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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended JULY 27, 1996
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-4187
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AMATI COMMUNICATIONS CORPORATION
(Formerly ICOT Corporation)
(Exact name of registrant as specified in its charter)
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DELAWARE 94-1675494
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2043 SAMARITAN DRIVE, SAN JOSE, CA 95124
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408)
879-2000
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE
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Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
COMMON STOCK, $.20 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K / /
The approximate aggregate market value of the registrant's common stock held
by non-affiliates on October 18, 1996 (based upon the closing sales price of
such stock as reported in the National Market by Nasdaq as of such date) was
$403,085,274.
As of October 18 1996, 17,718,034 shares of Registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of the Proxy Statement to be filed in connection with the
1996 Annual Meeting of Stockholders are incorporated by reference into Part III.
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AMATI COMMUNICATIONS CORPORATION
1996 FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business...................................................1
Item 2. Properties.................................................8
Item 3. Legal Proceedings..........................................9
Item 4. Submission of Matters to a Vote of Security Holders........9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.......................................10
Item 6. Selected Financial Data.....................................10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................11
Item 8. Financial Statements and Supplementary Data.................18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................36
PART III
Item 10. Directors and Executive Officers of the Registrant........37
Item 11. Executive Compensation....................................39
Item 12. Security Ownership of Certain Beneficial Owners and
Management..............................................40
Item 13. Certain Relationships and Related Transactions............40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................41
SIGNATURES...........................................................45
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PART I
ITEM 1. BUSINESS
Incorporated under the laws of the state of Delaware in 1968 as
Microform Data Systems, Inc., the Company changed its name to ICOT
Corporation in 1980. On November 28, 1995, ICOT Corporation, based in San
Jose, California and Amati Communications Corporation ("Old Amati"), a
privately held Mountain View, California based company completed a merger by
which Old Amati became a wholly-owned subsidiary of the Company. Effective
as of the merger, the Company's name was changed to Amati Communications
Corporation, and its common stock began trading on the Nasdaq National Market
under the symbol "AMTX". To accommodate its recent growth and to consolidate
facilities of the merged entities, the Company moved to a new office in
September 1996. The Company's principal offices are now located at 2043
Samaritan Drive, San Jose, California, 95124 and its telephone number is
(408) 879-2000, fax number is (408) 879-2900 and World Wide Web site is at :
http//www.amati.com.
The Company is a leading developer of advanced transmission equipment
utilizing Discrete Multi-tone ("DMT") technology for Asymmetrical Digital
Subscriber Line ("ADSL") and Very high-speed Digital Subscriber Line ("VDSL")
markets. The Company holds DMT and ADSL patents and has entered into
agreements covering its technology, or is in discussions regarding such
agreements, with companies like Motorola, NEC and Nortel.
The Company is also a provider of network connectivity systems for the
internetworking and Original Equipment Manufacturers ("OEM") markets. These
products are used primarily in two applications:
- International Business Machines Corporation ("IBM") compatible
personal computers ("PCs") to IBM mainframe connectivity
applications in Local Area Networks ("LANs").
- Bridge products for interconnecting Token-Ring LANs, Token-Ring and
Ethernet LANs, and Token-Ring LANs over Wide Area Networks ("WANs").
PRODUCTS AND MARKETS
The Company is currently developing products to provide high speed
digital video, voice and data transmission over copper coaxial cable media
utilizing DMT modulation technology. See "Technology" referenced below.
Beginning in 1987, Professor John M. Cioffi, who undertook initial research
on DMT technology, and his graduate students developed the concept of
utilizing DMT technology to transmit large amounts of digital code and
multimedia signals over ordinary telephone lines. This research resulted in
three patents, owned by Stanford University, to which the Company holds an
exclusive worldwide royalty-bearing license.
The Company has developed the DMT technology primarily for ADSL
applications. In 1992, a prototype system was developed with funding from
Northern Telecom to participate in the competition for the American National
Standards Institute ("ANSI") standard for the ADSL transmission
specification. In 1993, Amati's DMT technology was selected by ANSI and, as a
result, is recognized as the United States standard for ADSL transmission.
In cooperation with ANSI, the European Telecommunications Standards Institute
("ETSI") has provided an information annex that makes the appropriate data
rate changes for European ADSL service. The Company believes the award of
the ANSI and ETSI standards will increase the market potential for the
Company's products. Because Amati's DMT technology was selected as the
standard for ADSL, it is required to license such technology on a fair and
reasonable basis to third parties who request it.
ADSL (ASYMMETRICAL DIGITAL SUBSCRIBER LINE)
In the late 1980's, Bellcore, the research entity jointly created and
funded by the seven Regional Bell Operating Companies for the development of
new technologies, developed the parameters for ADSL as a high-quality,
low-cost method for transmitting digital video from the central office of the
local telephone company to a subscriber's home over ordinary copper
twisted-pair wire. The term "asymmetric" refers to the fact that there is a
different data rate in each direction (bi-directional) of the transmission.
The ANSI standard for ADSL sets the data rate at
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approximately 6 Mbps to the subscriber's home and approximately 600 Kbps from
the subscriber's home to the central office over 24 and 26 gauge copper
twisted-pair wire for a distance of at least two miles. The practical
implementation of ADSL products will allow the simultaneous transmission of
video, data and voice over the same copper wire that is currently installed
in most homes in the United States and other developed countries.
ADSL is intended for video dialtone services. The potential demand for
ADSL is being driven primarily by the threat to the telephone companies of
increased competition as a result of deregulation, and their desire to
provide video services utilizing their existing copper wire plant without
having to invest heavily in more expensive access technologies, such as
fiber-optic systems. Telephone companies are currently performing technical
and market trials of various video and multimedia systems. ADSL has the
potential of providing telephone companies with a technology that will enable
them to compete cost-effectively with their main competitors for video
services, the interexchange carriers and cable companies.
There are several access transmission technologies that can deliver
digital services to a subscriber's home. The most effective technology,
laying fiber-optic cable to each home, is not practical as a near-term
solution from both cost and time-to-implement perspectives. Therefore, the
telephone companies are reviewing interim strategies such as ADSL, Hybrid
Fiber Coax ("HFC"), fiber-to-the-curb and certain wireless solutions. The
Company believes ADSL is the most effective technology where homes are widely
dispersed or where the "take rates" of the services are low (which is
expected as new video services are introduced). ADSL provides the additional
advantages of utilizing the existing copper plant, which avoids trenching
streets and subscriber's properties to lay new coaxial or fiber-optic cables.
In addition, ADSL can be deployed easily on a home-by-home basis. However,
ADSL has the disadvantage relative to fiber-to-the-curb and HFC of offering
fewer simultaneous channels, although telephone office switches may be able
to offer a large menu of offerings with ADSL.
In order to implement an ADSL video service, there are a number of key
components in addition to the transmission equipment that must co-exist in a
cost effective manner, including the video content, a digital switch, a video
server, encode/decode equipment and a set-top box in the subscriber's home.
The Company's ability to effectively market ADSL products will depend, among
other factors, on the development and successful marketing of these
components and systems by other suppliers.
The Company's first ADSL product was called Prelude. Prelude was
completed in 1992 and utilized in the various competitions for the ANSI
standard, which was awarded to the Company's DMT technology. This prototype
was developed by engineers with funding by Northern Telecom to prove that a 6
Mbps data rate was possible over copper wire and to participate in the ANSI
standards competition. Prelude was produced using discrete (off-the-shelf)
components. Prelude has been utilized by telephone companies in 15 countries
throughout the world to evaluate the potential of ADSL, primarily in
laboratory trials.
Since November 1995, the Company began shipping the Overture series of
transceivers. The Overture 4 is a prototype that does not have a low enough
cost or power consumption for mass deployment and its components are entirely
discrete (off-the-shelf). It can operate at data rates of 1.5, 2, 3, or 4
Mbps in the downstream (central office to the home) direction and up to 64
Kbps in the upstream direction, and thus does not meet the ANSI standard of 6
Mbps for downstream transmission. The Overture 4 is currently participating
in field trials, but is to be phased out in favor of the next series called
Overture 8.
In March 1996, the Company delivered the Overture 8, a transceiver
characterized by a high bandwidth as defined by the ANSI standards.
Currently installed in its first trial of broadcast video in Australia, the
Overture 8 is the first product utilizing custom semiconductors designed by
the Company's own microelectronics group. Overture 8 has two components
developed utilizing standard Application Specific Integrated Circuit
("ASIC") design systems. The Company believes Overture 8 will be important
to the market because it has the capability to support the requirements
delineated in the ANSI standard, including four downstream channels and three
upstream channels. The downstream data rates using Overture 8 can be as high
as 8 Mbps in various multiples, such as four 2 Mbps channels, and can be
channelized in order to support such services as Integrated Services Digital
Network ("ISDN") or video conferencing. The cost and power consumption of the
initial version of Overture 8 may preclude it from being acceptable for mass
development, although the Company believes it is currently the most advanced
ADSL product on the market.
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In June 1996, a new version of the Overture 8 ADSL/DMT Modem
specifically designed to meet system needs for Internet access was announced.
Key to the new design is the core ADSL/DMT technology that enables Internet
access at data rates as high as 8 Mbps downstream and 640 Kbps upstream, 60
times faster than basic rate ISDN and up to 250 times faster than existing
dial-up modems. The new Overture 8 ADSL/DMT Modem for Internet Access adds
direct Ethernet connectivity, using 10BaseT, to both subscriber and central
office units. This is the first 8 Mbps ADSL modem with Ethernet available
commercially. Moreover, as with all standard ADSL/DMT modems, the new
Overture 8 provides the high-speed data transmission over standard phone
lines while still permitting voice traffic on the same connection.
VDSL (VERY HIGH-SPEED DIGITAL SUBSCRIBER LINE)
Telephone companies have been placing fiber-optic cables into
communities and are expected to continue to do so at an increasing rate. It
is currently not economically feasible to take the fiber directly to homes
and telephone companies are not expected to do so in the foreseeable future.
Access technologies such as fiber-to-the-curb and fiber-in-the-loop are
strategies that allow telephone companies to run the fiber to some platform
or node in the community and link homes requiring high bandwidth services
directly over copper wire or coaxial cable. The concept of transmitting at
such high data rates over thousands of feet of copper wire is just now
becoming a reality. VDSL is used in conjunction with a fiber-optic backbone
to cover the "last mile" as efficiently as possible. The VDSL market thus
requires DMT products that have higher data rates (25 Mbps to 52 Mbps) over
shorter distances (typically 500 to 3,000 feet) than ADSL products.
The Company believes that DMT technology is superior to other available
modulation technologies for this application and is designing VDSL products
using its microelectronics capability. As with ADSL, VDSL products will be
asymmetrical and are intended to carry video, voice and data simultaneously.
The Company's next VDSL product, called the Piccolo, is expected to operate
asymmetrically at speeds of up to 25 Mbps. These products are expected to be
introduced in 1997 and to compete for the ANSI standard for VDSL
transmission, which has not yet been awarded.
The Company's digital VDSL chip is being designed for utilization in
cable as well as copper transmissions. Management has been very involved in
cable standards activities in an attempt to obtain the endorsement for DMT
through the Institute of Electrical and Electronic Engineers ("IEEE") 802.14
committee, which has authority over the upstream cable standards. DMT has the
unique capability of optimizing the upstream data rate relative to other
technologies available, although there can be no assurance the Company will
win this endorsement. As the cable market migrates from analog systems to
digital with interactive requirements, a large opportunity for DMT-based
systems will exist. As is true for ADSL products, in order to implement a
video service over VDSL products, other key components, not supplied by the
Company, including video content, a digital switch, a video server,
encode/decode equipment and a set-top box in the subscriber's home, will be
required to co-exist in a cost effective manner.
HDSL (HIGH BIT RATE DIGITAL SUBSCRIBER LINE)
In contrast to ADSL, HDSL transmission is symmetrical, that is, the data
rate is the same in both directions. The Company's DMT technology is equally
efficient in a symmetrical or an asymmetrical architecture. The Company
believes that the HDSL market holds a longer range potential opportunity for
its DMT technology than does the ADSL market, and the Company may design
products for this market in the future.
TECHNOLOGY
The Company's core technology is DMT, a multicarrier modulation
technology. The concept of multicarrier transmission is over 30 years old;
however, research on the Company's DMT technology has been accomplished
during the past 8 years. The Company has exclusive, worldwide royalty-bearing
license rights to the DMT patents owned by Stanford University; since the
Company's inception, it has filed a number of patent applications to protect
its intellectual property. The Company considers itself to be the leader in
the development of DMT technology.
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The purpose of modulation technology is to transmit a signal over a
given medium as efficiently as possible. This requires minimizing errors in
transmission by avoiding the noise accompanying the chosen medium. In the
case of DMT, the available bandwidth is divided into carriers that reside at
different frequencies. The carriers are measured for their ability to send
data with the bits of information assigned to the carriers based upon their
capacity. Carriers with higher capacity are assigned more bits, while
carriers unable to carry data are turned off. In the case of an ADSL system,
the available bandwidth is 1.1 megahertz (MHz), consisting of 256 carriers
of 4 kilohertz (kHz) bandwidth each.
A DMT system has a transceiver at each end of the line. In the case of
ADSL, there is one transceiver in the telephone company's central office
called the ATU-C (ADSL Transmission Unit-Central office) and one in the
subscriber's home called the ATU-R (ADSL Transmission Unit-Remote). When DMT
initializes the ATU-C by transmitting 256 4 kHz carriers downstream to the
ATU-R, the ATU-R measures the quality of each of the carriers and then
decides whether a carrier has sufficient quality to be used for further
transmission and, if so, how much data this carrier should carry relative to
the other carriers that are to be used. This information is then passed back
to the ATU-C via a control channel where the bits are assigned to the
carriers. The system is very adaptive as it will change the bit assignments
should the line characteristics change during transmission. This procedure
maximizes performance by minimizing the probability of bit error in
transmission. Bit errors are typically caused by interference such as AM
radio stations, open-circuited branched telephone lines called bridge taps
and crosstalk from other wires. The system simply assigns fewer or no bits
to carriers at frequencies where the interference occurs.
The initial development of DMT was directed toward transmitting digital
video signals over ordinary copper twisted-pair wires. DMT is also effective
over other media, including coaxial cable and wireless transmission. The
Company believes that in order to design and manufacture commercially
acceptable products, cost and performance improvements beyond what is
available with current technology will be necessary. Accordingly, it has
assembled a microelectronics team that is designing custom integrated
semiconductor circuits utilizing standard ASIC design systems and certain
technologies beyond ASIC.
IBM PRODUCTS
During the past several years, the Company has undertaken several
projects in which it has designed, developed and manufactured custom
communications products for IBM. Pursuant to its principal agreement with
IBM, the Company furnishes engineering, manufacturing, and assembly services
for the manufacture of LAN bridge products in accordance with IBM
specifications and upon receipt of purchase orders for the products. The LAN
bridge products were upgraded during fiscal 1994 and shipping of the new
family of LAN bridge products commenced in January 1994. The new family of
products, while priced lower, has more features and options, and offers
significantly higher performance than the earlier bridge products. The
principal agreement with IBM, amended in December 1993, has been extended.
Under the terms of a second agreement, the Company provides development and
support services to IBM for a custom product. IBM launched this product in
the United States and Canada in July 1994. The product is currently being
launched in a number of European and Asian countries. In fiscal years 1995
and 1996, the Company received royalty payments from IBM on sales of this
product to end-customers.
Fiscal 1996 sales to IBM accounted for approximately 69% of the
Company's revenues. Since IBM considers product sales and market data
confidential, the Company has very little ability to anticipate future
demands. The Company is highly dependent on sales to IBM and expects that
quarterly and annual results could be volatile due to its dependence on this
dominant customer. IBM may terminate its agreements with the Company upon 30
days' notice without a significant penalty. Upon termination of the
agreements, the Company has continuing obligations to provide certain
products and technical support for a period of years, at a price then to be
negotiated.
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CONNECTIVITY PRODUCTS
The Company's PC to Mainframe Connectivity products consist of 3270
emulation products which are Disk Operating System ("DOS") and Microsoft
Windows based software and microcomputer boards (with extensive firmware)
that reside in an IBM or IBM compatible PC, and enable the PC to communicate,
access and transfer data through Systems Networks Architecture ("SNA") to IBM
or IBM compatible mainframes. The Company sells single user and LAN gateway
versions of all its products. LAN gateways allow multiple PC users, attached
directly to Token-Ring, Ethernet and other LANs, to access SNA networks
through one shared link. The Company markets its PC to Mainframe
Connectivity products to selected niche markets: OEMs, Application Program
Interface ("API") and strategic end-user market segments of the Windows and
DOS Connectivity markets. The Company's connectivity market share and
revenues have been declining in recent years and are expected to continue to
decline.
SALES, MARKETING, SERVICE
With its DMT products, the Company's strategy is to sell to telephone
companies worldwide through large telecommunication suppliers who will
integrate the Company's products into larger systems for their customers.
This type of OEM selling does not require a large sales force. In the PC to
Mainframe Connectivity market, the Company sells to end-users, independent
software vendors, OEM's and through a small network of resellers. In the
network connectivity business, the Company offers a 90-day warranty and
post-warranty support programs. Hardware products are typically serviced on a
factory repair basis. Software support is usually handled by phone
consultation or, less often, by an on-site visit by a systems engineer. The
Company employs two persons in sales, two in customer support, and one in
marketing.
Export sales of connectivity products in fiscal 1994, 1995, and 1996
represent 1-2% of total net sales, for each such year, primarily to Western
Europe and Canada. Following the merger in November 1995, shipments of the
Overture series of transceivers for use in field trials, primarily to the
countries of Australia, Israel, Germany and Italy accounted for 15% of total
net revenues. These sales are subject to certain controls and restrictions,
but the Company has not experienced any material difficulties related to these
sales.
BACKLOG
As of the end of fiscal 1995 and 1996, the Company's backlog was
approximately $3,358,000 and $2,961,000, respectively. The Company
anticipates that all of its current backlog will be filled within the 1997
fiscal year.
MANUFACTURING
Most of the Company's products are assembled at its San Jose, California
facility, where testing, quality assurance and material control activities
are performed. The Company has the capacity to increase its output without
further expansion of its physical plant and warehousing facilities. The
Overture series of transceivers is currently in production, and assembly and
testing of this product is being outsourced. Product quality and reliability
is maintained at vendors' sites through auditing at subcontractors'
facilities and inspection of incoming components.
Electronic and mechanical components, subassemblies and supplies are
purchased from many independent suppliers. Although the Company purchases
most of a given component, subassembly or supply from a single vendor,
management believes that, with a few exceptions, at least one alternative
source of supply is available at comparable cost for each component in its
product lines. A few components are consigned from IBM and there is no
alternative source of supply for these components.
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RESEARCH AND DEVELOPMENT
The Company believes that it has a technological leadership position in
DMT modulation technology. Future success, however, is largely dependent on
its ability to maintain this position through the development of new products
that meet a wide range of customer needs. Accordingly, the Company intends
to continue to make substantial investments in research and development.
There can be no assurance that future development efforts will result in
commercially successful products, or that these products will not be rendered
obsolete by changing technology, new industry standards or new product
announcements by others.
The Company has 47 full-time employees engaged in research and
development activities as of July 27, 1996. Its research and development
efforts are expended on the enhancement of existing products and for the
development of new products in order to meet rapidly changing customer
requirements. These efforts are organized into three main groups:
microelectronics, software development and hardware development. Currently,
the microelectronics group is focused primarily on efforts for the ADSL and
VDSL markets; the software group is focused primarily on development of
firmware for products such as Overture 8; and the hardware group is focused
primarily on analog and digital design activities.
Significant activities include the following:
- Adaptation/portation/new code generation for new operating systems at
the PC and network operating system level.
- Development of OEM products to customer specifications.
- Improved reliability of existing products through extensive in-house
testing of products. The Company has a full in-house test facility
including a mainframe with extensive testing software, multiple LANs
with multiple PCs, local attach, token ring attach, and remote dial-in
capability, a mainframe emulator, protocol analyzers, IBM controllers,
terminals and printers and many other test tools which it uses to
simulate customers' complex multivendor, multiproduct environments.
Net research and development expenses totaled $1,429,000 (17% of net
sales) in fiscal 1994, $1,595,000 (13% of net sales) in fiscal 1995 and
$3,837,000 (32% of net sales) in fiscal 1996. Higher research and
development costs in fiscal 1996 resulted from the introduction of the
Company's new family of Overture 8 ADSL/DMT modems and Overture 8 Access
System shelf products. All related research and development expenses are
charged to operations as incurred. Engineering expenses are net of software
development costs capitalized in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 86 and of IBM-funded development costs. In
fiscal 1994, capitalized software development costs totaled $455,000. There
was no capitalization of software development costs in 1995 and 1996. The
amount of funded development costs totaled $549,000, $637,000, and $589,000
respectively, for fiscal 1994, 1995 and 1996. The amortization of
capitalized software development costs charged to cost of sales in fiscal
1995 and 1996 were $310,000 and $246,000 respectively. In fiscal 1994, there
was no amortization of capitalized software development costs because there
were no capitalized software projects available for general release.
COMPETITION
Telephone company trials have demonstrated the feasibility of the ADSL
products. Two basic ADSL technologies have participated in these trials: the
Company's DMT multicarrier technology and the single Carrier-less
Amplitude/Phase modulation ("CAP") technology developed by AT&T. DMT and CAP
have been rival technologies since the ANSI standards competition in 1993,
which was won by the Company's DMT technology. The Company believes that its
DMT technology is less complex and more cost effective than a single carrier
technology, such as CAP. The CAP technology has competed at all trials using
transceivers developed from AT&T's proprietary chipset by Westell,
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Inc. located in Illinois. The trials to date have been run at data rates of
1.5 Mbps and 2 Mbps, the speeds of AT&T's CAP products. The Company believes
that as products capable of data rates of 6 Mbps and 8 Mbps become available
later this year, trials will be conducted at those speeds. As the
performance differences between DMT and CAP become greater at higher data
rates, the Company believes that most of the competition at the higher speeds
will come from new competitors using DMT technology.
The Company has provided a license to Motorola Corporation to develop a
standard compliant single chip solution for the ADSL market. Subject to
payment of royalty on net sales, Motorola has the non-exclusive right to sell
this chip. The Company also has the right to buy the Motorola chip at the
most favored customer price. The Company expects Motorola's customers to
become competitors with system level DMT products. Other entities with
development efforts underway with DMT technology for the ADSL marketplace
include: ORCKIT, Pairgain, Aware/Analog, ECI, Ericsson and Alcatel.
To date, there have not been any ADSL products introduced in the
marketplace that have a cost structure satisfactory for a mass development to
customers. In order to design and manufacture commercially viable product in
this market, a substantial investment in custom integrated semiconductors
must be made. The Company believes that after 1997 competition will be
primarily be on the basis of price. Those suppliers not making such
investments will not be able to compete effectively.
The PC to Mainframe Connectivity market is highly competitive and is
characterized by rapid advances in technology which result in the frequent
introduction of new products with improved performance characteristics,
thereby subjecting the Company's products to the risk of technological
obsolescence. The Company's ability to compete is dependent on several
factors, including: reliability, product performance, quality, features,
distribution channels, name awareness, customer support, product development
capabilities and the ability to meet delivery schedules. The Company
competes, directly or indirectly, with a broad range of companies, many of
whom have significantly greater financial and other resources. In addition,
the Company is competing for a limited and declining segment of the
PC-Connectivity market, which market is itself declining.
Many companies compete in the PC to Mainframe Connectivity market,
including IBM, Attachmate Corporation, Eicon Group, Inc., Network Software
Associates, Wall Data Incorporated, and Novell Inc. Products and policies
of these companies can adversely affect the Company's competitive position.
A large number of the Company's products interact with IBM equipment and
support IBM protocols. Thus, the development of new products, equipment or
communications systems by IBM could adversely affect its PC to Mainframe
Connectivity competitiveness.
PATENTS, TRADEMARKS AND LICENSES
The Company has a policy of seeking patents when appropriate on
inventions concerning new products and improvements as part of its on-going
research and development activities. Its patents are classified as follows:
- Group I - Consists of 3 patent applications and 1 patent (shared with
Northern Telecom), consisting of technology necessary to conform to the
ANSI standard for ADSL. The Company has informally agreed with the ANSI
standards body to license these patents to third parties on fair and
equitable terms.
- Group II - Consists of 2 patents issued to Stanford University in
1993 and 1994 and 1 patent application filed by Stanford University, all
of which have been exclusively licensed to the Company, and 1 patent
application filed by the Company in 1995. The technology described in
these patents is not necessary to conform to the ANSI standard for ADSL;
however, such technology makes ADSL transceivers more efficient.
- Group III - Consists of 1 patent owned by the Company and 5 patent
applications filed by the Company, all of which relate more generally to
the Company's DMT technology.
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The Company principally relies on its technological and engineering
resources to develop its business in an industry where technology changes
very fast. It does, however, consider the use of trademarks, copyrights,
license agreements and non-disclosure agreements as a means to protect its
proprietary technology and, therefore, it intends to seek and maintain
protection where appropriate.
The Company also holds one United States patent expiring in the year 2000
and one Canadian patent expiring in the year 2001. Both of these patents cover
an apparatus for interconnecting data communications and data terminal
equipment which is no longer an integral part of the Company's product
architecture. The Company also has several registered trademark, including
"ICOT-Registered Trademark-" and "OmniPATH-Registered Trademark-" and has
copyrights in its software and related documentation, including product
manuals.
The Company is a licensee under three OEM software source code licenses
that are used in connection with the development, maintenance, enhancement,
and support of various PC to Mainframe connectivity products. These licenses
pertain to peripheral products which the Company remarkets to complement or
add features to its core product line.
EMPLOYEES
As of July 27, 1996, the Company had 88 full-time employees, of whom 21
were engaged in manufacturing, 47 in research and development, 5 in marketing
and sales and 15 in general and administrative positions.
Ten members of the Company's engineering staff hold doctoral degrees.
The Company also employs a number of consultants who are primarily used in
engineering. Competition for technical personnel in this technology is
intense. In May 1995, the Company entered into an employment agreement with
Dr. Cioffi, its founder, Vice President, Engineering and Chief Technical
Officer. The agreement provides for Dr. Cioffi to be employed by the Company
until October 1998, while continuing his obligations as a full-time tenured
faculty member at Stanford University. Stanford University limits the amount
of time its faculty can spend on outside activities.
All employees of the Company are based in the United States. None of
its employees is subject to a collective bargaining agreement, and there have
been no work stoppages due to labor difficulties. The Company believes that
its employee relations are good.
ITEM 2. PROPERTIES
The Company's corporate headquarters and manufacturing facility is
located in San Jose, California. After the merger, the Company moved its
corporate, engineering and manufacturing operations to an approximately
48,700 square foot facility to consolidate its operations and accommodate its
recent growth. The lease for this facility commenced on July 15, 1996 and
expires on July 31, 2001. Prior to the move, the Company leased a single
story premise of 23,300 square feet in North San Jose occupied by the ICOT
group and a 9,500 square foot facility in Mountain View occupied by the Old
Amati group.
The Company's lease for its facility in North San Jose expires on July
23, 1999, and has been subleased for the remaining term of the lease.
Related rent and operating cost obligations are covered in full by sublease
income. The lease for Mountain View facility which would have expired April
1, 1997, has been canceled as of August 30, 1996. The Company has no
remaining obligations under this lease.
The Company's wholly owned subsidiary, ICOT International Limited, now
dormant, leases an approximately 6,400 square foot building located in
Wokingham, England. ICOT International Limited ceased its operations in the
United Kingdom in fiscal 1993 as part of the Company's restructuring of its
connectivity business. The lease on the Wokingham facility expires on
September 29, 2010. The Company has subleased this facility through
September 1997, but income from this sublease is less than its rental
obligations. The Company has recorded a liability of $294,000, net of
anticipated future sublease income, to cover partial rental obligations
related to this facility.
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The Company believes that its current facilities are adequate to
conduct operations, and that its facilities are adequate for the future
growth of the Company.
ITEM 3. LEGAL PROCEEDINGS
In November 1993, an action was brought against the Company for damages
related to the use of one of the Company's products. The plaintiff filed a
suit claiming repetitive stress injuries resulting from the use of the
Company's products in the course of employment with American Airlines during
the period from May 1981 through July 1991. The plaintiff alleges damages in
the amount of $1 million and has requested punitive damages of $10 million.
The Company believes that the claim is without merit and has tendered defense
of this action to its insurance carriers. In the opinion of management, the
outcome of this litigation will not have a material adverse effect on the
Company's financial position or its results of operations. The Company is
not involved in any other material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's security
holders during the fourth quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company has one class of stock outstanding, its common stock, which has
a par value of $.20 per share.
The Company's common stock is traded on the Nasdaq National Market under
the symbol "AMTX". The following table sets forth the range of high and low
sales prices for the periods indicated, as reported by the Nasdaq National
Market. These prices do not include retail markups, markdowns, or commissions.
FISCAL 1995 LOW HIGH
----------- ----- -----
First Quarter . . . . . . . . . . . . . . . . . . $0.88 $1.25
Second Quarter. . . . . . . . . . . . . . . . . . 0.63 1.06
Third Quarter . . . . . . . . . . . . . . . . . . 0.69 1.56
Fourth Quarter. . . . . . . . . . . . . . . . . . 1.13 3.38
FISCAL 1996 LOW HIGH
----------- ----- -----
First Quarter . . . . . . . . . . . . . . . . . . $2.50 $6.56
Second Quarter. . . . . . . . . . . . . . . . . . 3.19 9.50
Third Quarter . . . . . . . . . . . . . . . . . . 5.25 19.75
Fourth Quarter. . . . . . . . . . . . . . . . . . 9.38 36.50
On July 27, 1996, the Company had approximately 1,623 stockholders of
record. The Company has not paid cash dividends on its common stocks and its
present intention is not to do so.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data has been derived from the
Company's audited consolidated financial statements. The historical financial
data should be read in conjunction with the Company's consolidated financial
statements and notes thereto.
<TABLE>
<CAPTION>
YEARS ENDED JULY 25, JULY 31, JULY 30, JULY 29, JULY 27,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT) 1992 1993 1994 1995 1996
- - --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Net Sales . . . . . . . . . . . . . . . . . . $26,324 $12,307 $ 8,236 $12,040 $ 12,085
Income (Loss) before Income Taxes . . . . . . $ 3,398 $(5,963) $ 530 $ 1,933 $(34,035)
Provision for Income Taxes. . . . . . . . . . 265 ---- 27 97 43
------- ------- ------- ------- --------
Net Income (Loss) . . . . . . . . . . . . . . $ 3,133 $(5,963) $ 503 $ 1,836 $(34,078)
Net Income (Loss) per Share. . . . . . . . . . $ .23 $ (.46) $ .04 $ .16 $ (2.21)
SELECTED BALANCE SHEET DATA:
Current Assets. . . . . . . . . . . . . . . . $17,695 $11,188 $ 9,463 $ 7,793 $ 5,182
Current Liabilities . . . . . . . . . . . . . $ 4,042 $ 2,598 $ 2,171 $ 1,591 $ 4,267
Working Capital . . . . . . . . . . . . . . . $13,653 $ 8,590 $ 7,292 $ 6,202 $ 915
Total Assets. . . . . . . . . . . . . . . . . $21,101 $12,936 $11,391 $12,111 $ 6,241
Long-term Liabilities . . . . . . . . . . . . $ 1,566 $ 1,099 $ 428 $ 294 $ 294
Stockholders' Equity. . . . . . . . . . . . . $15,493 $ 9,239 $ 8,792 $10,226 $ 1,680
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
To the extent that the information presented in this Form 10-K discusses
financial projections, information or expectations about the Company's products
or markets, or otherwise makes statements about future events, such statements
are forward-looking and are subject to a number of risks and uncertainties that
could cause actual results to differ materially from the statements made. These
include, among others, successful and timely development and acceptance of new
products, the availability of sufficient funding to complete development of new
products and other factors described below. In addition, such risks and
uncertainties also include the matters identified under the heading "Risk
Factors" below.
OVERVIEW
On November 28, 1995, ICOT Corporation, based in San Jose, California, and
Amati Communications Corporation ("Old Amati"), a privately held Mountain View,
California based company, completed a merger by which Old Amati became a wholly-
owned subsidiary of ICOT Corporation. Effective as of the merger, the name of
the surviving company was changed to Amati Communications Corporation (the
"Company") and its common stock began trading on the Nasdaq National Market
under the symbol "AMTX" on November 29, 1995.
Under the terms of the merger agreement with Old Amati, the shareholders,
warrant holders and option holders of Old Amati acquired 6,788,924 newly issued
shares of the Company's stock, representing approximately 35% of the fully
diluted shares of the Company. As of the merger date, Old Amati employed
twenty-four full time employees, including four in manufacturing, two in sales
and customer support, fifteen in engineering and three in finance and
administration. Old Amati was a development stage company that developed and
marketed advanced transmission systems utilizing Discrete Multi-tone ("DMT")
technology to provide high speed transmission over copper and cable media. Old
Amati's DMT technology has been selected as the ANSI and ETSI standard for
Asymmetric Digital Subscriber Line ("ADSL") products.
The Company is a leading developer of advanced transmission equipment
utilizing Discrete Multi-tone (DMT) technology for the ADSL, Very high-speed
Digital Subscriber Line (VDSL) and cable modem markets. The Company is the
holder of ADSL/DMT patents and has licensed the technology to companies such as
Nortel, Motorola and NEC. The Company is also a provider of network connectivity
systems for the internetworking and OEM marketplaces
HIGHLIGHTS OF THE FISCAL YEAR
- Announced key strategic technology development partnerships with
Motorola and NEC for the next generation xDSL technologies.
- Delivered a new family of Overture 8 ADSL/DMT modems for field testing,
further increasing the Company's leadership position in the technology.
These new modems are the first to provide data transmission rates as
high as 8 Mbps downstream and 500 kbps upstream.
- Introduced an 8 Mbps ADSL modem which provides direct Ethernet
connectivity.
- Selected to participate in a significant number of new ADSL market
trials including the GTE-Microsoft ADSL trial in Redmond, WA, the GTE
Internet access trial in Dallas, TX, the Bezeq (Israel Telecom) Video
on Demand ("VOD") trial in Israel, the Swiss Telecom PTT interactive
video trial in Switzerland and the Telstra broadcast quality video
trial in Australia.
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RESULTS OF OPERATIONS
FISCAL YEAR 1996 VS FISCAL YEAR 1995
Total net sales in fiscal 1996 rose slightly to $12,085,000 from sales in
the previous fiscal year of $12,040,000. Sales to IBM accounted for 69% of the
Company's revenue in fiscal 1996 compared with 83% in fiscal 1995. Royalty
revenues during fiscal year 1996 of $875,000 continue to be derived from a
product developed by the Company for IBM in fiscal 1994. Although dependence on
one dominant customer has been reduced since the merger, the Company expects
that IBM will continue to account for a substantial portion of the Company's
revenues until the Company completes development and commercialization of its
ADSL products. IBM is not obligated to purchase any specified amounts of
products or to provide binding forecasts of product purchases for any period.
Since IBM considers product sales and market data confidential, the Company has
very little ability to forecast future demand. Furthermore, since IBM has the
exclusive responsibility for marketing and selling the products that the Company
develops, results of operations can be significantly affected by IBM's success
in the marketplace.
Since November 1995, the Company began shipping its Overture series of
transceivers. The Overture 4 is a prototype that does not have a low enough
cost or power consumption for mass deployment and its components are entirely
discrete (off the shelf). This product is to be phased out in favor of the
next series of transceiver, called Overture 8. In the third quarter of
fiscal 1996, the Company delivered the Overture 8, which is characterized by
a high bandwidth as defined by the ANSI standards. This product is currently
installed in its first field trial of broadcast video in Australia. Sales in
fiscal 1996 of Overture 4 and Overture 8 series field trials were $999,000
and $819,000, respectively. In addition, contract revenues of $148,000 from
customization of products were also realized in fiscal 1996. The Company
anticipates that the Overture series of products will continue to be
represented at international field trials in fiscal 1997.
PC to Mainframe Connectivity sales of $1,822,000 in fiscal 1996 represents
a decline of 14% when compared with the same period of the prior fiscal year due
to a general decline in the Company's connectivity market share. The PC to
Mainframe Connectivity market is highly competitive and is characterized by
rapid advances in technology which frequently result in the introduction of new
products with improved performance characteristics, thereby subjecting the
Company's products to risk of technological obsolescence. The Company competes
directly or indirectly with a broad range of companies, many of whom have
significantly greater resources. In addition, the Company is competing for a
limited and declining segment of the market.
Gross margins as a percent of sales were 39% in fiscal 1996 compared with
44% for the same period of fiscal 1995. The decline in margin was primarily
attributable to product mix resulting from shipment of new products to IBM and
costs to complete test trials of the Overture series of transceivers.
Amortization of capitalized software costs charged to cost of sales were
$246,000 in fiscal 1996 and $310,000 in fiscal 1995.
Net research and development expenses increased 141% to $3,837,000 in
fiscal 1996 when compared to the same period of fiscal 1995 largely because of
the addition as a result of the merger of fifteen Old Amati engineers and the
hiring of 20 new employees. Higher costs in fiscal 1996 are primarily due to
the introduction of the Company's new family of Overture 8 ADSL/DMT modems and
Overture 8 Access System shelf products. From the technology acquired in the
merger, the Company believes it has a technological leadership position in DMT
modulation. Maintaining this position is largely dependent on the Company's
ability to develop new products that meet a wide range of customer needs.
Research and development efforts for the DMT technology are grouped into three
areas: the microelectronics group which is primarily focused on ADSL and VDSL
markets; the software group, which is primarily focused on the development of
firmware for the Overture series; and the hardware group, which is primarily
focused on analog and digital design activities. All research and development
expenses related to this technology are charged to operations as incurred.
Expenses are net of funded development costs from IBM. Funded development costs
for fiscal 1996 were $589,000 compared to $637,000 in fiscal 1995. There was no
capitalization of software development costs in either fiscal year. The Company
considers research and development a key element in its ability to compete and
will continue to make investments in product development and support for IBM.
Marketing and sales expenses rose to $953,000 in fiscal 1996 compared to
$861,000 in fiscal 1995 due to an increase in overseas travel in conjunction
with Overture series participation in field trials internationally. Sales,
marketing and
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customer support operations of the acquired business, which cover both
domestic and international markets, is handled by five individuals. The
Company's strategy is to sell to telephone companies worldwide through large
telecommunication suppliers who will integrate the Company's products into
larger systems for their customers. This type of OEM selling does not
require a large sales force.
General and administrative expenses increased to $2,519,000 in fiscal
1996 as compared to $1,229,000 in fiscal 1995. This is primarily due to
patent expenses, additional corporate staffing, and occupancy costs
associated with the merger.
Interest income decreased to $168,000 in fiscal 1996 compared to
$301,000 in the same period of fiscal 1995 due to maturities of
held-to-maturity investments.
The provision for income taxes in fiscal 1996 was $43,000 compared to
$97,000 in fiscal 1995. Tax provisions were required for Federal alternative
minimum tax and California state taxes due to limitations on the use of
California's loss carryforwards. The Company had provided a valuation
allowance against the deferred tax asset attributable to the net operating
losses due to uncertainties regarding the realization of these assets.
FISCAL YEAR 1995 VS. FISCAL YEAR 1994
Total net sales in fiscal 1995 increased 46% to $12,040,000 compared to
sales of $8,236,000 in fiscal 1994. The increase is a result of shipments to
the Company's largest OEM customer, IBM, of products introduced into the
market in fiscal 1994. In addition, royalty revenues of $738,000 were
recognized in fiscal 1995 from another new product developed by the Company
and released by IBM in July 1994.
Revenues from IBM accounted for 83% of the Company's revenue in fiscal
1995, compared with 65% in fiscal 1994, due to royalties and the introduction
of new products. Sales to IBM are uncertain due to its transition to new
products. Shipments to IBM are determined only by IBM and can result in
revenue fluctuations. IBM can cancel its agreement with the Company at any
time without penalty upon 30 days' notice. IBM continues to account for a
substantial portion of the Company's revenues and, consequently, the
Company's business continues to be volatile due to its dependence on a
dominant customer. Because IBM has the exclusive responsibility for marketing
and selling of the products that the Company develops for IBM, its
profitability can be significantly affected by IBM's success in the
marketplace.
PC to Mainframe Connectivity sales of $2,109,000 in fiscal 1995
represent a decline of 26% from $2,857,000 for the prior fiscal due to
decreased royalties received from an OEM customer and to a general decline in
the Company's connectivity market share.
Gross margins as a percent of sales were 44% for fiscal 1995 compared
with 46% for the same period of fiscal 1994. The decrease in margins was
primarily attributable to product mix resulting from shipment of new products
with lower margins in the current fiscal year. Amortization of capitalized
software costs charged to cost of sales were $310,000 in fiscal 1995. There
was no amortization expense in the comparable period of the prior fiscal
year.
Net research and development expenses increased to $1,595,000 (13% of
sales) in fiscal 1995 compared to $1,429,000 (17% of sales) in fiscal 1994.
Research and development expenses are net of software development costs
capitalized in accordance with SFAS No. 86 and of funded development costs.
During fiscal 1995 there was no capitalization of software development costs,
resulting in higher expenses for the year. Software development costs
capitalized in the prior fiscal year were $455,000. Funded development costs
for fiscal 1995 were $637,000 compared with $549,000 in the comparable period
of fiscal 1994. The Company believes that research and development is a key
element in its ability to compete and will continue to make investments in
product development and support.
Marketing and sales expenses decreased to $861,000 (7% of sales) in
fiscal 1995 compared to $884,000 (11% of sales) in fiscal 1994, due to a
reduction in sales staff and related office expenses.
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General and administrative expenses increased to $1,229,000 (10% of
sales) in fiscal 1995 as compared to $1,177,000 (14% of sales) in fiscal
1994, with the addition of corporate planning and development personnel.
Interest income increased to $301,000 in fiscal 1995 compared to
$233,000 in the same period of fiscal 1994. This increase is primarily due to
higher interest yields on short-term investments and likewise includes
interest of $50,000 on secured promissory notes receivable from Old Amati.
The provision for income taxes in fiscal 1995 was $97,000 compared to
$27,000 in fiscal 1994. This provision was a result of net operating profit
after benefit of Federal net operating loss carryforwards. Fiscal 1995 and
1994 tax provisions were required for Federal alternative minimum tax and
California state taxes due to limitations on the use of California's loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and short term investments of $886,000 as of July 27,
1996, compared to $3,491,000 as of July 29, 1995. Cash used for operating
activities of $1,147,000 resulted primarily from the Company's net loss after
adjusting for the write off of acquired in-process research and development.
Cash used for investing activities of $598,000 was primarily for advances to
Old Amati and acquisition costs of $2,266,000, as offset by the proceeds from
sale of held-to-maturity investments of $2,425,000. Cash provided by financing
activities of $1,565,000 was derived primarily from the proceeds of stock
options exercised.
During fiscal 1996, the Company secured a bank line of credit for
$1,250,000 and a capital lease line of $1,500,000. In October 1996, the
Company entered into an Investment Agreement with certain investors (the
"Investors") which provides to the Company up to $15 million in equity
financing. In a related transaction, the Company borrowed $3,000,000 from
the Investors, which is secured by all of the Company's intellectual
property. The Company intends to repay this loan upon completion of the
financing. The Company's ability to meet its future capital requirements
will depend on many factors, including sales levels, progress in research and
development programs, the establishment of collaborative agreements, and
costs of manufacturing facilities and commercialization activities. While
the Company anticipates that the funding available under the line of credit,
capital lease line and Investment Agreement will be sufficient to meet its
capital requirements for the foreseeable future, the Company may require
funding in addition to that available under these agreements, and may seek
additional funding through collaborative agreements or through public or
private sale of securities prior to the commercialization of Old Amati
products. The Company had no material commitments for capital expenditures
as of July 27, 1996.
RISK FACTORS
The information about the Company included or incorporated by reference
herein contains forward looking statements that involve risks and
uncertainties, including the risks detailed below. The Shares of Common
Stock offered hereby involve a high degree of risk and prospective purchasers
should carefully consider the following factors.
HISTORY OF LOSSES. The Company had net income in the fiscal year ended
July 29, 1995 of approximately $1,836,000 and had a net loss in the fiscal
year ended July 27, 1996 of approximately $34,078,000 (including a charge
related to the Merger of approximately $31,554,000). Due in part to the
Merger, the Company is not expected to operate profitably in the foreseeable
future as the Company continues research, development, production and
marketing activities. There can be no assurance that the Company will ever
attain profitability. Any long-term viability, profitability and growth from
the Company' technology will depend upon successful commercialization of
products resulting from its research and product development activities.
Extensive additional research and development will be required prior to
commercialization of certain products. There can be no assurance that the
Company will be able to develop commercially viable products from its
technology, generate significant revenues and/or achieve profitability.
NEED FOR ADDITIONAL CAPITAL. During 1996, the Company secured a line of
credit for $1,250,000 and a capital lease line of $1,500,000 and entered into
an Investment Agreement with the Investors, which provides to the Company up
to $15 million in equity financing. In a related transaction, the Company
borrowed $3,000,000 from the Investors, which is secured by all of the
Company's intellectual property. The Company intends to repay this loan upon
completion of the financing. The Company's future capital requirements will
depend on many
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factors, including sales levels, progress in research and development
programs, the establishment of collaborative agreements, and costs of
manufacturing facilities and commercialization activities. The Company may
require funding in addition to that available under its line of credit,
capital lease line and the Investment Agreement. There can be no assurance
that such additional funding will be available on acceptable terms, if at
all. If additional funds are required and not available, the Company could
be required to curtail significantly or defer, temporarily or permanently,
one or more of its research ad development programs or to obtain funds
through arrangements that may require the Company to relinquish certain
technology or product rights.
MARKET FOR ADSL PRODUCTS STILL UNDER DEVELOPMENT; PRINCIPAL ADSL MARKET
OUTSIDE OF THE UNITED STATES. ADSL was developed to transmit digital video
over copper wire and also has application in providing access to the Internet
over copper wire. Although the current infrastructure in the local
distribution networks of telephone companies is based on copper wire, there
can be no assurance that telephone companies will pursue the deployment of
ADSL systems or, if deployment occurs, as to the volume and timing of such
deployment. Significant deployment may be prevented or delayed by a number of
factors, including cost, regulatory barriers, lack of programming content,
lack of consumer demand and the availability of alternative technologies.
Access systems with high performance broadband capability, such as the ADSL
system, may be attractive to telephone companies only to the extent that the
telephone companies plan to offer broadcast video, video-on-demand or
Internet access services which utilize the full features of a high
performance local distribution network. Substantial amounts of time, effort
and money will be required to develop such high performance services. There
can be no assurance that sufficient programming content for video services
will be developed to justify deploying digital video transmission systems, or
that programming content will be both attractive to consumers and offered at
prices that will create a mass market. If such high performances services
are offered, and there is demand for them, there can be no assurance that
telephone companies will select ADSL over competing technologies, such as
fiber-to-the-curb, hybrid fiber-coaxial ("HFC"), and wireless communications.
Fiber-to-the curb, HFC and wireless systems have greater bandwidth than the
ADSL products being developed by the Company. Although Internet access
services may provide a market for ADSL in the United States, because foreign
telephone companies currently face less competition from cable companies than
telephone companies face in the United States, the Company believes that its
principal markets for ADSL video applications will be outside the United
States.
PRICE COMPETITIVENESS OF ADSL PRODUCTS. The Company believes that in
order to design and manufacture commercially acceptable ADSL products, cost
improvements beyond those available with current technology will be
necessary. The future success of the Company will depend, in part, on it
ability to develop ADSL products that compete effectively on the basis of
price and performance. Current prices are significantly higher than those
that the Company believes would be necessary for mass deployment of ADSL
products. There can be no assurance that the Company will be successful in
developing ADSL products that can be sold at prices which are viable in the
market.
RAPID TECHNOLOGICAL CHANGE; COMPETITION IN THE TELECOMMUNICATION
TRANSMISSION BUSINESS. Competition from existing companies, including major
communications companies, is expected to increase. Most of the Company's
competitors in the communications industry are more established, benefit from
greater market recognition and have greater financial, technical, production
and marketing resources than the Company. Some competitors are developing
alternate access technologies, such as HFC, fiber-to-curb and wireless
systems, that may prove technologically superior or more cost effective than
the Company's technology. There can be no assurance that developments by
others will not render the Company's products or technologies obsolete or
noncompetitive or that the Company will be able to keep pace with new
technological developments.
COMPETITION IN THE PC TO MAINFRAME CONNECTIVITY BUSINESS. The PC to
Mainframe Connectivity market is highly competitive and is characterized by
rapid advances in technology which frequently result in the introduction of
new products with improved performance characteristics, thereby subjecting
the Company's products to the risk of technological obsolescence. The
Company's ability to compete is dependent on several factors, including
reliability, product performance, quality, features, distribution channels,
name awareness, customer support, product development capabilities, and the
ability to meet delivery schedules. The Company competes, directly or
indirectly, with a broad range of companies in the PC-Connectivity business,
many of whom have significantly greater financial and other resources. In
addition, the Company is only competing for a limited and declining segment
of the PC-Connectivity market, which is itself declining and expected to
continue to decline. The Company expects revenues from its PC-Connectivity
business to continue to decline.
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COMPETITION FOR VDSL STANDARDS. The Company expects to apply its DMT
technology to the development of VDSL products for the transmission of
digital video service in connection with a fiber-optic backbone to cover the
distance from this platform or node to subscribers' homes over copper wire or
coaxial cable. ANSI has not yet awarded the standard for VDSL technology,
and the competition for the American National Standards Institute ("ANSI")
standard for VDSL is expected to be intense. AT&T, as well as other
companies with greater resources than the Company, are expected to compete
for these standards. There is no assurance that the Company's DMT technology
will be successful in obtaining the ANSI VDSL standard.
DEPENDENCE ON COMPLEMENTARY PRODUCTS. Widespread use of ADSL and VDSL
products for digital video service will depend on the commercial availability
of other products and components, including the video content, digital
switches, video servers, encode/decode equipment, and set-top boxes in
subscribers' homes. There can be no assurance that other suppliers will
develop and market these complementary components effectively or that these
components, when combined with the Company's ADSL and VDSL products, will be
a cost-effective means of transmitting video-on-demand or video dialtone.
DEPENDENCE ON LARGE CUSTOMERS AND SYSTEM INTEGRATORS. The Company
expects to sell many of its telecommunication transmission products to large
telecommunications service companies which serve as integrators for the
various component systems that make up a video-on-demand or multimedia
system. These systems integrators in turn sell the systems to telephone
companies for distribution to their subscribers. The Company is largely
dependent on these systems integrators for the introduction of its products
to field trials. There can be no assurance that systems integrators will
select the Company's products for field trials or, if they do initially
select the Company's products, that they will continue to use them. In
addition, telephone companies are generally reluctant to deploy new
technologies available only from a single source, especially when the
supplier is as relatively small as the Company, and often require the
availability of alternative sources before deploying a new technology. This
reluctance may put the Company at a competitive disadvantage relative to some
of its competitors. Further, acceptance of the Company's products by these
customers may require the Company to relinquish rights to its technology or
products. There can be no assurance, however, that even if the Company were
to relinquish such rights to its technology or products, telephone companies
would deploy the Company's ADSL or VDSL products.
CUSTOMER CONCENTRATION; RELIANCE ON SALES TO IBM. Sales to IBM for PC
to Mainframe connectivity and related products accounted for approximately
65%, 83% and 69% of the Company's net sales in fiscal 1994, 1995 and 1996,
respectively and 64% for the nine months ended April 27, 1996. Since IBM
considers product sales and market data confidential, the Company has very
little ability to anticipate future demands and IBM is not obligated to
purchase any specified amount of products. For its PC-Connectivity products,
the Company is highly dependent on sales to IBM and expects that quarterly
and annual results could be volatile due to its dependence on this dominant
customer. In addition, there can be no assurance that IBM will continue to
distribute and support the Company's products. The Company's principal
contract with IBM expires in December 1996. Further, IBM may terminate its
agreements with the Company upon 30 days' notice without a significant
penalty.
INTERNATIONAL BUSINESS. The Company expects that sales outside of the
United States will represent a significant portion of its future sales,
especially of the Company's ADSL products. Operations outside of the United
States are subject to various risks, including exposure to currency
fluctuations, the imposition of governmental controls, the need to comply
with a wide variety of foreign and United States export laws, political and
economic instability, trade restrictions, changes in tariffs and taxes, and
longer payment cycles typically associated with international sales. The
inability of the Company to design products to comply with foreign standards
or any significant or prolonged delay in the Company's international sales
could have a material adverse effect on the Company's future business and
results of operations.
REGULATORY MATTERS. Telephone companies, which constitute the initial
primary market for the Company's telecommunication transmission products, and
cable television companies, which may become a future market for such
products, are subject to extensive regulation by both the federal and state
governments in the United States and by foreign governments. Many of these
regulations have the effect of limiting the economic incentive of telephone
companies to deploy new technologies. Restrictions on telephone companies
and cable television companies may
16
<PAGE>
materially and adversely affect demand for the products of the Company.
Recent legislation passed by Congress will significantly alter the
regulations on telephone companies and cable companies in the United States,
and there can be no assurance that such legislation will not adversely affect
the commercialization of the Company's products. In addition, both in the
United States and abroad, rates for telecommunications services are governed
by tariffs or licensed carriers that are subject to regulatory approval.
These tariffs also could have a material adverse affect on the demand for the
Company's products.
DEPENDENCE ON SUPPLIERS AND THIRD-PARTY MANUFACTURERS. Certain key
components in the Company's products, such as integrated circuits, are
currently available only from single sources. The Company does not have any
long-term supply contracts with its sole source vendors and purchases these
components on a purchase order basis. In addition, certain components and
subassemblies for the Company's products have long lead times. While the
Company seeks to accurately forecast its requirements, inaccuracies in its
forecast could result in shortages or oversupplies of these components. The
inability to obtain sufficient quantities of sole source components or
subassemblies as required, or to develop alternative sources as required in
the future, or inaccuracies in forecasts for long lead time components or
subassemblies could result in delays or reductions in product shipments or
product redesigns which would materially and adversely affect the Company's
business, operating results and financial condition. In addition, increases
in the prices of components for which the Company does not have alternate
sources could materially and adversely affect the Company's operating results.
The Company intends to outsource a portion of its manufacturing
operations to independent third party manufacturers. There are risks
associated with the use of independent manufacturers, including
unavailability of or delays in obtaining adequate supplies of products and
reduced control of manufacturing quality and production costs. There can be
no assurance that the Company's third party manufacturers will provide
adequate supplies of quality products on a timely basis. The inability to
obtain such products on a timely basis would have a material adverse effect
on the Company's business, operating results and financial condition.
PATENTS AND TRADE SECRETS. There can be no assurance that any patents
owned or controlled by the Company will provide commercially significant
protection of the Company's technology or ensure that the Company may not be
determined to infringe valid patents of others. The Company's patents have
not been tested in court, and the validity and scope of the Company's
proprietary rights could be challenged. The Company has also received
foreign patents, but since the patent laws of foreign countries differ from
those of the United States, the degree of protection afforded by any foreign
patents may be different from that available under U.S. patent laws.
The Company also relies on trade secrets and proprietary know-how which
it seeks to protect by confidentiality agreements with its collaborators,
employees and consultants. There can be no assurance that these agreements
will not be breached, that the Company will have adequate remedies for any
breach or that the Company's trade secrets and proprietary know-how will not
otherwise become known or be discovered by competitors.
THE COMPANY'S RSI LAWSUIT. The Company is a defendant in a suit brought
in November 1993 alleging repetitive stress injuries ("RSI") resulting from
the use of the Company's products claiming $1 million in compensatory and $10
million in punitive damages. The Company has tendered defense of the suit to
its insurance carriers, but there can be no assurance that the suit will not
have a material adverse effect on the financial position or results of
operations of the Company.
POSSIBLE VOLATILITY OF STOCK PRICE; SHARES ELIGIBLE FOR FUTURE SALE.
The market price of the Company's Common Stock has been and may continue to
be highly volatile. Future events, many of which will be beyond the control
of the Company, as well as announcements related to technology and product
development and collaborative arrangements and expected quarterly
fluctuations in revenues and financial results, may have a significant impact
on the market price of the Company's Common Stock. Future sales of Shares by
the Investors which is a party for the Investment Agreement or by other
current stockholders and by option holders and warrant holders who exercise
the Company stock options or warrants could have a depressive effect on the
market price of the Company's Common Stock.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Amati Communications Corporation:
We have audited the accompanying consolidated balance sheets of Amati
Communications Corporation (a Delaware corporation) and subsidiaries as of
July 27, 1996 and July 29, 1995, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years
ended July 27, 1996, July 29, 1995, and July 30, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Amati Communications
Corporation and subsidiaries as of July 27, 1996 and July 29, 1995, and the
results of their operations and their cash flows for each of the three years
ended July 27, 1996, July 29, 1995, and July 30, 1994 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
San Jose, California
August 30, 1996 (except with respect
to the matter discussed in Note 13, as to
which the date is October 3, 1996)
18
<PAGE>
AMATI COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
JULY 29, JULY 27,
(Dollars in thousands) 1995 1996
- - -------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . $ 1,066 $ 886
Short-term investments . . . . . . . . . . . . . . . . . 2,425 ---
Accounts receivable, less allowance of $21 in 1995
and $30 in 1996 . . . . . . . . . . . . . . . . . . . . 1,933 1,524
Inventories:
Finished goods . . . . . . . . . . . . . . . . . . . . 1 1
Work in process. . . . . . . . . . . . . . . . . . . . 711 890
Purchased parts. . . . . . . . . . . . . . . . . . . . 715 725
------- -------
1,427 1,616
Other current assets . . . . . . . . . . . . . . . . . . 942 1,156
------- -------
Total current assets . . . . . . . . . . . . . . . . 7,793 5,182
------- -------
Equipment and leasehold improvements, at cost:
Machinery and equipment. . . . . . . . . . . . . . . . . 2,772 3,436
Furniture and fixtures . . . . . . . . . . . . . . . . . 188 187
Leasehold improvements . . . . . . . . . . . . . . . . . 505 532
------- -------
3,465 4,155
Less: Accumulated depreciation and amortization . . . . . (2,879) (3,096)
------- -------
Equipment and leasehold improvements, net. . . . . . . . 586 1,059
------- -------
Old Amati advances and acquisition costs. . . . . . . . . 3,240 ---
Other assets. . . . . . . . . . . . . . . . . . . . . . . 492 ---
------- -------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . $12,111 $ 6,241
------- -------
------- -------
The accompanying notes are an integral part of these consolidated balance
sheets.
19
<PAGE>
AMATI COMMUNICATIONS CORPORATION
CONSOLIDATED BALANCE SHEETS
JULY 29, JULY 27,
(Dollars in thousands) 1995 1996
- - -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of capitalized lease obligations. . . $ 10 $ ---
Trade accounts payable . . . . . . . . . . . . . . . . . 612 643
Accrued expenses . . . . . . . . . . . . . . . . . . . . 777 1,272
Deferred revenue . . . . . . . . . . . . . . . . . . . . 192 1,957
Notes payable. . . . . . . . . . . . . . . . . . . . . . --- 395
------- -------
Total current liabilities. . . . . . . . . . . . . . 1,591 4,267
------- -------
Long-term liabilities:
Obligations under lease commitments. . . . . . . . . . . 294 294
------- -------
Total long-term liabilities. . . . . . . . . . . . . 294 294
------- -------
Commitments (Note 9) --- ---
Stockholders' equity:
Preferred stock - par value $100 per share
Authorized - 5,000 shares
Outstanding - none . . . . . . . . . . . . . . . . . --- ---
Common stock - par value $.20 per share
Authorized - 20,000,000 shares
Outstanding - 11,569,077 shares in 1995 and
17,692,802 shares in 1996. . . . . . . . . . . . . . 2,314 3,539
Additional paid-in capital . . . . . . . . . . . . . . 33,324 57,631
Accumulated deficit. . . . . . . . . . . . . . . . . . (25,412) (59,490)
------- -------
Total Stockholders' equity . . . . . . . . . . . . . 10,226 1,680
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . $12,111 $ 6,241
------- -------
------- -------
The accompanying notes are an integral part of these consolidated balance
sheets.
20
<PAGE>
AMATI COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE YEARS ENDED JULY 30, JULY 29, JULY 27,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1994 1995 1996
- - ---------------------------------------------------------------------------------------
<C> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . $ 8,236 $ 12,040 $ 12,085
Cost of sales . . . . . . . . . . . . . . . . . . . 4,428 6,716 7,404
-------- -------- --------
Gross margin . . . . . . . . . . . . . . . . . . 3,808 5,324 4,681
-------- -------- --------
Operating expenses:
Research and development . . . . . . . . . . . . 1,429 1,595 3,837
Marketing and sales . . . . . . . . . . . . . . . 884 861 953
General and administrative. . . . . . . . . . . . 1,177 1,229 2,519
Write off of acquired in-process
research and development . . . . . . . . . . . . --- --- 31,554
-------- -------- --------
Total operating expenses . . . . . . . . . . . . 3,490 3,685 38,863
-------- -------- --------
Income (loss) from operations. . . . . . . . . . 318 1,639 (34,182)
-------- -------- --------
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . 233 301 168
Interest expense . . . . . . . . . . . . . . . . (21) (7) (21)
-------- -------- --------
Total other income. . . . . . . . . . . . . . . 212 294 147
-------- -------- --------
Income (loss) before provision for income taxes. . 530 1,933 (34,035)
Provision for Income taxes . . . . . . . . . . . 27 97 43
-------- -------- --------
NET INCOME (LOSS). . . . . . . . . . . . . . . . . $ 503 $ 1,836 $(34,078)
-------- -------- --------
-------- -------- --------
NET INCOME (LOSS) PER SHARE. . . . . . . . . . . . $ .04 $ .16 $ (2.21)
-------- -------- --------
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS . . . . . . . . . . 12,319 11,491 15,448
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
AMATI COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE THREE YEARS ENDED JULY 27, 1996 COMMON STOCK PAID-IN ACCUMULATED
(IN THOUSANDS) SHARES AMOUNT CAPITAL DEFICIT TOTAL
- - ----------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Balance, July 31, 1993 . . . . . . . . . . . . . . 12,739 $ 2,548 $34,442 $(27,751) 9,239
Exercise of employee stock options. . . . . . . . 76 15 50 --- 65
Stock repurchase. . . . . . . . . . . . . . . . . (859) (172) (843) --- (1,015)
Net income. . . . . . . . . . . . . . . . . . . . --- --- --- 503 503
------ ------- ------- -------- ------
Balance, July 30, 1994 . . . . . . . . . . . . . . 11,956 2,391 33,649 (27,248) 8,792
Exercise of employee stock options. . . . . . . . 150 30 132 --- 162
Stock repurchase. . . . . . . . . . . . . . . . . (537) (107) (457) --- (564)
Net income. . . . . . . . . . . . . . . . . . . . --- --- --- 1,836 1,836
------ ------- ------- -------- ------
Balance, July 29, 1995 . . . . . . . . . . . . . . 11,569 2,314 33,324 (25,412) 10,226
Exercise of employee stock options. . . . . . . . 1,238 248 1,327 --- 1,575
Exercise of warrants from merger. . . . . . . . . 231 46 (46) --- ---
Issuance of shares from merger. . . . . . . . . . 4,655 931 23,026 --- 23,957
Net loss. . . . . . . . . . . . . . . . . . . . . --- --- --- (34,078) (34,078)
------ ------- ------- -------- -------
BALANCE, JULY 27, 1996 . . . . . . . . . . . . . . 17,693 $ 3,539 $57,631 $(59,490) $ 1,680
------ ------- ------- -------- -------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
22
<PAGE>
AMATI COMMUNICATIONS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE YEARS ENDED JULY 30, JULY 29, JULY 27,
(IN THOUSANDS) 1994 1995 1996
- - -------------------------------------------------------------------------------------
<C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss). . . . . . . . . . . . . . . . . . $ 503 $ 1,836 $(34,078)
Adjustments to reconcile net income (loss)
to net cash provided by (used for) operating
activities:
Depreciation and amortization. . . . . . . . . . . . 400 678 846
Provision for bad debts. . . . . . . . . . . . . . . --- --- 20
Loss on retirement of capital equipment. . . . . . . 126 41 153
Write off of in-process research
and development. . . . . . . . . . . . . . . . . . . --- --- 31,554
Changes in assets and liabilities:
Decrease (increase) in accounts receivable . . . . (439) (528) 1,340
Increase in inventories. . . . . . . . . . . . . . (535) (33) (189)
Increase in other assets . . . . . . . . . . . . . (64) (316) (194)
Decrease in accounts payable & accrued expenses. . (407) (315) (599)
Decrease in other long-term liabilities. . . . . . (584) (124) ---
------- ------- -------
Total adjustments. . . . . . . . . . . . . (1,503) (597) 32,931
------- ------- -------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (1,000) 1,239 (1,147)
------- ------- -------
Cash Flows from Investing Activities:
Advances to Old Amati and acquisition costs. . . . --- (3,240) (2,266)
Capital expenditures . . . . . . . . . . . . . . . (251) (61) (757)
Capitalized software development costs . . . . . . (455) --- ---
Purchase of short-term investments . . . . . . . . (14,207) (5,862) ---
Proceeds from sale of investments. . . . . . . . . 8,815 8,829 2,425
------- ------- -------
NET CASH USED FOR INVESTING ACTIVITIES . . . . . . . (6,098) (334) (598)
------- ------- -------
Cash Flows from Financing Activities:
Proceeds from the exercise of stock options. . . . 65 162 1,575
Payments on capital lease obligations. . . . . . . (107) (82) (10)
Stock repurchase . . . . . . . . . . . . . . . . . (1,015) (564) ---
------- ------- -------
NET CASH PROVIDED BY (USED FOR) FINANCING
ACTIVITIES . . . . . . . . . . . . . . . . . . . . (1,057) (484) 1,565
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . . (8,155) 421 (180)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . 8,800 645 1,066
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . $ 645 $ 1,066 $ 886
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
23
<PAGE>
AMATI COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 27, 1996
NOTE 1 OPERATIONS OF THE COMPANY
BUSINESS
Amati Communications Corporation ("Amati" or the "Company") is a leading
developer of advanced transmission equipment utilizing Discrete Multi-tone
("DMT") technology for the ("ADSL"), Very high-speed Digital Subscriber Line
("VDSL") and cable modem markets. The Company is the holder of the ADSL/DMT
patents and has licensed the technology to companies such as Motorola, NEC
and Nortel. The Company is also a provider of network connectivity systems
for the internetworking and OEM marketplaces. The Company is subject to a
number of risks, including dependence on key employees for technology
development and support, dependence on a few significant customers, potential
competition from larger more established companies, and its ability to obtain
adequate financing to support its growth.
On November 28, 1995, the Company and Amati Communications Corporation
("Old Amati"), a privately held Mountain View, California based company
completed a merger (the "Merger") by which Old Amati became a wholly-owned
subsidiary of the Company. Effective as of the Merger, the Company's name
was changed to Amati Communications Corporation and its common stock began
trading on the Nasdaq National Market under the symbol "AMTX".
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market, and include materials, labor and manufacturing overhead. Inventory is
valued at currently adjusted standards which approximate actual costs on a
first-in, first-out basis.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the related assets. Machinery and
equipment and furniture and fixtures generally have lives ranging from 3 to 5
years. Leasehold improvements are depreciated over the shorter of the lease
term or the useful life.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards No. 86 ("SFAS 86"). The
capitalization of these costs begins when technological feasibility of the
related product has been achieved, which has been defined as the point in
time that the Company has developed a beta version of the software product.
Capitalization ends when the product is available for general release to
customers. Amortization is computed on an individual product basis and is the
greater of (a) the ratio of current gross revenues for a product to the total
current and anticipated future gross revenues for that product or (b) the
straight-line method over the estimated economic life of the product.
Currently the Company is using an estimated economic life of three years for
all capitalized software costs.
In fiscal 1995 and 1996, there were no capitalization of software
development costs as the criteria for capitalization had not been met.
During fiscal 1994, the Company capitalized software of $455,000 and there
was no amortization of capitalized software development costs because none of
the capitalized software projects were available for general release. In
fiscal 1995 and 1996, the amortization of capitalized software development
costs charged to cost of sales was $310,000 and $246,000, respectively.
24
<PAGE>
AMATI COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 27, 1996
Capitalized software development costs related to the Company's OEM
market business, shown in other assets in the accompanying Consolidated
Balance Sheets was $492,000 for fiscal 1995 and $246,000 included in other
current assets for fiscal 1996.
ACCRUED EXPENSES
Accrued expenses include the following:
JULY 29, JULY 27,
1995 1996
-------- ---------
Accrued employee compensation . . . . . . . . . . $ 350 $ 793
Facilities reserve. . . . . . . . . . . . . . . . 126 --
Other . . . . . . . . . . . . . . . . . . . . . . 301 479
-------- ---------
$ 777 $1,272
-------- ---------
REVENUE RECOGNITION
The Company generally recognizes revenue from product sales upon
shipment to the customer. Revenues from software and engineering development
services are recognized as the Company performs the services in accordance
with contract terms. Revenues from maintenance and extended warranty
agreements are recognized ratably over the term of the agreement. The Company
also licenses products to OEMs and recognizes royalties as specified in the
license agreement when shipment of the licensed product by the OEM is
reported to the Company. Service maintenance, warranty and support revenues
accounted for less than 10% of the Company's total revenues.
The Company recognizes revenue from sales of software in accordance with
the American Institute of Certified Public Accountants' Statement of Position
("SOP") 91-1, "Software Revenue Recognition." The SOP requires, among other
things, that the sales value of post contract customer support which is
included as part of an initial warranty period, must be deferred and
amortized over the warranty period. Deferred revenues related to
post-contract customer support were $68,000 and $123,000 for fiscal years
1995 and 1996, respectively. These costs are included in accrued expenses in
the Company's Consolidated Balance Sheets.
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
For purposes of the Statements of Cash Flows, cash and cash equivalents
are defined as cash in banks and highly liquid investments with original
maturity dates of three months or less.
Cash paid for interest was $21,000, $7,000, and $56,000 for the fiscal
years 1994, 1995 and 1996, respectively. Cash paid for income taxes were
$34,000, $20,000, and $73,000 for fiscal years 1994, 1995 and 1996,
respectively.
INVESTMENTS
In accordance with SFAS No. 115, the Company has classified all of its
marketable debt securities as held-to-maturity, and has accounted for these
investments at amortized cost. Accordingly, no adjustment for unrealized
holding gains or losses has been reflected in the Company's financial
statements. At July 29, 1995, the Company's held-to-maturity securities
consisted of treasury bills with contractual maturities of less than twelve
months and the carrying amount of these investments approximated market value.
25
<PAGE>
AMATI COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 27, 1996
FUNDED DEVELOPMENT AGREEMENTS
The Company has entered into certain funded development arrangements
with IBM. These arrangement typically provide funding to the Company to
develop on a best efforts basis certain products or product enhancements
which IBM is interested in reselling to its customers. Under these
arrangements, the Company retains the rights to manufacture the developed
products and IBM purchases the manufactured products from the Company for
distribution to IBM's customers. The arrangements typically include a
minimum purchase commitment by IBM if the development is successful. Costs
under these agreements are deferred until the related development revenues
are recognized. Revenues under these agreements are generally recognized
when certain contractual milestones are met. Total revenues recognized under
these agreements were $555,000, $276,000 and $419,000 in fiscal 1994, 1995
and 1996, respectively.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. Actual results could differ from those estimates.
RECLASSIFICATION
Prior years' amounts in the Consolidated Financial Statements have been
reclassified where necessary to conform to the fiscal 1996 presentation.
NOTE 3 CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS
Financial instruments which may potentially subject the Company to a
concentration of credit risk principally consist of accounts receivable. The
Company generally does not require collateral on accounts receivable as the
majority of the Company's customers are large, well established companies.
During November 1995, the Company began shipping the Overture series of
transceivers. The Overture 4 is a prototype that does not have a low enough
cost or power consumption for mass deployment and is to be phased out in
favor of the next series of Overture 8. In the third quarter of fiscal 1996,
the Company delivered the Overture 8, which is characterized by a high
bandwidth as defined by the ANSI standards. This product is currently
installed in its first field trial of broadcast video in Australia. Sales in
fiscal 1996 of the Overture 4 and Overture 8 series of transceivers for use
in field trials were $999,000 and $819,000, respectively. In addition,
contract revenues of $148,000 from customization of products were also
realized in fiscal 1996. The Company anticipates the Overture series of
products will continue to be represented at international field trials in
fiscal 1997.
The Company also designs, manufactures and markets data communications
equipment and provides technical support and maintenance services related
thereto. Sales to IBM as a percent of net sales were 65%, 83% and 69% in
fiscal 1994, 1995 and 1996, respectively. The Company has a concentration of
accounts receivable with IBM of $724,000 as of July 27, 1996.
Export sales of connectivity products, primarily to Western Europe and
Canada in fiscal 1994, 1995 and 1996, represented 1-2% of total net sales.
Shipments of the Overture series of transceivers primarily to the countries
of Australia, Israel, Germany and Italy accounted for 15% of total revenues
in fiscal 1996.
26
<PAGE>
AMATI COMMUNICATIONS CORPORATION NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (CONTINUED) JULY 27, 1996
NOTE 4 LICENSE AGREEMENTS
The Company has certain license agreements (the "Original Agreements")
with Stanford University and University Ventures II, a California limited
investment partnership, whereby it was granted exclusive worldwide rights to
core technology and was required to further develop commercial applications
and licensed products in the field of use to maintain these agreements. In
exchange for the Original Agreements, the Company agreed to issue 125,000
shares of Series A convertible preferred stock to each licensor and pay
certain royalties on revenue generated from the licensed technology. Both
Original Agreements contained antidilution provisions in the event the
Company raised capital from the sale of stock. The term of the Original
Agreements extends to the last expiration date of the licensed patents. The
Company accounted for the license agreements as a transfer of nonmonetary
assets from its founders and recorded the license at the transferor's
historical cost basis of zero. On May 1, 1994, the Original Agreement with
Stanford University was revised to include a one-time fee of $250,000 and an
annual license maintenance fee of $25,000. The revised Original Agreements
provides for Stanford University to receive higher royalties on the Company's
revenues and provides that Stanford University's ownership in the Company
will not be diluted below 3% without a right of first refusal to participate
in future stock issuances, except in an initial public offering. Stanford
University may terminate the agreement if the Company fails to remedy any
conditions causing default, breach or incorrect reporting under the terms and
conditions of the license agreement within thirty days.
NOTE 5 NOTES PAYABLE
The Company has notes payable in the amount of $395,000, of which
$325,000 bear interest at 8% per annum and $70,000 at 12% per annum . All
notes are due and payable on January 31, 1997. Interest of $85,000 was
accrued as of July 27, 1996.
The Company has a bank line of credit for $1,250,000 with an interest
arrangement of 2% per month of the average daily factoring account balance
plus an administration fee of .5% of purchased accounts receivable.
Subsequent to year-end, the Company borrowed $330,000 against this bank line
of credit.
NOTE 6 STOCK OPTION PLANS
The Company has four employees' and one non-employee Directors' stock
option plans. The exercise price of options granted under any plan may not
be less than 100% of the fair market value of the stock on the date of grant.
An Incentive Stock Option Plan and a Supplemental Stock Option Plan were
adopted by the Company in 1981. Total shares authorized for issuance
pursuant to the Incentive Stock Option Plan and the Supplemental Stock Option
Plan were 875,000 shares and 1,025,000 shares, respectively. As of July 27,
1996, options to purchase up to 35,000 shares have been granted pursuant to
these plans and remain exercisable, and there are no options available for
future grant under these plans. Employee stock options issued under this
plan become exercisable at the rate of 25% after six months from the date of
grant and 25% per year thereafter, unless determined otherwise by the Board
of Directors at the time of grant. Both plans expired in October 1991. The
options that have been granted under these plans expire ten years after grant.
The Board of Directors adopted the 1990 Stock Option Plan on September
14, 1990, and it was approved by the Company's stockholders on December 14,
1990. The Company is authorized to issue options to purchase up to 900,000
shares of Company Common Stock pursuant to the 1990 Stock Option Plan. At a
special meeting of the Company's stockholders held on November 10, 1995, the
stockholders approved an amendment to the Company's 1990 Stock Option Plan to
increase the number of shares available for issuance pursuant to this plan in
conjunction with the Agreement of Merger dated August 3, 1995. The Company
may now issue options to purchase an aggregate of up to 3,500,000 shares
pursuant to the amended 1990 Stock Option Plan. As of July 27, 1996, options
to purchase up to 3,070,836 shares have
27
<PAGE>
AMATI COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 27, 1996
been granted pursuant to this plan, of which options to purchase up to
342,675 shares were exercisable on such date and become 17,039 shares were
available for future grant under this plan. Employee stock options issued
pursuant to this plan exercisable at the rate of 25% one year from the date
of the merger and 25% per year thereafter. The maximum term of options
granted under this plan is ten years.
The Old Amati 1992 Stock Option Plan and all outstanding and unexercised
options issued pursuant thereto were assumed by the Company upon consummation
of the merger, as approved by the stockholders of the Company on November 20,
1995. The Company is authorized to grant options to purchase up to an
aggregate of 1,591,234 shares of Company Common Stock pursuant to this plan.
As of July 27, 1996, options to purchase up to 1,207,713 shares of Company
Common Stock have been granted, pursuant to this plan, including options to
purchase up to 374,027 shares which were exercisable as of such date. There
are no shares available for future grants under this plan. Employee stock
options under this plan become exercisable at the rate of 25% one year from
the date of grant and with respect to 1/48 of the number of shares subject to
such option each month thereafter.
On July 12, 1996, the Company adopted the 1996 Stock Option Plan, and
authorized 1,000,000 shares of Company Common Stock. As of July 27, 1996
options to purchase up to 267,500 shares have been granted, no options were
exercisable and 732,500 shares were available for future grants under this
plan.
The Company adopted a 1990 Non-Employee Directors' Stock Option Plan on
September 14, 1990, and it was approved by the Company's stockholders on
December 14, 1990. The Company is authorized to issue options to purchase up
to an aggregate of 395,000 shares of Company Common Stock pursuant to this
plan. On the date the plan was adopted, each non-employee Director then in
office was granted an option to purchase up to 25,000 shares of common stock
of the Company. Each person who is elected for the first time to be a
non-employee Director will automatically be granted an option to purchase
25,000 shares of the Company's common stock pursuant to this plan, which
options will be immediately exercisable. On December 2, 1993, the plan was
amended to reduce by 150,000 shares the number of shares available for
issuance pursuant to the plan, leaving 245,000 shares available for grant
under this plan. As of July 27, 1996, options to purchase up to 67,500
shares have been granted pursuant to this plan, of which options to purchase
up to 52,500 shares were exercisable as of such date and 70,000 shares were
available for future grants under this plan.
On September 1 of each year commencing September 1, 1991, an option to
purchase 10,000 shares of the Company's common stock shall automatically be
granted to each non-employee Director then in office. These options become
exercisable at the rate of 25% after six months from the date of grant and
25% per year thereafter. These options expire ten years after grant.
Stock option activity under these plans was as follows:
OPTIONS OPTION PRICE
OUTSTANDING PER SHARE
----------- -------------
Balance, July 31, 1993. . . . . . . . . . . . . . 1,405,475
Granted . . . . . . . . . . . . . . . . . . . . . 20,000 $1.13 - $1.13
Exercised . . . . . . . . . . . . . . . . . . . . (76,250) $0.75 - $1.06
Canceled. . . . . . . . . . . . . . . . . . . . . (253,950) $1.00 - $3.25
----------
Balance, July 30, 1994. . . . . . . . . . . . . . 1,095,275
Granted . . . . . . . . . . . . . . . . . . . . . 160,000 $1.19 - $2.03
Exercised . . . . . . . . . . . . . . . . . . . . (150,250) $0.75 - $1.53
Canceled. . . . . . . . . . . . . . . . . . . . . (66,100) $0.75 - $1.88
----------
Balance, July 29, 1995. . . . . . . . . . . . . . 1,038,925
Granted . . . . . . . . . . . . . . . . . . . . . 4,876,145 $0.01 -$22.00
Exercised . . . . . . . . . . . . . . . . . . . . (1,238,077) $0.01 - $8.13
Canceled. . . . . . . . . . . . . . . . . . . . . (28,444) $1.13 - $2.13
----------
Balance, July 27, 1996. . . . . . . . . . . . . . 4,648,549
----------
28
<PAGE>
On July 27, 1996, there were 4,648,549 shares of Company common stock
reserved for issuance upon the exercise of outstanding options and 819,539
shares of common stock reserved for future grants under all stock option plans.
During October 1995, the Financial Accounting Standards Board issued
Statement No. 123 ("SFAS No. 123")," Accounting for Stock-Based
Compensation", which establishes a fair value based method of accounting for
stock-based compensation plans requires additional disclosures for those
companies who elect not to adopt the new method of accounting. SFAS No. 123
will be effective for fiscal years beginning after December 15, 1995 and
management does not expect it to have a material effect on the Company's
financial condition or results of operations.
29
<PAGE>
AMATI COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JULY 27, 1996
NOTE 7 INCOME TAXES
As of July 27, 1996, the Company's tax net operating loss carryforwards
for federal tax purposes were approximately $26,741,000. The United States
Tax Reform Act of 1986 contains provisions which limit the amount of net
operating loss carryforwards which may be utilized in any given fiscal year
when a significant change in ownership interest occurs. These carryforwards
expire in various amounts through fiscal 2011. The Company also has certain
tax credit carryforwards of $1,395,000 which expire in various amounts
through the year 2009. The United States Tax Reform Act of 1986 contains
provisions that may limit the net operating loss carryforwards and research
and development credits available to be used in any given year should certain
events occur. Management of the Company believes, however, that such a
limitation will not have a significant impact on the overall utilization of
its net operating loss carryforwards.
The Company has an additional $2,234,000 of net operating loss
carryforwards which were acquired in connection with a fiscal 1988
acquisition. The change in ownership of the acquired company will affect the
availability and timing of the amount of prior losses to be used to offset
taxable income in future years. These carryforwards expire in various amounts
through the year 2005.
As of July 27, 1996, the Company also has net operating loss
carryforwards of approximately $6,627,000 available to offset future
California state taxable income. These carryforwards expire in various
amounts through the year 2001. The Company also has certain California tax
credit carryforwards of $86,000.
The provision for income taxes is as follows (in thousands):
JULY 30, JULY 29, JULY 27,
1994 1995 1996
-------- -------- --------
Provision for income taxes:
Current federal. . . . . . . . . . . . . . . . . $ 11 $ 39 $ 17
Current state. . . . . . . . . . . . . . . . . . 16 58 26
-------- -------- --------
Total provision for income taxes . . . . . . . $ 27 $ 97 $ 43
-------- -------- --------
The difference between the Company's effective income tax rate and
the Federal statutory rate is as follows:
JULY 30, JULY 29, JULY 27,
1994 1995 1996
-------- -------- --------
Statutory federal income tax rate . . . . . . . 34% 34% (34)%
State income tax rate, net of federal benefit . 7 7 7
Previous losses not benefited . . . . . . . . . (36) (36) 32
-------- -------- --------
Income tax rate . . . . . . . . . . . . . . . . 5% 5% 5%
-------- -------- --------
30
<PAGE>
AMATI COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 27, 1996
The major components of the net deferred tax asset are as follows
(in thousands):
JULY 29, JULY 27,
1995 1996
-------- --------
Deferred tax assets:
Cumulative temporary differences . . . . . . . . $ 471 $1,468
Tax credits. . . . . . . . . . . . . . . . . . . 1,189 1,395
Net operating loss . . . . . . . . . . . . . . . 7,662 9,496
Other accruals . . . . . . . . . . . . . . . . . 199 118
-------- --------
Total assets . . . . . . . . . . . . . . . . 9,521 12,477
Valuation allowance. . . . . . . . . . . . . . . (9,179) (12,392)
-------- --------
Net deferred income tax asset. . . . . . . . . . 342 85
Deferred tax liabilities:
Capitalized software expenditures. . . . . . . . 342 85
-------- --------
Total liabilities. . . . . . . . . . . . . . 342 85
-------- --------
Total net deferred tax assets . . . . . . . . . . $ 0 $ 0
-------- --------
NOTE 8 NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number
of shares outstanding of common stock and common stock equivalents (when
dilutive) using the treasury stock method. No common stock equivalents have
been included in 1996 because the effect would be to decrease the loss per
share.
NOTE 9 LEASE COMMITMENTS
At July 27, 1996, approximate future minimum rental commitments under
all noncancelable operating leases are as follows (in thousands):
FISCAL YEAR RENTALS
- - ----------- RENTAL RECEIVABLE
PAYMENTS UNDER SUBLEASES
-------- ---------------
1997. . . . . . . . . . . . . . . . . . . . . . . $ 1,029 $ 221
1998. . . . . . . . . . . . . . . . . . . . . . . 974 252
1999. . . . . . . . . . . . . . . . . . . . . . . 974 252
2000. . . . . . . . . . . . . . . . . . . . . . . 781 -
2001. . . . . . . . . . . . . . . . . . . . . . . 781 -
Thereafter. . . . . . . . . . . . . . . . . . . . 736 -
-------- ------
$ 5,275 $ 725
-------- ------
Total rent expense for all operating leases amounted to
approximately $1,128,000, $1,038,000, and $971,000 in fiscal 1994, 1995 and
1996, respectively. Rent expense in fiscal 1994, 1995 and 1996 is before
sublease income of $231,000, $297,000, and $137,000.
33
<PAGE>
AMATI COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 27, 1996
NOTE 10 LITIGATION
In November 1993, an action was brought against the Company for damages
related to the use of the Company's products. The plaintiff filed a suit
claiming repetitive stress injuries resulting from the use of the Company's
product in the course of employment with American Airlines from the period
May 1981 through July 1991. The plaintiff alleges damages in the amount of
$1 million and seeks punitive damages of $10 million. The Company believes
that the claim is without merit and has tendered defense of this action to its
insurance carriers. In the opinion of management, the outcome of this litigation
will not have a material adverse effect on the Company's financial position or
its results of operations.
NOTE 11 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly information is for the years ended July 29, 1995 and
July 27, 1996.
<TABLE>
<CAPTION>
FISCAL 1995
QUARTER ENDED OCTOBER 29, JANUARY 28, APRIL 29, JULY 29,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1994 1995 1995 1995
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales. . . . . . . . . . . . . $3,063 $2,638 $3,036 $3,303
Gross Profit . . . . . . . . . . . $1,315 $1,192 $1,169 $1,648
Net Income . . . . . . . . . . . . $ 212 $ 307 $ 441 $ 876
Net Income Per Share . . . . . . . $ 0.02 $ 0.03 $ 0.04 $ 0.07
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996
QUARTER ENDED OCTOBER 28, JANUARY 27, APRIL 27, JULY 27,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1996 1996 1996
- - ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales. . . . . . . . . . . . . $3,354 $ 2,524 $3,756 $ 2,451
Gross Profit . . . . . . . . . . . $1,514 $ 978 $1,576 $ 613
Net Income (Loss). . . . . . . . . $ 816 $(32,199) $ (498) $(2,197)
Net Income (Loss) Per Share. . . . $ 0.07 $ (2.12) $(0.03) $ (0.13)
</TABLE>
NOTE 12 ACQUISITION OF OLD AMATI
On November 28, 1995, the Company acquired all of the outstanding shares of
Amati Communications Corporation ("Old Amati") for approximately $29.5 million.
The purchase price consisted of the issuance of 2.6 million shares of Company
common stock in exchange for all shares of Old Amati common stock, 1.5 million
shares of Company common stock in exchange for all shares of Old Amati Series A
Preferred Stock, warrants for the purchase of up to 1.1 million shares of
Company common stock in exchange for all Old Amati warrants, and options to
purchase up to 1.6 million shares of Company common stock in exchange for all
options to purchase Old Amati Common stock. The purchase price also includes
registration and other acquisition costs of $0.8 million, total cash advances to
Old Amati prior to the merger of $5.6 million and is net of the estimated
proceeds from the assumed exercise of Old Amati options and warrants of
$3.3 million.
The transaction was accounted for using the purchase method of accounting.
The Company allocated the purchase price to the net assets based upon their
estimated fair values. The fair values of tangible assets acquired and
liabilities assumed were $1.2 million and $3.2 million, respectively. The
balance of the purchase price, $31.6 million,
34
<PAGE>
AMATI COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
JULY 27, 1996
was charged to earnings to write-off in-process research and development that
had not reached technological feasibility and had no alternative future uses.
The following table reflects unaudited pro forma combined results of
operations of the Company and Old Amati on the basis that the acquisition had
taken place and the related charge, noted above, was recorded at the beginning
of the fiscal year for each of the periods presented:
TWELVE MONTHS ENDED
JULY 29, 1995 JULY 27, 1996
------------- -------------
(In thousands except per share data)
Revenues $ 13,092 $ 13,512
Net Loss $(35,666) $(36,527)
Net Loss per Share $ (2.21) $ (2.15)
Number of Shares used
in Computation 16,146 17,008
In management's opinion, the unaudited pro-forma combined results of
operations are not necessarily indicative of the actual results that would have
occurred had the acquisition been consummated at the beginning of 1995 or at the
beginning of 1996 or of future operations of the combined companies under the
ownership and management of the Company.
NOTE 13 SUBSEQUENT EVENT
On October 3, 1996, the Company entered into an Agreement with certain
investors (the "Investors") under which the Company could raise up to
$15,000,000 in equity, subject to certain conditions. The Company
anticipates the initial financing under the Agreement, if completed, would be
$10,000,000. The number of common shares to be issued under the agreement is
subject to the market price at the date of issuance. Furthermore, the number
of shares issued could subsequently be increased if the average share price
for a period of time subsequent to the date of issuance is less than the
share price at the date of issuance. In addition, under the Agreement the
Investors were issued warrants to purchase 600,000 shares of common stock.
Such warrants are exercisable for a period of five years and allow for an
optional net exercise whereby the Company would not receive any cash upon
exercise.
In a related transaction, on October 3, 1996 and October 8, 1996, the
Company borrowed an aggregate of $3,000,000 from the Investors, which is
secured by all of the Company's intellectual property. The Company intends
to repay this loan upon completion of the initial financing.
35
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
36
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Executive Officers and Directors of the Company during the fiscal year
and their ages as of the date of filing of the Form 10-K Registration Statement
are as follows:
NAME AGE POSITION
------------------ --- ------------------------------------
Dr. James Gibbons 56 Chairman of the Board
Donald Lucas 66 Director
James Steenbergen 49 President, Chief Executive Officer,
Chief Financial Officer, Director
Dr. John Cioffi 39 Chief Technical Officer, Founder, Director
Aamer Latif 38 Director
Christopher Barnes 47 Vice President of European Sales
Benjamin Berry 47 Vice President of Marketing
David Bivolcic 39 Senior Vice President
Ronald Carlini 57 Vice President of Corporate Development
Joseph Grady, Jr. 49 Vice President of Worldwide Sales
James Hood 55 Vice President of Engineering
Teresita Medel 49 Treasurer, Secretary and Controller
Dr. James Gibbons served as the Chairman of the Board of Directors of Old
Amati since 1992. Dr. Gibbons is a Professor of Electrical Engineering and has
served as the Dean of the School of Engineering at Stanford University since
1984. Dr. Gibbons currently serves on the Board of Directors of Lockheed
Corporation, Raychem Corporation, Centigram Corporation, El Paso Natural Gas
Company and Cisco Systems, Incorporated. Dr. Gibbons was elected as Chairman of
the Company's Board effective December 4, 1995.
Mr. Donald Lucas, a venture capitalist, has been a Director of the Company
since 1968. He is also a director of Cadence Design Systems, Inc., Delphi
Information Systems, Inc., Kahler Corporation, Oracle Corp., Macromedia, Inc.,
Quantum Health Resources, Inc., Racotek, Inc., Transcend Services, Inc., and
Tricord Systems, Incorporated.
Mr. James Steenbergen, President and CEO, has been Chief Executive Officer
and President for several high-technology companies involved in the manufacture
and development of systems for the telecommunications industry. These companies
include Optilink Corporation, SRX and Granger Associates. Mr. Steenbergen was
elected to the Company's Board effective December 4, 1995.
Dr. John Cioffi, Chief Technical Officer, is the founder of Old Amati and
has served as Vice President of Engineering, Chief Technical Officer and
Director of Old Amati since 1991. Dr. Cioffi has also been a Professor of
Electrical Engineering at Stanford University since 1986. Dr. Cioffi sits on
the technical boards of C-Cube Microsystems, Inc., and Wireless Access Inc. and
has served on the technical staffs of Bell Laboratories Inc. and IBM's Almaden
Research Laboratories. Dr. Cioffi was elected to the Company's Board effective
December 4, 1995.
Mr. Aamer Latif was elected President, Chief Executive Officer, Chief
Financial Officer and Director of the Company in May 1993; he was elected
Chairman in July 1995 and served in that capacity until December 1995. Prior to
1993, Mr. Latif served in various positions in Engineering with the Company
since 1980. He resigned as an officer of the Company on November 27, 1995.
Mr. Christopher Barnes, Vice President of European Sales, joined the
Company in July 1996. Mr. Barnes has extensive experience in global high
technology markets, having previously been responsible for international sales
in various leading communications companies, including Marconi UK, DSC
Communications and Telesciences.
37
<PAGE>
Mr. Benjamin Berry, Vice President of Marketing, was previously Vice
President of Marketing and Business Development for Digital Link Corporation, a
manufacturer of high-speed data communications equipment. He has also been a
Division Manager at Granger Associates and a Member of Technical Staff for Bell
Laboratories.
Mr. David Bivolcic was elected Senior Vice President of the Company in May
1993. Prior to that, he served as the Company's Vice President, Operations
since December 1989.
Mr. Ronald Carlini, Vice President of Corporate Development, came to the
Company after holding a variety of senior management positions in the computer
and telecommunications industries, including General Manager and Executive Vice
President at ADACOM Corporation; General Manager and Vice President of Telex
Corporation; and Division Account Marketing Manager at IBM Corporation.
Mr. Joseph Grady, Jr., served as Old Amati's Vice President of Worldwide
Sales from August of 1994 until the merger with the Company, and continues in
that position with the Company. Previously, Mr. Grady served as Assistant Vice
President of Sales of Newbridge Networks Corporation from 1992 to 1994. Mr.
Grady served as Manager of Distribution, Sales and Development for Octel
Communications Corporation from 1991 to 1992. Mr. Grady also served as Vice
President of Telephone Company Sales for Racal Data Communications Inc. for 1985
to 1991.
Mr. James Hood, Vice President of Engineering has thirty years of industry
experience. He served as President and Executive Officer of MERET Optical
Communications, Inc. Prior to that, he was President and Chief executive
Officer of CATEL Telecommunications Inc.
Ms. Teresita Medel was elected Secretary of the Company in December 1994.
She has served as Treasurer and Controller of the Company since July 1993.
Prior to 1993, she had served as the Company's Accounting Manager since 1979.
38
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The sections entitled "Executive Compensation" appearing in the Company's
1996 Proxy Statement is incorporated herein by reference.
BOARD COMPENSATION
Each director who was not also an officer or employee of the Company
received a fee of $2,000 per quarter in fiscal 1996. In addition, each such
director received a fee of $2,000 for each Board meeting attended and $2,000 for
each Audit Committee meeting attended during fiscal 1994. Board resolutions
adopted April 26, 1996 discontinues the payment of quarterly and attendance
fees. The Company has a policy of reimbursing directors for reasonable travel
and related expenses incurred in attending Board and Committee meetings.
Donald L. Lucas, a director of the Company, did not receive any of the
aforementioned payments; however, Mr. Lucas in fiscal 1996 received $21,600 in
consulting fees for services rendered to the Company.
Directors who are not employees of the Company or an affiliate of the
Company are eligible to participate in the Company's 1990 Non-Employee
Directors' Stock Option Plan. Pursuant to such plan, on September 1, 1995, each
non-employee Director received an option to purchase up to 10,000 shares of the
Company's Common Stock on September 1, 1995 at an exercise price of $4.63 per
share. Grants are automatically made annually under this plan.
39
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Company's 1996 Proxy Statement is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) INDEX TO FINANCIAL STATEMENTS
The following consolidated financial statements are included in
Part II, Item 8:
Page
----
Report of Independent Public Accountants................... 18
Consolidated Balance Sheets as of July 29, 1995 and
July 27, 1996............................................. 19-20
Consolidated Statements of Operations for the Three Years
Ended July 27, 1996....................................... 21
Consolidated Statements of Stockholders' Equity for the
Three Years Ended July 27, 1996........................... 22
Consolidated Statements of Cash Flows for the Three Years
Ended July 27, 1996....................................... 23
Notes to Consolidated Financial Statements................. 24-35
(2) INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule II Valuation and Qualifying Accounts.............. 44
All other schedules called for under Regulation S-X are omitted because
they are not applicable, not required, or required information is immaterial
or is shown in the financial statements or notes thereto.
(3) INDEX TO EXHIBITS
See section (c).
(b) REPORTS ON FORM 8-K
None.
(c) INDEX TO EXHIBITS
2.1 The Amended and Restated Agreement and Plan of Incorporated
Reorganization and Merger among Registrant, Amati by Reference
Communications Corporation and IA Acquisition
Corporation, dated August 3, 1995 and the Amendment
thereto dated October 6, 1995 are filed as Exhibit 2.1
to the Registrant's Form S-4 Registration Statement
File No. 33-62023 dated October 16, 1995.
3.1 Restated Certification of Incorporation filed with the Incorporated
Delaware Secretary of State of November 17, 1989 is by Reference
filed as Exhibit 3.1 to Registrant's Form 10-K Annual
Report for its fiscal year ended July 28, 1990.
3.2 By-Laws as amended through July 21, 1989 are filed as Incorporated
Exhibit 3(iii) to Registrant's Form 10-K Annual Report by Reference
for its fiscal year ended July 29, 1989.
10.1* 1981 Incentive Stock Option Plan as amended through Incorporated
October 12, 1987, is filed as Exhibit 10(iii) to by Reference
Registrant's Form 10-K Annual Report for its fiscal
year ended August 1, 1987.
10.2* 1981 Supplemental Stock Option Plan as amended through Incorporated
October 12, 1987, is filed as Exhibit 10(iv) to by Reference
Registrant's Form 10-K Annual Report for its fiscal
year ended August 1, 1987.
41
<PAGE>
10.3 Lease dated August 27, 1985 between Registrant and Incorporated
Zanker/North Pointe Associates with respect to by Reference
Registrant's facilities at 3801 Zanker Road, San Jose,
California is filed as Exhibit 10(xiii) to Registrant's
Form 10-K Annual Report for its fiscal year ended
August 3, 1985.
10.4* 1985 Director's Stock Option Plan as amended through Incorporated
December 11, 1987 is filed as Exhibit 28 to Registrant's by Reference
Form S-8 Registration Statement File No. 33-21103.
10.5 Lease amendment dated September 19, 1990 between Incorporated
Registrant and Zanker/North Pointe Associates with by Reference
respect to Registrant's facilities at 3801 Zanker Road,
San Jose, California is filed as Exhibit 10.6 to
Registrant's Form 10-K Annual Report for its fiscal
year ended July 28,1990.
10.6* 1990 Stock Option Plan adopted September 14, 1990 is Incorporated
filed as Exhibit 10.8 to Registrant's Form 10-K Annual by Reference
Report for its fiscal year ended July 28, 1990.
10.7* 1990 Non-Employee Director's Stock Option Plan adopted Incorporated
September 14, 1990 is filed as Exhibit 10.9 to by Reference
Registrant's Form 10-K annual Report for its fiscal
year ended July, 28, 1990.
10.8 Manufacturing Agreement dated October 9, 1989 between Incorporated
Registrant and International Business Machines by Reference
Corporation is filed as Exhibit 10.9 to Registrant's
Form 10-K Annual Report for its fiscal year ended
July 27, 1991 as amended.
10.9 Lease dated February 10, 1994 between Registrant and Incorporated
Zanker/North Pointe Associates with respect to by Reference
Registrant's facilities at 3801 Zanker, San Jose,
California is filed as Exhibit 10.9 to Registrant's
Form 10-K Annual Report for its fiscal year ended July 30,
10.10 Registration Rights Agreement is filed as Exhibit 10.1 Incorporated
to Registrant's Form S-3 dated March 8, 1996. by Reference
10.11* Affiliate's Agreement between the Registrant and Incorporated
Dr. John Cioffi is filed as Exhibit 10.3 to Registrant's by Reference
Form S-3 dated March 8, 1996.
10.12* Severance Agreement dated May 15, 1995, amended Incorporated
August 12, 1995 between Registrant and Aamer Latif is by Reference
filed as Exhibit 10.15 to Registrant's Form 10-Q for
the quarter ended October 28, 1995.
10.13 License Agreement dated January 1, 1992 between Incorporated
Registrant and Stanford University and University by Reference
Ventures II, a California limited investment partnership,
is filed as Exhibit 10.16 to the Registrant's Form 10-Q
for the quarter ended January 27, 1996. (Confidential
treatment has been requested with respect to specific
portions of this exhibit)
10.14 License Agreement dated March 16, 1995 between Registrant Incorporated
and Motorola is filed as Exhibit 10.17 to the by Reference
Registrant's Form 10-Q for the quarter ended January 27,
1996. (Confidential treatment has been requested with
respect to specific portions of this exhibit).
10.15* Employment Agreement dated May 5, 1995 with Dr. John Incorporated
Cioffi is filed as Exhibit 10.18 to the Registrant's by Reference
Form 10-Q for the quarter ended January 27, 1996.
42
<PAGE>
10.16 Lease dated July 15, 1996 between Registrant and Berg
and Berg Developers with respect to Registrant's
facilities at 2043 Samaritan Drive, San Jose is filed
as Exhibit 10.16 hereto.
10.17* 1996 Stock Option Plan adopted July 12, 1996 is filed
as Exhibit 10.17 hereto.
10.18 Investment Agreement dated October 3, 1996 among Incorporated
Registrant, Quantum Industrial Partners LDC, S-C by Reference
Phoenix Holdings, L.L.C., Winston Partners L.P.,
Winston Partners II LDC, and Winston Partners II
L.L.C. is filed as Exhibit 4.1 to Registrant's Form
S-3 dated October 8, 1996.
10.19 Form of Class A Warrant is filed as Exhibit 4.2 to Incorporated
Registrant's Form S-3 dated October 8, 1996. by Reference
10.20 Form of Class B Warrant is filed as Exhibit 4.3 to Incorporated
Registrant's Form S-3 dated October 8, 1996. by Reference
10.21 Registration Rights Agreement dated October 3, 1996 Incorporated
among Registrant and Quantum Industrial Partners LDC, by Reference
S-C Phoenix Holdings, L.L.C., Winston Partners L.P.,
Winston Partners II LDC, and Winston Partners II L.L.C.
is filed as Exhibit 4.4 to Registrant's Form S-3 dated
October 8, 1996.
21.1 A list of Registrant's subsidiaries is filed as
Exhibit 21.1 hereto
23.1 Consent of Independent Public Accounts is filed as
Exhibit 23.1 hereto.
24.0 Power of Attorney.
The exhibits not filed herewith were previously filed with the Commission as
indicated and are hereby incorporated by reference.
___________
* Management Contracts or Compensatory Plans.
43
<PAGE>
SCHEDULE II
AMATI COMMUNICATIONS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
Balance
at Charged to Charged Balance at
Beginning Costs & to Other End of
DESCRIPTION of Period Expenses Accounts Deductions Period
- - -------------------------------------------------------------------------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Year ended July 30, 1994 . . . . $ 32 $ --- $ --- $ (7)(1) $ 25
Year ended July 29, 1995 . . . . $ 25 $ --- $ --- $ (4)(1) $ 21
Year ended July 27, 1996 . . . . $ 21 $ 20 $ 5 $ (16)(1) $ 30
ACCRUED RESTRUCTURING CHARGE:
Year ended July 30, 1994 . . . . $1,381 $ --- $ --- $(540)(2) $ 841
Year ended July 29, 1995 . . . . $ 841 $ --- $ --- $(547)(2) $ 294
Year ended July 27, 1996 . . . . $ 294 $ --- $ --- $ --- $ 294
(1) Uncollectible accounts written off
(2) Usage
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on October 18, 1996.
Amati Communications Corporation
By: /S/ JAMES E. STEENBERGEN
----------------------------
James E. Steenbergen
CHAIRMAN OF THE BOARD, PRESIDENT ,
CHIEF EXECUTIVE OFFICER, AND CHIEF
FINANCIAL OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James Steenbergen and Teresita Medel,
or either of them, with the power of substitution, his attorney in fact, to
sign any amendments to this Registration Statement and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each of said attorney-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this Report
has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/S/ DR. JAMES GIBBONS Chairman of the Board October 18, 1996
---------------------
Dr. James Gibbons
/S/DONALD LUCAS Director October 18, 1996
---------------
Donald Lucas
/S/ DR. JOHN CIOFFI Director October 18, 1996
-------------------
Dr. John Cioffi
/S/ AAMER LATIF Director October 18, 1996
---------------
Aamer Latif
/S/ JAMES STEENBERGEN Chairman of the Board, President, October 18, 1996
--------------------- Chief Executive Officer, Chief
James Steenbergen Financial Officer (Principal
Executive Officer) (Principal
Financial Officer)
/S/ TERESITA MEDEL Treasurer, Secretary and Corporate October 18, 1996
------------------ Controller (Principal Accounting
Teresita Medel Officer)
45
<PAGE>
EXHIBIT 10.16
STANDARD FORM LEASE
PARTIES: This Lease, executed in duplicate at Cupertino, California, on April
, 1996, by and between Berg & Berg Developers, a California General
Partnership, and Amati Communications Corporation, a Delaware Corporation,
hereinafter called respectively Lessor and Lessee, without regard to number
or gender.
USE: WITNESSETH: That Lessor hereby leases to Lessee, and Lessee hires from
Lessor, for the purpose of conducting therein office, research and
development, light manufacturing, and warehouse activities, and any other
legal activity; and for no other purpose without obtaining the prior written
consent of Lessor.
PREMISES: The real property with appurtenances as shown on Exhibit A.1 (the
"Premises") situated in the City of San Jose, County of Santa Clara, State of
California, and more particularly described as follows:
Lessee's portion of the Premises is 48,677 square feet of building,
including all improvements thereto, as shown on Exhibit A.2 including
the right to use up to 169 unreserved parking spaces as shown on
Exhibit A.3. The address for the leased portion of the Premises is
2043 Samaritan Drive, San Jose, California. Lessee's pro-rata share
of the building is 64.2%.
TERM: The term shall be for sixty (60) months and fifteen (15) days unless
extended pursuant to Section 35 of this Lease (the "Lease Term"), commencing
on the 15th day of July, 1996 (the "Commencement Date"), and ending on the
31st day of July, 2001.
RENT: Base rent shall be payable in monthly installments as follows:
Base rent Estimated CAC Total
--------- ------------- -----
Days 1 through 15 $29,206 $ 7,302 $36,508
Months 1 through 12 $58,412 $14,603* $73,015
Monthly base rent to increase by 3% on the annual anniversary of the
Commencement Date each year during the Lease Term over the prior year's rent.
CAC charges to be adjusted per Common Area Charges Section below.
Base rent as scheduled above shall be payable in advance on or before the
first day of each calendar month during the Lease Term. The term "Rent," as
used herein, shall be deemed to be and to mean the base monthly rent and all
other sums required to be paid by Lessee pursuant to the terms of this Lease.
Rent shall be paid in lawful money of the United States of America, without
offset or deduction, and shall be paid to Lessor at such place or places as
may be designated from time to time by Lessor. Rent for any period less than
a calendar month shall be a pro rata portion of the monthly installment.
Upon execution of this Lease, Lessee shall deposit with Lessor the first
month's rent.
COMMON AREA CHARGES: Lessee shall pay to Lessor, as additional Rent, an
amount equal to 20.64% of the total common area charges of the Project and
64.2% of the total common area charges for the Premises as defined below (the
common area charges for the Project and the common area charges for the
Premises collectively referred to herein as ("CAC")). Lessee shall pay to
Lessor as Rent, on or before the first day of each calendar month during the
Lease Term, subject to adjustment and reconciliation as provided hereinbelow,
the sum of Fourteen Thousand Six Hundred Three Dollars ($14,603), said sum
representing Lessee's estimated monthly payment of Lessee's percentage share
of CAC. It is understood and agreed that Lessee's obligation under this
paragraph shall be prorated to reflect the Commencement Date and the end of
the Lease Term. Upon execution of this Lease, Lessee shall deposit with
Lessor the first month's estimated CAC.
Lessee's estimated monthly payment of CAC payable by Lessee during the
calendar year in which the Lease commences is set forth above. At or prior
to the commencement of each succeeding calendar year term (or as soon as
practical thereafter), Lessor shall provide Lessee with Lessee's estimated
monthly payment for CAC which Lessee shall pay to Lessor as Rent. Within 120
days of the end of the calendar year and the end of the Lease Term, Lessor
shall provide Lessee a statement of actual CAC incurred including capital
reserves for the preceding year or other applicable period in the case of a
termination year. If such statement shows that Lessee has paid less than its
actual percentage, then Lessee shall on demand pay to Lessor the amount of
such deficiency. If such statement shows that Lessee has paid more than its
actual percentage, then Lessor shall, at its option, promptly refund such
excess to Lessee or credit the amount thereof to the Rent next becoming due
from Lessee. Lessor reserves the right to revise any estimate of CAC if the
actual or projected CAC show an increase or decrease in excess of 10% from an
earlier estimate for the same period. In such event, Lessor shall provide a
revised estimate to Lessee, together with an
<PAGE>
explanation of the reasons therefor, and Lessee shall revise its monthly
payments accordingly. Lessor's and Lessee's obligation with respect to
adjustments at the end of the Lease Term or earlier expiration of this Lease
shall survive the Lease Term or earlier expiration.
As used in this Lease, CAC shall include but are not limited to, (i) all
items as specified in Paragraphs 5(b), 6, 9, 12, 16 and 31; (ii) utility
costs related to the common areas of the Samaritan Project (the "Project" as
shown on Exhibit A.3) and utility costs related to Lessee's portion of the
Premises; (iii) all costs and expenses including but not limited to supplies,
materials, equipment and tools used or required in connection with the
operation and maintenance of the Project; (iv) licenses, permits and
inspection fees; (v) all other costs incurred by Lessor in maintaining and
operating the Project; (vi) all reserves for capital replacements; and (vii)
an amount equal to three percent (3%) of the actual expenditures for the
aggregate of all CAC, as compensation for Lessor's accounting and processing
services. Lessee shall have the right to review the CAC applicable to this
Lease annually.
SECURITY DEPOSIT: Lessee shall deposit with Lessor the sum of Seventy Three
Thousand Fifteen Dollars ($73,015) (the "Security Deposit"). The Security
Deposit shall be held by Lessor as security for the faithful performance by
Lessee of all of the terms, covenants, and conditions of this Lease
applicable to Lessee. If Lessee commits a default as provided for herein,
including but not limited to a default with respect to the provisions
contained herein relating to the condition of the Premises, Lessor may (but
shall not be required to) use, apply or retain all or any part of the
Security Deposit for the payment of any amount which Lessor may spend by
reason of default by Lessee. If any portion of the Security Deposit is so
used or applied, Lessee shall, within ten days after written demand therefor,
deposit cash with Lessor in an amount sufficient to restore the Security
Deposit to its original amount. Lessee's failure to do so shall be a default
by Lessee. Any attempt by Lessee to transfer or encumber its interest in the
Security Deposit shall be null and void. Upon execution of this Lease,
Lessee shall deposit with Lessor the Security Deposit.
LATE CHARGES: Lessee hereby acknowledges that a late payment made by Lessee
to Lessor of Rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited
to, processing and accounting charges, and late charges, which may be imposed
on Lessor according to the terms of any mortgage or trust deed covering the
Premises. Accordingly, if any installment of Rent or any other sum due from
Lessee is not received by Lessor or Lessor's designee within ten (10) days
after such amount is due, Lessee shall pay to Lessor a late charge equal to
five (5%) percent of such overdue amount. The parties hereby agree that such
late charge represents a fair and reasonable estimate of the costs Lessor
will incur by reason of late payments made by Lessee. Acceptance of such
late charges by Lessor shall in no event constitute a waiver of Lessee's
default with respect to such overdue amount, nor shall it prevent Lessor from
exercising any of the other rights and remedies granted hereunder.
QUIET ENJOYMENT: Lessor covenants and agrees with Lessee that upon Lessee
paying Rent and performing its covenants and conditions under this Lease,
Lessee shall and may peaceably and quietly have, hold and enjoy the Premises
for the Lease Term, subject, however, to the rights reserved by Lessor
hereunder.
IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS:
1. POSSESSION: Possession shall be deemed tendered on July 1, 1996. Rent shall
commence on the Commencement Date.
2. LESSEE'S IMPROVEMENTS: Lessor and Lessee hereby agree that the following
terms and conditions represent the parties mutual understanding and agreement
with respect to Lessee's improvements to the Premises.
1. Lessee shall pay the first Two Hundred Fifty Thousand Dollars ($250,000)
for Lessee's tenant improvements to the Premises with no reimbursement by
Lessor.
2. Lessor shall reimburse Lessee for the next Two Hundred Fifty Thousand
Dollars ($250,000) for additional tenant improvements made by Lessee to the
Premises.
2
<PAGE>
3. Lessor shall also pay Lessee for any additional tenant improvements
necessary in excess of $500,000, up to a maximum of Two Hundred Thousand
Dollars ($200,000) ("Additional TI Funding"), which amount shall be
amortized over the first eighteen (18) months of the Lease Term at 10%
interest per annum, and shall be paid by Lessee to Lessor as additional
Rent, during the first eighteen months of the Lease Term. The amortized
cost for the Additional TI Funding is not included in the base rent
provided for above. The additional Rent to be paid by Lessee to Lessor if
Lessee uses the maximum Additional TI Funding of $200,000 shall be Twelve
Thousand Eleven Dollars ($12,011) per month.
4. All of Lessor's reimbursements to Lessee for tenant improvements
shall be subject to: (a) Lessee paying the first Two Hundred Fifty
Thousand Dollars ($250,000) for tenant improvements to the Premises, (b)
Lessee requesting Lessor to pay up to Four Hundred Fifty Thousand
Dollars ($450,000) for additional tenant improvements to the Premises,
(c) Lessee executing a UCC-1 fixture filing in favor of Lessor or its
assigns securing Lessor or its assigns interest in all tenant
improvements at the Premises, (d) Lessee providing Lessor with evidence
of the costs paid by Lessee for the tenant improvements to the Premises,
(e) Lessee providing Lessor with copies of lien releases from all
suppliers and contractors applicable to the tenant improvements, and (f)
Lessee providing Lessor with a copy of the final inspections from the
City of San Jose applicable to the tenant improvements at the Premises.
5. If at any time after the execution of the Lease, Amati's cash
position falls below Five Hundred Thousand Dollars ($500,000), Amati
shall immediately reduce the principal amount of the Additional TI
Funding by paying to Lessor One Hundred Thousand Dollars ($100,000). After
receipt of the One Hundred Thousand Dollars ($100,000), Lessor shall
provide Lessee with a recalculation of the required amortization payments
applicable to the Additional TI Funding.
6. Lessee shall be responsible for designing, contracting and completing
the tenant improvements at the Premises. Lessee may use the services of
Hallmark Construction; however, in no event will the contractor's
failure to complete the tenant improvements on time result in a delay of
the Commencement Date or Lessee's obligation to commence paying Rent.
7. All tenant improvements shall be completed in a good and workmanlike
manner, in compliance with all government codes, requirements and
regulations, and with all necessary permits. Lessee understands and
acknowledges that the tenant improvements contemplated herein will force
modifications to the Premises to comply with government codes, requirements
and regulations and Lessee shall be responsible for these modifications.
8. Lessor shall review and approve all plans, schedules, and costs for the
tenant improvements to be made to the Premises and Lessor's approval shall
not be unreasonably withheld. If Lessee has not heard back from Lessor
within five (5) business days, then the plans submitted shall be deemed
approved. Time is of the essence. Lessor's primary concern in reviewing
and approving the plans for the tenant improvements is the location of any
restrooms in addition to the overall layout of the Premises. Lessor is
willing to review preliminary single line drawing for layout purposes and
Lessor shall provide any comments within two (2) business days.
9. Lessee and its contractors shall not change or affect the structural
components or structural characteristics of the Premises without signed
engineering drawings and specific written approval of Lessor.
10. Lessee and its contractors shall not change or affect the service of
HVAC, electrical, plumbing, or other services to Lessor's vacant space or
to other tenants at the Premises.
11. Lessee and its general contractor shall provide general liability
insurance in the amount of not less than Five Million Dollars ($5,000,000)
naming Lessor as an additional insured prior to starting any work at the
Premises and prior to taking possession of the Premises.
2.1 ACCEPTANCE OF PREMISES AND COVENANTS TO SURRENDER: . As a material
inducement to the execution and delivery of this Lease by Lessor, Lessee is
leasing the portion of the Premises in an "AS IS" physical condition and in an
"AS IS" state of repair. .Lessor represents that the Premises are in good order
and repair, and comply with all requirements for occupancy as of the date of
lease execution. Lessee agrees on the last day of the Lease Term, or on the
sooner termination of this Lease, to surrender the Premises to Lessor in Good
Condition and Repair. Good Condition and Repair ("Good Condition and Repair")
3
<PAGE>
shall not mean original condition, but shall mean that the Premises are in a
commercially acceptable condition suitable for occupancy by a reasonable
lessee. The interior walls of all office and warehouse areas, the floors of
all office and warehouse areas, all suspended ceilings and any carpeting are
to be cleaned and in Good Condition and Repair. Lessee also agrees to
surrender unto Lessor all alterations, additions, and improvements which may
have been made in, to, or on the Premises by Lessee, except that Lessee shall
ascertain from Lessor, within (30) days before the end of the Lease Term or
earlier termination of this Lease, whether Lessor desires to have the
Premises or any part or parts thereof restored to their condition as of the
Commencement Date of this Lease; if Lessor shall so desire, then Lessee shall
restore said Premises or such part or parts thereof before the end of the
Lease Term or earlier termination of this Lease at Lessee's sole cost and
expense. Lessee, on or before the end of the Lease Term or sooner
termination of this Lease, shall remove all its personal property and trade
fixtures from the Premises, and all such property not so removed shall be
deemed to be abandoned by Lessee. Lessee shall reimburse Lessor for all
disposition costs incurred by Lessor relative to Lessee's abandoned property.
If the Premises are not surrendered at the end of the Lease Term or earlier
termination of this Lease, Lessee shall indemnify Lessor against loss or
liability resulting from any delay caused by Lessee in surrendering the
Premises including, without limitation, any claims made by any succeeding
Lessee founded on such delay.
3. USES PROHIBITED: Lessee shall not commit, or suffer to be committed, any
waste upon the Premises, or any nuisance, or other act or thing which may
disturb the quiet enjoyment of any other tenant in or around the buildings in
which the subject Premises are located or allow any sale by auction upon the
Premises, or allow the Premises to be used for any improper, immoral,
unlawful or objectionable purpose, or place any loads upon the floor, walls,
or ceiling which may endanger the structure, or use any machinery or
apparatus which will in any manner vibrate or shake the Premises or the
building of which it is a part, or place any harmful liquids in the drainage
system of the building. No waste materials or refuse shall be dumped upon or
permitted to remain upon any part of the Premises outside of the building
proper. No materials, supplies, equipment, finished products or
semi-finished products, raw materials or articles of any nature shall be
stored upon or permitted to remain on any portion of the Premises outside of
the building structure, unless approved by the local, state federal or other
applicable governing authority. Lessor consents to Lessee's use of materials
which are incidental to the normal, day-to-day operations of any office user,
such as copier fluids, cleaning materials, etc., but this does not relieve
Lessee of any of its obligations not to contaminate the Premises or related
real property or violated any Hazardous Materials Laws.
4. ALTERATIONS AND ADDITIONS: Lessee shall not make, or suffer to be made,
any alteration or addition to said Premises, or any part thereof, without the
express, advance written consent of Lessor; any addition or alteration to
said Premises, except movable furniture and trade fixtures, shall become at
once a part of the realty and belong to Lessor at the end of the Lease Term
or earlier termination of this Lease. Alterations and additions which are
not deemed as trade fixtures shall include HVAC systems, lighting systems,
electrical systems, partitioning, carpeting, or any other installation which
has become an integral part of the Premises. Lessee agrees that it will not
proceed to make such alterations or additions until all required government
permits have been obtained and after having obtained consent from Lessor to
do so, until five (5) days from the receipt of such consent, so that Lessor
may post appropriate notices to avoid any liability to contractors or
material suppliers for payment for Lessee's improvements. Lessee shall at
all times permit such notices to be posted and to remain posted until the
completion of work. At the end of the Lease Term or earlier termination of
this Lease, Lessee shall remove and shall be required to remove its special
tenant improvements and all related equipment installed by Lessee at or
during the Lease Term and Lessee shall return the Premises to the condition
that existed before the installation of the special tenant improvements.
Notwithstanding the above, Lessor agrees to allow any reasonable alterations
and improvements and will use its best efforts to notify Lessee at the time
of approval if such improvements or alterations are to be removed at Lease
Expiration or earlier termination of this Lease.
5. MAINTENANCE OF PREMISES:
(a) Lessee shall at its sole cost and expense keep and maintain the
interior of the Premises, including, but not limited to, all lighting
systems, temperature control systems and plumbing systems, in Good
Condition and Repair, including any required replacements. Lessee shall
maintain all wall surfaces and floor coverings in Good Condition and
Repair, free of holes, gouges, or defacements.
4
<PAGE>
(b) Lessor shall keep and maintain in Good Condition and Repair including
replacements, at Lessee's expense, based on a pro-rata share of cost based on
square footage or costs directly related to Lessee's use of the Premises the
following, which shall be included in the monthly CAC:
1. The exterior of the building, any appurtenances and every part
thereof, including but not limited to, glazing, sidewalks, parking
areas, electrical systems, HVAC systems, roof membrane, and painting
of exterior walls.
2. The HVAC by a service contract with a licensed air conditioning and
heating contractor which contract shall provide for a minimum of bi-
monthly maintenance of all air conditioning and heating equipment at
the Premises including HVAC repairs or replacements which are either
excluded from such service contract or any existing equipment
warranties.
3. The landscaping by a landscape contractor to water, maintain, trim
and replace, when necessary, any shrubbery and landscaping at the
Premises.
4. The roof membrane by a service contract with a licensed reputable
roofing contractor which contract shall provide for a minimum of semi-
annual maintenance, cleaning of storm gutters, drains, removing of
debris and trimming overhanging trees, repair of the roof and
application of a finish coat every five years at the Premises.
5. Extermination services.
6. Fire monitoring services.
(c) Lessee hereby waives any and all rights to make repairs at the expense of
Lessor as provided in Section 1942 of the Civil Code of the State of
California, and all rights provided for by Section 1941 of said Civil Code.
(d) Lessor shall be responsible for the repair of any structural defects in
the Premises including the roof structure (not membrane), exterior walls and
foundation during the Lease Term.
6. HAZARD INSURANCE: Lessee shall not use, or permit said Premises, or any
part thereof, to be used, for any purpose other than that for which said
Premises are hereby leased; and no use shall be made or permitted to be made
of the Premises, nor acts done, which may cause a cancellation of any
insurance policy covering said building, or any part thereof, nor shall
Lessee sell or permit to be kept, used or sold, in or about said Premises,
any article which may be prohibited by a standard form fire insurance policy.
Lessee shall, at its sole cost and expense, comply with any and all
requirements, pertaining to said Premises, of any insurance organization or
company, necessary for the maintenance of reasonable fire and general
liability insurance, covering said building and appurtenances. Lessor agrees
to purchase and keep in force fire and extended coverage insurance covering
loss or damage to the Premises in amounts not to exceed the full replacement
cost of said Premises as determined by Lessor, with proceeds payable to
Lessor. Lessee acknowledges that the insurance referenced above does not
include coverage for Lessee's personal property. In the event of a loss per
the insurance provisions of this paragraph, Lessee shall be responsible for
deductibles up to a maximum of $5,000 per occurrence. Lessee agrees to pay
to the Lessor as additional Rent, on demand, the full cost of said insurance
as evidenced by insurance billings to Lessor.. If said insurance billings
cover the Premises, and Lessee does not occupy the entire Premises, the
insurance premiums and deductibles shall be allocated to the portion of the
Premises occupied by Lessee on a pro-rata square footage or other equitable
basis, as determined by Lessor. It is understood and agreed that Lessee's
obligation under this paragraph will be prorated to reflect the Commencement
Date and the end of the Lease Term.
Lessor and Lessee hereby waive any rights each may have against the other
related to any loss or damage caused to Lessor or Lessee as the case may be,
or to the Premises or its contents, and which may arise from any risk
generally covered by fire and extended coverage insurance. The parties shall
provide that their respective insurance policies insuring the property or the
personal property include a waiver of any right of subrogation which said
insurance company may have against Lessor or Lessee, as the case may be.
Lessor shall maintain in full force and effect, a policy of rental loss
insurance, in an amount equal to the amount of Rent payable by Lessee
commencing on the date of loss during the next ensuing one (1) year, as
reasonably determined by Lessor with proceeds payable to Lessor ("Loss of
Rents Insurance. Lessee agrees to pay to the Lessor as additional Rent, on
demand, the full cost of said insurance as evidenced by insurance billings to
the Lessor which shall be included in Lessee's monthly CAC.
5
<PAGE>
7. ABANDONMENT: Lessee shall not vacate or abandon the Premises at any time
during the Lease Term; and if Lessee shall abandon, vacate or surrender said
Premises, or be dispossessed by process of law, or otherwise, any personal
property belonging to Lessee and left on the Premises shall be deemed to be
abandoned, at the option of Lessor. Notwithstanding the above, the Premises
shall not be considered vacated or abandoned if Lessee maintains the Premises
in Good Condition and Repair, provides security, pays the required Rent to
Lessor, and is not in default.
8. FREE FROM LIENS: Lessee shall keep the subject Premises and the property
in which the subject Premises are situated, free from any and all liens
including but not limited to liens arising out of any work performed,
materials furnished, or obligations incurred by Lessee. However, the Lessor
shall allow Lessee to contest a lien claim, so long as the claim is
discharged prior to any foreclosure proceeding being initiated against the
property and provided Lessee provides Lessor a bond if the lien exceeds
$5,000.
9. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: Lessee shall, at its sole cost
and expense, comply with all of the requirements of all local, municipal,
state and federal authorities now in force, or which may hereafter be in
force, pertaining to Lessee's use and occupancy of the said Premises, and
shall faithfully observe in the use of the Premises all local and municipal
ordinances and state and federal statutes now in force or which may hereafter
be in force. After completion of Lessee's improvements as provided for in
Section 2 of this Lease and except as stated above, Lessee shall not be
required to pay for the construction of any single improvement required under
this paragraph in excess of $25,000, unless such improvement is required to
comply with Lessee's particular use of the Premises; if such improvement is
not required due to Lessee's particular use of the Premises and such
improvement cost exceeds $25,000, such improvement cost shall be amortized
over the estimated useful life of the improvement, not to exceed 10 years at
Wells Fargo prime rate plus one percent (1%). Lessee shall pay to Lessor the
amortized costs of such improvement on a monthly basis over the remaining
lease term and any extensions thereof, which shall be included in Lessee's
monthly CAC.
10. LESSEE'S INSURANCE: Lessee, as a material part of the consideration to be
rendered to Lessor, hereby waives all claims against Lessor and Lessor's
Agents for damages to goods, wares and merchandise, and all other personal
property in, upon or about said Premises, and for injuries to persons in,
upon or about said Premises, from any cause arising at any time, and Lessee
will hold Lessor and Lessor's Agents exempt and harmless from any damage or
injury to any person, or to the goods, wares and merchandise and all other
personal property of any person, arising from the use or occupancy of the
Premises by Lessee, or from the failure of Lessee to keep the Premises in
good condition and repair, as herein provided. Lessee shall secure and keep
in force a standard policy of commercial general liability insurance and
property damage policy covering the Premises, including parking areas,
insuring the Lessee. A certificate of said policy naming Lessor as an
additional insured shall be delivered to Lessor and will have a combined
single limit for both bodily injury, death and property damage in an amount
not less than five million dollars ($5,000,000.00). The limits of said
insurance shall not, however, limit the liability of Lessee hereunder. Lessee
shall obtain a written obligation on the part of the insurer to notify Lessor
30 days in advance in writing before any cancellation thereof. Lessee shall
obtain, at Lessee's sole cost and expense, a policy of fire and extended
coverage insurance including coverage for direct physical loss special form,
and a sprinkler leakage endorsement insuring the personal property of Lessee.
The proceeds from any personal property damage policy shall be payable to
Lessee. Lessee shall, at its sole cost and expense, comply with all of the
insurance requirements of all local, municipal, state and federal authorities
now in force, or which may hereafter be in force, pertaining to Lessee's use
and occupancy of the said Premises.
11. ADVERTISEMENTS AND SIGNS: Lessee shall not place or permit to be placed,
in, upon or about the Premises any unusual or extraordinary signs, or any
signs not approved by the city, local, state, federal or other applicable
governing authority. Lessee shall not place, or permit to be placed upon the
Premises, any signs, advertisements or notices without the written consent of
the Lessor, and such consent shall not be unreasonably withheld. A sign so
placed on the Premises shall be so placed upon the understanding and
agreement that Lessee will remove same at the end of the Lease Term or
earlier termination of this Lease and repair any damage or injury to the
Premises caused thereby, and if not so removed by Lessee, then Lessor may
have the same removed at Lessee's expense.
12. UTILITIES: Lessee shall pay for all water, gas, heat, light, power,
telephone and other utilities supplied to the Premises. Any charges for
sewer usage or related fees shall be the obligation of Lessee and paid for by
Lessee. If any such services are not
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separately metered to Lessee, Lessee shall pay a reasonable proportion of all
charges which are jointly metered, the determination to be made by Lessor
acting reasonably and on any equitable basis. Lessee's share of water, gas,
and electricity serving the Premises and the Project shall be included in
Lessee's monthly CAC, subject to adjustment as provided in the Common Area
Charges Section of this Lease. Lessor shall not be liable to Lessee for any
disruption in any of the utility services to the Premises.
13. ATTORNEY'S FEES: In case suit should be brought for the possession of the
Premises, for the recovery of any sum due hereunder, or because of the breach
of any other covenant herein, the losing party shall pay to the prevailing
party reasonable attorney's fee which shall be deemed to have accrued on the
commencement of such action and shall be enforceable whether or not such
action is prosecuted to judgment.
14.1 DEFAULT: The occurrence of any of the following shall constitute a
default and breach of this Lease by Lessee: a) Any failure by Lessee to pay
Rent or to make any other payment required to be made by Lessee hereunder
when due if not cured within ten (10) days after written notice thereof by
Lessor to Lessee; b) The abandonment or vacation of the Premises by Lessee
except as provided in Section 7; c) A failure by Lessee to observe and
perform any other provision of this Lease to be observed or performed by
Lessee, where such failure continues for thirty days after written notice
thereof by Lessor to Lessee; provided, however, that if the nature of such
default is such that the same cannot be reasonably cured within such thirty
(30) day period, Lessee shall not be deemed to be in default if Lessee shall,
within such period, commence such cure and thereafter diligently prosecute
the same to completion; d) The making by Lessee of any general assignment for
the benefit of creditors; the filing by or against Lessee of a petition to
have Lessee adjudged a bankrupt or of a petition for reorganization or
arrangement under any law relating to bankruptcy; e) the appointment of a
trustee or receiver to take possession of substantially all of Lessee's
assets or Lessee's interest in this Lease, or the attachment, execution or
other judicial seizure of substantially all of Lessee's assets located at the
Premises or of Lessee's interest in this Lease.
14.2 SURRENDER OF LEASE: In the event of any such default by Lessee, then in
addition to any other remedies available to Lessor at law or in equity,
Lessor shall have the immediate option to terminate this Lease before the end
of the Lease Term and all rights of Lessee hereunder, by giving written
notice of such intention to terminate. In the event that Lessor terminates
this Lease due to a default of Lessee, then Lessor may recover from Lessee:
a) the worth at the time of award of any unpaid Rent which had been earned at
the time of such termination; plus b) the worth at the time of award of
unpaid Rent which would have been earned after termination until the time of
award exceeding the amount of such rental loss that the Lessee proves could
have been reasonably avoided; plus c) the worth at the time of award of the
amount by which the unpaid Rent for the balance of the Lease Term after the
time of award exceeds the amount of such rental loss that the Lessee proves
could have been reasonably avoided; plus d) any other amount necessary to
compensate Lessor for all the detriment proximately caused by Lessee's
failure to perform his obligations under this Lease or which in the ordinary
course of things would be likely to result therefrom; and e) at Lessor's
election, such other amounts in addition to or in lieu of the foregoing as
may be permitted from time to time by applicable California law. As used in
(a) and (b) above, the "worth at the time of award" is computed by allowing
interest at the rate of Wells Fargo's prime rate plus two percent (2%) per
annum. As used in (c) above, the "worth at the time of award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of
San Francisco at the time of award plus one percent (1%).
14.3 RIGHT OF ENTRY AND REMOVAL: In the event of any such default by Lessee,
Lessor shall also have the right, with or without terminating this Lease, to
re-enter the Premises and remove all persons and property from the Premises;
such property may be removed and stored in a public warehouse or elsewhere at
the cost of and for the account of Lessee.
14.4 ABANDONMENT: In the event of the vacation or abandonment, except as
provided in Section 7, of the Premises by Lessee or in the event that Lessor
shall elect to re-enter as provided in paragraph 14.3 above or shall take
possession of the Premises pursuant to legal proceeding or pursuant to any
notice provided by law, and Lessor does not elect to terminate this Lease as
provided in paragraph 14.2 above, then Lessor may from time to time, without
terminating this Lease, either recover all Rent as it becomes due or relet
the Premises or any part thereof for such term or terms and at such rental
rates and upon such other terms and conditions as Lessor, in its sole
discretion, may deem advisable with the right to make alterations and repairs
to the Premises. In the event that Lessor elects to relet the Premises, then
Rent received by Lessor from such reletting shall be applied; first, to the
payment of any indebtedness other than Rent due hereunder from Lessee to
Lessor; second, to the payment
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of any cost of such reletting; third, to the payment of the cost of any
alterations and repairs to the Premises; fourth, to the payment of Rent due
and unpaid hereunder; and the residue, if any, shall be held by Lessor and
applied to the payment of future Rent as the same may become due and payable
hereunder. Should that portion of such Rent received from such reletting
during any month, which is applied by the payment of Rent hereunder according
to the application procedure outlined above, be less than the Rent payable
during that month by Lessee hereunder, then Lessee shall pay such deficiency
to Lessor immediately upon demand therefor by Lessor. Such deficiency shall
be calculated and paid monthly. Lessee shall also pay to Lessor, as soon as
ascertained, any costs and expenses incurred by Lessor in such reletting or
in making such alterations and repairs not covered by the rentals received
from such reletting.
14.5 NO IMPLIED TERMINATION: No re-entry or taking possession of the Premises
by Lessor pursuant to 14.3 or 14.4 of this Article 14 shall be construed as
an election to terminate this Lease unless a written notice of such intention
is given to Lessee or unless the termination thereof is decreed by a court of
competent jurisdiction. Notwithstanding any reletting without termination by
Lessor because of any default by Lessee, Lessor may at any time after such
reletting elect to terminate this Lease for any such default.
15. SURRENDER OF LEASE: The voluntary or other surrender of this Lease by
Lessee, or a mutual cancellation thereof, shall not work a merger, and shall,
at the option of Lessor, terminate all or any existing subleases or sub
tenancies, or may, at the option of Lessor, operate as an assignment to him
of any or all such subleases or sub tenancies.
16. TAXES: Lessee shall pay and discharge punctually and when the same shall
become due and payable without penalty, all real estate taxes, personal
property taxes, taxes based on vehicles utilizing parking areas in the
Premises, taxes computed or based on rental income (other than federal, state
and municipal net income taxes), environmental surcharges, privilege taxes,
excise taxes, business and occupation taxes, school fees or surcharges, gross
receipts taxes, sales and/or use taxes, employee taxes, occupational license
taxes, water and sewer taxes, assessments (including, but not limited to,
assessments for public improvements or benefit), assessments for local
improvement and maintenance districts, and all other governmental impositions
and charges of every kind and nature whatsoever, regardless of whether now
customary or within the contemplation of the parties hereto and regardless of
whether resulting from increased rate and/or valuation, or whether
extraordinary or ordinary, general or special, unforeseen or foreseen, or
similar or dissimilar to any of the foregoing (all of the foregoing being
hereinafter collectively called "Tax" or "Taxes") which, at any time during
the Lease Term, shall be applicable or against the Premises, or shall become
due and payable and a lien or charge upon the Premises under or by virtue of
any present or future laws, statutes, ordinances, regulations, or other
requirements of any governmental authority whatsoever. The term
"Environmental Surcharge" shall include any and all expenses, taxes, charges
or penalties imposed by the Federal Department of Energy, Federal
Environmental Protection Agency, the Federal Clean Air Act, or any
regulations promulgated thereunder, or any other local, state or federal
governmental agency or entity now or hereafter vested with the power to
impose taxes, assessments or other types of surcharges as a means of
controlling or abating environmental pollution or the use of energy in regard
to the use, operation or occupancy of the Premises. The term "Tax" shall
include, without limitation, all taxes, assessments, levies, fees,
impositions or charges levied, imposed, assessed, measured, or based in any
manner whatsoever (i) in whole or in part on the Rent payable by Lessee under
this Lease, (ii) upon or with respect to the use, possession, occupancy,
leasing, operation or management of the Premises, (iii) upon this transaction
or any document to which Lessee is a party creating or transferring an
interest or an estate in the Premises, (iv) upon Lessee's business operations
conducted at the Premises, (v) upon, measured by or reasonably attributable
to the cost or value of Lessee's equipment, furniture, fixtures and other
personal property located on the Premises or the cost or value of any
leasehold improvements made in or to the Premises by or for Lessee,
regardless of whether title to such improvements shall be in Lessor or
Lessee, or (vi) in lieu of or equivalent to any Tax set forth in this Section
16. In the event any such Taxes are payable by Lessor and it shall not be
lawful for Lessee to reimburse Lessor for such Taxes, then the Rent payable
thereunder shall be increased to net Lessor the same net rent after
imposition of any such Tax upon Lessor as would have been payable to Lessor
prior to the imposition of any such Tax. It is the intention of the parties
that Lessor shall be free from all such Taxes and all other governmental
impositions and charges of every kind and nature whatsoever. However,
nothing contained in this Section 16 shall require Lessee to pay any Federal
or State income, franchise, estate, inheritance, succession, transfer or
excess profits tax imposed upon Lessor. If any general or special
assessment is levied and assessed against the Premises, Lessor agrees to use
its best reasonable efforts to cause the assessment to become a lien on the
Premises securing repayment of a bond sold to finance the improvements to
which the assessment relates which is payable in installments of principal
and interest over the maximum term allowed by law. It is
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understood and agreed that Lessee's obligation under this paragraph will be
prorated to reflect the Commencement Date and the end of the Lease Term. It
is further understood that if Taxes cover the Premises and Lessee does not
occupy the entire Premises, the Taxes will be allocated to the portion of the
Premises occupied by Lessee based on a pro-rata square footage or other
equitable basis. Taxes billed by Lessor to Lessee shall be included in the
monthly CAC.
Subject to any limitations or restrictions imposed by any deeds of trust or
mortgages now or hereafter covering or affecting the Premises, Lessee shall have
the right to contest or review the amount or validity of any Tax by appropriate
legal proceedings but which is not to be deemed or construed in any way as
relieving, modifying or extending Lessee's covenant to pay such Tax at the time
and in the manner as provided in this Section 16. However, as a condition of
Lessee's right to contest, if such contested Tax is not paid before such contest
and if the legal proceedings shall not operate to prevent or stay the collection
of the Tax so contested, Lessee shall, before instituting any such proceeding,
protect the Premises and the interest of Lessor and of the beneficiary of a deed
of trust or the mortgagee of a mortgage affecting the Premises against any lien
upon the Premises by a surety bond, issued by an insurance company acceptable to
Lessor and in an amount equal to one and one-half (1 1/2) times the amount
contested or, at Lessor's option, the amount of the contested Tax and the
interest and penalties in connection therewith. Any contest as to the validity
or amount of any Tax, whether before or after payment, shall be made by Lessee
in Lessee's own name, or if required by law, in the name of Lessor or both
Lessor and Lessee. Lessee shall defend, indemnify and hold harmless Lessor
from and against any and all costs or expenses, including attorneys' fees, in
connection with any such proceedings brought by Lessee, whether in its own name
or not. Lessee shall be entitled to retain any refund of any such contested Tax
and penalties or interest thereon which have been paid by Lessee. Nothing
contained herein shall be construed as affecting or limiting Lessor's right to
contest any Tax at Lessor's expense.
17. NOTICES: Unless otherwise provided for in this Lease, any and all written
notices or other communication (the "Communication") to be given in
connection with this Lease shall be given in writing and shall be given by
personal delivery, facsimile transmission or by mailing by registered or
certified mail with postage thereon or recognized overnight courier, fully
prepaid, in a sealed envelope addressed to the intended recipient as follows:
(a) to the Lessor at: 10050 Bandley Drive
Cupertino, California 95014
Attention: Carl E. Berg
Fax No: (408) 725-1626
(b) to the Lessee at: 2043 Samaritan Drive
San Jose, California
Attention:
Fax No:
or such other addresses, facsimile number or individual as may be designated
by a Communication given by a party to the other parties as aforesaid. Any
Communication given by personal delivery shall be conclusively deemed to have
been given and received on a date it is so delivered at such address provided
that such date is a business day, otherwise on the first business day
following its receipt, and if given by registered or certified mail, on the
day on which delivery is made or refused or if given by recognized overnight
courier, on the first business day following deposit with such overnight
courier and if given by facsimile transmission, on the day on which it was
transmitted provided such day is a business day, failing which, on the next
business day thereafter.
18. ENTRY BY LESSOR: Lessee shall permit Lessor and its agents to enter into
and upon said Premises at all reasonable times within business hours and
provided Lessor is escorted by a Lessee employee using the minimum amount of
interference and inconvenience to Lessee and Lessee's business, subject to
any security regulations of Lessee, for the purpose of inspecting the same or
for the purpose of maintaining the building in which said Premises are
situated, or for the purpose of making repairs, alterations or additions to
any other portion of said building, including the erection and maintenance of
such scaffolding, canopies, fences and props as may be required, without any
rebate of Rent and without any liability to Lessee for any loss of occupation
or quiet enjoyment of the Premises; and shall permit Lessor and his agents,
at any time within ninety (90) days prior
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to the end of the Lease Term, to place upon said Premises any usual or
ordinary "For Sale" or "For Lease" signs and exhibit the Premises to
prospective tenants at reasonable hours.
19. DESTRUCTION OF PREMISES: In the event of a partial destruction of the
said Premises during the Lease Term from any cause which is covered by
Lessor's property insurance, Lessor shall forthwith repair the same, provided
such repairs can be made within ninety (90) days under the laws and
regulations of State, Federal, County, or Municipal authorities, but such
partial destruction shall in no way annul or void this Lease, except that
Lessee shall be entitled to a proportionate reduction of Rent while such
repairs are being made to the extent of payments received by Lessor under its
Loss of Rents Insurance coverage. With respect to any partial destruction
which Lessor is obligated to repair or may elect to repair under the terms of
this paragraph, the provision of Section 1932, Subdivision 2, and of Section
1933, Subdivision 4, of the Civil Code of the State of California are waived
by Lessee. In the event that the building in which the subject Premises may
be situated is destroyed to an extent greater than thirty-three and one-third
(33 1/3%) of the replacement cost thereof, Lessor or Lessee may elect to
terminate this Lease, whether the subject Premises is insured or not. A
total destruction of the building in which the subject Premises are situated
shall terminate this Lease. Notwithstanding the above, Lessor is only
obligated to repair or rebuild to the extent of available insurance proceeds
including any deductible amount. Should Lessor determine that insufficient
or no insurance proceeds are available for repair or reconstruction of
Premises, Lessor, at its sole option, may terminate the Lease. Lessee shall
have the option of continuing this Lease by agreeing to pay all repair costs
to the subject Premises.
20. ASSIGNMENT AND SUBLETTING: Lessee shall not assign this Lease, or any
interest therein, and shall not sublet the said Premises or any part thereof,
or any right or privilege appurtenant thereto, or cause any other person or
entity (a bona fide subsidiary or affiliate of Lessee excepted) to occupy or
use the Premises, or any portion thereof, without the advance written
reasonable consent of Lessor except as stated herein. Any such assignment or
subletting without such consent shall be void, and shall, at the option of
the Lessor, terminate this Lease. This Lease shall not, or shall any
interest therein, be assignable, as to the interest of Lessee, by operation
of law, without the written consent of Lessor. Notwithstanding Lessor's
obligation to provide reasonable approval, Lessor reserves the right to
withhold its consent for any proposed sublessee or assignee of Lessee if the
proposed sublessee or assignee is a user or generator of Hazardous Materials.
If Lessee desires to assign its rights under this Lease or to sublet, all or
a portion of the subject Premises to a party other than a bona fide
subsidiary or affiliate of Lessee, Lessee shall first notify Lessor of the
proposed terms and conditions of such assignment or subletting. Lessor shall
have the right of first refusal to enter into a direct Lessor-lessee
relationship with such party under such proposed terms and conditions, in
which event Lessee shall be relieved of its obligations hereunder to the
extent of the Lessor-lessee relationship entered into between Lessor and such
third party. Notwithstanding the foregoing, Lessee may assign this Lease to a
successor in interest, whether by merger or acquisition, provided there is no
substantial reduction in the net worth of the resulting entity and the
resulting entity is not a user or generator of Hazardous Materials. Whether
or not Lessor's consent to a sublease or assignment is required, in the event
of any sublease or assignment, Lessee shall be and shall remain primarily
liable for the performance of all conditions, covenants, and obligations of
Lessee hereunder and, in the event of a default by an assignee or sublessee,
Lessor may proceed directly against the original Lessee hereunder and/or any
other predecessor of such assignee or sublessee without the necessity of
exhausting remedies against said assignee or sublessee.
21. CONDEMNATION: If any part of the Premises shall be taken for any public
or quasi-public use, under any statute or by right of eminent domain or
private purchase in lieu thereof, and a part thereof remains which is
susceptible of occupation hereunder, this Lease shall as to the part so
taken, terminate as of the date title vests in the condemnor or purchaser,
and the Rent payable hereunder shall be adjusted so that the Lessee shall be
required to pay for the remainder of the Lease Term only that portion of Rent
as the value of the part remaining. The rental adjustment resulting will be
computed at the same Rental rate for the remaining part not taken; however,
Lessor shall have the option to terminate this Lease as of the date when
title to the part so taken vests in the condemnor or purchaser. If all of
the Premises, or such part thereof be taken so that there does not remain a
portion susceptible for occupation hereunder, this Lease shall thereupon
terminate. If a part or all of the Premises be taken, all compensation
awarded upon such taking shall be payable to the Lessor. Lessee may file a
separate claim and be entitled to any award granted to Lessee
22. EFFECTS OF CONVEYANCE: The term "Lessor" as used in this Lease, means only
the owner for the time being of the land and building constituting the Premises,
so that, in the event of any sale of said land or building, or in the event of a
Lease of said building, Lessor shall be and hereby is entirely freed and
relieved of all covenants and obligations of Lessor hereunder, and it
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shall be deemed and construed, without further agreement between the parties
and the purchaser of any such sale, or the Lessor of the building, that the
purchaser or lessor of the building has assumed and agreed to carry out any
and all covenants and obligations of the Lessor hereunder. If any security
is given by Lessee to secure the faithful performance of all or any of the
covenants of this Lease on the part of Lessee, Lessor may transfer and
deliver the security, as such, to the purchaser at any such sale of the
building, and thereupon the Lessor shall be discharged from any further
liability.
23. SUBORDINATION: This Lease, in the event Lessor notifies Lessee in
writing, shall be subordinate to any ground lease, deed of trust, or other
hypothecation for security now or hereafter placed upon the real property at
which the Premises are a part and to any and all advances made on the
security thereof and to renewals, modifications, replacements and extensions
thereof. Lessee agrees to promptly execute any documents which may be
required to effectuate such subordination. Notwithstanding such
subordination, if Lessee is not in default and so long as Lessee shall pay
the Rent and observe and perform all of the provisions and covenants required
under this Lease, Lessee's right to quiet possession of the Premises shall
not be disturbed or effected by any subordination.
24. WAIVER: The waiver by Lessor of any breach of any term, covenant or
condition, herein contained shall not be construed to be a waiver of such
term, covenant or condition or any subsequent breach of the same or any other
term, covenant or condition therein contained. The subsequent acceptance of
Rent hereunder by Lessor shall not be deemed to be a waiver of Lessee's
breach of any term, covenant, or condition of the Lease.
25. HOLDING OVER: Any holding over after the end of the Lease Term requires
Lessor's written approval prior to the end of the Lease Term, which,
notwithstanding any other provisions of this Lease, Lessor may withhold and
shall be construed to be a tenancy at sufferance from month to month. Lessee
shall pay to Lessor monthly base rent equal to one and one-half (1.5) times
the monthly base rent installment due in the last month of the Lease Term and
all other additional rent and all other terms and conditions of the Lease
shall apply, so far as applicable. Holding over by Lessee without written
approval of Lessor shall subject Lessee to the liabilities and obligations
provided for in this Lease and by law, including, but not limited to those in
Section 2.1 of this Lease. Lessee shall indemnify and hold Lessor harmless
against any loss or liability resulting from any delay caused by Lessee in
surrendering the Premises, including without limitation, any claims made or
penalties incurred by any succeeding lessee or by Lessor. No holding over
shall be deemed or construed to exercise any option to extend or renew this
Lease in lieu of full and timely exercise of any such option as required
hereunder.
26. SUCCESSORS AND ASSIGNS: The covenants and conditions herein contained
shall, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of all of the
parties hereto; and all of the parties hereto shall be jointly and severally
liable hereunder.
27. ESTOPPEL CERTIFICATES: Lessee shall at any time during the Lease Term,
upon not less than ten (10) days prior written notice from Lessor, execute
and deliver to Lessor a statement in writing certifying that, this Lease is
unmodified and in full force and effect (or, if modified, stating the nature
of such modification) and the dates to which the Rent and other charges have
been paid in advance, if any, and acknowledging that there are not, to
Lessee's knowledge, any uncured defaults on the part of Lessor hereunder or
specifying such defaults if they are claimed. Any such statement may be
conclusively relied upon by any prospective purchaser or encumbrancer of the
Premises. Lessee's failure to deliver such a statement within such time shall
be conclusive upon the Lessee that (a) this Lease is in full force and
effect, without modification except as may be represented by Lessor; (b)
there are no uncured defaults in Lessor's performance.
28. TIME: Time is of the essence of the Lease.
29. CAPTIONS: The headings on titles to the paragraphs of this Lease are not
a part of this Lease and shall have no effect upon the construction or
interpretation of any part thereof. This instrument contains all of the
agreements and conditions made between the parties hereto and may not be
modified orally or in any other manner than by an agreement in writing signed
by all of the parties hereto or their respective successors in interest.
30. PARTY NAMES: Landlord and Tenant may be used in various places in this Lease
as a substitute for Lessor and Lessee respectively.
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31. EARTHQUAKE INSURANCE: As a condition of Lessor agreeing to waive the
requirement for earthquake insurance, Lessee agrees that it shall pay, as
additional Rent, which shall be included in the monthly CAC, an amount not to
exceed Nineteen Thousand Four Hundred Seventy Dollars ($19,470) per year for
earthquake insurance if Lessor desires to obtain some form of earthquake
insurance in the future, if and when available, on terms acceptable to Lessor.
32. HABITUAL DEFAULT: Notwithstanding anything to the contrary contained in
Section 14 herein, Lessor and Lessee agree that if Lessee shall have
defaulted in the payment of Rent for three or more times during any twelve
month period during the Lease Term, then such conduct shall, at the option of
the Lessor, represent a separate event of default which cannot be cured by
Lessee. Lessee acknowledges that the purpose of this provision is to prevent
repetitive defaults by the Lessee under the Lease, which constitute a
hardship to the Lessor and deprive the Lessor of the timely performance by
the Lessee hereunder.
33. HAZARDOUS MATERIALS
33.1 DEFINITIONS: As used herein, the following terms shall have the following
meaning:
a. The term "Hazardous Materials" shall mean (i) polychlorinated biphenyls;
(ii) radioactive materials and (iii) any chemical, material or substance
now or hereafter defined as or included in the definitions of "hazardous
substance" "hazardous water", "hazardous material", "extremely hazardous
waste", "restricted hazardous waste" under Section 25115, 25117 or 15122.7,
or listed pursuant to Section 25140 of the California Health and Safety
Code, Division 20, Chapter 6.5 (Hazardous Waste Control Law), (ii) defined
as "hazardous substance" under Section 25316 of the California Health and
Safety Code, Division 20, Chapter 6.8 (Carpenter-Presley-Tanner Hazardous
Substances Account Act), (iii) defined as "hazardous material", "hazardous
substance", or "hazardous waste" under Section 25501 of the California
Health and Safety Code, Division 20, Chapter 6.95 (Hazardous Materials
Release, Response, Plans and Inventory), (iv) defined as a "hazardous
substance" under Section 25181 of the California Health and Safety Code,
Division 20l, Chapter 6.7 (Underground Storage of Hazardous Substances),
(v) petroleum, (vi) asbestos, (vii) listed under Article 9 or defined as
"hazardous" or "extremely hazardous" pursuant to Article II of Title 22 of
the California Administrative Code, Division 4, Chapter 20, (viii) defined
as "hazardous substance" pursuant to Section 311 of the Federal Water
Pollution Control Act, 33 U.S.C. 1251 et seq. or listed pursuant to Section
1004 of the Federal Water Pollution Control Act (33 U.S.C. 1317), (ix)
defined as a "hazardous waste", pursuant to Section 1004 of the Federal
Resource Conservation and Recovery Act, 42 U.S.C. 6901 et seq., (x) defined
as "hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Responsibility Compensations, and Liability Act, 42 U.S.C.
9601 et seq., or (xi) regulated under the Toxic Substances Control Act, 156
U.S.C. 2601 et seq.
b. The term "Hazardous Materials Laws" shall mean any local, state and
federal laws, rules, regulations, or ordinances relating to the use,
generation, transportation, analysis, manufacture, installation, release,
discharge, storage or disposal of Hazardous Material.
c. The term "Lessor's Agents" as used herein shall mean Lessor's agents,
representatives, employees, contractors, subcontractors, directors,
officers and partners.
d. The term "Lessee's Agents" as used herein shall mean Lessee's agents,
representatives, employees, contractors, subcontractors, directors,
officers, partners, invitees or any other person in or about the Premises.
33.2 LESSEE'S RIGHT TO INVESTIGATE: Lessee shall be entitled to cause such
inspection, soils and ground water tests, and other evaluations to be made of
the Premises as Lessee deems necessary regarding (i) the presence and use of
Hazardous Materials in or about the Premises, and (ii) the potential for
exposure to Lessee's employees and other persons to any Hazardous Materials
used and stored by previous occupants in or about the Premises. Lessee shall
provide Lessor with copies of all inspections, tests and evaluations. Lessee
shall indemnify, defend and hold Lessor harmless from any cost, claim or
expense arising from such entry by Lessee or from the performance of any such
investigation by such Lessee.
33.3 LESSOR'S REPRESENTATIONS: Lessor hereby represents and warrants to the
best of Lessor's knowledge that the Premises are, as of the date of this
Lease, in compliance with all Hazardous Material Laws.
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33.4 LESSEE'S OBLIGATION TO INDEMNIFY: Lessee, at its sole cost and expense,
shall indemnify, defend, protect and hold Lessor and Lessor's Agents harmless
from and against any and all cost or expenses, including those described
under subparagraphs i, ii and iii herein below set forth, arising from or
caused in whole or in part, directly or indirectly by:
a. Lessee's or Lessee's Agents' use, analysis, storage, transportation,
disposal, release, threatened release, discharge or generation of Hazardous
Material to, in, on, under, about or from the Premises; or
b. Lessee's or Lessee's Agents failure to comply with Hazardous Material
laws; or
c. Any release of Hazardous Material to, in, on, under, about, from or onto
the Premises caused by Lessee or Lessee's Agents or occurring during the
Lease Term, except ground water contamination from other parcels where the
source is from off the Premises not arising from or caused by Lessee or
Lessee's Agents.
The cost and expenses indemnified against include, but are not limited to the
following:
i. Any and all claims, actions, suits, proceedings, losses, damages,
liabilities, deficiencies, forfeitures, penalties, fines, punitive damages,
cost or expenses;
ii. Any claim, action, suit or proceeding for personal injury (including
sickness, disease, or death), tangible or intangible property damage,
compensation for lost wages, business income, profits or other economic
loss, damage to the natural resources of the environment, nuisance,
pollution, contamination, leaks, spills, release or other adverse effects
on the environment;
iii. The cost of any repair, clean-up, treatment or detoxification of the
Premises necessary to bring the Premises into compliance with all Hazardous
Material Laws, including the preparation and implementation of any closure,
disposal, remedial action, or other actions with regard to the Premises,
and expenses (including, without limitation, reasonable attorney's fees and
consultants fees, investigation and laboratory fees, court cost and
litigation expenses).
33.5 LESSEE'S OBLIGATION TO REMEDIATE CONTAMINATION: Lessee shall, at its
sole cost and expense, promptly take any and all action necessary to
remediate contamination of the Premises by Hazardous Materials during the
Lease Term.
33.6 OBLIGATION TO NOTIFY: Lessor and Lessee shall each give written notice
to the other as soon as reasonably practical of (i) any communication
received from any governmental authority concerning Hazardous Material which
related to the Premises and (ii) any contamination of the Premises by
Hazardous Materials which constitutes a violation of any Hazardous Material
Laws.
33.7 SURVIVAL: The obligations of Lessee under this Section 33 shall survive the
Lease Term or earlier termination of this Lease.
33.8 CERTIFICATION AND CLOSURE: On or before the end of the Lease Term or
earlier termination of this Lease, Lessee shall deliver to Lessor a
certification executed by Lessee stating that, to the best of Lessee's
knowledge, there exists no violation of Hazardous Material Laws resulting
from Lessee's obligation in Paragraph 33. If pursuant to local ordinance,
state or federal law, Lessee is required, at the expiration of the Lease
Term, to submit a closure plan for the Premises to a local, state or federal
agency, then Lessee shall furnish to Lessor a copy of such plan.
33.9 PRIOR HAZARDOUS MATERIALS: Lessee shall have no obligation to clean up
or to hold Lessor harmless with respect to, any Hazardous Material or wastes
discovered on the Premises which were not introduced into, in, on, about,
from or under the Premises during the Lease Term or ground water
contamination from other parcels where the source is from off the Premises
not arising from or caused by Lessee or Lessee's Agents.
34. BROKERS: Lessor and Lessee represent that they have not utilized or
contacted a real estate broker or finder with respect to this Lease other than
Colliers Parrish ("CP") and Lessee agrees to indemnify and hold Lessor harmless
against any claim, cost, liability or cause of action asserted by any broker or
finder claiming through Lessee other than CP. Lessor shall at its sole cost and
expense pay the brokerage commission per Lessor's standard commission schedule
to CP in connection with this transaction. Lessor represents and warrants that
it has not utilized or contacted a real estate broker or finder with respect to
this Lease other than CP and Lessor agrees to indemnify and hold Lessee harmless
against any claim, cost, liability or cause of action asserted by any broker or
finder claiming through Lessor.
35. OPTION TO EXTEND
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A. OPTION: Lessor hereby grants to Lessee one (1) option to extend the Lease
Term, with the extended term to be for a period of five (5) years, on the
following terms and conditions:
(i) Lessee shall give Lessor written notice of its exercise of its option
to extend no earlier than twenty-four (24) calendar months, nor later than
six (6) calendar months before the Lease Term would end but for said
exercise. Time is of the essence.
(ii) Lessee may not extend the Lease Term pursuant to any option granted by
this section 35 if Lessee is in default as of the date of the exercise of
its option. If Lessee has committed a default by Lessee as defined in
Section 14 or 32 that has not been cured or waived by Lessor in writing by
the date that any extended term is to commence, then Lessor may elect not
to allow the Lease Term to be extended, notwithstanding any notice given by
Lessee of an exercise of this option to extend.
(iii) All terms and conditions of this Lease shall apply during the
extended term, except that the base rent and rental increases for each
extended term shall be determined as provided in Section 35 (B) below
(iv) Once Lessee delivers a notice of exercise of its options to extend the
Lease Term, Lessee may not withdraw such exercise and subject to the
provisions of this Section 35, such notice shall operate to extend the
Lease Term. Upon any extension of the Lease Term pursuant to this Section
35, the term "Lease Term" as used in this Lease shall thereafter include
the then extended term.
(v) The option rights of Amati Communications Corporation granted under
this Section 35 are granted for Amati Communications Corporation's personal
benefit and may not be assigned or transferred by Amati Communications
Corporation or exercised if Amati Communications Corporation is not
occupying the Premises at the time of exercise.
B. EXTENDED TERM RENT - OPTION PERIOD: The monthly Rent for the Premises
during the extended term shall equal the fair market monthly Rent for the
Premises as of the commencement date of the extended term, but in no case,
less than the Rent during the last month of the prior Lease term. Promptly
upon Lessee's exercise of the option to extend, Lessee and Lessor shall meet
and attempt to agree on the fair market monthly Rent for the Premises as of
the commencement date of the extended term. In the event the parties fail to
agree upon the amount of the monthly Rent for the extended term prior to
commencement thereof, the monthly Rent for the extended term shall be
determined by appraisal in the manner hereafter set forth; provided, however,
that in no event shall the monthly Rent for the extended term be less than in
the immediate preceding period. Annual base rent increases during the
extended term shall be three percent (3%) per year. In the event it becomes
necessary under this paragraph to determine the fair market monthly Rent of
the Premises by appraisal, Lessor and Lessee each shall appoint a real estate
appraiser who shall be a member of the American Institute of Real Estate
Appraiser ("AIREA") and such appraisers shall each determine the fair market
monthly Rent for the Premises taking into account the value of the Premises
and the amenities provided by the outside areas, the common areas, and the
Building, and prevailing comparable Rentals in the area. Such appraisers
shall, within twenty (20) business days after their appointment, complete
their appraisals and submit their appraisal reports to Lessor and Lessee. If
the fair market monthly Rent of the Premises established in the two (2)
appraisals varies by five percent (5%) or less of the higher Rent, the
average of the two shall be controlling. If said fair market monthly Rent
varies by more than five percent (5%) of the higher Rental, said appraisers,
within ten (10) days after submission of the last appraisal, shall appoint a
third appraiser who shall be a member of the AIREA and who shall also be
experienced in the appraisal of Rent values and adjustment practices for
commercial properties in the vicinity of the Premises. Such third appraiser
shall, within twenty (20) business days after his appointment, determine by
appraisal the fair market monthly Rent of the Premises taking into account
the same factors referred to above, and submit his appraisal report to Lessor
and Lessee. The fair market monthly Rent determined by the third appraiser
for the Premises shall be controlling, unless it is less than that set forth
in the lower appraisal previously obtained, in which case the value set forth
in said lower appraisal shall be controlling, or unless it is greater than
that set forth in the higher appraisal previously obtained in which case the
Rent set for in said higher appraisal shall be controlling. If either Lessor
or Lessee fails to appoint an appraiser, or if an appraiser appointed by
either of them fails, after his appointment to submit his appraisal within
the required period in accordance with the foregoing, the appraisal submitted
by the appraiser properly appointed and timely submitting his appraisal shall
be controlling. If the two appraisers appointed by Lessor and Lessee are
unable to agree upon a third appraiser within the required period in
accordance
14
<PAGE>
with the foregoing, application shall be made within twenty (20) days
thereafter by either Lessor or Lessee to AIREA, which shall appoint a member
of said institute willing to serve as appraiser. The cost of all appraisals
under this subparagraph shall be borne equally be Lessor and Lessee.
36. APPROVALS: Whenever in this Lease the Lessor's or Lessee's consent is
required, such consent shall not be unreasonably or arbitrarily withheld or
delayed. In the event that the Lessor or Lessee does not respond to a
request for any consents which may be required of it in this Lease within ten
business days of the request of such consent in writing by the Lessee or
Lessor, such consent shall be deemed to have been given by the Lessor or
Lessee.
37. AUTHORITY: Each party executing this Lease represents and warrants that
he or she is duly authorized to execute and deliver the Lease. If executed
on behalf of a corporation, that the Lease is executed in accordance with the
by-laws of said corporation (or a partnership that the Lease is executed in
accordance with the partnership agreement of such partnership), that no other
party's approval or consent to such execution and delivery is required, and
that the Lease is binding upon said individual, corporation (or partnership)
as the case may be in accordance with its terms.
38. INDEMNIFICATION OF LESSOR: Except to the extent caused by the sole
negligence or willful misconduct of Lessor or Lessor's Agents, Lessee shall
defend, indemnify and hold Lessor harmless from and against any and all
obligations, losses, costs, expenses, claims, demands, attorney's fees,
investigation costs or liabilities on account of, or arising out of the use,
condition or occupancy of the Premises or any act or omission to act of
Lessee or Lessee's Agents or any occurrence in, upon, about or at the
Premises, including, without limitation, any of the foregoing provisions
arising out of the use, generation, manufacture, installation, release,
discharge, storage, or disposal of Hazardous Materials by Lessee or Lessee's
Agents. It is understood that Lessee is and shall be in control and
possession of the Premises and that Lessor shall in no event be responsible
or liable for any injury or damage or injury to any person whatsoever,
happening on, in, about, or in connection with the Premises, or for any
injury or damage to the Premises or any part thereof. This Lease is entered
into on the express condition that Lessor shall not be liable for, or suffer
loss by reason of injury to person or property, from whatever cause, which in
any way may be connected with the use, condition or occupancy of the Premises
or personal property located herein. The provisions of this Lease permitting
Lessor to enter and inspect the Premises are for the purpose of enabling
Lessor to become informed as to whether Lessee is complying with the terms of
this Lease and Lessor shall be under no duty to enter, inspect or to perform
any of Lessee's covenants set forth in this Lease. Lessee shall further
indemnify, defend and hold harmless Lessor from and against any and all
claims arising from any breach or default in the performance of any
obligation to Lessee's part to be performed under the terms of this Lease.
The provisions of Section 38 shall survive the Lease Term or earlier
termination of this Lease with respect to any damage, injury or death
occurring during the Lease Term.
39. LESSOR'S LIABILITY: If Lessee should recover a money judgment against
Lessor arising in connection with this Lease, the judgment shall be satisfied
only out of the Lessor's interest in the Premises and neither Lessor or any
of its partners shall be liable personally for any deficiency.
40. MISCELLANEOUS PROVISIONS: All rights and remedies hereunder are
cumulative and not alternative to the extent permitted by law and are in
addition to all other rights or remedies in law and in equity.
41. CHOICE OF LAW: This lease shall be construed and enforced in accordance
with the substantive laws of the State of California. The language of 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 Lessor or Lessee.
42. ENTIRE AGREEMENT: This Lease, including the attached exhibits, is the
entire agreement between the parties, and there are no agreements or
representations between the parties except as expressed herein. Except as
otherwise provided for herein, no subsequent change or addition to this Lease
shall be binding unless in writing and signed by the parties hereto.
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IN WITNESS WHEREOF, Lessor and Lessee have executed these presents, the day and
year first above written.
LESSOR LESSEE
BERG & BERG DEVELOPERS AMATI COMMUNICATIONS CORPORATION
By:_____________________________ By:_________________________________
signature of authorized representative signature of authorized representative
________________________________ ____________________________________
printed name printed name
________________________________ ____________________________________
title title
________________________________ ____________________________________
date date
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Exhibit E
Lessee Approval Deadlines
Lease signed 03/15/96
Approval of site plan 03/15/96
Approval of building elevation 03/15/96
Approval of restroom, stairs and underground plumbing 03/15/96
Approval of preliminary floor plan, single line 03/15/96
Approval of final shell plans 03/30/96
Approval of interior plans and specifications 04/15/96
Final selection of all material and interior finishes for
construction such as carpet, ceramic tile, paint and any other
lessee selected materials & finishes 05/15/96
Lessee shall not unreasonably withhold approval of final shell or interior
plans if they conform in general to the preliminary site plan, preliminary
elevation, and floor plans.
The Commencement Date shall be extended one day for each day Lessee does not
meet each deadline set forth on this Exhibit E.
17
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1996 STOCK OPTION PLAN
OF
AMATI COMMUNICATIONS CORPORATION
1. PURPOSES OF THE PLAN. The purposes of the 1996 Stock Option Plan
(the "Plan") of Amati Communications Corporation, a Delaware corporation (the
"Company"), are to:
(a) Encourage selected employees, directors and consultants to
improve operations and increase profits of the Company;
(b) Encourage selected employees, directors and consultants to
accept or continue employment or association with the Company or its Affiliates;
and
(c) Increase the interest of selected employees, directors and
consultants in the Company's welfare through participation in the growth in
value of the common stock of the Company (the "Common Stock").
Options granted under this Plan ("Options") may be "incentive stock
options" ("ISOs") intended to satisfy the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or "nonqualified
options" ("NQOs").
2. ELIGIBLE PERSONS. Every person who at the date of grant of an
Option is a full-time employee of the Company or of any Affiliate (as defined
below) of the Company is eligible to receive NQOs or ISOs under this Plan.
Every person who at the date of grant is a consultant to, or non-employee
director of, the Company or any Affiliate (as defined below) of the Company is
eligible to receive NQOs under this Plan. The term "Affiliate" as used in the
Plan means a parent or subsidiary corporation as defined in the applicable
provisions (currently Sections 424(e) and (f), respectively) of the Code. The
term "employee" includes an officer or director who is an employee, of the
Company. The term "consultant" includes persons employed by, or otherwise
affiliated with, a consultant.
3. STOCK SUBJECT TO THIS PLAN. Subject to the provisions of
Section 6.1.1 of the Plan, the total number of shares of stock which may be
issued under options granted pursuant to this Plan shall not exceed 1,000,000
shares of Common Stock. The shares covered by the portion of any grant under
the Plan which expires unexercised shall become available again for grants under
the Plan.
4. ADMINISTRATION.
4.1 GENERAL. This Plan shall be administered by the Board of
Directors of the Company (the "Board") or, either in its entirety or as
permitted pursuant to Section 4.2 hereof, by a
<PAGE>
committee to which administration of the Plan, or of part of the Plan, is
delegated (in either case, the "Administrator").
4.2 COMMITTEE OF THE BOARD. Subject to the discretion of the
Board, this Plan may be administered by a committee (the "Committee") of at
least two Board members each of whom are a "Non-Employee Director" as defined
under Rule 16b-3 promulgated by the Securities and Exchange Commission
("Rule 16b-3") under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or any successor rule thereto.
4.3 AUTHORITY OF ADMINISTRATOR. Subject to the other
provisions of this Plan, the Administrator shall have the authority, in its
discretion: (i) to grant Options; (ii) to determine the fair market value of
the Common Stock subject to Options; (iii) to determine the exercise price of
Options granted; (iv) to determine the persons to whom, and the time or times
at which, Options shall be granted, and the number of shares subject to each
Option; (v) to interpret this Plan; (vi) to prescribe, amend, and rescind
rules and regulations relating to this Plan; (vii) to determine the terms and
provisions of each Option granted (which need not be identical), including
but not limited to, the time or times at which Options shall be exercisable;
(viii) with the consent of the optionee, to modify or amend any Option;
(ix) to authorize any person to execute on behalf of the Company any instrument
evidencing the grant of an Option; and (x) to make all other determinations
deemed necessary or advisable for the administration of this Plan. The
Administrator may delegate nondiscretionary administrative duties to such
employees of the Company as it deems proper.
4.4 INTERPRETATION BY ADMINISTRATOR. All questions of
interpretation, implementation, and application of this Plan shall be determined
by the Administrator. Such determinations shall be final and binding on all
persons.
4.5 RULE 16b-3. With respect to persons subject to Section 16
of the Exchange Act, if any, transactions under this Plan are intended to comply
with the applicable conditions of Rule 16b-3, or any successor rule thereto. To
the extent any provision of this Plan or action by the Administrator fails to so
comply, it shall be deemed modified to the extent necessary to comply with
Rule 16b-3, to the extent permitted by law and deemed advisable by the
Administrator. Notwithstanding the above, it shall be the responsibility of such
persons, not of the Company or the Administrator, to comply with the
requirements of Section 16 of the Exchange Act, and neither the Company nor the
Administrator shall be liable if this Plan or any transaction under this Plan
fails to comply with the applicable conditions of Rule 16b-3 or any successor
rule thereto, or if any such person incurs any liability under Section 16 of the
Exchange Act.
5. GRANTING OF OPTIONS; OPTION AGREEMENT. No Options shall be
granted under this Plan after ten years from the date of
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<PAGE>
adoption of this Plan by the Board. Each Option shall be evidenced by a
written stock option agreement, in form satisfactory to the Company, executed
by the Company and the person to whom such Option is granted; PROVIDED,
HOWEVER, that the failure by the Company, the optionee, or both to execute
such an agreement shall not invalidate the granting of an Option, although
the exercise of each option shall be subject to Section 6.1.3. The stock
option agreement shall specify whether each Option it evidences is a NQO or
an ISO. Subject to Section 6.3.3 with respect to ISOs, the Administrator may
approve the grant of Options under this Plan to persons who are expected to
become employees, directors or consultants of the Company, but are not
employees, directors or consultants at the date of approval.
6. TERMS AND CONDITIONS OF OPTIONS. Each Option granted under this
Plan shall be subject to the terms and conditions set forth in Section 6.1.
NQOs shall be also subject to the terms and conditions set forth in Section 6.2,
but not those set forth in Section 6.3. ISOs shall also be subject to the terms
and conditions set forth in Section 6.3, but not those set forth in Section 6.2.
6.1 TERMS AND CONDITIONS TO WHICH ALL OPTIONS ARE SUBJECT. All
Options granted under this Plan shall be subject to the following terms and
conditions:
6.1.1 CHANGES IN CAPITAL STRUCTURE. Subject to
Section 6.1.2, if the stock of the Company is changed by reason of a stock
split, reverse stock split, stock dividend, or recapitalization, combination or
reclassification, appropriate adjustments shall be made by the Board in (a) the
number and class of shares of stock subject to this Plan and each Option
outstanding under this Plan, and (b) the exercise price of each outstanding
Option; PROVIDED, HOWEVER, that the Company shall not be required to issue
fractional shares as a result of any such adjustments. Each such adjustment
shall be subject to approval by the Board in its sole discretion.
6.1.2 CORPORATE TRANSACTIONS. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
optionee at least 30 days prior to such proposed action. To the extent not
previously exercised, all Options will terminate immediately prior to the
consummation of such proposed action. In the event of a merger or consolidation
of the Company with or into another corporation or entity in which the Company
does not survive, or in the event of a sale of all or substantially all of the
assets of the Company in which the stockholders of the Company receive
securities of the acquiring entity or an affiliate thereof, all Options shall be
assumed or equivalent options shall be substituted by the successor corporation
(or other entity) or a parent or subsidiary of such successor corporation (or
other entity). If such successor does not agree to assume the Options or to
substitute
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<PAGE>
equivalent options therefor, unless the Administrator shall determine
otherwise, the Options will expire upon such event.
6.1.3 TIME OF OPTION EXERCISE. Subject to Section 5 and
Section 6.3.4, Options granted under this Plan shall be exercisable in
accordance with a schedule related to the date of the grant of the Option, the
date of first employment, or such other date as may be set by the Administrator
(in any case, the "Vesting Base Date") and specified in the written stock option
agreement relating to such Option; PROVIDED, HOWEVER, that unless otherwise
specifically determined by the Administrator, the right to exercise an Option
shall vest at the rate of 25% per year over four years from the date the option
was granted. In any case, no Option shall be exercisable until a written stock
option agreement in form satisfactory to the Company is executed by the Company
and the optionee.
6.1.4 OPTION GRANT DATE. Except in the case of advance
approvals described in Section 5, the date of grant of an Option under this Plan
shall be the date as of which the Administrator approves the grant.
6.1.5 NONASSIGNABILITY OF OPTION RIGHTS. Unless otherwise
specifically determined by the Administrator, no Option granted under this Plan
shall be assignable or otherwise transferable by the optionee except by will or
by the laws of descent and distribution, and during the life of the optionee, an
Option shall be exercisable only by the optionee.
6.1.6 PAYMENT. Except as provided below, payment in full,
in cash, shall be made for all stock purchased at the time written notice of
exercise of an Option is given to the Company, and proceeds of any payment shall
constitute general funds of the Company. At the time an Option is granted or
exercised, the Administrator, in the exercise of its absolute discretion after
considering any tax or accounting consequences, may authorize any one or more of
the following additional methods of payment:
(a) Acceptance of the optionee's promissory note for
all or part of the Option price, payable on such terms and bearing such interest
rate as determined by the Administrator (but in no event less than the minimum
interest rate specified under the Code at which no additional interest would be
imputed), which promissory note may be either secured or unsecured in such
manner as the Administrator shall approve (including, without limitation, by a
security interest in the shares of the Company); and
(b) Delivery by the optionee of Common Stock already
owned by the optionee (or having Common Stock which is acquired on exercise of
the Option withheld by the Company) for all or part of the Option price,
provided the value (determined as set forth in Section 6.1.11) of such Common
Stock
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<PAGE>
is equal on the date of exercise to the Option price, or such portion thereof
as the optionee is authorized to pay by delivery of such stock; PROVIDED,
HOWEVER, that if an optionee has exercised any portion of any Option granted
by the Company by delivery or withholding of Common Stock, the optionee may
not, within six months following such exercise, exercise any Option granted
under this Plan by delivery or withholding of Common Stock without the
consent of the Administrator.
6.1.7 TERMINATION OF EMPLOYMENT. If for any reason other
than death or disability, an optionee ceases to be employed by or to serve as a
consultant to the Company or any of its Affiliates (such event being called a
"Termination"), Options held at the date of Termination (to the extent then
exercisable) may be exercised in whole or in part at any time within three
months of the date of such Termination, or such other period of not less than
thirty days after the date of such Termination as is specified in the Option
Agreement (but in no event after the Expiration Date); PROVIDED, that if such
exercise of the Option would result in liability for the optionee under
Section 16(b) of the Exchange Act, then such three-month period automatically
shall be extended until the tenth day following the last date upon which
optionee has any liability under Section 16(b) (but in no event after the
Expiration Date). If an optionee dies or becomes disabled (within the meaning
of Section 22(c)(3) of the Code) while employed by or serving as a consultant to
the Company or an Affiliate or within the period that the Option remains
exercisable after Termination, Options then held (to the extent then
exercisable) may be exercised, in whole or in part, by the optionee, by the
optionee's personal representative or by the person to whom the Option is
transferred by devise or the laws of descent and distribution, for such period
of up to twelve months after the death, or eighteen months after the permanent
and total disability, of the optionee, as is specified in the Option Agreement
(but in no event after the Expiration Date). For purposes of this
Section 6.1.7, "employment" includes service as a director or as a consultant.
For purposes of this Section 6.1.7, an optionee's employment shall not be deemed
to terminate by reason of sick leave, military leave or other leave of absence
approved by the Administrator, if the period of any such leave does not exceed
90 days or, if longer, if the optionee's right to reemployment by the Company or
any Affiliate is guaranteed either contractually or by statute.
6.1.8 REPURCHASE OF STOCK. At the option of the
Administrator, the stock to be delivered pursuant to the exercise of any Option
granted to an employee, director or consultant under this Plan may be subject to
a right of repurchase in favor of the Company with respect to any employee, or
director or consultant whose employment, or director or consulting relationship
with the Company is terminated. Such right of repurchase shall be at the Option
exercise price and, unless otherwise determined by the Administrator, (i) shall
lapse at the rate of 25% per year over four years from the date the
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<PAGE>
Option is granted (without regard to the date it becomes exercisable), and
must be exercised for cash or cancellation of purchase money indebtedness
within 90 days of such termination.
Determination of the number of shares subject to any such right of
repurchase shall be made as of the date the employee's employment by, director's
director relationship with, or consultant's consulting relationship with, the
Company terminates, not as of the date that any Option granted to such employee,
director or consultant is thereafter exercised.
6.1.9 WITHHOLDING AND EMPLOYMENT TAXES. At the time of
exercise of an Option or at such other time as the amount of such obligations
becomes determinable (the "Tax Date"), the optionee shall remit to the Company
in cash all applicable federal and state withholding and employment taxes. If
authorized by the Administrator in its sole discretion after considering any tax
or accounting consequences, an optionee may elect to (a) deliver a promissory
note on such terms as the Administrator deems appropriate, (b) tender to the
Company previously owned shares of Common Stock or other securities of the
Company, or (c) have shares of Common Stock which are acquired upon exercise of
the Option withheld by the Company to pay some or all of the amount of tax that
is required by law to be withheld by the Company as a result of the exercise of
such Option.
Limitations on the foregoing may be imposed by the Administrator, in
its sole discretion, if the Administrator determines that such limitations are
required in order that the transaction shall be exempt from Section 16(b) of the
Exchange Act pursuant to Rule 16b-3, or any successor rule thereto. Any
securities tendered or withheld in accordance with this Section 6.1.9 shall be
valued by the Company as of the Tax Date.
6.1.10 OTHER PROVISIONS. Each Option granted under this
Plan may contain such other terms, provisions, and conditions not inconsistent
with this Plan as may be determined by the Administrator, and each ISO granted
under this Plan shall include such provisions and conditions as are necessary to
qualify the Option as an "incentive stock option" within the meaning of
Section 422 of the Code.
6.1.11 DETERMINATION OF VALUE. For purposes of the Plan,
the value of Common Stock or other securities of the Company shall be determined
as follows:
(a) If the stock of the Company is listed on any
established stock exchange or a national market system, including without
limitation the National Market System of the National Association of Securities
Dealers, Inc. Automated Quotation System, 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 system or exchange (or the largest
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<PAGE>
such exchange) for the date the value is to be determined (or if there are no
sales for such date, then for the last preceding business day on which there
were sales), as reported in the WALL STREET JOURNAL or similar publication.
(b) If the stock of the Company is regularly quoted by
a recognized securities dealer but selling prices are not reported, its fair
market value shall be the mean between the high bid and low asked prices for the
stock on the date the value is to be determined (or if there are no quoted
prices for the date of grant, then for the last preceding business day on which
there were quoted prices).
(c) In the absence of an established market for the
stock, the fair market value thereof shall be determined in good faith by the
Administrator, with reference to the Company's net worth, prospective earning
power, dividend-paying capacity, and other relevant factors, including the
goodwill of the Company, the economic outlook in the Company's industry, the
Company's position in the industry and its management, and the values of stock
of other corporations in the same or a similar line of business.
6.1.12 OPTION TERM. No ISO shall be exercisable more than
ten years after the date of grant, or such lesser period of time as is set forth
in the stock option agreement (the end of the maximum exercise period stated in
the stock option agreement is referred to in this Plan as the "Expiration
Date").
6.1.13 EXERCISE PRICE. The exercise price of any Option
granted to any person who owns, directly or by attribution under the Code
currently Section 424(d), stock possessing more than ten percent of the total
combined voting power of all classes of stock of the Company or of any Affiliate
(a "Ten Percent Stockholder") shall in no event be less than 110% of the fair
market value (determined in accordance with Section 6.1.11) of the stock covered
by the Option at the time the Option is granted.
6.2 TERMS AND CONDITIONS TO WHICH ONLY NQOS ARE SUBJECT. Except
as set forth in Section 6.1.13, the exercise price of a NQO shall be not less
than 85% of the fair market value (determined in accordance with Section 6.1.11)
of the stock subject to the Option on the date of grant.
6.3 TERMS AND CONDITIONS TO WHICH ONLY ISOS ARE SUBJECT.
Options granted under this Plan which are designated as ISOs shall be subject to
the following terms and conditions:
6.3.1 EXERCISE PRICE. Except as set forth in
Section 6.1.13, the exercise price of an ISO shall be determined in accordance
with the applicable provisions of the Code and shall in no event be less than
the fair market value
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<PAGE>
(determined in accordance with Section 6.1.11) of the stock covered by the
Option at the time the Option is granted.
6.3.2 DISQUALIFYING DISPOSITIONS. If stock acquired by
exercise of an ISO granted pursuant to this Plan is disposed of in a
"disqualifying disposition" within the meaning of Section 422 of the Code, the
holder of the stock immediately before the disposition shall promptly notify the
Company in writing of the date and terms of the disposition and shall provide
such other information regarding the Option as the Company may reasonably
require.
6.3.3 GRANT DATE. If an ISO is granted in anticipation of
employment as provided in Section 5, the Option shall be deemed granted, without
further approval, on the date the grantee assumes the employment relationship
forming the basis for such grant, and, in addition, satisfies all requirements
of this Plan for Options granted on that date.
6.3.4 VESTING. Notwithstanding any other provision of this
Plan, ISOs granted under all incentive stock option plans of the Company and its
subsidiaries may not "vest" for more than $100,000 in fair market value of stock
(measured on the grant dates(s)) in any calendar year. For purposes of the
preceding sentence, an option "vests" when it first becomes exercisable. If, by
their terms, such ISOs taken together would vest to a greater extent in a
calendar year, and unless otherwise provided by the Administrator, ISOs with
lower exercise prices shall vest before ISOs with higher exercise prices,
regardless of the grant date.
6.3.5 TERM. Notwithstanding Section 6.1.12, no ISO granted
to any Ten Percent Stockholder shall be exercisable more than five years after
the date of grant.
7. MANNER OF EXERCISE. An optionee wishing to exercise an Option
shall give written notice to the Company at its principal executive office, to
the attention of the officer of the Company designated by the Administrator,
accompanied by payment of the exercise price as provided in Section 6.1.6. The
date the Company receives written notice of an exercise hereunder accompanied by
payment of the exercise price will be considered as the date such Option was
exercised. Promptly after receipt of written notice of exercise of an Option,
the Company shall, without stock issue or transfer taxes to the optionee or
other person entitled to exercise the Option, deliver to the optionee or such
other person a certificate or certificates for the requisite number of shares of
stock. An optionee or permitted transferee of an optionee shall not have any
privileges as a stockholder with respect to any shares of stock covered by the
Option until the date of issuance (as evidenced by the appropriate entry on the
books of the Company or a duly authorized transfer agent) of such shares.
-8-
<PAGE>
8. EMPLOYMENT OR CONSULTING RELATIONSHIP. Nothing in this Plan or
any Option granted thereunder shall interfere with or limit in any way the right
of the Company or of any of its Affiliates to terminate any optionee's
employment or consulting at any time, nor confer upon any optionee any right to
continue in the employ of, or consult with, the Company or any of its
Affiliates.
9. FINANCIAL INFORMATION. The Company shall provide to each
optionee during the period such optionee holds an outstanding Option, and to
each holder of Common Stock acquired upon exercise of Options granted under the
Plan for so long as such person is a holder of such Common Stock, annual
financial statements of the Company as prepared either by the Company or
independent certified public accountants of the Company. Such financial
statements shall include, at a minimum, a balance sheet and an income statement,
and shall be delivered as soon as practicable following the end of the Company's
fiscal year.
10. CONDITIONS UPON ISSUANCE OF SHARES. Shares of Common Stock shall
not be issued pursuant to the exercise of an Option unless the exercise of such
Option and the issuance and delivery of such shares pursuant thereto shall
comply with all relevant provisions of law, including, without limitation, the
Securities Act of 1933, as amended (the "Securities Act").
11. NONEXCLUSIVITY OF THE PLAN. The adoption of the Plan shall not
be construed as creating any limitations on the power of the Company to adopt
such other incentive arrangements as it may deem desirable, including, without
limitation, the granting of stock options other than under the Plan.
12. MARKET STANDOFF. Each Optionee, if so requested by the Company
or any representative of the underwriters in connection with any registration of
the offering of any securities of the Company under the Securities Act shall not
sell or otherwise transfer any shares of Common Stock acquired upon exercise of
Options during such period following the effective date of a registration
statement of the Company filed under the Securities Act as is agreed upon
between the Company and such representative(s); PROVIDED, HOWEVER, that such
restriction shall apply only to the first two registration statements of the
Company to become effective under the Securities Act which includes securities
to be sold on behalf of the Company to the public in an underwritten public
offering under the Securities Act. The Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restriction
until the end of such period.
13. AMENDMENTS TO PLAN. The Board may at any time amend, alter,
suspend or discontinue this Plan. Without the consent of an optionee, no
amendment, alteration, suspension or discontinuance may adversely affect
outstanding Options except to conform this Plan and ISOs granted under this Plan
to the
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<PAGE>
requirements of federal or other tax laws relating to incentive stock options.
No amendment, alteration, suspension or discontinuance shall require
stockholder approval unless (a) stockholder approval is required to preserve
incentive stock option treatment for federal income tax purposes, or (b) the
Board otherwise concludes that stockholder approval is advisable.
14. EFFECTIVE DATE OF PLAN. This Plan shall become effective upon
adoption by the Board; PROVIDED, HOWEVER, that no ISO shall be exercisable
unless and until written consent of the stockholders of the Company, or approval
of stockholders of the Company voting at a validly called stockholders' meeting,
is obtained within 12 months after adoption by the Board. If such stockholder
approval is not obtained within such time, ISOs granted hereunder shall
terminate and be of no force and effect from and after expiration of such 12-
month period although any NQO granted shall remain in full force and effect.
The Plan shall terminate ten years after adoption by the Board unless terminated
earlier by the Board.
Plan adopted by the Board of Directors on July 12, 1996.
Plan approved by Stockholders on _______________, 1996.
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<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
ICOT International, Ltd.
(Organized in the United Kingdom)
IA Acquisition Corporation
(Organized in the State of California)
Pathway Design, Inc.
(Organized in the State of California)
Microform Publishing Company
(Organized in the State of California)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our report included in this Form 10-K, into the Company's previously filed
Registration Statements File Nos. 2-76324, 2-88042, 2-94922, 33-2525,
33-21102, 33-41465 and 33-65395 on Form S-8 and No. 333-01187 on Form S-3.
ARTHUR ANDERSEN LLP
San Jose, California
October 18, 1996
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