 10 days upon their
receipt of it, shall inform MC of the result of their checking.
(2) If it is found that the contents do not meet the specification defined in
the Proposal, MC shall have to re-report the contents to meet the specification
by the timing NTT indicate. The timing of such checking shall be counted from
the date NTT receive the modified version.
(3) The date for completion shall be defined as the timing of passing such
checking as defined in (1) and (2) above.
(modification)
Article 8 If NTT find some discrepancy between the contents of the Report and
requirements (definition of Deliverables) in the Proposal within 30 days after
receipt of the Report, MC shall have to modify the Report to meet such
requirements with free of charge.
(Payment)
Article 9 NTT shall pay a fee within 45 days ("Time for Payment") upon receipt
of invoices issued by MC.
(2) If issuing invoices by MC are delayed for over 15 days from a date of
completion, days after 15 days until NTT's receipt of invoices shall not be
counted within the Time for Payment.
(3) Payment shall be made by telegraphic transfer to the account of the bank MC
indicated.
(partial payment)
Article 10. NTT agree to pay 50% of the fee defined in Article 4 together with
5%
<PAGE>
consumption tax to MC at the execution of this Agreement.
(2) NTT agree that they shall make payment to MC within 45 days after their
receipt of invoice to be issued to MC
(3) This partial payment will be deducted from the fee defined in Article 4 and
will be paid to MC by following Article 9.
(interest for Delay of Payment)
Article 11 If NTT do not make payment by the Time of Payment due to NTT's
mistake, MC shall be able to request NTT to pay interests at 8.25% per year.
(Copyright)
Article 12 The copyright of the Report belongs to NTT upon completion of
Payment. MC or the third party defined in the Article 5 in this Contract,
however, have the same rights on idea, know-how and data which are base of the
Report.
2. MC or the third party defined in the Article 6 in this Contract shall not
have the right to modify the Report.
3. The copy right of the Software simulation program to be delivered to NTT
shall belong to the third party which develop it. NTT, however, shall be able to
have a license to use the software for their own use only.
4. MC shall hold NTT harmless from any claim or dispute which may arise from or
in connection with infringement of any patent, utility model, design, trademark
or any other industrial property rights or copyrights in connection with the
Deliverables. MC shall indemnify, reimburse and compensate NTT for all losses
and damages including costs, expenses and charges for defensive actions by NTT,
if MC should incur them as a result of such claim or dispute.
(Information to be given by NTT)
Article 13 NTT shall provide MC with necessary information which, shall be
fundamentals for MC's pursuing this consultation.
(2) MC shall handle such information in good faith as administrator of such
information.
(3) Such information shall be returned to NTT by MC if such information is no
longer needed or NTT request so to MC.
(Confidentiality)
Article 14 Any operational/business information of NTT known by MC shall not be
disclosed to any other party or used for another purpose than that of this
Contract. This
<PAGE>
clause shall be effective after completion of this Contract.
(Compensation for Damage)
Article 15 If NTT or other party get damage by MC's pursuing of this
Consultation, MC shall compensate up to the amount of this Contract.
(Delay of Performing MC's Obligation)
Article 16 If some delay of delivery of deliverables can be expected by force
majeure, directly or indirectly, MC shall inform NTT of such delay together with
information of expecting completion date and receive advise from NTT.
(2) If MC expect delay of delivery due to its responsibility, MC shall be able
to ask extend such due date to NTT with clarifying reasons in written form, NTT
shall be able to accept such delay with some amount of penalty.
(Termination)
Article 17 NTT shall be able to terminate all or a part of Contract without any
notification in case below;
(a) if MC do not perform all or a part of its obligation without understandable
reasons.
(b) if there is no prospectus for MC's completion of consultation due to MC's
fault,
(c) if MC is bankrupt, or forced to continue its operation,
(d) if MC is ordered to stop its operation by Governmental body,
(e) if MC breach the Contract other than above.
(2) MC shall have obligation for compensating such damage to NTT
(Governing Law)
Article 18 This Contract shall be governed by the laws of Japan.
(others)
Article 19 NTT and MC shall discuss and settle anything which are not defined
in this Contract with good faith each other.
<PAGE>
Attachment 2.
- -------------
Consulting Proposal
To
NTT
Prepared by Mitsubishi Corporation and Centillium Technology
1/28/97
Proprietary and Confidential
<PAGE>
Mitsubishi Corporation and Centillium Technology Corporation are pleased to
present a Consulting proposal for the analysis of the theoretical performance of
various DSL technologies over Japanese loop plant in presence of other
Interferences.
I. NTT's Goals of the Proposal
- -------------------------------
Through this analysis NTT wishes to identify the capability of the DSL
technologies to accomplish the following transmission solutions:
1. Symmetrical solution which can provide bit rates of around 500Kb/s with very
high network coverage.
2. Asymmetrical solution with up to 6Mb/s downstream and up to 64Kb/s upstream.
In this case the network coverage is expected to be lower.
II. Scope of consultation
- -------------------------
The consultation will consist of the following steps:
1. Define and build mathematical models for the various loop configurations
identified by NTT.
2. Define and build mathematical models for Interference sources such as TCM-
ISDN.
3. Theoretical performance simulations for ADSL DMT based on the standard
T1E1.413 recommendations. These performance simulations will be performed as
stated in item 1 and item 2 of the "Goals" above.
4. Theoretical performance simulation for Centillium's UDSL(TM) solution as
proposed to the U.S. market. These performance simulations will be performed
as stated in item 1 of the "Goals" above.
UDSL(TM) is the registered trademark of Centillium Technology. UDSL(TM) is
the Universal DSL solution that has been proposed by Centillium to the
T1E1.4
Proprietary and Confidential
<PAGE>
Committee and ITU-T for consideration as part of G Lite standard. UDSL(TM)
is a low power, low cost solution providing symmetric or asymmetric data
rates of about 786Kbs over existing copper lines.
5. Theoretical performance simulation for Centillium's TCM-UDSL(TM). These
performance simulations will be performed as stated in item 1 of the
"Goals" above.
6. Theoretical performance simulations for ADSL-CAP. These performance
simulations will be stated in item 1 and item 2 of the "Goals" above.
7. Sensitivity Analysis of the Gauge of Copper Wires used to ADSL-DMT and
UDSL.
9. Sensitivity Analysis of Bridge Taps to the ADSL DMT and UDSL.
III. Deliverables
- ------------------
1. As a result of the above work statement, Centillium shall deliver the
result of the investigation to NTT for each of the above cases (item 3, 4,
5, 6, 7, 8 and 9 above) in the following format.
A.) For performance calculations the following conditions are assumed:
- No Bridge Taps are used
- Copper insulation type is paper
- 0.4mm Gauge wire is used
- Three TCM-ISDN disturbers cases are assumed; 0, 20, and 49
Proprietary and Confidential
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Zero ISDN 20 ISDN 49 ISDN
Disturbers Disturbers Disturbers
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADSL-DMT, 64Kb Reach vs Bit Rate Reach vs Bit Rate Reach vs Bit Rate
Upstream
- --------------------------------------------------------------------------------------------
ADSL DMT Reach vs Bit Rate Reach vs Bit Rate Reach vs Bit Rate
- --------------------------------------------------------------------------------------------
UDSL Reach vs Bit Rate Reach vs Bit Rate Reach vs Bit Rate
- --------------------------------------------------------------------------------------------
ADSL-CAP Reach vs Bit Rate Reach vs Bit Rate Reach vs Bit Rate
- --------------------------------------------------------------------------------------------
ADSL-CAP, 64Kb Reach vs Bit Rate Reach vs Bit Rate Reach vs Bit Rate
Upstream
- --------------------------------------------------------------------------------------------
TCM-UDSL Reach vs Bit Rate Reach vs Bit Rate Reach vs Bit Rate
- --------------------------------------------------------------------------------------------
</TABLE>
B.) For the sensitivity analysis to the copper insulation materials, the
following conditions will be fixed:
- 20 ISDN disturbers
- Average length (80% coverage ration)
- 0.4mm Gauge
- No Bridge Taps
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Copper Insulation Used ADSL-DMT UDSL
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Paper Achievable Bit Rate Achievable Bit Rate
- ------------------------------------------------------------------------------------------
Paper + Plastic Achievable Bit Rate Achievable Bit Rate
- ------------------------------------------------------------------------------------------
</TABLE>
C.) For the sensitivity analysis to the Copper Gauge, the following
conditions will be fixed:
- 20 ISDN disturbers
- Average length (80% coverage ration)
- Paper Insulation
- No Bridge Taps
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Copper Gauge ADSL-DMT UDSL
- ------------------------------------------------------------------------------------------
<S> <C> <C>
0.4mm Achievable Bit Rate Achievable Bit Rate
- ------------------------------------------------------------------------------------------
0.65mm Achievable Bit Rate Achievable Bit Rate
- ------------------------------------------------------------------------------------------
</TABLE>
D.) For the sensitivity analysis to the Bridge Taps, the following conditions
will be
Proprietary and Confidential
<PAGE>
fixed:
- 20 ISDN disturbers
- Average length (80% coverage ration)
- Paper Insulation
- 0.4mm Gauge
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Bridge Taps ADSL-DMT UDSL
- ------------------------------------------------------------------------------------------
<S> <C> <C>
No Bridge Taps Achievable Bit Rate Achievable Bit Rate
- ------------------------------------------------------------------------------------------
One Bridge Tap Achievable Bit Rate Achievable Bit Rate
- ------------------------------------------------------------------------------------------
</TABLE>
2. For the case of UDSL(TM), Centillium shall provide NTT with an Interface
specification for the proposed UDSL(TM) system. This Interface Specification
shall focus on the system level transmission characteristics. An outline of
the Interface specification is shown in the attachment.
3. Based on the result of the above analysis, if all of the cases considered
fail to meet performance results stated in the "NTT's Goals of the Proposal"
section of this document. Centillium may provide additional ideas and
recommendations on ways to achieve the desired goals.
4. Centillium shall provide NTT with simulation software program in Object form,
for NTT's own operation of the simulation for studying sensitivities of
several other parameters. The simulation software program, however, shall be
used for NTT internal use only and no third party NTT can use it, and no
documents, such as manuals and/or instructions shall be available.
IV. Disclosure of information to third parties
- -------------------------------------------------
NTT is free to disclose the result of this work which covers information about
transmission capability, bit rates, distance and performance simulation results.
V. Staffing
- ---------------
Proprietary and Confidential
<PAGE>
Centillium Technology Corporation has assigned its most senior members to this
project. The technical part of project shall be headed by Dr. Guozhu Long. Dr.
Long will be assisted by Dr. Jing Dong Lin, Mr. Tony O'Toole, Mr. Bob Cai and
Mr. Sanjay Gupta. Each member will be responsible for a portion of this
specification. The following is the assignment of each team member:
Dr. Long: System Design, Director of Signal Processing department
Dr. Lin: Loop and Interference Characterization, Manager of Signal Processing
department
Tony O'Toole: TC Layer specification, Director of System Engineering
Bob Cai: Layer 2 compatibility, Manager, ATM and Layer 2 solutions
Mr. Sanjay Gupta: Modem Handshaking, training and start up sequence, Staff
Engineer, Signal Processing Department.
The project shall be directly managed by Faraj Aalaei, V.P. of Planning and Mr.
Shahin Hedayat, V.P. of engineering.
VI. Completion date:
- --------------------
The proposed timeline for the project is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Task Responsible Completion Date
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Identify loop configurations NTT 1/M/98
- ------------------------------------------------------------------------------------------
Build loop models and Centillium 2/M/98
Interference models
- ------------------------------------------------------------------------------------------
Interim Review Centillium & NTT 3/M/98
- ------------------------------------------------------------------------------------------
Final results presentation Centillium 4/E/98
to NTT
- ------------------------------------------------------------------------------------------
</TABLE>
1. It is understood that Centillium's obligation for this consultation work will
be completed upon its submitting a copy of written report which contain
information defined in item III. 1. -3. of this proposal, having a meeting
for explaining the report verbally to NTT, and submitting simulation software
program defined in item III. 4. of this proposal.
2. Centillium will submit a copy of written report mentioned in above, with A4
size
Proprietary and Confidential
<PAGE>
like paper in English. Some drawings or chart may be included in the paper.
3. Centillium will make its staff(s) available for the meeting in order to
respond technical questions to be raised by NTT. The meeting will be done by
either or both Japanese or English.
4. Centillium will inform NTT of their progress of work around a month later
after execution of the contract by preparing a written report.
5. The simulation software program will be passed to NTT through floppy disks.
6. Centillium will complete all tasks by 30/Apr/98.
VII. Cost
- ---------
The estimate cost of this activity is US$236,000 and is broken down as below:
Hours per engineer: 236 hours
Total Engineering hours for 5 Engineers: 1,180 hours
Cost per Hour: US$200
Total Cost: US$236,000
Centillium is honored and privileged to work with NTT and as such is flexible in
the amount of payment from NTT.
Proprietary and Confidential
<PAGE>
Attachment 1: Outline for UDSL(TM) Interface Specification
Proprietary and Confidential
<PAGE>
1. General
This section includes Scope, Definition, Objective, Acronyms and References for
the document.
2. Reference Architecture and Functions
This section presents
The reference of the end to end system.
A high level summary of functions by the DSL Transmission System.
3. Transmission Convergence Sub-layer
This section presents the TC sub-layer, including general super frame format and
the format for each rate, Reed Solomon, potential interleaving, etc. The frame
synchronization state machine is also discussed here.
4. Line Coding
This section discusses the line coding of UDSL(TM) system.
5. Operation and Maintenance
This section discusses the OAM&P related issues, including the EOC channel and
protocols carried over the EOC channel. The OAM states, Potential AIS, RDI
messages, Loop back tests, and performance measurement, and error reporting are
also defined in this section.
Proprietary and Confidential
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 9, 2000, in Amendment No. 1 to the
Registration Statement (Form S-1 No. 333-30772) and related Prospectus of
Centillium Communications, Inc.
Our audits also included the financial statement schedule listed in Item
16(b) of Amendment No. 1 to the Registration Statement. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
Ernst & Young LLP
San Jose, California
March 30, 2000
