<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
MARK ONE:
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1994
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 0-11879
VLSI TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-2597282
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
1109 MCKAY DRIVE, SAN JOSE, CALIFORNIA 95131
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(408) 434-3000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK AS OF SEPTEMBER 30,
1994:
36,151,753
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<PAGE> 2
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VLSI TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS -- UNAUDITED
(THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 25, SEPTEMBER 30, SEPTEMBER 25,
1994 1993 1994 1993
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues................................. $ 151,609 $ 137,341 $ 437,780 $ 382,607
Cost of sales................................ 93,843 85,189 268,654 249,784
----------- ----------- ----------- -----------
Gross profit............................... 57,766 52,152 169,126 132,823
----------- ----------- ----------- -----------
Operating expenses:
Research and development................... 20,174 16,936 58,777 47,248
Marketing, general and administrative...... 26,380 24,239 77,123 69,374
Special charge............................. -- -- -- 1,008
----------- ----------- ----------- -----------
Operating income............................. 11,212 10,977 33,226 15,193
Interest income and other expenses, net...... 873 337 2,383 1,211
Interest expense............................. (2,403) (1,923) (6,451) (6,008)
----------- ----------- ----------- -----------
Income before provision for taxes on
income..................................... 9,682 9,391 29,158 10,396
Provision for taxes on income................ 2,142 1,878 6,920 2,078
----------- ----------- ----------- -----------
Net income................................... $ 7,540 $ 7,513 $ 22,238 $ 8,318
=========== =========== =========== ===========
Net income per share......................... $ .20 $ .21 $ .59 $ .24
=========== =========== =========== ===========
Weighted average common and common equivalent
shares outstanding......................... 37,839,602 36,217,048 37,414,006 34,800,093
=========== =========== =========== ===========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
2
<PAGE> 3
VLSI TECHNOLOGY, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS -- UNAUDITED
(THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 25,
1994 1993
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 82,613 $ 41,536
Liquid investments............................................... 8,692 31,100
Accounts receivable, net of allowance for doubtful accounts and
customer returns of $2,300 ($2,250 at December 25, 1993)...... 89,393 70,666
Inventories:
Raw materials................................................. 5,460 8,831
Work-in-process............................................... 38,197 39,178
Finished goods................................................ 11,520 14,103
--------- --------
Total inventories........................................ 55,177 62,112
Deferred and refundable income taxes............................. 11,966 11,966
Prepaid expenses and other current assets........................ 5,674 5,066
--------- --------
Total current assets..................................... 253,515 222,446
Property, plant and equipment, at cost............................. 484,558 412,693
Accumulated depreciation and amortization.......................... (271,353) (228,767)
--------- --------
Net property, plant and equipment................................ 213,205 183,926
Other assets....................................................... 5,771 5,851
--------- --------
TOTAL ASSETS............................................. $ 472,491 $412,223
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 55,788 $ 39,446
Accrued compensation and benefits................................ 21,123 15,762
Deferred income.................................................. 9,273 9,121
Other accrued liabilities........................................ 30,714 29,088
Current capital lease obligations................................ 8,353 8,314
Current portion of long-term debt................................ 6,730 6,292
--------- --------
Total current liabilities................................ 131,981 108,023
Non-current capital lease obligations.............................. 4,296 10,944
Long-term debt..................................................... 88,968 74,911
Deferred income taxes.............................................. 5,837 5,837
Stockholders' equity:
Preferred Shares, $.01 par value................................. -- --
Common Stock, $.01 par value..................................... 361 351
Junior Common Stock, $.01 par value.............................. -- 2
Additional paid-in capital....................................... 227,346 221,013
Retained earnings (Accumulated deficit).......................... 13,702 (8,536)
Stockholders' notes receivable................................... -- (322)
--------- --------
Total stockholders' equity............................... 241,409 212,508
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $ 472,491 $412,223
========= ========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
3
<PAGE> 4
VLSI TECHNOLOGY, INC.
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS -- UNAUDITED
(THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 25,
1994 1993
------------- -------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS
<S> <C> <C>
Operating activities:
Net income...................................................... $ 22,238 $ 8,318
Adjustments to reconcile net income to net cash generated by
operations:
Special charge............................................... -- 1,008
Depreciation and amortization................................ 44,761 35,552
Changes in operating assets and liabilities:
Accounts receivable........................................ (18,727) 582
Inventories................................................ 6,935 (1,581)
Accounts payable, accrued liabilities and deferred
income.................................................... 23,481 10,976
Other...................................................... (1,992) 158
--------- ---------
Net cash generated by operations............................. 76,696 55,013
--------- ---------
Investing activities:
Purchases of property, plant and equipment...................... (51,239) (44,299)
Purchases of liquid investments................................. (54,770) (21,509)
Proceeds from sales and maturities of liquid investments........ 77,123 12,959
Other........................................................... (450) (916)
--------- ---------
Net cash flow used for investing activities.................. (29,336) (53,765)
--------- ---------
Financing activities:
Payments on debt and capital lease obligations.................. (13,001) (10,993)
Issuance of Common Shares, net.................................. 6,718 6,748
--------- ---------
Net cash flow used for financing activities.................. (6,283) (4,245)
--------- ---------
Net increase (decrease) in cash and cash equivalents.............. 41,077 (2,997)
Cash and cash equivalents, beginning of period.................... 41,536 69,674
--------- ---------
Cash and cash equivalents, end of period.......................... $ 82,613 $ 66,677
========= =========
Supplemental disclosure:
Cash outflows for property, plant and equipment................. $ 51,239 $ 44,299
Add: Secured equipment loans................................. 20,887 7,500
Add: Capital lease obligations incurred...................... -- 4,479
--------- ---------
Property, plant and equipment additions.................... $ 72,126 $ 56,278
========= =========
Interest paid................................................... $ 5,167 $ 5,190
========= =========
Income taxes paid, net.......................................... $ 7,222 $ 1,051
========= =========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
4
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VLSI TECHNOLOGY, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The accompanying interim consolidated condensed financial statements
have been prepared in conformance with generally accepted accounting principles,
consistent with those applied in the VLSI Technology, Inc. Annual Report on Form
10-K for the year ended December 25, 1993 (the 1993 Annual Report). This
Quarterly Report on Form 10-Q (Form 10-Q) should be read in conjunction with the
1993 Annual Report. The interim financial statements are unaudited, but reflect
all normal recurring adjustments that are, in the opinion of management,
necessary to a fair statement of results for the interim periods presented. The
results for the quarter and nine-month period ended September 30, 1994 are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 30, 1994.
2. Effective with the beginning of fiscal 1994, the Company changed its
fiscal year end from the last Saturday in December to the last Friday in
December. While most fiscal years consist of 52 weeks, fiscal 1994 will consist
of 53 weeks. The extra week is reflected in the first quarter of 1994, resulting
in 14 weeks for the quarter ended April 1, 1994 compared to 13 weeks for the
quarter ended March 27, 1993 and all other quarters presented.
3. During the third quarter of 1994, the Company reclassified costs
associated with its 21 Technology Centers from research and development to cost
of sales and marketing, general and administrative. Amounts reclassified
year-to-date in 1994 and 1993 total $13.8 million for both years, with third
quarter amounts of $4.7 million and $4.6 million, respectively. Cost of sales
were increased $11.6 million and $10.6 million, respectively, for the 1994 and
1993 year-to-date periods with third quarter effects of $4.1 million and $3.6
million, respectively. Marketing, general and administrative were increased $2.2
million and $3.2 million, respectively, for the 1994 and 1993 year-to-date
periods with third quarter effects of $0.6 million and $1.0 million,
respectively.
4. The 1994 year-to-date tax provision reflects the benefit of tax credit
carryforwards.
5. The Company is a named defendant in a lawsuit filed by Texas
Instruments Incorporated (TI) in 1990 claiming patent infringement. For more
information, see Note 4 of Notes to Consolidated Financial Statements on pages
25 and 26 of the Company's 1993 Annual Report and Item 1 in Part II of this Form
10-Q.
6. The results for the nine months ended September 30, 1994 include a $3.3
million reduction in research and development (R&D) expenditures reflecting
reimbursement by Intel Corporation (Intel) of R&D activities in accordance with
the Technology and Manufacturing Agreement of July 8, 1992, as amended. The
parties terminated that agreement in early November 1994. VLSI has been informed
of Intel's desire to dispose of its equity ownership interest in VLSI. The terms
of the Intel/VLSI Stock and Warrant Purchase Agreement dated July 8, 1992 could
be interpreted to obligate VLSI to pay for certain costs, including printing
expenses, legal fees and brokerage commissions or underwriters' discounts
associated with the sale of VLSI securities held by Intel. To the extent any
such costs are borne by VLSI, none of which can be readily determined prior to
the sale of the securities, they would be applied against the Company's equity
balances as an element of the cost of the 1992 private placement transaction
with Intel. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Factors Affecting Future Results" and "-- Liquidity and
Capital Resources".
7. The special charge of $1.0 million in the quarter ended June 26, 1993
represents a charge for purchased in-process research and development relating
to the acquisition of certain assets by COMPASS Design Automation, Inc.
(COMPASS), a Company subsidiary. The aggregate purchase price totaled $2.4
million, including the assumption of liabilities.
8. Effective December 26, 1993, the Company adopted Statement of Financial
Accounting Standards No. 115 -- "Accounting for Certain Investments in Debt and
Equity Securities" (FAS 115), which creates certain classification categories
for such investments, based on the nature of the securities and the intent and
investment goals of the Company. FAS 115 has been adopted on a prospective
basis, and the financial statements of prior years have not been restated. The
cumulative effect of the change was not material.
5
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITON AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS -- FIRST NINE MONTHS OF 1994 COMPARED TO THE FIRST NINE
MONTHS OF 1993
This Management's Discussion and Analysis of Financial Condition and Results of
Operations (MDA) should be read in conjunction with the MDA in the 1993 Annual
Report.
The following table summarizes the Company's operating results for the 40-week,
nine-month period ended September 30, 1994 as compared to the 39-week,
nine-month period ended September 25, 1993 (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
-----------------------------------------------------
1994 1993
------------------------------- -------------------
PERCENT PERCENT PERCENT
OF NET CHANGE OF NET
AMOUNTS REVENUES FROM 1993 AMOUNTS REVENUES
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues.............................. $437,780 100.0% 14.4% $382,607 100.0%
Cost of sales............................. 268,654 61.4 7.6 249,784 65.3
-------- ----- -------- -----
Gross margin.............................. 169,126 38.6 27.3 132,823 34.7
Research & development.................... 58,777 13.4 24.4 47,248 12.3
Marketing, general and administrative..... 77,123 17.6 11.2 69,374 18.1
Special charge............................ -- -- * 1,008 0.3
-------- ----- -------- -----
Operating income.......................... 33,226 7.6 118.7 15,193 4.0
Interest expense & other, net............. (4,068) .9 (15.2) (4,797) 1.3
Income taxes.............................. 6,920 1.6 233.0 2,078 0.5
-------- ----- -------- -----
Net income................................ $ 22,238 5.1 167.3 $ 8,318 2.2
======== ===== ======== =====
</TABLE>
- - ------------
* Not meaningful
The Company recorded net income of $22.2 million for the first nine months of
1994, compared to net income of $8.3 million in the comparable period of 1993.
The increase is primarily due to enhanced gross margins resulting from
manufacturing efficiencies, lower assembly costs and a favorable product mix.
The first nine months of 1993 were adversely affected by a manufacturing process
difficulty that was isolated to a single manufacturing facility and affected a
limited number of customers. This issue was discovered late in the first quarter
of 1993. As discussed in Note 3 of Notes to Consolidated Condensed Financial
Statements, in the third quarter of 1994, the Company reclassified its
Technology Center costs (which had previously been classified as R&D expenses)
into cost of sales and marketing, general and administrative costs. This
accounting change was made to make the presentation of the Company's financial
statements more comparable with the financial statement presentation of its
closest competitors. The reclassification decreased R&D expenses for the first
nine months of 1994 by $13.8 million and the first nine months of 1993 by $13.8
million. The reclassification increased cost of sales by $11.6 million and $10.6
million in year-to-date 1994 and 1993, respectively, and increased marketing,
general and administrative expenses by $2.2 million and $3.2 million,
respectively. Year-to-date 1994 results were negatively affected by certain
one-time third quarter events, including a $1.0 million product return and
downsizing costs of $1.4 million associated with a reduction in force in the
Company's Personal Computer Division (PCD) and manufacturing assembly
operations, both located in Tempe, Arizona.
Net revenues for the first nine months of 1994 increased 14.4% from the
corresponding period of 1993, primarily reflecting revenue increases between
periods in the Company's silicon product divisions. Net revenues from the
Company's application-specific standard products (ASSPs) for the X86-based
portion of the personal computer (PC) marketplace increased significantly from
the first nine months of 1993 to the first nine months of 1994 despite $1.0
million of product returned for re-testing on the last day of the third quarter
of 1994. Unit volumes of these devices shipped in 1994 exceeded 1993 levels and
average sales prices also increased. The higher average sales prices reflect
increased functionalities of new products in the Company's sales mix. The
Company's application-specific integrated circuit (ASIC) net revenues increased
in 1994 from the corresponding period of 1993, largely from strong demand for
the Company's communications devices despite a decrease in net revenues from
Apple Computer, Inc. (Apple). Software net revenues have also increased between
the periods.
6
<PAGE> 7
International revenues, which include export sales, increased 13.6% over the
first nine months of 1993, but decreased as a percentage of net revenues,
accounting for 48.4% of consolidated net revenues in the first nine months of
1994 compared to 48.7% in the first nine months of 1993. A slight decrease in
European net revenues due to a decline in unit volume shipments for the PC
market was more than offset by a sharp increase in export sales, which are
predominantly to the Asia-Pacific region, reflecting an increase in units
shipped for the portable computer market as VLSI's customers utilize overseas
manufacturing operations in the Asia-Pacific region. Sales to the Japan market
increased slightly in the first nine months of 1994 from the first nine months
of 1993.
Gross margin as a percentage of net revenues (as adjusted for the
reclassification of Technology Center costs) increased to 38.6% in the first
nine months of 1994 from 34.7% in the first nine months of 1993. Gross margin
percentages have been reduced by approximately 2.7 percentage points in each of
the two periods as a result of the reclassification of Technology Center costs
previously classified as research and development expenses. The increase in
gross margin percentage in 1994 over 1993 was driven primarily by a sales mix
shift to higher margin devices and better production yields, combined with lower
assembly costs and lower costs on certain high-volume packages. The Company also
continues to seek to reduce its manufacturing costs through enhanced yields on
newer technologies, smaller device geometries and selective equipment additions
to remove production bottlenecks. Future gross margins will depend in part upon
the economic environment, customer acceptance of new products, product
functionality and capabilities, changes in product mix and the effects of
manufacturing cost reduction activities. Gross margin in the third quarter of
1994 was negatively affected by the $1.0 million product return and a $0.7
million charge relating to downsizing the Company's assembly manufacturing
operations and PCD.
The Company's gross margins are also affected by variations in semiconductor
manufacturing operations, including defect densities, scheduled and unscheduled
plant shutdowns and wafer yields. Depending upon the nature and reasons for such
variations, differences in cost can either be inventoried as capitalized
manufacturing variances and expensed as the related product is sold (often in a
subsequent quarter) or charged to cost of sales in the period incurred. In
general, material unusual, unfavorable variances are expensed in the period in
which incurred, while other variances are capitalized. As mentioned above, cost
of sales for the 1993 period included charges for an isolated manufacturing
process difficulty encountered during that period.
Total research and development expenditures, as adjusted for the
reclassification of Technology Center costs, increased $11.5 million in the
first nine months of 1994 compared to the same 1993 period. The R&D expenses
for both periods primarily reflect development of new products and
technologies, including the Company's SuperCore(TM) SC590 Pentium-compatible
chip set, handheld computing devices, devices for wireless technologies and
software for the Electronic Design Automation market. On August 4, 1994, the
Company announced that it reduced its R&D investment effort for the handheld
computing marketplace. The Company continues to invest in new manufacturing
technologies and future design and production capabilities in geometries
smaller than 0.6-micron. The special charge of $1.0 million in 1993 for
in-process research and development reflects the acquisition of certain assets
by COMPASS.
Marketing, general and administrative expenses increased $7.7 million but
decreased as a percentage of net revenues from the 1993 nine-month period to the
1994 nine-month period reflecting an increase in various costs, including
increased sales costs on higher revenue volumes and increased marketing
activities.
Operating expenses in the third quarter of 1994 include $0.7 million for the
downsizing of the Personal Computer Division.
Interest expense and other, net, decreased to $4.1 million in the first nine
months of 1994 from $4.8 million in the comparable 1993 period. Interest income
increased between periods, reflecting the effect of higher interest rates on
higher overall cash balances. Interest expense was also higher, reflecting an
increased weighted-average balance of loans and capitalized leases.
Both the 1994 and 1993 year-to-date tax provisions reflect benefits for tax
carryforwards. In both years, the utilization of operating loss and credit
carryforwards have been subject to alternative minimum tax limitations. The
provision for income taxes in the remaining quarter of 1994 will depend on the
overall profitability of the Company, as well as those countries in which
profits and losses are incurred.
7
<PAGE> 8
RESULTS OF OPERATIONS -- THIRD QUARTER OF 1994 COMPARED TO THE THIRD QUARTER OF
1993
The following table summarizes the Company's operating results for the
three-month period ended September 30, 1994 as compared to the three-month
period ended September 25, 1993 (dollars in thousands):
<TABLE>
<CAPTION>
THIRD QUARTER
-----------------------------------------------------
1994 1993
------------------------------- -------------------
PERCENT PERCENT PERCENT
OF NET CHANGE OF NET
AMOUNTS REVENUES FROM 1993 AMOUNTS REVENUES
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Net revenues.............................. $151,609 100.0% 10.4% $137,341 100.0%
Cost of sales............................. 93,843 61.9 10.2 85,189 62.0
-------- -------- -------- --------
Gross margin.............................. 57,766 38.1 10.8 52,152 38.0
Research & development.................... 20,174 13.3 19.1 16,936 12.3
Marketing, general and administrative..... 26,380 17.4 8.8 24,239 17.7
-------- -------- -------- --------
Operating income.......................... 11,212 7.4 2.1 10,977 8.0
Interest expense & other, net............. (1,530) 1.0 (3.5) (1,586) 1.1
Income taxes.............................. 2,142 1.4 14.1 1,878 1.4
-------- -------- -------- --------
Net income................................ $ 7,540 5.0 0.4 $ 7,513 5.5
======== ======== ======== ========
</TABLE>
The Company earned net income of $7.5 million in the third quarter of 1994 and
in the third quarter of 1993 despite higher net revenues in the 1994 quarter.
The 1994 net income was marked by certain one-time events, including $1.4
million in charges related to the downsizing of certain PC and
manufacturing-related operations, a $1.0 million product return on the last day
of the quarter, and unfavorable effects on the Company approximating $0.5
million from foreign currency rate changes. The third quarter of 1994 was also
negatively affected by higher operating expenses and a slightly higher effective
tax rate. The effect of the reclassification of Technology Center costs was to
increase cost of sales by $4.1 million and $3.6 million in the third quarters of
1994 and 1993, respectively, decrease R&D expenses by $4.7 million and $4.6
million, respectively, and increase marketing, general and administrative
expenses by $0.6 million and $1.0 million, respectively.
Net revenues in the third quarter of 1994 increased 10.4% from the comparable
1993 period, reflecting increased net revenues from higher unit shipments and
average sales prices of X86-based PC devices. Net revenues from the sale of ASIC
devices were down slightly between the periods, as a decrease in net revenues
from Apple was not quite offset by increases in net revenues from other
products, especially wireless devices. Software net revenues were comparable
between periods.
Third quarter 1994 international revenues increased in terms of both amount and
as a percentage of net revenues over the third quarter of 1993, primarily due to
increases in export sales to the Asia-Pacific region. European net revenues
increased from the comparable 1993 period due to growth in the Company's
shipments of PC devices in that region. Export sales to the Asia-Pacific area in
the third quarter of 1994 increased substantially over the third quarter of
1993, due to an increase in shipments of portable devices for the PC market to
that area.
Gross margins as a percentage of net revenues (as adjusted for the
reclassification of Technology Center costs) were comparable between the
periods, but reflected shifts in sales mix. This result was driven by lower
margins from personal computer devices, offset by higher margin contribution
from the sales of ASIC devices. The Company recorded a $1.0 million charge to
net revenues and thereby gross margins in the third quarter of 1994, reflecting
a product return on the last day of the quarter, for which there was
insufficient time to test, re-screen and reship the product. Reserves taken for
portable PC devices as well as downsizing charges also negatively affected
margins during the third quarter of 1994.
R&D expenditures, as adjusted, increased 19.1% in the third quarter of 1994
compared to expenditures in the same 1993 period, reflecting continuing
investment in new package and process technologies, development of
8
<PAGE> 9
products for communications markets and development of software for the
Electronic Design Automation market.
Marketing, general and administrative expenses for the third quarter of 1994
increased by $2.1 million from the third quarter of the prior year, reflecting
increased sales costs associated with higher revenue levels and increased
marketing activities. Operating expenses in the third quarter of 1994 also
include downsizing charges as described above.
Interest expense and other, net, decreased to $1.5 million in the current
quarter from $1.6 million in the same period a year ago. Interest income on the
Company's overall higher cash balances increased, reflecting higher investment
yields than in the third quarter of 1993, offset by increased interest expense
due to higher balances of loans and capitalized leases.
FACTORS AFFECTING FUTURE RESULTS
The Company is making significant investments in research and development of new
products in 1994. New product development often requires long-term forecasting
of markets, market trends, development and implementation of new processes and
technologies and a substantial capital commitment. No assurance can be given
that the Company's product and process development efforts will be successful,
that new product introductions will achieve market acceptance or that the
markets in question will develop. For example, the Company expended considerable
financial and technical resources during 1993 through the second quarter of 1994
toward the development of its Polar(TM) product, a device intended for the
handheld computer market integrating Intel's 386SL(TM) microprocessor. To date,
the handheld market has not developed per initial expectations. The Company now
believes that significant uncertainty exists as to the revenue potential of the
handheld market in general. As a result, the Company and Intel, its partner in
the Polar development effort, have canceled further production of the Polar
product and in early November 1994, terminated the amended July 8, 1992
Technology and Manufacturing Agreement between the companies. In addition, the
parties are exploring alternatives to carry out Intel's expressed desire to
dispose of its equity ownership position in the Company. See also "-- Liquidity
and Capital Resources".
As discussed in the 1993 Annual Report, the semiconductor industry has a history
of cyclicality and is characterized by shortening product life cycles,
continuous evolution of process technology, high fixed costs, additions of
manufacturing capacity in large increments and wide fluctuations in product
supply and demand. In addition, competition is intense, particularly in core
logic X86 chip sets where Intel has become a major supplier of personal computer
chip sets and mother boards. The Company's products are susceptible to pricing
pressures and the Company continually attempts to pursue cost reductions
including process enhancements and manufacturing geometry reductions in order to
maintain favorable gross margins. Future gross margins will also vary with the
general condition of the economy, customer acceptance of new technologies and
products, product functionality and capabilities, shifts in product mix and the
success of ongoing manufacturing cost reduction activities.
The Company is continually expanding and upgrading its manufacturing capacity.
These activities require significant investments in capital equipment and
facilities. Any significant expansion or upgrade of semiconductor manufacturing
capacity has attendant risks. Specifically, the Company has recently begun a
program to expand and upgrade its manufacturing facility in San Jose,
California. The work effort associated with the upgrade and expansion of that
facility could result in a disruption to the facility's manufacturing cycle,
thereby lowering the output of the facility as well as wafer yields. This could
have a material adverse impact on the Company's future operating results.
The Company, from time to time, may begin risk production of new products prior
to final internal and/or external qualification of such products. If the
products do not prove to be production-worthy, the Company could face the loss
of potentially significant future revenues from the devices and adverse affects
in operating results. As an example of risk production, in the third quarter of
1994 the Company ramped production of its SuperCore SC590 chip set for
Pentium-based computer systems prior to the Company's full internal
qualification of such product.
9
<PAGE> 10
Approximately two-thirds of the Company's net revenues for the third quarter and
first nine months of 1994 were derived from sales to its top 20 customers, a
large percentage of which are in the personal computer business. In addition,
shipments to a single customer in the personal computer business, Compaq
Computer Corporation (Compaq), accounted for 24.4% of net revenues during the
third quarter of 1994 and 23.0% for the first three quarters of 1994. Shipments
to Compaq were up sharply from 1993, when they accounted for less than 10% of
the Company's net revenues for that year. As a result of this concentration of
its customer base, the Company's operating results would be materially adversely
affected by the loss of business from, or the cancellation of orders by, any
such customers. During the third quarter of 1994, the Company experienced a
decrease in orders from Compaq, which may result in reduced sales to Compaq in
the fourth quarter of 1994 and first quarter of 1995. The Company has
experienced such a decrease during the first nine months of 1994 in sales to
Apple, resulting in a decrease in Apple net revenues to less than 10% of net
revenues in the first nine months of 1994, as compared to approximately 19.5% of
net revenues in the first nine months of 1993. In addition, the personal
computer market, from which the Company derives over half of its net revenues,
is volatile and subject to significant shifts in technologies and demand as well
as severe pricing pressures.
The Company sells its ASSPs under terms and conditions customarily found in the
semiconductor industry. Sales of these products are subject to customer
cancellation with limited advance notice prior to shipment. Due to the Company's
relatively narrow customer base for certain ASSPs and the short product life
cycles of such products, the Company could be unexpectedly left with significant
inventory exposure, which could have a material adverse affect on the Company's
operating results.
Other factors that may adversely affect VLSI's future results include pending
litigation and contingencies, environmental regulations and earthquakes. (See
the 1993 Annual Report for a more detailed discussion of Factors Affecting
Future Results.)
The status of the Company's pending material legal proceeding is set forth in
Item 1, Part II of this Form 10-Q. The Company cannot accurately predict the
eventual outcome of this matter with TI. Management believes the ultimate
outcome of this matter will not result in a material adverse effect on VLSI's
consolidated financial position or results of operations. An unfavorable outcome
could, however, have an adverse effect on VLSI's future business operations and
could be material to any particular quarter's results of operations. In
addition, the ongoing costs of defending lawsuits utilizes cash and management
resources.
LIQUIDITY AND CAPITAL RESOURCES
VLSI generates cash from operations, equipment financings and sales of its
securities. Principal uses of cash include purchases of capital equipment needed
for semiconductor manufacturing and engineering and payments of debt and lease
obligations.
At September 30, 1994, total cash, cash equivalents and liquid investments
increased $18.7 million from the 1993 fiscal year-end balance due primarily to
cash from operations and loan borrowings, offset by purchases of property, plant
and equipment and payments of debt and capital leases in the first nine months
of 1994. Working capital increased to $121.5 million at September 30, 1994
compared to $114.4 million at December 25, 1993.
During the nine-month period ended September 30, 1994, the Company generated
$76.7 million of cash from operations, a 39.4% increase over the $55.0 million
of cash generated for the nine-month period ended September 25, 1993. Accounts
receivable were $18.7 million higher at September 30, 1994 than at December 25,
1993, reflecting increased sales volumes. Concurrently, inventory levels have
declined $6.9 million from December 25, 1993 levels. Accounts payable and
accrued compensation at September 30, 1994 have increased by $21.7 million from
December 25, 1993 as a result of the timing of payments for the higher level of
spending for fixed assets and for increases in production volumes, as well as
increases in accrued compensation and benefits that reflect the timing of
payments.
Cash used for investing activities was $29.3 million for the nine-month period
ended September 30, 1994, as compared to $53.8 million for the nine-month period
ended September 25, 1993. The large decrease is a result of the Company's
shifting its liquid investments into cash equivalents in order to take advantage
of anticipated
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<PAGE> 11
increased interest rates for liquid investments. VLSI invested $72.1 million in
property, plant and equipment during the first nine months of 1994 compared to
$56.3 million in the comparable 1993 period. Capital additions during 1994 were
financed by cash and equipment loans. The 1994 and 1993 nine-month investments
in property, plant and equipment included acquisition of equipment for
sub-micron wafer fabrication, upgrades to manufacturing and office facilities
and computers and software to support research and development activity. The
Company expects to continue to utilize debt and/or lease financing for portions
of its 1994 capital expenditures.
Cash used for financing activities was $6.3 million in the first nine months of
1994 compared to $4.2 million in the same 1993 period. This increase in net
expenditures reflects higher payments on debt and capital lease obligations in
1994. Unused committed credit facilities approximated $52.5 million at
September 30, 1994.
VLSI currently estimates that total capital expenditures for 1994 will exceed
$100 million and will include expenditures for further increases in 0.6-micron
wafer fabrication capability. The Company entered into a lease agreement during
the third quarter of 1994 for space adjacent to its San Jose campus. The Company
will utilize this additional office space for its growing engineering functions
and to better organize its operational space layout.
Intel, which owns approximately 5.36 million shares, or 14.8%, of the Company's
Common Stock, and a warrant to purchase approximately an additional 2.68 million
shares of the Company's Common Stock at an exercise price of $11.69 per share,
elected in July 1994 to waive its right to maintain its percentage of equity
ownership interest in the Company's Common Stock and its right to have an
observer attend meetings of the Company's Board of Directors. Intel has also
informed VLSI that Intel wishes to dispose of its equity ownership interest. The
terms of the Intel/VLSI Stock and Warrant Purchase Agreement dated July 8, 1992
could be interpreted to obligate VLSI to pay for certain costs, including
printing expenses, legal fees and brokerage commissions or underwriters'
discounts associated with the sale of VLSI securities held by Intel. To the
extent any such costs are borne by VLSI, none of which can be readily determined
prior to the sale of the securities, they would be applied against the Company's
equity balances as an element of the cost of the 1992 private placement
transaction with Intel.
VLSI believes that its existing cash balances, together with cash flow from
operations and available credit facilities, will be sufficient to meet its
liquidity and capital expenditure needs through 1995. While the Company believes
that its current capital resources are sufficient to meet its near-term needs,
in order to meet its longer-term needs, VLSI continues to investigate the
possibility of generating financial resources through technology or
manufacturing partnerships, as well as from equity or debt financing based on
market conditions. However, as a result of Intel's desire to sell such a large
number of shares of Common Stock, VLSI may be effectively precluded from raising
capital through the sale of equity in the near term. There can be no assurance
that the Company will be able to obtain future financing when needed or on
favorable terms.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 of the Company's Annual Report on Form 10-K for
the fiscal year ended December 25, 1993 for discussions of certain pending legal
proceedings. Except as discussed below, there have been no material developments
in any of these matters since the filing referenced above.
Texas Instruments
With respect to the TI actions against the Company and four other
defendants, in February 1992, the United States International Trade Commission
(ITC) affirmed the decision of the Administrative Law Judge that the Company's
old plastic encapsulation gating process infringed TI's patent, but found the
Company's newly developed process to be non-infringing. The U.S. Executive
Branch affirmed the order in the second quarter of 1992. The United States Court
of Appeal, for the Federal Circuit, affirmed the ITC decision in the first
quarter of 1993. In the first quarter of 1994, the parties filed cross motions
for summary judgment, all of which were denied in August 1994. A trial date for
TI's patent infringement action in the United States District Court for the
Northern District of Texas, Dallas Division, has been set for April 1995.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- See Index to Exhibits on Page 14.
(b) Reports on Form 8-K -- None.
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<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VLSI TECHNOLOGY, INC.
(Registrant)
<TABLE>
<S> <C>
Date November 11, 1994 By: /s/ GREGORY K. HINCKLEY
------------------------------------- --------------------------------------
Gregory K. Hinckley
Vice President, Finance and
Chief Financial Officer
(Principal Financial Officer)
Date November 11, 1994 By: /s/ BALAKRISHNAN S. IYER
------------------------------------- --------------------------------------
Balakrishnan S. Iyer
Vice President, Controller and Chief
Accounting Officer
(Principal Accounting Officer)
</TABLE>
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<PAGE> 14
VLSI TECHNOLOGY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1994
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
ITEM DESCRIPTION
- - ---- -----------
<S> <C>
10.1 Leasing Agreement dated September 21, 1994 between Sobrato-Sobrato Interests, as
Lessor, and the Registrant, as Lessee, for property located at 1240 McKay Drive, San
Jose, California.
10.2 Termination Agreement dated November 7, 1994 between Intel Corporation and
Registrant.
11.1 Calculation of Earnings Per Share
27.1 Financial Data Schedule
</TABLE>
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<PAGE> 1
EXHIBIT 10.1
Parties: This Lease is entered into on this 21st day of September, 1994,
between Sobrato-Sobrato Interests, a California limited partnership, and VLSI
Technology, Inc., a Delaware corporation, hereinafter called respectively
Landlord and Tenant.
Grant: Landlord hereby leases to Tenant, and Tenant hires from Landlord
those certain Premises with the appurtenances, situated in the city of San Jose,
county of Santa Clara, state of California, and more particularly described as
follows, to-wit:
Premises: A 96,020 square foot single-story building ("Building") of
concrete tilt-up construction commonly known and designated as 1240 McKay Drive,
San Jose, as outlined in Exhibit "A".
Use: Tenant shall use the Premises only for the following purposes and
shall not change the use of the Premises without the prior written consent of
Landlord, which consent shall not be unreasonably withheld: general office;
research & development; ancillary warehouse and other related legal uses.
Rent & Term: The term shall be for ninety eight (98) months and fifteen
(15) days, commencing on September 15, 1994 ("the Commencement Date"), and
ending on November 30, 2002, payable, without deduction or offset, in monthly
installments as follows:
<TABLE>
<S> <C>
September 15, 1994 -- November 30, 1997: $71,055.00 per month
December 1, 1997 -- November 30, 2002: The greater of (i) Forty Nine Thousand Nine
Hundred Thirty and No/100 Dollars
($49,930.00), or (ii) the Fair Market Rental
for the Premises as determined pursuant to
paragraph 32 of this Lease.
</TABLE>
The base monthly rent shall be due on or before the first day of each calendar
month during the term hereof. Said rental shall be paid in lawful money of the
United States of America, without offset or deduction, and shall be paid to
Landlord at such place or places as may be designated from time to time by
Landlord. Rent for any period less than a calendar month shall be a pro rata
portion of the monthly installment.
Late Charges: Tenant hereby acknowledges that late payment by Tenant to
Landlord of rent and other sums due hereunder will cause Landlord 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,
administrative, processing, accounting charges, and late charges, which may be
imposed on Landlord by the terms of any contract, revolving credit, mortgage or
trust deed covering the Premises. Accordingly, if any installment of rent or any
other sum due from Tenant shall not be received by Landlord or Landlord's
designee within ten (10) days after such amount shall be due Landlord shall give
Tenant written notice of such non-payment and if payment is not made within ten
(10) days after such notice, Tenant shall pay to Landlord a late charge equal to
five (5%) percent of such overdue amount which shall be due and payable with the
payment then delinquent. The parties hereby agree that such late charge
represents a fair and reasonable estimate of the costs Landlord will incur by
reason of late payment by Tenant.
IT IS FURTHER MUTUALLY AGREED BETWEEN THE PARTIES AS FOLLOWS:
1. Possession: Tenant acknowledges that the Premises is currently subject
to an existing lease with Computer Associates, Inc. ("Associates"). Landlord,
Tenant and Associates have entered into a termination of lease agreement wherein
Associates has agreed to surrender the Premises to Landlord on the Commencement
Date and has agreed to pay certain sums to Tenant in consideration of Tenant's
execution of this Lease. Tenant has agreed to accept possession of the Premises
in the condition received by Landlord from Associates on the Commencement Date.
2. Acceptance of Premises and Covenants to Surrender: By entry hereunder,
Tenant accepts the Premises as being in good and sanitary order, condition and
repair and accepts the Building and the other improvements in their present
condition. Tenant agrees on the last day of the term hereof, or on the sooner
termination of this Lease, to surrender the Premises to Landlord in good
condition and repair, ordinary wear and tear and damage by the elements
excepted. Tenant shall surrender all alterations, additions, and improvements in
place to Landlord. On or before the end of the term or sooner termination of
this Lease,
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<PAGE> 2
Tenant shall remove all its personal property and trade fixtures from the
Premises, and all property not so removed shall be deemed to be abandoned by
Tenant.
3. Uses Prohibited: Tenant shall not commit, or knowingly suffer to
be committed, any waste upon the said 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 Premises may be located or allow any sale by auction
upon the Premises, or allow the Premises to be used for any unlawful or
objectionable purpose, or place any loads upon the floor, walls, or ceiling
which 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, waste materials, or hazardous materials in the
drainage system of or soils surrounding the Building. No materials, supplies,
equipment, finished products or semi-finished products, raw materials or
articles of any nature or any waste materials, refuse, scrap or debris shall be
stored upon or permitted to remain on any portion of the Premises outside of
the Building proper, other than refuse temporarily held in dumpsters.
4. Alterations and Additions: Except as herein provided, Tenant shall not
make, or suffer to be made, any structural alteration or addition to the
Premises, or any part thereof, without the written consent of Landlord first had
and obtained based upon Tenant's delivering to Landlord the proposed
architectural and structural Plans for all such alterations. Any addition or
alteration to the said Premises, except movable furniture and trade fixtures,
shall become at once a part of the realty and belong to Landlord. Alterations
and additions which are not to be deemed as trade fixtures shall include
heating, lighting, electrical systems, air conditioning, partitioning,
carpeting, or any other installation which has become an integral part of the
Premises. After having obtained Landlord's required consent, Tenant agrees that
it will not proceed to make such alterations or additions until three (3) days
from the receipt of such consent, in order that Landlord may post appropriate
notices to avoid any liability to contractors or material suppliers for payment
for Tenant's improvements. Tenant will at all times permit such notices to be
posted and to remain posted until the completion of work. Landlord's consent
shall not be required as to any single Tenant alteration of the Premises which
(i) will not affect the structural integrity of the Building constituting the
Premises, and (ii) is not initially budgeted to cost more than Seventy Five
Thousand Dollars ($75,000.00). Landlord's consent shall be required as to any
other proposed Tenant alteration of the Building and any such consent will not
be unreasonably withheld or delayed by Landlord, provided, however, that the
granting of any such consent may be specifically conditioned upon the execution
by Tenant of an agreement to (i) remove such alteration, and (ii) restore the
structural integrity and roof of the Building (to the extent affected by such
alteration) at the end of the term of this Lease.
Notwithstanding anything contained in the preceding paragraph, Landlord has
granted its consent and has further agreed that Tenant will not be required to
remove at the expiration of the Lease the alterations and additions to be
constructed by Tenant, at its expense, shortly after the Commencement Date as
described on the plans attached hereto as Exhibit "B".
5. Maintenance of Premises: Unless caused by Tenant's negligence,
Landlord shall be solely responsible for the maintenance of the Building
structure and shall make any repair or replacement required to the Building
structure and parking lot including but not limited to the footings, foundation,
roof structure and membrane (excluding normal roof maintenance), concrete tilt
panels, exterior glazing, and parking lot. All other repairs or replacements
shall be the responsibility of the Tenant. Tenant shall, at its sole cost, keep
and maintain said Premises and appurtenances and every part hereof, including
but not limited to, interior walls, roof membrane (normal maintenance only),
plumbing, electrical and HVAC systems, and all the Tenant Interior Improvements
in good and sanitary order, condition, and repair. Tenant shall provide Landlord
with a copy of a service contract between Tenant and a licensed air-conditioning
and heating contractor which contract shall provide for bi-monthly maintenance
of all air conditioning and heating equipment at the Premises. Tenant shall pay
the cost of all air-conditioning and heating equipment repairs or replacements
which are either excluded from such service contract or any existing equipment
warranties. Tenant shall be responsible for the preventive maintenance of the
membrane of the roof, which responsibility shall be deemed properly discharged
if (i) Tenant contracts with a licensed roof contractor who is reasonably
satisfactory to both Tenant and Landlord, at Tenant's sole cost, to inspect the
roof membrane at least every six months, with the first inspection due the sixth
(6th) month after the Commencement Date, and (ii) Tenant performs, at
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<PAGE> 3
Tenant's sole cost, all preventive maintenance recommendations made by such
contractor within a reasonable time after such recommendations are made. Such
preventive maintenance might include acts such as clearing storm gutters and
drains, removing debris from the roof membrane, trimming trees overhanging the
roof membrane, applying coating materials to seal roof penetrations, repairing
blisters, and other routine measures. Tenant shall provide to Landlord a copy of
such preventive maintenance contract and paid invoices for the recommended work.
All vinyl wall surfaces and floor tile are to be maintained in an as good a
condition as when Tenant took possession free of holes, gouges, or defacements
other than any damage from ordinary wear and tear and the elements. The Tenant
agrees to water, maintain and replace, when necessary, any shrubbery and
landscaping.
6. Hazard Insurance: Tenant shall not use, which is not now the case, or
knowingly permit said Premises, or any part thereof, to be used, for any purpose
other than that for which the said Premises are hereby leased; and no use shall
be made or permitted to be made of the said Premises, nor acts done, which will
cause an increase in premiums or a cancellation of any insurance policy covering
said Building, or any part thereof, nor shall Tenant sell or permit to be kept,
used or sold, in or about said Premises, any article which may be prohibited by
the standard form of fire insurance policies. Tenant 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 public liability insurance, covering said Building and
appurtenances. The Landlord agrees to purchase and keep in force fire and
extended coverage insurance covering the Premises in amounts not to exceed the
actual insurable value of said Premises as determined by Landlord's insurance
company's appraisers. The Tenant agrees to pay to the Landlord as additional
rent, on demand, the full cost of said insurance as evidenced by insurance
billings to the Landlord. Payment shall be due to Landlord within ten (10) days
after written invoice to Tenant. In addition Landlord agrees to purchase
earthquake insurance if either (i) Tenant requests such coverage, or (ii) if
earthquake insurance is commercially available at reasonable rates and if it
becomes normal (which is not the case now) in the San Jose area for owners and
tenants routinely to purchase earthquake insurance.
In addition, Tenant agrees to insure its personal property, additions,
alterations, and improvements and to obtain worker's compensation and public
liability and property damage insurance for occurrences within the Premises of
$5,000,000.00 combined single limited for bodily injury and property damage.
Tenant shall name Landlord as an additional insured, shall deliver a copy of the
policies and renewal certificates to Landlord. All such policies shall provide
for thirty (30) days' prior written notice to Landlord of any cancellation or
termination.
It is understood and agreed that Tenant's obligation under this paragraph
will be prorated to reflect the Commencement Date and termination date of this
Lease. Landlord and Tenant hereby waive any rights each may have against the
other on account of any loss or damage occasioned to the Landlord or the Tenant
as the case may be, or to the Premises or its contents, and which may arise from
any risk covered by their respective insurance policies, as set forth above. The
parties shall obtain from their respective insurance companies a waiver of any
right of subrogation which said insurance company may have against the Landlord
or the Tenant, as the case may be.
7. Abandonment: Tenant shall not vacate or abandon the Premises at any
time during the term; and if Tenant shall abandon, vacate or surrender said
Premises, or be dispossessed by process of law, or otherwise, any personal
property belonging to Tenant and left on the Premises shall be deemed to be
abandoned, at the option of Landlord, except such property as may be mortgaged
to Landlord. Tenant cannot be held in default hereunder if Tenant continues to
pay rent in accordance with this Lease, even though Tenant may have vacated the
Premises in whole or in part.
8. Free from Liens: Tenant shall keep the Premises and the property on
which the Premises are situated, free from any liens arising out of any work
performed, materials furnished, or obligations incurred by Tenant.
9. Compliance with Governmental Regulations: Tenant shall, at its sole
cost and expense, comply with all of the requirements of all municipal, state
and federal authorities now in force, or which may hereafter be in force,
pertaining to Tenant's permitted uses of the said Premises, and shall faithfully
observe in the use of
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<PAGE> 4
the Premises all municipal ordinances and state and federal statutes now in
force or which may hereafter be in force. The judgment of any court of competent
jurisdiction, or the admission of Tenant in any action or proceeding against
Tenant, whether Landlord be a party thereto or not, that Tenant has violated any
such ordinance or statute in the use of the Premises, shall be conclusive of
that fact as between Landlord and Tenant.
10. Toxic Waste and Environmental Damage: Without the prior written
consent of Landlord, Tenant shall not bring, allow, use or permit upon the
Premises, or generate or create at or emit or dispose from the Premises in
violation of applicable laws any chemicals, toxic or hazardous gaseous, liquid
or solid materials or waste, including without limitation, material or substance
having characteristics of ignitability, corrosivity, reactivity, or extraction
procedure toxicity or substances or materials which are listed on any of the
environmental protection agency's lists of hazardous wastes or which are
identified in sections 66680 through 66685 of title 22 of the California
Administrative Code as the same may be amended from time to time. Tenant shall
comply, at its sole cost, with all laws pertaining to, and shall indemnify and
hold Landlord harmless from any claims, liabilities, costs or expenses incurred
or suffered by Landlord arising from such bringing, allowing, using, permitting,
generating, creating, or emitting or disposing of any such materials. Tenant's
indemnification and hold harmless obligations include, without limitation, (i)
claims, liability, costs or expenses resulting from or based upon
administrative, judicial (civil or criminal) or other action, legal or
equitable, brought by any private or public person under common law or under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), the Resource Conservation and Recovery Act of 1980 ("RCRA") or any
other federal, state, county or municipal law, ordinance or regulation, (ii)
claims, liabilities, costs or expenses pertaining to the cleanup or containment
of wastes, the identification of the pollutants in the waste, the identification
of scope of any environmental contamination, the removal of pollutants from
soils, riverbeds or aquifers, the provision of an alternative public drinking
water source, or the long term monitoring of ground water and surface waters,
and (iii) all costs of defending such claims. In order to obtain consent, Tenant
shall deliver to Landlord its written proposal describing the toxic material to
be brought onto the Premises, measures to be taken for storage and disposal
thereof, and safety measures to be employed to prevent pollution of the air,
ground, surface and ground water. The above indemnity shall not apply to the
acts of third parties.
11. Indemnity: As a material part of the consideration to be rendered to
Tenant by Landlord, Tenant hereby waives all claims against Landlord for damages
to goods, wares and merchandise, and all other personal property in, upon or
about said Premises and for injuries to persons in or about said Premises, from
any cause arising at any time other than any such claim arising from Landlord's
negligent acts, and Tenant will hold Landlord 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 of the Premises by
Tenant, or from the failure of Tenant to keep the Premises in good condition and
repair, as herein provided. Further, in the event Landlord is made party to any
litigation due to the acts or omission of Tenant, Tenant will indemnify and hold
Landlord harmless from any such claim or liability including Landlord's costs
and expenses and reasonable attorney's fees incurred in defending such claims.
12. Advertisements and Signs: Tenant will not place or permit to be
placed, in, upon or about the said Premises any signs not approved by the city
or other governing authority. Tenant agrees that it will remove any such signs
at the expiration of the Lease.
13. Utilities: Tenant shall pay directly to the providing utility all
water, gas, heat, light, power, telephone and other utilities supplied to the
Premises. Landlord shall not be liable for a loss of or injury to property,
however occurring, through or in connection with or incidental to furnishing or
failure to furnish any of utilities to the Premises and Tenant shall not be
entitled to abatement or reduction of any portion of the rent so long as any
failure to provide and furnish the utilities to the Premises is due to any cause
beyond the Landlord's reasonable control.
14. 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 or in the event of arbitration of a dispute
under this Lease, the losing party shall pay to the prevailing party a
reasonable attorney's fee as
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<PAGE> 5
part of its costs 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.
15. Tenant's Default: The occurrence of any of the following shall
constitute a material default and breach of this Lease by Tenant: a) any failure
by Tenant to pay the rental or to make any other payment required to be made by
Tenant hereunder, where such failure continues for ten (10) days after written
notice thereof by Landlord to Tenant; b) the abandonment or vacation of the
Premises by Tenant without paying rent as provided in this Lease; c) a failure
by Tenant to observe and perform any other provision of this Lease to be
observed or performed by Tenant, where such failure continues for thirty (30)
days after written notice thereof by Landlord to Tenant; provided, however, that
if the nature of such default is such that the same cannot reasonably be cured
within such thirty (30) day period Tenant shall not be deemed to be in default
if Tenant shall within such period commence such cure and thereafter diligently
prosecute the same to completion; d) the making by Tenant of any general
assignment for the benefit of creditors; the filing by or against Tenant of a
petition to have Tenant adjudged a bankrupt or of a petition for reorganization
or arrangement under any law relating to bankruptcy (unless, in the case of a
petition filed against Tenant, the same is dismissed or stayed pending appeal
within sixty (60) days after the filing); the appointment of a trustee or
receiver to take possession of substantially all of Tenant's assets located at
the Premises or of Tenant's interest in this Lease, where possession is not
restored to Tenant within sixty (60) days; or the attachment, execution or other
judicial seizure of substantially all of Tenant's assets or of Tenant's interest
in this Lease, where such seizure is not discharged within sixty (60) days. The
notice requirements set forth herein are in lieu of and not in addition to the
notices required by California Code of Civil Procedure section 1161.
15. (A) Remedies: In the event of any such default by Tenant, then in
addition to any other remedies available to Landlord at law or in equity,
Landlord shall have the immediate option to terminate this Lease and all rights
of Tenant hereunder by giving written notice of such intention to terminate. In
the event that Landlord shall elect to so terminate this Lease then Landlord may
recover from Tenant: 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 the amount by which the unpaid rent which would have been earned
after termination until the time of award exceeds the amount of such rental loss
Tenant 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 term
after the time of award exceeds the amount of such rental loss that Tenant
proves could be reasonably avoided; plus d) any other amount necessary to
compensate Landlord for all the detriment proximately caused by Tenant's failure
to perform its obligations under this Lease and e) at Landlord's election, such
other amounts in addition to or in lieu of the foregoing as may be permitted
from time to time by applicable California law. The term "rent", as used herein,
shall be deemed to be and to mean the minimum monthly installments of rent and
all other sums required to be paid by Tenant pursuant to the terms of this
Lease, all other such sums being deemed to be additional rent due hereunder. As
used in (a) and (b) above, the "worth at the time of award" is computed by
allowing interest at the rate of the discount rate of the federal reserve bank
of San Francisco plus two and one half (2 1/2%) percent 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 (18) percent.
15. (B) Right to Re-enter: In the event of any such default by Tenant,
Landlord shall also have the right, after terminating this Lease, to re-enter
the Premises.
15. (C) Abandonment: In the event of the vacation or abandonment of the
Premises by Tenant without continuing to pay rent as provided in this Lease or
in the event that Landlord shall elect to re-enter as provided in paragraph
15.(B) above or shall take possession of the Premises pursuant to legal
proceeding or pursuant to any notice provided by law, then if Landlord does not
elect to terminate this Lease as provided in paragraph 15.(A) above, then the
provisions of California civil code section 1951.4, as amended from time to
time, shall apply and Landlord may from time to time, without terminating this
Lease, either recover all rental as it becomes due or relet the Premises or any
part thereof for such term or terms and at such rental or rentals and upon such
other terms and conditions as Landlord in its sole discretion may deem advisable
with the right to make alterations and repairs to the Premises. In the event
that Landlord shall elect to so relet, then rentals received by Landlord from
such reletting shall be applied: first, to the payment of any indebtedness other
than
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<PAGE> 6
rent due hereunder from Tenant to Landlord; second, to the payment 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 Landlord and applied in
payment of future rent as the same may become due and payable hereunder. Should
that portion of such rentals received from such reletting during any month,
which is applied by the payment of rent hereunder, be less than the rent payable
during that month by Tenant hereunder, then Tenant shall pay such deficiency to
Landlord immediately upon demand therefor by Landlord. Such deficiency shall be
calculated and paid monthly. Tenant shall also pay to Landlord, as soon as
ascertained, any costs and expenses incurred by Landlord in such reletting or in
making such alterations and repairs not covered by the rentals received from
such reletting. Any alterations made by Landlord must be prudent and required to
release the space to the new Tenant.
16. Surrender of Lease: The voluntary or other surrender of this Lease by
Tenant, or a mutual cancellation thereof, shall not automatically effect a
merger of the Lease with Landlord's ownership of the Premises. Instead, at the
option of Landlord, Tenant's surrender may terminate all or any existing
sublease or subtenancies, or may operate as an assignment to Landlord of any or
all such subleases or subtenancies, thereby creating a direct relationship
between Landlord and any subtenants.
17. This paragraph intentionally left blank.
18. Landlord's Default: In the event of Landlord's failure to perform any
of its covenants or agreements under this Lease, Tenant shall give Landlord
written notice of such failure and shall give Landlord the reasonable
opportunity (not exceeding thirty [30] days) to cure such failure prior to any
claim for breach or for damages resulting from such failure.
19. Taxes: Tenant shall be liable for all taxes levied against personal
property and trade or business fixtures, and agrees to pay, as additional
rental, all real estate taxes and special assessment installments levied on the
Premises, upon the occupancy of the Premises and including any substitute or
additional charges which may be imposed during the Lease term including real
estate tax increases due to a sale or other transfer of the Premises, as they
appear on the city and county tax bills during the Lease term, and as they
become due. It is understood and agreed that Tenant's obligation under this
paragraph will be prorated to reflect the commencement and termination dates of
this Lease. In the event Landlord bills Tenant for real estate taxes prior to
Landlord making the tax payment to the County of Santa Clara, Tenant shall have
the right to make the tax payment jointly in the name of Landlord and the County
of Santa Clara. In any time during the term of this Lease a tax, excise on
rents, business license tax, or any other tax, however described, is levied or
assessed against Landlord, as a substitute or addition in whole or in part for
taxes assessed or imposed on land or Buildings, Tenant shall pay and discharge
its prorata share of such tax or excise on rents or other tax before it becomes
delinquent, except that this provision is not intended to cover gross or net
income taxes on or measured by Tenant's income, or inheritance, gift or estate
tax imposed upon the Landlord. In the event that a tax of the nature herein
contemplated to be paid by Tenant is placed, levied, or assessed against
Landlord and the taxing authority takes the position that the Tenant cannot pay
and discharge his prorata share of such tax on behalf of the Landlord, then at
the sole election of the Landlord, the Landlord may increase the rental charged
hereunder by the exact amount of such tax.
Tenant at its cost shall have the right, at any time, to seek a reduction
in the assessed valuation of the Premises or to contest any real property taxes
that are to be paid by Tenant. Landlord shall not be required to join in any
such proceeding or contest unless the provisions of any law require that the
proceeding or contest be brought by or in the name of the owner of the Premises.
In such event, Landlord shall join in the proceeding or contest or permit it to
be brought in Landlord's name, provided that Landlord is not required to bear
any cost in connection therewith. Any credits or refunds resulting from such
effort shall be paid to Tenant.
20. Notices: All notices given to Tenant may be given in writing
personally or by depositing the same in the United States mail, postage prepaid,
and addressed to Tenant at (i) the said Premises and (ii) at 1109 McKay Drive,
San Jose, CA, Attn.: Purchasing Manager, whether or not Tenant has departed
from, abandoned or vacated the Premises.
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<PAGE> 7
21. Entry by Landlord: Tenant shall permit Landlord and his agents to
enter into and upon said Premises at all reasonable times subject to any
security regulations of Tenant for the purpose of inspecting the same or for the
purpose of maintaining the Premises or for the purpose of making repairs,
alterations or additions to any other portion of said Premises without any
rebate of rent or without any liability to Tenant for any loss of occupation or
quiet enjoyment of the Premises thereby occasioned; provided that no activity by
Landlord materially interferes with Tenant's use or occupancy of the Premises.
Tenant shall permit Landlord and his agents, at any time within ninety (90) days
prior to the expiration of this Lease, to place upon said Premises any "for
sale" or "to lease" signs and exhibit the Premises to prospective tenants at
reasonable hours and upon reasonable prior notice.
22. Destruction of Premises: In the event of a partial destruction of the
Premises during the term from any cause, Landlord shall forthwith repair the
same, provided such repairs can be made within one hundred eighty (180) 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 Tenant shall be entitled to a proportionate reduction of rent
while such repairs are being made, such proportionate reduction to be based upon
the extent to which the making of such repairs shall interfere with the business
carried on by Tenant in the Premises, in the reasonable judgment of Landlord.
For purposes of this paragraph "partial destruction" shall mean destruction of
not more than one-third ( 1/3) of the replacement cost of the Premises. If (i)
such repairs cannot be made in one hundred eighty (180) days, (ii) such repairs
cannot be made under applicable laws and regulations, (iii) the damage occurs
during the last twelve (12) months of the term of this Lease, or (iv) the
Premises are more than partially destroyed, then Landlord or Tenant may
terminate this Lease. With respect to any partial destruction which Landlord 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 Tenant.
Notwithstanding the preceding paragraph, in the event of a total or partial
destruction of the Premises by an uninsured casualty costing in excess of five
percent (5%) of the replacement cost of the Building, Landlord shall have the
option to terminate this Lease.
In the event of any dispute between Landlord and Tenant relative to the
provisions of this paragraph, they shall each select an arbitrator, the two
arbitrators so selected shall select a third arbitrator and the three
arbitrators so selected shall hear and determine any controversy and their
decision thereon shall be final and binding upon both Landlord and Tenant, who
shall bear the cost of such arbitration equally between them. In all events
Landlord shall not be required to restore additions, alterations or improvements
made by Tenant or replace Tenant's fixtures or personal property except any
thereof damaged by Landlord's negligent acts.
23. Assignment or Sublease: Tenant shall be entitled from time to time
during the term of this Lease to assign or sublet all or portions of the
Premises but only in each instance with the prior written consent of the
Landlord which shall not be unreasonably withheld or delayed. If any such
proposed assignment or sublet transaction is to be upon terms and conditions
which would require the assignee or subtenant to pay rent in excess of the rent
payable to the Landlord by Tenant hereunder with respect to the relevant portion
of the Premises, then any rent realized by Tenant under any such sublease and
assignment in excess of the rent payable hereunder after reasonable subletting
and assignment costs and after a reasonable management fee for Tenant's
administration of the sublease, shall be divided and paid fifty percent (50%) to
Landlord and fifty percent (50%) to Tenant. Tenant's obligation to pay over
Landlord's portion of the consideration shall constitute an obligation for
additional rent hereunder.
Landlord's consent (which must be in writing and in form reasonably
satisfactory to Landlord) to the proposed assignment or sublease shall not be
unreasonably withheld or delayed, provided and upon condition that: (i) in
Landlord's reasonable judgment, the proposed assignee or subtenant is engaged in
such a business, and the Premises, or the relevant part thereof, will be used in
such a manner, that is limited to the use expressly permitted under this Lease
or by applicable laws and governmental regulations; (ii) the proposed sublease
shall be in form reasonably satisfactory to Landlord; and (iii) Tenant shall
reimburse Landlord on demand for any reasonable, direct costs that may be
incurred by Landlord in connection with said assignment
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<PAGE> 8
or sublease up to a maximum reimbursement of $1,000.00 per transaction unless
such sublease or assignment requires significant negotiation in which as the
maximum reimbursement shall be $5,000.00.
Any sublease or assignment executed with the consent of Landlord shall be
subject to all of the covenants, agreements, terms, provisions and conditions
contained in this Lease. Notwithstanding any such sublease or assignment and the
acceptance of rent or additional rent by Landlord from any subtenant or
assignee, Tenant shall and will remain fully liable for the payment of the rent
and additional rent due, and to become due hereunder, for the performance of all
of the covenants, agreements, terms, provisions and conditions contained in this
Lease on the part of Tenant to be performed and for all acts and omissions of
any licensee, subtenant, assignee or any other person claiming under or through
any subtenant that shall be in violation of any of the obligations of this
Lease, and any such violation shall be deemed to be a violation by Tenant.
Tenant shall further indemnify, defend and hold Landlord harmless from and
against any and all losses, liabilities, damages, costs and expenses (including
reasonable attorney fees) resulting from any claims that may be made against
Landlord by any real estate brokers or other persons claiming a commission or
similar compensation in connection with the proposed assignment or sublease. In
the event of Tenant's default, Tenant hereby assigns all rents due from any
assignment or subletting to Landlord as security for performance of its
obligations under this Lease and Landlord may collect such rents as Tenant's
attorney-in-fact, except that Tenant may collect such rents unless a default
occurs as described in paragraph 15 above.
Any assignment or transfer shall be made only if and shall not be effective
until the assignee shall execute, acknowledge and deliver to Landlord an
agreement, in form and substance satisfactory to Landlord, whereby the assignee
shall assume all of the obligations of this Lease on the part of Tenant to be
performed or observed.
If Tenant is a corporation or partnership, all the above provisions shall
apply to a transfer (by one or more transfers) of a majority of the stock of the
corporation or the majority of ownership or control of the partnership (unless
the sale is a result of normal trading on a national stock exchange), as if such
transfer were an assignment of this Lease; but said provisions shall not apply
to transactions with a corporation or partnership that controls, is controlled
by, or is under direct or indirect common control with Tenant. Landlord consents
to an assignment (without releasing Tenant) to Compass Design Automation.
The termination of this Lease due to Tenant's default shall not
automatically terminate any assignment or sublease then in existence. At the
election of Landlord, the assignee or subtenant shall attorn to Landlord and
Landlord shall undertake the obligations of the Tenant under the sublease or
assignment; provided the Landlord shall not be liable for prepaid rent, security
deposits or other defaults of the Tenant to the subtenant or assignee.
24. 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 suitable
for Tenant's intended use hereunder, this Lease shall as to the part so taken,
terminate as of the date title shall vest in the condemnor or purchaser, and the
rent payable hereunder shall be adjusted so that the Tenant shall be required to
pay for the remainder of the term only such portion of such rent as the value of
the part remaining after such taking bears to the value of the entire Premises
prior to such taking. If all of the Premises, or such part thereof be taken so
that there does not remain a portion suitable for Tenant's intended use
hereunder, this Lease shall thereupon terminate at the option of Tenant. If a
part of all of the Premises be taken, all compensation awarded upon such taking
shall go to the Landlord and the Tenant shall have no claim thereto but Landlord
shall cooperate with Tenant to seek a separate award for compensation for (i)
damage to or taking of any alterations, additions or improvements made by
Tenant, and (ii) Tenant's relocation costs.
25. Effects of Conveyance: The term "Landlord" as used in this Lease,
means only the owner for the time being of the land and Building, containing the
Premises, so that, in the event of any sale of said land or Building, or in the
event of a master Lease of the Building, the Landlord shall be and hereby is
entirely freed and relieved of all covenants and obligations of the Landlord
hereunder, and it shall be deemed and construed, without further agreement
between the parties and the purchaser at any such sale, or the master Tenant of
the Building, that the purchaser or master Tenant of the Building has assumed
and agreed to carry out any and all covenants and obligations of the Landlord
hereunder.
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<PAGE> 9
26. Subordination: In the event Landlord notifies Tenant in writing, this
Lease shall be subordinate to any deed of trust, or other hypothecation for
security now or hereafter placed upon the real property of 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. Tenant agrees to
promptly execute reasonable documents which may be required to effectuate such
subordination. In such subordination the lender shall agree that in the event of
a foreclosure Tenant's right to quiet possession of the Premises shall not be
disturbed if Tenant is not in default and so long as Tenant shall pay the rent
and observe and perform all of the provisions of this Lease. Landlord agrees to
use its best efforts to obtain such a non-disturbance from the existing lender,
Union Labor Life Insurance.
27. Waiver: The waiver by Landlord of any breach of any term, covenant or
condition, herein contained shall not be deemed to be a waiver of such term,
covenant or condition or any subsequent breach of the same or any other term,
covenant or condition herein contained. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
by Tenant of any term, covenant or condition of this Lease, other than the
failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rent.
28. Holding Over: Any holding over after the termination or expiration of
the said term, shall be construed to be a hold over tenancy from month to month
and Tenant shall pay rent to Landlord at a rate equal to one hundred and fifty
percent (150%) the monthly rental installment due in the month preceding the
termination or expiration of the Lease and shall otherwise be on the terms and
conditions herein specified, except those provisions relating to the term and
any options to extend or renew, which terms are expressly waived during any hold
over. Furthermore, 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.
29. 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 the parties hereto; and
all of the parties hereto shall be jointly and severally liable hereunder.
30. Estoppel Certificates: Tenant shall at any time during the term of
this Lease, upon not less than ten (10) days prior written notice from Landlord,
execute and deliver to Landlord 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 date to which the rent and other charges
are paid in advance, if any, and acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord 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.
31. Option to Extend: Tenant shall have the option and right to extend
the term of this Lease for two (2) separate additional and successive option
periods of five (5) years each, (each such period being referred to as the
"Renewal Term") commencing with rent at the "Fair Market Rental", as defined in
paragraph 32 below, only under the following conditions precedent: (i) Tenant is
not at the time in default hereunder and no event has occurred which but for the
giving of notice or the passage of time would constitute an event of default
hereunder; (ii) Tenant or its subsidiaries alone is in occupation of and is
conducting the business in the whole of the Premises and Tenant, for itself and
its successors and assigns, hereby expressly acknowledges and agrees that this
option to extend is personal to Tenant; and (iii) and Tenant has delivered
written notice to Landlord not less than two hundred seventy (270) days prior to
the expiration of the then existing term or any renewal term of the Lease of
Tenant's intention to extend the term of the Lease.
32. Fair Market Rental: For purposes of this Lease the term "Fair Market
Rental" shall mean the going market rental as of December 1, 1997 (or as the
date of commencement of each Renewal Term as applicable). In determining the
Fair Market Rental the parties shall consider the all relative terms and
conditions including but not limited to: (i) Tenant's financial condition, (ii)
the length of the lease term, (iii) the amount of the leasing commission, (iv)
the building age and condition and the existing condition and configuration of
the tenant improvements, (v) tenant improvement allowances offered (though
Landlord shall
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<PAGE> 10
not be required to provide a tenant improvement allowance), and (vi) comparable
rents for similar facilities in North San Jose adjusted for any rental abatement
offered.
The parties shall negotiate in good faith in order to reach agreement on
the Fair Market Rental; and in the event the parties are unable to reach
agreement, the matter shall be referred to arbitration by three (3) M.A.I.
appraisers, experienced in the evaluation of similar rental properties in the
county of Santa Clara, state of California. Landlord and Tenant shall each
appoint one such arbitrator within thirty (30) days of a written request for
arbitration from the other, and the two arbitrators so selected shall select a
third arbitrator within fifteen (15) days after the selection of the second
arbitrator. The determination of the Fair Market Rental by the three arbitrators
shall be made by the vote of two (2) or more of the three arbitrators within
thirty (30) days from the date of the appointment of the third arbitrator and
shall be final for all purposes. The cost of arbitration shall be shared
equally.
33. Right Of First Offering To Purchase: Landlord hereby grants Tenant a
right of first offering to purchase the Building. Prior to Landlord offering to
sell the Building to a third party, Landlord shall give Tenant written notice of
such desire and the terms and other information under which Landlord intends to
sell the Building. Provided at the time of exercise Tenant is not in default,
Tenant, its subsidiaries, or any approved subtenant shall have the option, which
must be exercised, if at all, by written notice to Landlord within ten (10) days
after Tenant's receipt of Landlord's notice, to purchase the Building at the
sales price and terms of sale specified in the notice. In the event Tenant
timely exercises such option to purchase the Building, Landlord shall sell the
Building to Tenant, and Tenant shall purchase the Building from Landlord in
accordance with the price and terms specified in Landlord's notice. Landlord and
Tenant shall, in good faith, attempt to reach agreement on the terms of a
mutually acceptable purchase agreement consistent with the terms set forth in
Landlord's notice within thirty (30) days of Landlord's notice. In the event (i)
Landlord and Tenant are unable to reach agreement on a mutually acceptable
purchase agreement within such thirty (30) day period or (ii) Tenant fails to
exercise Tenant's option within said ten (10) day period, Landlord shall have
one hundred eighty (180) days thereafter to sell the Building at no less than
ninety percent (90%) of the sales price and upon the same or substantially the
same other terms of sale as specified in the notice to Tenant. In the event
Landlord fails to sell the Building within said one hundred eighty (180) day
period or in the event Landlord proposes to sell the Building at less than
ninety percent (90%) of the sales price or on other material terms which are
more favorable to the prospective purchaser than that proposed to Tenant,
Landlord shall be required to resubmit such offer to Tenant in accordance with
this Right of First Offering.
This Right of First Offering shall automatically terminate, (i) upon the
expiration or sooner termination of the Lease, or (ii) in the event of a
foreclosure or other involuntary transfer of Landlord's interest in the
Premises. Notwithstanding the forgoing, this Right of First Offering shall not
apply to transfers of all or a portion of the Building to (i) John A. Sobrato
and/or John M. Sobrato (individually and collectively "Sobrato"), and (ii) any
immediate family member of Sobrato, and (iii) any trust established, in whole or
in part, for the benefit of Sobrato and/or any immediate family member of
Sobrato, (iv) any partnership in which Sobrato or any immediate family member,
either directly or indirectly (e.g., through a partnership or corporate entity
or a trust) retains a general partner interest, and/or (v) any corporation under
the control, either directly or indirectly, by Sobrato or any immediate family
member of Sobrato, however such transferee shall remain subject to the terms of
this paragraph 33.
34. Option to Lease 1290 McKay: Tenant shall have an option to lease 1290
McKay by consisting of 81,216 rentable square feet only under the following
conditions precedent: (i) Tenant is not at the time in default hereunder and no
event has occurred which but for the giving of notice or the passage of time
would constitute an event of default hereunder; (ii) Tenant or its subsidiary
alone is in occupation of and is conducting the business in the whole of the
Premises and Tenant, for itself and its successors and assigns, hereby expressly
acknowledges and agrees that this option to extend is personal to Tenant and its
subsidiaries; and (iii) and Tenant has delivered written notice to Landlord
between June 1, 1997 and June 30, 1997. In the event Tenant exercises this
option, the parties shall enter into a lease for 1290 McKay and substantially
the same terms and conditions as those contained in this Lease including a lease
expiration date of November 30, 2002. Base monthly rent for 1290 McKay shall be
the greater of (i) 66c psf ("Minimum Rent") or (ii) the
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then applicable Fair Market Rental determined pursuant to paragraph 32 above. If
the Fair Market Rental is determined to be less than Minimum Rent and Tenant is
unwilling to pay the Minimum Rent, Tenant shall have the right to rescind its
exercise of its option to lease 1290 McKay. If Tenant rescinds its option and
Landlord subsequently decides to offer 1290 McKay to a third party at a rent
less than the Minimum Rent, Landlord shall be obligated to first submit Tenant
the revised business terms upon which it is willing to lease such space and
Tenant shall have a ten (10) day period under which to accept such terms or
Landlord shall be free to lease the 1290 McKay on such terms to a third party.
35. Options: In the event that Tenant hereunder has any multiple options
to extend this Lease, a later option to extend the Lease cannot be exercised
unless the prior option has been so exercised.
36. Quiet Enjoyment: Upon Tenant's faithful and timely performance of all
the terms and covenants of the Lease, Tenant shall quietly have and hold the
Premises for the term and any extensions thereof.
37. Landlord's Liability: If Tenant should recover a money judgment
against Landlord arising in connection with this Lease, the judgment shall be
satisfied only out of Landlord's interest in the Premises including the
improvements and real property and neither Landlord or any of its partners shall
be liable personally for any deficiency.
38. Authority of Parties:
(a) Corporate Authority. If Tenant is a corporation, each individual
executing this Lease on behalf of said corporation represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of said
corporation, in accordance with a duly adopted resolution of the board of
directors of said corporation or in accordance with the by-laws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms.
(b) Limited Partnerships. If the Landlord herein is a limited partnership,
it is understood and agreed that any claims by Tenant on Landlord shall be
limited to the assets of the limited partnership. And furthermore, Tenant
expressly waives any and all rights to proceed against the individual partners
or the officers, directors or shareholders of any corporate partner, except to
the extent of their interest in said limited partnership.
39. 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 and remedies in law and in equity.
If any term or provision of this Lease is held unenforceable or invalid by
a court of competent jurisdiction, the remainder of the Lease shall not be
invalidated thereby but shall be enforceable in accordance with its terms,
omitting the invalid or unenforceable term.
This Lease shall be governed by and construed in accordance with California
law.
Time is of the essence hereunder.
The headings or 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.
If Tenant fails to perform any obligation required under this Lease or by
law or governmental regulation, Landlord, after giving Tenant written notice of
its intention to do so, in its sole discretion may without notice perform such
obligation, in which event Tenant shall pay Landlord as additional rent all sums
paid by Landlord in connection with such substitute performance within ten (10)
days following Landlord's written notice for such payment. Any delinquent sum
shall bear interest at the maximum lawful contract rate permitted to be charged
under California law.
If Landlord and Tenant become parties to any litigation concerning this
Lease, the Premises, the Building or the project by reason of any alleged act or
omission of one to the other the losing party shall be liable to the other for
reasonable attorneys fees, court costs and litigation expenses incurred by the
other in the litigation, whether or not such litigation leads to actual court
action.
All monetary sums due from Tenant to Landlord under this Lease shall be
deemed to be rent.
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In witness whereof, Landlord and Tenant have executed these presents, the
day and year first above written.
LANDLORD TENANT
Sobrato-Sobrato Interests, VLSI Technology, Inc.,
a California limited partnership a Delaware corporation
By: /s/ J M SOBRATO By: /s/ THOMAS F. MULVANEY
-------------------------------- -----------------------------------
Its: Trustee for the General Partner Its: Vice President
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EXHIBIT "A" -- PREMISES
[CONTAINS DIAGRAM OF POTENTIAL LAYOUT OF LEASED FACILITIES]
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EXHIBIT "B" -- ALTERATIONS APPROVED BY LANDLORD
[WAS NOT COMPLETED AND THEREFORE INTENTIONALLY LEFT BLANK]
28
<PAGE> 1
EXHIBIT 10.2
TERMINATION AGREEMENT
This TERMINATION AGREEMENT is entered into as of November 7, 1994 ("Effective
Date") by and between VLSI Technology, Inc., a Delaware Corporation ("VLSI"),
and Intel Corporation, a Delaware Corporation ("INTEL")
Whereas, THE TECHNOLOGY AND MANUFACTURING AGREEMENT BETWEEN INTEL CORPORATION
AND VLSI TECHNOLOGY, INC., including ADDENDUM NO. 1 TO PIA AGREEMENT, both dated
July 8, 1992, and ADDENDUM NO. 2 TO PIA AGREEMENT, effective date August 1,
1993, is an agreement between the PARTIES to cooperate in the development and
marketing of the INTEL 386(TM) microprocessor architecture into a new and
undeveloped market segment, the PIA market segment (hereinafter the "PIA
AGREEMENT"); and
Whereas, the PARTIES now agree that the intent of the PIA AGREEMENT is no longer
consistent with the business and technical needs of the PARTIES;
Whereas, the PARTIES desire to amicably end the PIA AGREEMENT, and make an
equitable and final disposition of the business and technical issues that remain
as a result of the PIA AGREEMENT;
Now therefore, the PARTIES hereto agree as follows:
1.0 DEFINITIONS
1.1. All terms defined in Section 1.0 of the PIA AGREEMENT have the same
definition when used herein.
1.2. "POLAR(TM) CHIP SET" shall mean the integrated circuits designed by VLSI
where functionality is divided between (1) a device in which the INTEL
CORE is contained within a single chip combined with VLSI CELLS
("POLAR(TM) IPC"), (2) a companion device containing only VLSI CELLS
("POLAR(TM) MPC"), and (3) optionally, a PCMCIA controller integrated
circuit containing only VLSI CELLS ("ELC").
1.3 "COOPERATIVE ENGINEERING AGREEMENT" shall mean the COOPERATIVE ENGINEERING
PROGRAM AGREEMENT BETWEEN INTEL CORPORATION AND VLSI TECHNOLOGY, INC., with
an effective date of August 1, 1993.
1.4. "DRACO(TM)" shall mean the VLSI chip set product as defined and developed
in the COOPERATIVE ENGINEERING AGREEMENT.
2.0. AGREEMENTS
2.1. The PIA AGREEMENT between VLSI and INTEL, including ADDENDUM NO. 1 TO PIA
AGREEMENT, both dated July 8, 1992, and ADDENDUM NO. 2 TO PIA AGREEMENT,
effective date August 1, 1993, and any other related agreements are
terminated by mutual agreement of the parties. Effective the date of
execution of this TERMINATION AGREEMENT, the licenses granted by one PARTY
to the other PARTY in the PIA AGREEMENT shall be terminated. No Sections
of the PIA AGREEMENT will survive or remain in effect. This TERMINATION
AGREEMENT will define all on-going terms and conditions related to the
activities conducted under the PIA AGREEMENT.
2.2. No VLSI FSBs were licensed to INTEL under the PIA AGREEMENT. The PARTIES
hereby agree that no VLSI FSBs were created, enhanced, improved or
modified based on INTEL CONFIDENTIAL INFORMATION during the PIA AGREEMENT.
Certain blocks have been separately licensed from INTEL under the
following agreements:
2.2.1. AGREEMENT FOR TRANSFER OF TECHNICAL INFORMATION FROM INTEL
CORPORATION TO VLSI TECHNOLOGY, INC. effective date June 15, 1993.
(the "POWER MANAGEMENT AGREEMENT")
29
<PAGE> 2
2.2.2. AGREEMENT FOR EXCHANGE OF TECHNOLOGY BETWEEN INTEL CORPORATION AND
VLSI TECHNOLOGY, INC., effective date June 15, 1993, (the
"16550/82365SL EXCHANGE AGREEMENT")
2.2.3. AGREEMENT FOR TRANSFER OF 8051FX TECHNICAL INFORMATION FROM INTEL
CORPORATION TO VLSI TECHNOLOGY, INC., effective date February 16,
1993 ( the "8051FX AGREEMENT").
2.3. VLSI retains no rights to use INTEL CONFIDENTIAL INFORMATION in the Cache
RAM, PLL and/or Input/Output cells provided to VLSI by INTEL under the PIA
AGREEMENT.
2.4. INTEL will bear, and will forgive VLSI and waive any expenses that INTEL
has incurred and for which VLSI has not reimbursed INTEL, or any expenses
that INTEL incurs in conjunction with INTEL'S contribution to the
completion of POLAR(TM) CHIP SET , or any other outstanding obligations of
VLSI from the PIA AGREEMENT.
2.5. The PARTIES agree to execute Amendment Number 1 to the POWER MANAGEMENT
AGREEMENT, concurrently with this TERMINATION AGREEMENT, which will
include a license for VLSI to modify the INTEL Power Management block.
2.6. The PARTIES agree to execute Amendment Number 1 to the COOPERATIVE
ENGINEERING AGREEMENT concurrently with this TERMINATION AGREEMENT, which
will include forgiveness of the monies owed by VLSI to INTEL for
development activities under that agreement, and provisions for the
payment of royalties by VLSI to INTEL on VLSI'S sale of DRACO(TM) to third
parties.
2.7. There will be no royalties or INTEL CORE access fees payable by VLSI to
INTEL under the PIA AGREEMENT, or repayment of core access fees or
royalties under the COOPERATIVE ENGINEERING AGREEMENT.
3.0. INTELLECTUAL PROPERTY OWNERSHIP
3.1 No JOINT INVENTIONS were made by the PARTIES under the PIA AGREEMENT.
3.2. All intellectual property rights which each PARTY owns as of the EFFECTIVE
DATE of this TERMINATION AGREEMENT or which are developed or acquired by
each PARTY hereafter outside the scope of the PIA AGREEMENT and this
TERMINATION AGREEMENT, shall remain the sole and exclusive property of
such PARTY and no licenses are granted or implied, other than those
expressly granted herein.
3.3. To the extent that VLSI has entered into or may enter into technology
(including patent and other intellectual property) licenses with third
parties wherein such licenses require or provide for VLSI to license such
third parties to make, use or sell technology newly received by VLSI, it
is agreed and understood that:
3.3.1 INTEL does not allow VLSI to license or otherwise transfer to a
third party any INTEL intellectual property provided by INTEL to
VLSI under the PIA AGREEMENT or this TERMINATION AGREEMENT; and
3.3.2 VLSI will not license or otherwise transfer to a third party any
INTEL intellectual property provided by INTEL to VLSI under the PIA
AGREEMENT or this TERMINATION AGREEMENT.
3.4. INTEL owns all copyright and maskwork rights to the INTEL CORE in any
form. VLSI owns all copyright and maskwork rights to the VLSI CELLS. All
maskwork rights under the Semiconductor Chip Protection Act of 1984 (and
under relevant laws in countries outside the U.S.A.), and all copyrights
with respect to any POLAR(TM)CHIP SETS are the joint property of the
PARTIES regardless of which PARTY designed the POLAR(TM) CHIP SETS,
subject to (1) acknowledgment by VLSI to preexisting maskwork rights and
copyrights in the INTEL CORE by INTEL, (2) acknowledgment by INTEL to
preexisting maskwork rights and copyrights in the VLSI CELLS by VLSI,
30
<PAGE> 3
(3) acknowledgment by the PARTIES to any pre-existing rights in any
customer provided information by such customer, and (4) the PARTIES agree
to execute such documents as are necessary to perfect such ownership
rights. Notwithstanding such joint ownership, each PARTY shall use such
maskwork rights and copyrights subject to the terms and conditions in
this AGREEMENT.
3.5. With respect to POLAR(TM) IPCS, INTEL shall retain any and all rights to
perfect maskwork rights and copyrights in any country. With respect to
POLAR(TM) MPC & ELC, VLSI shall retain any and all rights to perfect
maskwork and copyrights in any country.
4.0. CONFIDENTIAL INFORMATION
4.1 All disclosure of CONFIDENTIAL INFORMATION by one PARTY to the other PARTY
pursuant to the PIA AGREEMENT was made by or under the supervision of a
TECHNICAL COORDINATOR of the disclosing PARTY to a TECHNICAL COORDINATOR
of the receiving PARTY.
4.2 For a period of ten (10) years from the date of disclosure under the PIA
AGREEMENT, the PARTIES continue to agree to use the same degree of care
and discretion to avoid disclosure, publication or dissemination outside
of itself as it would employ with its own similar information which it
does not desire to have published, disclosed or disseminated. As a minimum
protection, the receiving PARTY shall not disclose the CONFIDENTIAL
INFORMATION of the other to any third party, individual, corporation or
other entity (except to mask vendors and subcontractors under restrictions
equivalent to those in this Section 4.0), without the prior written
consent of the disclosing PARTY. This obligation of nondisclosure shall
not apply to any information which is:
4.2.1. published or otherwise made available to the public other than by
breach of this TERMINATION AGREEMENT by the PARTY receiving the
information; or
4.2.2. rightfully received by the receiving PARTY from a third party
without restriction on disclosure; or
4.2.3. known to the PARTY receiving the CONFIDENTIAL INFORMATION prior to
the first receipt of same from the disclosing PARTY; or
4.2.4. hereinafter disclosed by the disclosing PARTY to a third party
without restriction on disclosure; or
4.2.5. independently developed by the receiving PARTY.
4.3 VLSI shall not use the INTEL CONFIDENTIAL INFORMATION for any purpose other
than as specifically authorized by INTEL under this TERMINATION AGREEMENT,
or as otherwise authorized by INTEL in writing. INTEL shall not use the
VLSI CONFIDENTIAL INFORMATION for any purpose other than as specifically
authorized by VLSI under the TERMINATION AGREEMENT, or as otherwise
authorized by VLSI in writing.
4.4 VLSI employees that have had access to the INTEL CORE or INTEL CORE
interface specification will not work on any activity at VLSI, to create
X86 DERIVATIVE products for a period of one (1) year after the Effective
Date of this TERMINATION AGREEMENT. A list of these employees is included
as Attachment B of this TERMINATION AGREEMENT.
4.5 The INTEL CONFIDENTIAL INFORMATION related to the INTEL CORE is will be
returned to INTEL within thirty (30) days of the date of execution of this
TERMINATION AGREEMENT.
4.6 The INTEL CONFIDENTIAL INFORMATION shall be subject to the provisions in
ATTACHMENT "A".
4.7 The PARTIES affirm that the terms in Sections 4.8, 4.9 and 4.10 were
adhered to under the PIA AGREEMENT, and will remain in effect under the
TERMINATION AGREEMENT.
4.8 With respect to the INTEL CONFIDENTIAL INFORMATION or the VLSI CONFIDENTIAL
INFORMATION when such is disclosed in writing, including such CONFIDENTIAL
31
<PAGE> 4
INFORMATION recorded in an electronic medium such as a tape or disk,
and accepted, such writing will state the date of disclosure, that the
CONFIDENTIAL INFORMATION contained therein is confidential and that it is
being disclosed pursuant to this AGREEMENT, and will contain an
appropriate legend, such as, "INTEL CONFIDENTIAL" or "VLSI CONFIDENTIAL",
as the case may be.
4.9 At the disclosing PARTY'S request, the receiving PARTY shall (i) return to
the disclosing PARTY the original and all copies of the CONFIDENTIAL
INFORMATION provided by the disclosing PARTY and (ii) have one of its
officers certify in writing to the disclosing PARTY that it will not make
any further use of such CONFIDENTIAL INFORMATION, and specifically that the
receiving PARTY will not manufacture or have manufactured for it any
POLAR(TM) IPC or X86 DERIVATIVES incorporating the disclosing PARTY'S
CONFIDENTIAL INFORMATION, or (iii) at the disclosing PARTY'S option,
destroy such CONFIDENTIAL INFORMATION.
4.10. The INTEL CONFIDENTIAL INFORMATION related to the INTEL CORE is highly
confidential and proprietary INTEL information. This INTEL CONFIDENTIAL
INFORMATION is provided to VLSI to create useful versions of the INTEL
CORE, including the INTEL CORE netlist and behavioral model, and shall be
subject to specific controls established to limit access to the INTEL
CORE in whatever form.
4.10.1 The INTEL CORE shall be accessible only to VLSI employees within
PCD who have a need to know. The VLSI employees having access to
the INTEL CORE shall be named and this list shall be maintained by
VLSI'S TECHNICAL COORDINATOR. These employees shall sign agreements
with VLSI establishing that they will not work on any activity
while at VLSI, or for any other PARTY, for a period of one (1)
year, that relates to work in the design, development, or
manufacture of X86 DERIVATIVES.
4.10.2 In no circumstances may the INTEL CORE be made available to third
parties without INTEL'S prior written permission, except as
embodied in a POLAR(TM) CHIP SET.
4.10.3 The INTEL CORE shall be available only within VLSI PCD in Tempe,
Arizona. VLSI shall maintain a log of all authorized copies of the
INTEL CORE. The VLSI TECHNICAL COORDINATOR shall be responsible to
maintain this log. This log shall be made available to INTEL at any
time upon INTEL'S request. VLSI shall maintain all copies of the
INTEL CORE under secured means, including locked files or areas
providing restricted access.
4.10.4 VLSI shall make no copies of any tangible media containing any
INTEL CORE CONFIDENTIAL INFORMATION. If additional copies are
required, the TECHNICAL COORDINATOR shall request in writing a
stated number of copies from the INTEL TECHNICAL COORDINATOR.
4.10.5 INTEL may perform an audit, at least annually, to insure that the
INTEL CORE CONFIDENTIAL INFORMATION is being protected in
accordance with the terms of this AGREEMENT.
4.10.6 The requirements in this Section 4.10 remain the responsibility of
VLSI who shall establish its own security procedures and audits to
insure compliance with these provisions. VLSI shall notify INTEL
whenever VLSI has determined that INTEL CORE CONFIDENTIAL
INFORMATION has been lost or stolen, and shall take all reasonable
efforts to locate and recover these materials. Annually, VLSI shall
reasonably permit INTEL to audit its compliance to the provisions
in this Section
5.0. MUTUAL RELEASE
Each party agrees to fully release, waive and discharge the other party and its
officers, directors, employees and SUBSIDIARIES from any and all claims of any
kind or nature, known or unknown, including any claim for attorneys' fees and
costs which it may have now or in the future which arises out of the express
terms of the PIA AGREEMENT, except for enforcement of Section 4, CONFIDENTIAL
INFORMATION, of this
32
<PAGE> 5
TERMINATION AGREEMENT. Further the parties agree to expressly waive and
relinquish all rights and benefits afforded by Section 1542 of the Civil Code of
the State of California which states as follows:
"A general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the release,
which if known by him must have materially affected his settlement with the
debtor."
6.0. COVENANT NOT TO SUE
The parties recognize that each party may independently develop new products
which are intended to compete with products which have been discussed and
developed under the previous agreement. The parties agree and covenant not to
sue the other party on any claim by that party relating to any new product which
uses the functions and specifications contained in POLAR(TM) product, and any
know-how or trade secrets retained in the skills and knowledge of employees that
were obtained during the PIA AGREEMENT. Notwithstanding the foregoing provisions
of this Section 6, no license to any patents and copyrights of the other party
are granted directly or indirectly, or by implication, estoppel or otherwise.
7.0. GENERAL
7.1. The validity, performance and construction of this TERMINATION AGREEMENT
shall be governed by the laws of the State of California, USA (excluding
its conflict of laws provisions). Santa Clara County, California shall be
the appropriate venue and jurisdiction for the resolution of disputes
hereunder.
7.2. The prevailing party in any legal action arising out of, or related to
this TERMINATION AGREEMENT shall be entitled, in addition to any other
rights and remedies it may have, to reimbursement for its expenses
incurred in such action, including court costs and reasonable attorney's
fees.
7.3. All notices or communications to be given under this TERMINATION AGREEMENT
shall be in writing and shall be deemed delivered upon hand delivery, upon
acknowledged telex or facsimile communication, or three (3) days after
deposit in the United States mail, postage prepaid, by certified,
registered or first class mail, addressed to the parties at their
addresses set forth above.
7.4. In the event that any provision of this TERMINATION AGREEMENT is
prohibited by any law governing its construction, performance or
enforcement, such provision shall be ineffective to the extent of such
prohibition without invalidating thereby any of the remaining provisions
of the TERMINATION AGREEMENT. The captions of sections herein are intended
for convenience only, and the same shall not be interpretive of the
content of such section.
7.5. This TERMINATION AGREEMENT settles all differences between the parties
with respect to the subject matter generally described herein and shall
not in any way be construed as an admission by either party.
7.6. Except as provided in Section 6.0, COVENANT NOT TO SUE, INTEL shall
retain, and does not relinquish, rights to claims for infringement of
INTEL'S patents, copyrights, masks works, and trade secrets for any
activities conducted by VLSI or its customers. Except for functional
imitations of INTEL products, INTEL agrees to notify VLSI first regarding
any other issues or legal claims, and attempt to resolve the situation.
7.7. EXCEPT FOR MISAPPROPRIATION OR MISUSE OF CONFIDENTIAL INFORMATION, NEITHER
PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR INCIDENTAL OR CONSEQUENTIAL
OR EXEMPLARY DAMAGES TO THE OTHER PARTY, TO ANY CUSTOMER OF THE OTHER
PARTY OR ANY THIRD PARTY FOR DAMAGES ARISING OUT OF OR CONNECTED WITH THE
DELIVERY, USE OR PERFORMANCE OF THE PRODUCTS, OR OTHER ACTIVITY OR BREACH
OF ITS OBLIGATIONS TO THE OTHER PARTY UNDER THIS AGREEMENT, REGARDLESS OF
THE FORM OF ACTION, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES.
33
<PAGE> 6
HOWEVER, THIS SECTION 7.7 SHALL NOT LIMIT EITHER PARTY'S RIGHT TO COLLECT
ANY AMOUNTS OTHERWISE DUE UNDER THE TERMS OF THIS AGREEMENT. THE
PROVISIONS OF THIS SECTION SHALL SURVIVE THE TERMINATION OF THIS
AGREEMENT.
7.8. This TERMINATION AGREEMENT sets forth the entire agreement and
understanding between the parties regarding the termination of the PIA
AGREEMENT and fully supersedes all prior agreements and understandings,
both written and oral, regarding these subjects.
<TABLE>
<S> <C>
ACCEPTED & AGREED:
VLSI TECHNOLOGY, INC. INTEL CORPORATION
By: /s/ Thomas F. Mulvaney By: /s/ Stephen P. Nachtsheim
_______________________________________ ______________________________________
signature of authorized representative signature of authorized representative
Thomas F. Mulvaney Stephen P. Nachtsheim
__________________________________________ ________________________________________
printed name printed name
Vice President and Secretary Vice President & G.M.
__________________________________________ ________________________________________
title title
7 November 1994 November 9, 1994
__________________________________________ _________________________________________
date date
</TABLE>
34
<PAGE> 7
ATTACHMENT "A"
SECURITY PROVISIONS WITHIN VLSI PCD REGARDING INTEL CONFIDENTIAL INFORMATION
VLSI'S Personal Computer Division ("PCD") is the operating unit responsible for
the development and marketing of products for the PIA market. During the term of
the PIA AGREEMENT and this TERMINATION AGREEMENT, PCD will receive access to
certain Intel Confidential and Trade secret Information relating to but not
limited to the following:
1. Intel's 386 CPU Core
2. Intel's 650 Process Design Rules
During the term of the PIA AGREEMENT additional CONFIDENTIAL INFORMATION
regarding the PIA market and associated products has been generated jointly by
Intel and VLSI.
Documents (hard copy or electronic media) being transferred from Intel to VLSI
or from VLSI to Intel will be reviewed by the Intel and VLSI Technical
Coordinators and will be classified according to the policy outline in VLSI'S
Information Security Classification Policy #00-00046. INTEL documents will be
classified as "RESTRICTED CONFIDENTIAL" or "REGISTERED CONFIDENTIAL". Documents
which are subsequently generated and reference or incorporate information
contained within a RESTRICTED CONFIDENTIAL or REGISTERED CONFIDENTIAL document
will carry the same classification as the source or referenced document.
Intel documents classified as RESTRICTED CONFIDENTIAL will be marked as
RESTRICTED CONFIDENTIAL INFORMATION and treated in the same manner as VLSI
RESTRICTED CONFIDENTIAL INFORMATION.
RESTRICTED CONFIDENTIAL INFORMATION will be made generally available to PCD
employees. These documents will not be made available to other VLSI divisions
but will be made available to VLSI Corporate management as required. PCD's
CONFIDENTIAL INFORMATION Manager (CIM) will be responsible for determining who
will be given access to RESTRICTED CONFIDENTIAL INFORMATION.
Intel documents classified as REGISTERED CONFIDENTIAL will be marked as
REGISTERED CONFIDENTIAL INFORMATION and treated in the same manner as VLSI
REGISTERED CONFIDENTIAL INFORMATION. Examples of Intel REGISTERED CONFIDENTIAL
INFORMATION are:
Intel's 386 CPU Core Design
Intel's 386 CPU Test Vectors
Intel's 0.8 micron 650 Process Design Rules
REGISTERED CONFIDENTIAL INFORMATION will be made available to only those PCD
employees with a need to know. Any Intel REGISTERED CONFIDENTIAL INFORMATION
needed by other VLSI organizations or Compass will only be disclosed between
that organization and Intel. Intel will be responsible for informing the PCD
Technical Coordinator when any such disclosure is made.
This attachment outlines the methods for protecting the above mentioned Intel
RESTRICTED CONFIDENTIAL and REGISTERED CONFIDENTIAL INFORMATION. It is expected
that Intel will institute similar policies and procedures for protecting VLSI
RESTRICTED CONFIDENTIAL and REGISTERED CONFIDENTIAL INFORMATION.
I. Controlled Access
REGISTERED CONFIDENTIAL INFORMATION will be released only to PCD employees
with a need to know.
The "REGISTERED CONFIDENTIAL Control Roster" will contain the list of
employees who have been given access authorization rights to the REGISTERED
CONFIDENTIAL INFORMATION.
35
<PAGE> 8
The employee will not make copies of the REGISTERED CONFIDENTIAL documents
or files.
Employees will keep RESTRICTED CONFIDENTIAL and REGISTERED CONFIDENTIAL
INFORMATION documents in a locked enclosure when not being used.
The REGISTERED CONFIDENTIAL INFORMATION received by the employee is not to
be taken out of a PCD facility.
The PCD CIM will perform periodic non-scheduled audits to confirm proper
compliance to the established security procedures.
If an individual leaves PCD (terminates or transfers), the employee will be
required to surrender all REGISTERED CONFIDENTIAL and RESTRICTED
CONFIDENTIAL INFORMATION prior to being exited from PCD.
II. DOCUMENT CONTROL
The REGISTERED CONFIDENTIAL and RESTRICTED CONFIDENTIAL INFORMATION will be
physically protected by PCD using security measures to ensure that the
information is not accessible to individuals and organizations outside PCD.
Intel specific REGISTERED CONFIDENTIAL and RESTRICTED CONFIDENTIAL INFORMATION
with the Document Control Room will be maintained in separate locked storage
containers and willed be marked accordingly.
The Document Control Room will only be accessible by the PCD CIM and his
designated representatives (Authorized Employees).
Only Authorized Employees will be permitted to make copies of RESTRICTED
CONFIDENTIAL INFORMATION.
III. ELECTRONIC DATABASES
The Intel 386 CORE data will be located in a separate locked room with on
an isolated computer that is not connected to a network or other external
electronic means. Only individuals that are Authorized Employees will have
access to the keys to the room and the log-in privilege to the computer.
Removable media containing Intel 386 CORE data will be secured in locked
containers in this secure room.
The Computer will be maintained by an CIM Authorized Employee.
Employees are not allowed to load personal software or data on the
Computer.
Employees are not allowed to make copies of REGISTERED CONFIDENTIAL or
RESTRICTED CONFIDENTIAL INFORMATION and load such information on the
Employee's personal computer equipment.
IV. TRAINING
All personnel in PCD will receive training in RESTRICTED CONFIDENTIAL
INFORMATION security procedures upon their assignment to the PCD.
VLSI personnel outside of PCD with access to RESTRICTED CONFIDENTIAL
INFORMATION, trade secrets or market information will be required to read
the written PCD security policy, will sign a document acknowledging his
obligation relative to RESTRICTED CONFIDENTIAL INFORMATION and attend a
quarterly briefing by the CIM.
36
<PAGE> 9
ATTACHMENT "B"
List of VLSI employees who had access to INTEL CORE or INTEL CORE interface
specification during the development of Polar(TM) chips and who are employed at
VLSI on the Effective Date.
EMPLOYEES NAME
[ *
]
[*] Text omitted -- CONFIDENTIAL TREATMENT REQUESTED -- Indicates text for which
confidential treatment has been requested and that has been omitted and filed
separately with the Commission.
37
<PAGE> 1
EXHIBIT 11.1
VLSI TECHNOLOGY, INC.
CALCULATION OF EARNINGS PER SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 25, SEPTEMBER 30, SEPTEMBER 25,
1994 1993 1994 1993
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Net income............................. $ 7,540 $ 7,513 $22,238 $ 8,318
======= ======= ======= =======
Average number of common and common
equivalent shares:
Average common shares outstanding.... 36,121 33,960 35,727 33,505
Dilutive options..................... 1,719 2,257 1,687 1,295
------- ------- ------- -------
Average number of common and common
equivalent shares.................... 37,840 36,217 37,414 34,800
======= ======= ======= =======
Earnings per common and common
equivalent share..................... $ .20 $ .21 $ .59 $ .24
======= ======= ======= =======
FULLY DILUTED EARNINGS PER SHARE
Net income............................. $ 7,540 $ 7,513 $22,238 $ 8,318
Add interest expense on convertible
subordinated debentures
net of tax effect.................... 755 805 2,264 2,414
------- ------- ------- -------
Adjusted net income.................... $ 8,295 $ 8,318 $24,502 $10,732
======= ======= ======= =======
Average number of common and common
equivalent shares on a fully diluted
basis:
Average common shares outstanding.... 36,121 33,960 35,727 33,505
Dilutive options..................... 1,723 3,359 1,811 2,596
Conversion of convertible
debentures........................ 2,614 2,614 2,614 2,614
------- ------- ------- -------
Average number of common and common
equivalent shares on a fully
diluted basis........................ 40,458 39,933 40,152 38,715
======= ======= ======= =======
Fully diluted earnings per common and
common equivalent share.............. $ .21 $ .21 $ .61 $ .28
======= ======= ======= =======
</TABLE>
38
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements in Form 10-Q of VLSI Technology, Inc. for the quarterly
period ended September 30, 1994 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<CIK> 0000704386
<NAME> VLSI TECHONOLOGY, INC.
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1994
<PERIOD-START> DEC-26-1993
<PERIOD-END> SEP-30-1994
<EXCHANGE-RATE> 1
<CASH> 82,613
<SECURITIES> 8,692
<RECEIVABLES> 91,693
<ALLOWANCES> (2,300)
<INVENTORY> 55,177
<CURRENT-ASSETS> 253,515
<PP&E> 484,558
<DEPRECIATION> (271,353)
<TOTAL-ASSETS> 472,491
<CURRENT-LIABILITIES> 131,981
<BONDS> 93,264
<COMMON> 361
0
0
<OTHER-SE> 241,048
<TOTAL-LIABILITY-AND-EQUITY> 472,491
<SALES> 437,780
<TOTAL-REVENUES> 437,780
<CGS> 268,654
<TOTAL-COSTS> 268,654
<OTHER-EXPENSES> 135,968
<LOSS-PROVISION> (68)
<INTEREST-EXPENSE> 6,451
<INCOME-PRETAX> 29,158
<INCOME-TAX> 6,920
<INCOME-CONTINUING> 22,238
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,238
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0.61
</TABLE>
