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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1999
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 000-23193
APPLIED MICRO CIRCUITS CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
Delaware 94-2586591
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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6290 Sequence Drive
San Diego, California 92121
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (619) 450-9333
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $846,000,000 as of March 31, 1999, based upon the
closing sale price on the Nasdaq National Market reported for such date.
Shares of Common Stock held by each officer and director and by each person
who owns 5% of more of the outstanding Common Stock have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
There were 26,612,069 shares of the registrant's Common Stock issued and
outstanding as of March 31, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the Annual Meeting of Stockholders to be held on August 3, 1999.
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PART I
Item 1. Business.
Applied Micro Circuits Corporation ("AMCC" or the "Company") was
incorporated and commenced operations in California in 1979. AMCC was
reincorporated in Delaware in 1987. Certain statements in this Annual Report
on Form 10-K, including certain statements contained in the "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Such forward-looking statements involve known and unknown
risks, uncertainties and other factors which may cause the actual results,
performance or achievements of the Company to be materially different from any
future results, performance or achievements expressed or implied by such
forward-looking statements. See "Factors That May Affect Future Results" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Overview
AMCC designs, develops, manufactures and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure. The
Company utilizes a combination of high-frequency analog, mixed-signal and
digital design expertise coupled with system-level knowledge and multiple
silicon process technologies to offer IC products for the wide area network
markets that address the SONET/SDH and ATM transmission standards and for the
fiber optic based portions of the local area network markets that address the
Gigabit Ethernet and Fibre Channel transmission standards. In these markets,
the Company provides physical layer products such as transceivers, crosspoint
switches and Clock Recovery and Synthesis Units, physical media dependent
products such as transimpedance amplifiers and laser drivers, and overhead
processor products such as framers and mappers. The Company currently supplies
products for the Sonet OC-3, OC-12 and OC-48 transmission standards, and is
currently developing an OC-192 chip set. The Company also leverages its
technology to provide solutions for the ATE, broadcast HDTV, high-speed
computing and military markets. Customers of the Company include 3Com,
Alcatel, Cisco Systems, Marconi Communications, Lucent, Nortel, Raytheon
Systems, Seimens and Teradyne.
Industry Background
The Communications Industry
Communications technology has evolved from simple analog voice signals
transmitted over networks of copper telephone lines to complex analog and
digital voice and data transmitted over hybrid networks of media such as
copper, coaxial and fiber optic cables. This evolution has been driven by
enormous increases in the number of users and the complexity of the data types
transmitted over networks. In addition, the substantial growth in the
Internet, the World Wide Web, cellular and facsimile communications; the
emergence of new applications such as video conferencing; and the increase in
demand for remote network access and higher speed, higher bandwidth
communication between local area networks and local and wide area networks
have increased network bandwidth requirements. This increase has made many
systems architectures inadequate.
In the wide area network ("WAN") market, service providers and equipment
suppliers in particular have been impacted by the inadequacy of systems
architectures caused by the current public network infrastructure. This
infrastructure was designed to optimize voice communications and is not well
suited for the high-throughput requirements of data transmission that is
transmitted in "bursts." The volume and complexity of this data has led to the
increasing deployment of fiber optic technology for use in wide area networks
("WANs"). This technology has substantially greater transmission capacity and
is less error prone and easier to maintain than copper networks. The
Synchronous Optical Network ("SONET") standard in North America and Japan, and
the Synchronous Digital Hierarchy ("SDH") standard in the rest of the world,
have emerged as the standards for the transmission of signals over optical
fiber. The SONET/SDH standards facilitate high data integrity and
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improved network reliability, while reducing maintenance and other operation
costs by standardizing interoperability among equipment from different
vendors. A transmission protocol complementary to SONET/SDH, Asynchronous
Transfer Mode ("ATM"), has emerged to optimize bandwidth utilization. ATM is a
network transmission protocol that packages data into fixed sized cells
enabling the support of not only data traffic, but delay-sensitive voice,
video and imaging applications.
In the local area network ("LAN") market, similar bandwidth issues have
arisen as the greater computational power of PCs have enabled powerful network
applications such as video conferencing and Web communications. However, these
new applications and the increasing number of computers on networks have
significantly increased the volume of data traffic and, as a result, the
network has now become the bottleneck in the delivery of integrated video,
audio and data. Ethernet is currently the most widespread LAN standard,
operating at 10 to 100 megabits per second. However, LAN backbones are rapidly
being upgraded to Gigabit Ethernet and ATM in order to increase available
bandwidth. These network protocols, which enable expanded bandwidth in excess
of one gigabit per second, are emerging as the new standards for LAN
backbones. In addition, the Fibre Channel standard, which also facilitates
data transmission at rates exceeding one gigabit per second, has emerged as a
practical, cost-effective and expandable method for achieving high-speed,
high-volume data transfer among workstations, mainframes, data storage devices
and other peripherals. Fibre Channel and Gigabit Ethernet are complementary
and compatible transmission standards, and the emergence of Gigabit Ethernet
has accelerated the growth of the Fibre Channel standard.
The Communications IC Opportunity
In order to address the growing requirements of communications networks,
equipment suppliers are having to develop and introduce increasingly
sophisticated systems at a rapid rate. To achieve the performance and
functionality required by such systems, these OEMs must utilize increasingly
complex integrated circuits ("ICs"), which now account for a larger portion of
the value-added proprietary content of such systems. As a result of the rapid
pace of new product introductions, the proliferation of standards to be
accommodated and the difficulty of designing and producing requisite ICs,
equipment suppliers increasingly outsource these ICs to semiconductor firms
with specialized expertise. These trends have created a significant
opportunity for IC suppliers that can design cost-effective solutions for the
transmission of high-frequency data. Dataquest estimates that the worldwide
SONET/SDH/ATM markets for ICs were approximately $670 million in 1998 and will
increase to approximately $1.7 billion in 2002. The Fibre Channel and Gigabit
Ethernet markets combined were approximately $70 million in 1998 and Dataquest
estimates that such combined markets will be approximately $190 million in
2002.
IC suppliers must utilize a variety of skills and technologies to satisfy
the requirements of communications equipment OEMs. These OEMs require IC
suppliers that possess system-level expertise and can quickly bring to market
high-performance, highly reliable, power-efficient ICs. Additionally, these
OEMs seek suppliers with both analog and digital expertise to provide a more
complete solution that enables faster integration into the system design and
higher performance. In particular, WAN OEMs require IC suppliers to provide
solutions that minimize jitter (a measure of the stability and noisiness of a
signal), which degrades transmission quality over distance. LAN products
typically have substantially shorter life cycles than WAN products, and the
rate of new product introductions is very high. Therefore, LAN OEMs
specifically require IC suppliers that can provide IC solutions that
accommodate these increased time-to-market demands. Furthermore, the LAN
market is highly cost driven and generally involves large volumes. Therefore,
OEMs in this market require IC suppliers that can provide increasingly lower
cost IC solutions that can quickly be ramped into high-volume production.
In the high-performance IC market, a number of process technologies are used
to produce ICs. Traditionally, designers have relied on silicon-based
manufacturing process technologies for the development of high-speed, mixed-
signal, analog and digital circuits with precision timing. In some cases, OEMs
utilize discrete components or IC solutions based on non-silicon processes
such as gallium arsenide ("GaAs") to meet the high-frequency requirements of
certain communications products. However, non-silicon processes tend to be
more expensive, less predictable with respect to yields and less able to ramp
to high-volume production than silicon processes.
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AMCC Strategy
AMCC's objective is to be the leading supplier of high-performance, high-
bandwidth connectivity IC solutions for the world's communications
infrastructure. To achieve this objective, the Company employs the following
strategies:
Focus on High-Growth Wide Area Network Markets
AMCC targets key high-growth WAN markets, including those for SONET/SDH and
ATM products. The Company has built substantial competencies focused on the
specific requirements of these markets in the areas of process technology and
mixed-signal design and substantial expertise in systems architecture and
applications support. The Company believes that the integration of these
capabilities enables it to optimize solutions addressing the high-bandwidth
connectivity requirements of WAN systems OEMs. Additionally, AMCC leverages
its design expertise, process technologies and systems capabilities in WAN
markets to address specific customer requirements in the fiber optic portion
of the LAN markets.
Provide Complete System Solutions to the Customer and Aggressively Integrate
Products
AMCC's strategy in the WAN market is two fold; 1) provide fiber to switch
silicon solutions and; 2) continue to optimize these solutions through
integration. To this end, in April 1998, AMCC acquired Ten Mountains Design
which develops analog designs for physical media dependent ("PMD") devices. In
March 1999, AMCC acquired Cimaron Communications Corporation providing the
Company with expertise in the development of overhead processor products
("OHP") and system level design. The Company believes that these acquisitions,
together with AMCC's established competence in the high-speed mixed-signal (or
physical layer) development, now allow AMCC to offer comprehensive solutions
for communications equipment OEMs from the fiber to the switch. This provides
our customers with guaranteed interoperability, pre-designed subsystems,
better-cost economics, and system level expertise. The result is faster time
to market, better performance and lower cost. To continue these customer
benefits in future generations of products, AMCC is pursuing an aggressive
integration strategy to provide greater functionality in fewer IC's.
Capitalize on Multiple Silicon-Process Technologies to Provide Optimized
Solutions
The Company is dedicated to utilizing the best silicon process technology
available to offer solutions optimized for specific applications and customer
requirements. The Company has successfully developed multiple generations of
its processes and believes that it will be able to continue the evolution of
its processes to deliver the performance required of future communications
ICs. AMCC believes its current and future bipolar and BiCMOS processes and
design expertise, complemented by advanced CMOS and silicon germanium ("SiGe")
BiCMOS processes from external foundries, provide the Company with the
flexibility to design and manufacture products that are tailored to its
customers' individual needs. Through this flexible approach, AMCC is better
able to transition products over time to new manufacturing processes as
product performance requirements and process technologies evolve.
Capitalize on Established Silicon-Process Technologies to Provide Cost-
Effective Solutions
The Company applies its systems expertise and its analog, mixed-signal and
digital design techniques to architect high-performance products based on
established silicon process technologies. The Company believes that these
silicon-based processes are proven, stable and predictable relative to non-
silicon processes and benefit from the extensive semiconductor industry
infrastructure devoted to the support of silicon processes.
Products and Customers
AMCC designs, develops, manufactures and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure. The
Company's current IC products primarily address the needs
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of the fiber optic based WAN and LAN markets. The Company's products for this
market are designed to respond to the growing demand for high-speed networking
applications for established WAN standards such as SONET/SDH and ATM and LAN
standards such as Gigabit Ethernet, ATM and Fibre Channel. The Company also
markets and sells IC products that address the needs of the ATE, broadcast
HDTV, high-speed computing and military markets. The Company utilizes its
high-performance design expertise and systems knowledge, together with its
internal bipolar and BiCMOS processes and CMOS and SiGe processes from outside
foundries, to design and manufacture products that are tailored to its
customers' individual needs.
The Company uses its design methodologies to develop a platform product and
leverage that product into multiple derivative products that are highly
optimized for specific applications. For example, the Company recently
developed the S3019, a SONET/SDH OC-12 transceiver, as a platform for 5
products in its S303X family. By reusing significant portions of the platform
design, the Company can reduce develop time, risk and costs. This is
especially important in analog intensive circuitry such as very low jitter
phase locked loops ("PLLs").
The following table summarizes the product types AMCC offers in the
communication markets:
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Product Category
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Market Digital Layer Mixed Signal Layer Analog Layer
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WAN--SONET/SDH/ATM:
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OC-3............................. X X
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OC-12............................ X X
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OC-48............................ X X X
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OC-192........................... Z Z Z
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LAN:
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Fibre Channel.................... X X
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Gigabit Ethernet................. X X
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X = AMCC currently produces or has sampled products in this market.
Z = AMCC is actively developing products in this market.
Analog Layer (or PMD): AMCC's analog layer products interface directly to
the lasers or photo diodes that provide the electrical to optical and optical
to electrical conversions. These products include various amplifiers that take
very weak electrical signals (e.g. a few millivolts) and amplify into more
traditional digital level signals (e.g. hundreds of millivolts). AMCC's
efforts in these areas are focused at the high end ranging from 1 to 10 Gbps.
Mixed Signal Layer (or physical layer): AMCC's mixed signal products
transmit and receive data from the PMD layer in a very high-speed serial
format (up to 10Gbps). They are one of the most key elements in the control of
overall system jitter, a measure of the "noisiness" of the signal. Low noise
enables transmission of data over greater distances with fewer errors. The
system clock is also generated or recovered in these devices. Data is
converted from a high-speed serial format to a lower-speed parallel interface
that can be handled by the digital layer. Data is also received on the lower-
speed parallel interface (digital layer) and serialized into a high-speed
format and handed to the PMD layer.
Digital Layer (or overhead processors ("OHP")): AMCC's digital layer
products receive and transmit data from the physical (or mixed signal) layer
in a parallel format. These products then perform a number of functions
including framing, terminating the overhead, performance monitoring, and
mapping the data payload to/from the transmission format. The data is then
available to be sent to a switch core or handed off for additional processing
(grooming, traffic shaping, policing, etc). AMCC's digital layer products are
found predominately in systems such as very high-speed add-drop multiplexers,
digital cross-connects, terabit routers and dense wave division multiplexers
("DWDM").
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WAN Products
WAN Analog Products: Over the past year AMCC introduced its first generation
of PMD products for the OC-48 (2.488 Gbps) market. The S3049 (laser driver)
and S3051 (post amplifier) were developed on AMCC's internal bipolar
technology. Additional OC-48 and OC-192 PMD products are currently under
development in a SiGe process.
WAN Mixed Signal Products: AMCC introduced its first generation of SONET OC-
12 (622 Mbps) products in 1993. The Company has since developed 3 additional
generations of these products, each integrating greater functionality on each
chip while improving jitter performance. For example, the Company's first
generation of these products consisted of transmitter/receiver pairs with dual
voltage. The second generation consisted of products that are compatible with
single +5 volt optical modules. The Company's third generation physical layer
product was a single chip transceiver operating at a single +3.3 volt power
supply. This product offers systems OEMs selectable reference frequencies, a 4
or 8-bit data path, a PECL or TTL level interface, a diagnostic mode and
special failure indicators. The Company's fourth generation, the S3038,
incorporated 4 transceivers and utilized 5 PLL's in a single device. The S3038
was the Company's first SONET/SDH physical layer device implemented in CMOS
from an external foundry.
Over the past year the Company completed a first generation of OC-48 (2.5
Gbps) mixed signal devices. The S3043 and S3044 chipset operating off a single
+3.3 volt supply offered the industry's lowest power solution for CSU, mux and
demux functions. Additionally the Company introduced the S3050, a multi-rate
CDR, which performs clock and data recovery on OC-3 (155Mbps), OC-12
(622Mbps), gigabit ethernet (1.25 Gbps) or OC-48 (2.488 Gbps) data rates. The
Company is currently developing its second generation of these products as
well as solutions for OC-192.
WAN Digital Layer Products: In the past year AMCC introduced its first
generation of digital layer products for the OC-48 market. The first of these
products, the S3045, performs the mux/demux functions for an OC-48 payload
into four OC-12 payloads. With the acquisition of Cimaron Communications in
March 1999, the Company has subsequently introduced 3 additional digital layer
products, the Congo with OC-12 packet-over-SONET, the Nile with integrated OC-
12 to DS-3 mapping, and the Amazon with fully functional packet-over-SONET for
OC-48. All of these devices can be utilized with the Company's mixed signal
and analog layer products providing a very comprehensive solution set. The
Company is currently developing second generations and OC-192 digital layer
products.
Serial Backplane Products. In addition to the WAN and LAN network equipment
and standards developed to address the issue of network bandwidth, network
equipment OEMs must also ensure that once high-frequency signals exit the
transmission network, they can be switched efficiently, while taking full
advantage of the available bandwidth. Backplanes (the boards that distribute
signals to various ports of a switching system) are currently emerging as a
serious constraint for systems OEMs because redesigning the traditional
architecture of parallel channels to accommodate higher frequency signals is
prohibitively expensive. Therefore, serial channels, which can accommodate
much higher frequencies, are being increasingly employed. The Company believes
that this transition has created a significant opportunity for suppliers that
can design IC solutions enabling the transmission of high-frequency data
through a serial backplane. In May 1998, the Company introduced the S2064, a
quad transceiver implemented in 0.35 micron CMOS. The S2064 is a platform
product that the company has used to develop and introduce 7 other products.
The Company is currently developing higher bandwidth serial backplane
products.
Current customers in the WAN market which the Company ships production
products and/or has commenced development programs with include 3Com, Alcatel,
Ciena, Cisco, ECI, Ericson, FORE, Fujitsu, Hitachi, Lucent, Marconi, Monterey,
NEC, Nokia, Nortel, Pirelli, Siemens, Sycamore, Tellabs, and Tellium. All of
the Company's communications devices are supported with evaluation boards and
design aids to facilitate easy integration into system architectures.
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LAN Products
LAN Analog Products: Over the past year AMCC introduced its first PMD
products for the gigabit ethernet and fibre channel standards. The S7011
vertical cavity surface emitting laser driver offers digital programmability
for laser trimming, which greatly reduces the number of external components
and system integration time.
LAN Mixed Signal Products: AMCC introduced its first physical layer products
in the gigabit ethernet and fibre channel markets in 1995. The Company has
since developed 3 generations of products that support both +5 and +3.3 volt
and today range from a single channel transceiver to quad channel
transceivers.
Current customers in the LAN market which the company ships production
products and/or has commenced development programs with include 3Com,
Cabletron Systems, Cisco, Compaq, Digital Equipment Corporation, FORE,
Fujikura, Fujitsu, Hewlett-Packard, IBM, Lucent, Newbridge Networks, Nortel,
Siemens, Sun Microsystems, Tellabs and Vixel.
ATE
AMCC introduced its current generation gate array Q20000 family of products
in 1991 and its Micropower-based standard cell products in 1993. Micropower,
one of the first products to offer +3.3V operation for high performance ASICs,
uses AMCC's proprietary bipolar process. The high-performance and low-power
characteristics of this family of products make it particularly suitable for
high performance semiconductor ATE applications that require approximately
4,000 equivalent gates, low jitter and precision circuits. Current customers
for the Company's products for the ATE market include Hewlett-Packard, LTX,
Schlumberger, Teradyne and Texas Instruments.
High-Speed Computing Products
AMCC offers a PCI product line that address the high-speed computing market.
The S5933 is a standard master/slave PCI controller chip. The S5920 is a
standard target-only PCI controller chip. These devices are supported with
comprehensive development kits and third-party driver software. The Company
sells these products to a very large and diverse customer base. Current
customers of the Company's products include Cisco Systems, Ericsson, IBM and
SAT. The Company's S5933 PCI controller chip is also used in reference designs
with C-Cube Microsystems for digital video disk products.
Military
The Company's Q20000 gate array family of ASIC products are well suited for
military applications and as replacements for ECLinPS(TM) logic from Motorola.
The Company sells ASICs to military customers such as Northrop Grumman,
Raytheon Systems Co. and Rockwell International.
Technology
The Company utilizes its technological and design expertise to solve the
unique problems of high-speed analog, digital and mixed-signal circuit designs
for the world's communications infrastructure. The Company's competencies
include the design and manufacture of high-performance digital and mixed
signal ICs, in-depth knowledge of the architecture and functioning of high-
bandwidth fiber optic communications systems, proven ASIC design methodologies
and libraries, and high-performance semiconductor manufacturing and packaging
expertise.
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Design of High-Performance Digital and Mixed-Signal ICs
AMCC has developed multiple generations of products that integrate both
analog and digital elements on the same chip, while balancing the difficult
trade-offs of speed, power and timing inherent in high-speed applications.
AMCC was one of the first companies to embed analog PLLs in bipolar chips with
digital logic for high-speed data transmission and receiver applications.
Since the introduction of AMCC's first on-chip clock recovery and clock
synthesis products in 1993 (the S3005/S3006 chip set), the Company has refined
these key circuits and has successfully integrated multiple analog functions
and multiple channels on the same chip. For example, the Company has developed
a quad transceiver with a PLL clock recovery and PLL clock multiplier. The
mixing of digital and analog signals poses difficult challenges for IC
designers, particularly at high frequencies. The Company has built significant
expertise in mixed-signal IC designs through the development of multiple
generations of products. Through the acquisition of Cimaron Communications,
the Company added VLSI digital design and systems expertise. AMCC will
continue to apply these competencies in the development of increasingly
complex digital layer products. AMCC believes it can leverage these skills
into the development of high gate count digital chips with integrated complex
analog and high frequency logic.
Systems and Architecture Expertise
AMCC believes that its systems architects, design engineers and technical
marketing and applications engineers have a thorough understanding of the
fiber optic communications systems for which the Company designs and builds
ASSPs. The Company substantially expanded this expertise into higher layers of
communication systems with the acquisition of Cimaron. Using this systems
expertise, AMCC develops semiconductor devices to meet OEMs' high-bandwidth
systems requirements. By understanding the systems into which its products are
designed, the Company believes that it is better able to anticipate and
develop optimal solutions for the various cost, power and performance trade-
offs faced by its customers. AMCC believes that its systems knowledge also
enables the Company to develop more comprehensive, interoperable solutions.
This allows AMCC to develop boards with multiple products that are a more
substantial part of the customers system, enabling faster time to integration
into their products.
Process Technology
AMCC utilizes its own internal wafer fabrication facility and has developed
and produced multiple generations of cost-effective, high-performance bipolar
and BiCMOS processes. The proven internal silicon-based process technologies
employed by the Company have not required the highly capital-intensive
facilities needed by certain advanced microprocessor, memory or CMOS ASIC
suppliers. Additionally, the Company has obtained access to advanced CMOS and
SiGe BiCMOS processes through foundry relationships. The Company believes that
through the use of internal and external process technologies, the Company is
able to provide an optimal mix of cost and performance for the targeted
application.
Packaging
AMCC has substantial experience in the development and use of plastic and
ceramic packages for high-performance applications. The selection of the
optimal package solution is a vital element of the delivery of high-
performance products, and involves balancing cost, size, thermal management
and technical performance. AMCC's products are designed to reduce power
dissipation and die size to enable the use of industry standard packages. AMCC
employs a wide variety of package types, and is currently designing products
using ball grid arrays, tape ball grid arrays and multi-chip modules with pin
counts in excess of 200 pins. The Company's experience with a variety of
packages is one of the factors that enables it to provide optimal high-
performance IC solutions to its customers.
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Research and Development
AMCC's research and development expertise and efforts are focused on the
development of high-performance analog, digital and mixed-signal ASSPs for
fiber optic communications applications. The Company also develops silicon
wafer fabrication processes and design methodologies that are optimized for
these applications.
Product Development
The Company's product development is focused on building high-performance
high gate count digital design expertise and analog-intensive design expertise
that is incorporated into well-documented blocks that can be reused for
multiple products. The Company has, and continues to make, significant
investments in advanced CAD tools to leverage its design engineering staff,
reduce design cycle time and increase first-time design correctness. The
Company's product development is driven by the imperatives of reducing design
cycle time, increasing first-time design correctness, adhering to disciplined,
well documented design processes and continuing to be responsive to customer
needs. The Company is also developing high-performance packages for its
products in collaboration with its packaging suppliers and its customers.
Process Development
The Company's process development is focused on enhancing its current
bipolar processes and developing new processes optimized for high-performance
digital and mixed-signal communications applications. AMCC's process engineers
are also involved with the selection and management of the Company's
relationships with outside foundries to provide the advanced CMOS and SiGe
BiCMOS processes required by certain of AMCC's products. A failure by the
Company to improve its existing process technologies or obtain access to new
process technologies from external foundries in a timely or affordable manner
could adversely affect the Company's business, financial condition and
operating results.
The Company's research and development expenses in fiscal years 1997, 1998,
1999 were $7.9, $13.3 and $22.5 million, respectively, which were 13.7%, 17.3%
and 21.4%, respectively, of revenues for such periods. The Company has 119
employees engaged in engineering and product development related activities.
Manufacturing
Wafer Fabrication
AMCC manufactures certain of its products at its four-inch wafer fabrication
facility in San Diego, California in an 8,200 square foot clean room. The
Company believes that its wafer fabrication facility has competitive yields,
cycle times and costs, produces large die at acceptable yields and operates on
a flexible basis of multiple products and variable lot sizes. However, there
can be no assurance that the Company will achieve or obtain acceptable
manufacturing yield levels in the future. The Company is currently running
several different bipolar and BiCMOS processes in this facility.
The Company is exploring alternatives for the expansion of its manufacturing
capacity which would likely occur after fiscal year 2000, including expanding
its current 49 wafer fabrication facility, building a new wafer fabrication
facility, purchasing a wafer fabrication facility and entering into strategic
relationships to obtain additional capacity. Any of these alternatives could
require a significant investment by the Company including an investment in
excess of $80.0 million if the Company chose to or was required to build a new
wafer fabrication facility. There can be no assurance that any of the
alternatives for expansion of its manufacturing capacity will be available on
a timely basis, or that the Company will be able to manage its growth and
effectively integrate its proposed expansion into its current operations.
AMCC currently utilizes four outside foundries, AMI Semiconductor, IBM,
Kawasaki CSI Japan and Taiwan Semiconductor Manufacturing Corporation for the
production of products designed on CMOS processes.
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Additionally, AMCC is developing new products on IBM's SiGe BiCMOS processes.
The Company does not plan to fabricate its own CMOS wafers. The Company
generally does not have long-term wafer supply agreements with its other
outside foundries that guarantee wafer or product quantities, prices or
delivery lead times. There are certain risks associated with the Company's
dependence upon external foundries for certain of its products, including
reduced control over delivery schedules, quality assurance, manufacturing
yields and costs, the potential lack of adequate capacity during periods of
excess demand, limited warranties on wafers or products supplied to the
Company, increases in prices and potential misappropriation of the Company's
intellectual property.
Components and Raw Materials
AMCC purchases all of its "raw" silicon wafers from Wacker Siltronic
Corporation. While most silicon wafers now being supplied to the semiconductor
industry are larger than four inches, AMCC believes that Wacker Siltronic will
continue to supply AMCC's needs for the foreseeable future. AMCC also carries
a significant inventory of raw wafers to cushion any interruption in supply.
AMCC purchases its ceramic packages from Kyocera America and NTK Ceramics and
its plastic packaging from Amkor and ASAT.
Assembly and Test
The Company assembles prototypes and modest production volumes of specific
products in its internal assembly facility in San Diego, California. Most of
the Company's production assembly, however, is performed by multiple assembly
subcontractors located in the Far East, Europe and the United States.
Following assembly, the packaged units are returned to the Company for burn-in
(in some cases), final testing and marking prior to shipment to customers.
From time to time, some testing is performed by subcontractors.
Sales and Marketing
The Company sells its products principally through a direct sales
organization consisting of a network of independent manufacturers'
representatives in specified territories that work under the direction of the
Company's direct sales force and distributors.
The Company has a total of 17 direct sales personnel and field applications
engineers. The direct sales force is technically trained and is supported by
applications engineers in the field as well as applications and design
engineers at the Company's headquarters. The Company believes that this
"engineering-intensive" relationship with its customers results in strong,
long-term customer relationships beneficial to both the Company and its
customers. The Company augments this strategic account sales approach with
domestic and foreign distributors, which service primarily smaller accounts
purchasing ASSPs.
In North America, the Company's direct sales effort is supported by 18
independent manufacturers' representatives and one distributor. The Company
sells its products through 11 distributors and 2 independent manufacturers'
representatives in Europe and 8 distributors throughout the rest of the world.
During the years ended March 31, 1997, 1998, and 1999, 20%, 21% and 20%,
respectively, of net revenues were from Nortel. In 1998 and 1999, Insight
Electronics, the Company's domestic distributor, accounted for 11% and 13% of
net revenues. Additionally, in 1999, Raytheon Systems Co. accounted for 16% of
net revenues. No other customer accounted for more than 10% of revenues in any
period. In fiscal 1997, 1998 and 1999, approximately 21%, 23% and 24% of the
Company's revenues were derived from sales to customers located outside of
North America.
The Company's sales headquarters is located in San Diego, California. The
Company maintains sales offices in Burlington and Andover, Massachusetts;
Raleigh, North Carolina; Plano, Texas; San Jose, California; Munich, Germany;
Milan, Italy, Tokyo, Japan; and Cheshire, United Kingdom.
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Backlog
The Company's sales are made primarily pursuant to standard purchase orders
for delivery of products. Quantities of the Company's products to be delivered
and delivery schedules are frequently revised to reflect changes in customer
needs, and customer orders can be canceled or rescheduled without significant
penalty to the customer. For these reasons, the Company's backlog as of any
particular date is not representative of actual sales for any succeeding
period, and the Company therefore believes that backlog is not a good
indicator of future revenue. The Company's backlog for products requested to
be shipped and non-recurring engineering services to be completed in the next
six months was $38.2 million on March 31, 1999, compared to $30.1 million on
March 31, 1998. Included in backlog at March 31, 1999 is the $9.3 million
balance of an order received from Raytheon Systems Co. related to an end-of-
life buy for integrated circuits used in its high speed radar systems.
Proprietary Rights
The Company relies in part on patents to protect its intellectual property.
The Company has been issued 14 patents in the United States and one patent in
Canada, which patents principally cover certain aspects of the design and
architecture of the Company's IC products and have expiration dates ranging
from 2004 to 2015. In addition, the Company has 19 patent applications pending
in the United States Patent and Trademark Office (the "PTO"). There can be no
assurance that the Company's pending patent applications or any future
applications will be approved, or that any issued patents will provide the
Company with competitive advantages or will not be challenged by third parties
or that if challenged, will be found to be valid or enforceable, or that the
patents of others will not have an adverse effect on the Company's ability to
do business. Furthermore, there can be no assurance that others will not
independently develop similar products or processes, duplicate the Company's
products or processes or design around any patents that may be issued to the
Company.
To protect its intellectual property, the Company also relies on a
combination of mask work protection under the Federal Semiconductor Chip
Protection Act of 1984, trademarks, copyrights, trade secret laws, employee
and third-party nondisclosure agreements and licensing arrangements. A mask
work refers to the intangible information content of the set of masks or mask
databases used to make a semiconductor chip product. Despite these efforts,
there can be no assurance that others will not independently develop
substantially equivalent intellectual property or otherwise gain access to the
Company's trade secrets or intellectual property, or disclose such
intellectual property or trade secrets, or that the Company can meaningfully
protect its intellectual property. A failure by the Company to meaningfully
protect its intellectual property could have a material adverse effect on the
Company's business, financial condition and operating results.
As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property
rights. The Company in the past has been and in the future may be notified
that it may be infringing the intellectual property rights of third parties.
The Company has certain indemnification obligations to customers with respect
to the infringement of third party intellectual property rights by its
products. There can be no assurance that infringement claims by third parties
or claims for indemnification by customers or end users of the Company's
products resulting from infringement claims will not be asserted in the future
or that such assertions, if proven to be true, will not materially adversely
affect the Company's business, financial condition or operating results. On
July 31, 1998, the Lemelson Medical, Education & Research Foundation Limited
Partnership filed a lawsuit in the U.S. District Court for the District of
Arizona against 26 companies, including AMCC, engaged in the manufacture
and/or sale of IC products. The complaint alleges infringement by the
defendants of certain U.S. patents held by the Lemelson Partnership relating
to certain semiconductor manufacturing processes. On November 25, 1998, the
Company was served a summons pursuant to this lawsuit. The complaint seeks,
among other things, injunctive relief and unspecified treble damages.
Previously, the Lemelson Partnership has offered the Company a license under
the Lemelson patents. Management is monitoring this matter and, although the
ultimate outcome of this matter is not currently determinable, The Company
believes, based in part on the licensing terms previously offered by the
Lemelson Partnership, that the resolution of this matter will not have a
material adverse effect on the financial position or liquidity; however, there
can be
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<PAGE>
no assurance that the ultimate resolution of this matter will not have a
material adverse effect on the results of operations for any quarter.
Furthermore, there can be no assurance that the Company would prevail in any
such litigation. In the event of any adverse ruling in any such matter, the
Company could be required to pay substantial damages, which could include
treble damages, cease the manufacturing, use and sale of infringing products,
discontinue the use of certain processes or obtain a license under the
intellectual property rights of the third-party claiming infringement. There
can be no assurance, however, that a license would be available on reasonable
terms or at all. Any limitations on the Company's ability to market its
products, any delays and costs associated with redesigning its products or
payments of license fees to third parties or any failure by the Company to
develop or license a substitute technology on commercially reasonable terms
could have a material adverse effect on the Company's business, financial
condition and operating results.
Competition
The semiconductor market, particularly the high-performance semiconductor
market, is highly competitive and subject to rapid technological change, price
erosion and heightened international competition. The communications, ATE and
high-speed computing industries are also becoming intensely competitive due in
part to deregulation and heightened international competition. The ability of
the Company to compete successfully in its markets depends on a number of
factors, including product performance, success in designing and
subcontracting the manufacture of new products that implement new
technologies, product quality, reliability, price, the efficiency of
production, design wins for its IC products, ramp up of production of the
Company's products for particular system manufacturers, end-user acceptance of
the system manufacturers' products, market acceptance of competitors' products
and general economic conditions. In addition, the Company's competitors may
offer enhancements to existing products, or offer new products based on new
technologies, industry standards or customer requirements, that are available
to customers on a more timely basis than comparable products from the Company
or that have the potential to replace or provide lower cost alternatives to
the Company's products. The introduction of such enhancements or new products
by the Company's competitors could render the Company's existing and future
products obsolete or unmarketable. Furthermore, once a customer has designed a
supplier's product into its system, the customer is extremely reluctant to
change its supply source due to the significant costs associated with
qualifying a new supplier. Finally, the Company expects that certain of its
competitors and other semiconductor companies may seek to develop and
introduce products that integrate the functions performed by the Company's IC
products on a single chip, thus eliminating the need for the Company's
products. Each of these factors could have a material adverse effect on the
Company's business, financial condition and results of operations.
In the communications markets, the Company competes primarily against
companies such as Analog Devices, Conextant, Giga, Hewlett-Packard, Lucent,
Maxim, PMC-Sierra, Philips, Sony, Texas Instruments, TriQuint and Vitesse. In
certain circumstances, most notably with respect to ASICs supplied to Nortel,
AMCC's customers or potential customers have internal IC manufacturing
capability, and this internal source is an alternative available to the
customer. In the ATE market, the Company competes primarily against Vitesse
and silicon ECL and BiCMOS products offered principally by semiconductor
manufacturers such as Analog Devices, Lucent Technologies and Maxim. In the
high-speed computing market, the Company competes primarily against companies
such as Chrontel, Cypress, ICS, PLX and Tundra. Many of these companies and
potential new competitors have significantly greater financial, technical,
manufacturing and marketing resources than the Company. In addition, in lower-
frequency applications, the Company faces increasing competition from other
CMOS-based products, particularly as the performance of such products
continues to improve. There can be no assurance that the Company will be able
to develop new products to compete with new technologies on a timely basis or
in a cost-effective manner. Any failure by the Company to compete successfully
in its target markets, particularly in the communications markets, would have
a material adverse effect on the Company's business, financial condition and
results of operations.
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Environmental Matters
The Company is subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in its manufacturing process.
Any failure to comply with present or future regulations could result in the
imposition of fines on the Company, the suspension of production or a
cessation of operations. In addition, such regulations could restrict the
Company's ability to expand its facilities at its present location or
construct or operate its planned wafer fabrication facility or could require
the Company to acquire costly equipment or incur other significant expenses to
comply with environmental regulations or clean up prior discharges. In this
regard, since 1993 the Company has been named as a potentially responsible
party ("PRP") along with a large number of other companies that used Omega
Chemical Corporation ("Omega") in Whittier, California to handle and dispose
of certain hazardous waste material. The Company is a member of a large group
of PRPs that has agreed to fund certain remediation efforts at the Omega site,
which efforts are ongoing. To date, the Company's payment obligations with
respect to such funding efforts have not been material, and the Company
believes that its future obligations to fund such efforts will not have a
material adverse effect on its business, financial condition or operating
results. Although the Company believes that it is currently in material
compliance with applicable environmental laws and regulations, there can be no
assurance that the Company is or will be in material compliance with such laws
or regulations or that the Company's future obligations to fund any
remediation efforts, including those at the Omega site, will not have a
material adverse effect on the Company's business, financial condition or
operating results.
Employees
As of March 31, 1999, the Company had 361 full-time employees: 29 in
administration, 119 in engineering and product development, 155 in operations
and 58 in marketing and sales. The Company's ability to attract and retain
qualified personnel is essential to its continued success. None of the
Company's employees is represented by a collective bargaining agreement, nor
has the Company ever experienced any work stoppage. The Company believes its
employee relations are good. Loss of the services of, or failure to recruit,
key design engineers or other technical and management personnel could be
significantly detrimental to the Company's product and process development
programs or otherwise have a material adverse effect on the Company's
business, financial condition, and operating results.
Executive Officers of the Registrant
The executive officers of the Company, and their ages as of May 31, 1999, are
as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
President, Chief Executive Officer
David M. Rickey..................... 43 and Director
Roger A. Smullen, Sr................ 63 Chairman of the Board of Directors
William E. Bendush.................. 50 Vice President, Finance and
Administration, and Chief Financial
Officer
Kenneth L. Clark.................... 51 Vice President, Operations
Joel O. Holliday.................... 60 Vice President
Brent E. Little..................... 35 Vice President, Marketing
Gary Martin......................... 48 Vice President and Chief Technical
Officer, Cimaron Communications
Vice President, Cimaron
Ram Sudireddy....................... 32 Communications
Thomas L. Tullie.................... 34 Vice President, Sales
</TABLE>
David M. Rickey has served as President, Chief Executive Officer and
Director since February 1996. From August 1993 to May 1995, Mr. Rickey served
as the Company's Vice President of Operations. From May 1995 to February 1996,
Mr. Rickey served as Vice President of Operations at NexGen, a semiconductor
company. Previously, Mr. Rickey spent more than eight years with Nortel, a
telecommunications manufacturer, where he
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<PAGE>
led the wafer fab engineering and manufacturing operations in both Ottawa,
Canada and San Diego, California. Mr. Rickey also worked in various
engineering positions with IBM from 1981 to 1985. Mr. Rickey has earned B.S.
degrees from both Marietta College (summa cum laude) and Columbia University.
In addition, Mr. Rickey received an M.S. in Materials Science and Engineering
from Stanford University.
Roger A. Smullen, Sr. has served as the Chairman of the Company's Board of
Directors since October 1982. From April 1983 until April 1987, Mr. Smullen
served as the Company's Chief Executive Officer. Previously, he was senior
vice president of operations of Intersil, Inc.'s semiconductor division. In
1967, Mr. Smullen co-founded National Semiconductor. Prior to that, he was
director of integrated circuits at Fairchild Semiconductor. Mr. Smullen is
currently a director of Micro Linear Corporation, a manufacturer of integrated
circuits. He holds a B.S. in Mechanical Engineering from the University of
Minnesota.
William E. Bendush joined the company in April 1999 as Vice President,
Finance and Administration, Treasurer, Chief Financial Officer and Secretary
replacing Mr. Holliday who resigned these posts in April 1999. With more than
28 years of leadership experience in financial management and financing, Mr.
Bendush came to AMCC from Silicon Systems Inc., where the past 14 years he
served as Senior Vice President and Chief Financial Officer. Prior to joining
Silicon Systems Inc., Mr. Bendush held various financial management positions
at Setac Inc., AM International, Gulf + Western Industries and Gould Inc. Mr.
Bendush is a Certified Public Accountant and holds a bachelor's degree from
Northern Illinois University. In addition, Mr. Bendush currently serves as a
member of the board of directors and Chairman of the Audit committee of
Smartflex Systems Inc.
Kenneth L. Clark has served as Vice President, Operations since November
1997. Prior to joining the Company, Mr. Clark worked at Integrated Device
Technologies, Inc., a semiconductor company, from February 1995 to October
1997, where he served as Director, Fab Operations. From 1990 to 1995, Mr.
Clark served in various senior management positions including Director, Fab
Operations at Silicon Systems, Inc., a semiconductor company. From 1987 to
1990, Mr. Clark served as Director, Fab Operations at National Semiconductor
Corp. Mr. Clark has also held manufacturing and engineering management
positions at Cypress Semiconductor Corp., Zymos, Inc., Micron Technology and
American Microsystems, Inc. Mr. Clark holds a B.S. in Physics from the
University of Washington.
Joel O. Holliday served as the Vice President, Finance and Administration,
Treasurer, Chief Financial Officer and Secretary of the Company from November
1981 to April 1999. Mr. Holliday currently serves as a Vice President of AMCC.
He has previously served as the Director of Finance during the reorganization
of Westgate-California Corporation and as Vice President, Finance of Spin
Physics, Inc., an electronics company. Mr. Holliday received a B.A. from
Claremont McKenna College and an M.B.A. from Harvard Business School.
Brent E. Little joined the Company in 1991. Prior to his current position as
Vice President of Marketing, he held several marketing management positions
with AMCC as the Director or Strategic Marketing, and Director of Marketing
for ASIC products. Prior to joining the Company, Mr. Little worked as Business
Development Manager for Analysis and Technology, Inc, and worked with the U.S.
Navy as a Project Engineer. Mr. Little earned his B.S in Electrical
Engineering from University of California, Santa Barbara.
Gary Martin joined the Company on March 17, 1999 with the acquisition of
Cimaron Communications Corporation, as Vice President and Chief Technical
Officer, Cimaron Communications. Prior to joining the Company, Dr. Martin, co-
founded Cimaron Communications Corporation, and served as its Chief Technical
Officer since its inception on January 2, 1998. From 1995 to 1997, he served
as Vice President of Engineering and Chief Technical Officer at ATI. From 1978
to 1995, Dr. Martin held various management and technical positions at AT&T
Bell Laboratories. Dr. Martin holds a master's degree and doctorate in
Electrical Engineering from Stanford University and a B.S. and M.S. in
Mechanical Engineering from Oklahoma State University.
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<PAGE>
Ram Sudireddy joined the Company on March 17, 1999, with the acquisition of
Cimaron Communications Corporation, as Vice President, Cimaron Communications.
Prior to joining the Company, Mr. Sudireddy co-founded Cimaron Communications
Corporation, and served as its President and CEO from its inception in January
1998. From 1996 to 1997, he founded Siltek Corporation, an ATM and Sonet
design company, and served as its Vice President of Research and Development.
From 1991 to 1996, Mr. Sudireddy was a member of technical staff at AT&T Bell
Laboratories, where he held positions as chief architect and lead designer for
a number of highly complex ASICs. Mr. Sudireddy has a master's degree in
Computer Engineering from the University of Massachusetts at Lowell, and a
bachelor's degree in Electrical Engineering from Nagarjuna University in
Guntur, India.
Thomas L. Tullie has served as Vice President, Sales since August 1996.
Prior to joining the Company, from 1989 to 1996 Mr. Tullie held several
strategic sales management positions, most recently as Director of East Coast
Sales, at S-MOS Systems, a semiconductor company. Prior to joining S-MOS
Systems, Mr. Tullie was a designer in the workstations group of Digital
Equipment Corporation. Mr. Tullie earned a B.S. from the University of
Massachusetts and an M.B.A. from Clark University.
Factors That May Affect Future Results
Our operating results may fluctuate because of many factors, many of which
are beyond our control
If our operating results are below the expectations of public market
analysts or investors, then the market price of our common stock could be
materially and adversely affected.
Some of the factors that affect our quarterly and annual results, but which
are difficult to control or predict are:
. the rescheduling or cancellation of orders by customers;
. fluctuations in the timing and amount of customer requests for product
shipments;
. fluctuations in manufacturing output, yields and inventory levels;
. changes in the mix of products that our customers buy;
. our ability to introduce new products and technologies on a timely
basis;
. the announcement or introduction of products and technologies by our
competitors;
. the availability of external foundry capacity, purchased parts and raw
materials;
. competitive pressures on selling prices;
. the amounts and timing of costs associated with warranties and product
returns;
. the amounts and timing of investments in research and development;
. market acceptance of our products and of our customers' products;
. the timing of depreciation and other expenses that we expect to incur in
connection with any required expansion of our manufacturing capacity;
. costs associated with compliance with applicable environmental
regulations or remediation;
. costs associated with future litigation, if any, including without
limitation, litigation or settlements relating to the use or ownership
of intellectual property;
. general semiconductor industry conditions; and
. general economic conditions.
Our expense levels are relatively fixed and are based, in part, on our
expectations of future revenues. We are continuing to increase our operating
expenses for personnel and new product development. However, we
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<PAGE>
have a limited ability to reduce expenses quickly in response to any revenue
shortfalls. Consequently, our business, financial condition and operating
results would be adversely affected if we do not achieve increased revenues.
We can have revenue shortfalls for a variety of reasons, including:
. significant pricing pressures that occur because of declines in average
selling prices over the life of a product;
. sudden shortages of raw materials or production capacity constraints
that lead producers to allocate available supplies or capacity to
customers with resources greater than us and, in turn, interrupt our
ability to meet our production obligations;
. fabrication, test or assembly capacity constraints for internally
manufactured devices which interrupt our ability to meet our production
obligations; and
. the rescheduling or cancellation of customer orders.
In addition, our business is characterized by short-term orders and shipment
schedules, and customer orders typically can be canceled or rescheduled
without significant penalty to the customer. Due to the absence of substantial
noncancellable backlog, we typically plan our production and inventory levels
based on internal forecasts of customer demand, which are highly unpredictable
and can fluctuate substantially. In addition, from time to time, in response
to anticipated long lead times to obtain inventory and materials from our
outside foundries, we may order materials in advance of anticipated customer
demand, which might result in excess inventory levels or unanticipated
inventory write-downs if expected orders fail to materialize, or other factors
render the customer's products less marketable. Furthermore, we currently
anticipate that an increasing portion of our revenues in future periods will
be derived from sales of application-specific standard products ("ASSPs"), as
compared to application-specific integrated circuits ("ASICs"). Customer
orders for ASSPs typically have shorter lead times than orders for ASICs,
which may make it increasingly difficult for us to predict revenues and
inventory levels and adjust production appropriately in future periods. If we
are unable to plan inventory and production levels effectively, our financial
condition and operating results could be materially adversely affected.
One example of the volatility of our results is that we experienced revenue
fluctuations and incurred net losses in fiscal 1995 and 1996. These revenue
fluctuations and net losses were caused by the termination of a relationship
with a strategic foundry partner, decreased orders from two major customers,
charges associated with a reduction in the company's workforce and charges for
excess inventory. Accordingly, we believe that period-to-period comparisons of
operating results should not be relied upon as an indication of future
performance. In addition, the results of any quarterly period are not
indicative of results to be expected for a full fiscal year.
Our operating results depend substantially on our manufacturing yields, which
may not meet expectations.
AMCC Fabrication
We manufacture most of our semiconductors at our San Diego 49 wafer
fabrication facility. Our yields can decline whenever a substantial percentage
of wafers must be rejected or a significant number of die on each wafer are
nonfunctional. Such declines can be caused by many factors over which we have
little or no control, including minute levels of contaminants in the
manufacturing environment, design issues, defects in masks used to print
circuits on a wafer and difficulties in the fabrication process.
Unfortunately, the ongoing expansion of the manufacturing capacity of our
existing wafer fabrication facility could increase the risk of contaminants in
the facility. In addition, many of these problems are difficult to diagnose,
time consuming and expensive to remedy and can result in shipment delays.
Because the majority of our costs of manufacturing are relatively fixed,
maintenance of the number of shippable die per wafer is critical to our
results of operations. Yield decreases can result in substantially higher unit
costs and may result in reduced gross profit and net income. In the past we
experienced yield problems in connection with the manufacture of our products.
We estimate yields per wafer in order to estimate the value of inventory. If
yields are materially different than projected, work-in-process inventory may
need to be revalued.
15
<PAGE>
We have in the past and may in the future from time to time take inventory
write-downs as a result of decreases in manufacturing yields. We may suffer
periodic yield problems in connection with new or existing products or in
connection with the commencement of production in our proposed new
manufacturing facility or the transfer of our operations to this facility.
Fabrication by Third Parties
Semiconductor manufacturing yields are a function both of product design and
process technology. When our products are manufactured by an outside foundry,
the process technology is typically proprietary to the manufacturer. Since low
yields may result from either design or process technology failures, yield
problems may not be effectively determined or resolved until an actual product
exists that can be analyzed and tested to identify process sensitivities
relating to the design rules that are used. As a result, yield problems may
not be identified until well into the production process, and resolution of
yield problems may require cooperation between ourselves and our manufacturer.
In some cases this risk could be compounded by the offshore location of
certain of our manufacturers, increasing the effort and time required to
identify, communicate and resolve manufacturing yield problems.
If we develop relationships with additional outside foundries, yields could
be adversely affected due to difficulties associated with adapting our
technology and product design to the proprietary process technology and design
rules of the new foundries. Because of our limited access to wafer fabrication
capacity from outside foundries for certain products, any decrease in
manufacturing yields of such products could result in an increase in our per
unit costs for such products and force us to allocate available product supply
among customers, which could potentially adversely impact customer
relationships as well as revenues and gross margin. Our outside foundries may
not achieve or maintain acceptable manufacturing yields in the future.
Furthermore, we also face the risk of product recalls resulting from design or
manufacturing defects which are not discovered during the manufacturing and
testing process.
Our business strategy is based on increasing dependence on the WAN and LAN
communications markets.
An important part of our strategy is to continue our focus on the WAN market
and to leverage our technology and expertise to penetrate further the LAN
market for high-speed ICs. If we are unable to penetrate these markets
further, our short and long term business will suffer. In the short term, we
may experience reduced revenues. In the long term, our revenues could stop
growing and may decline. We anticipate that sales to our other traditional
markets will grow more slowly or not at all and, in some instances, as in the
case of military markets, may decrease over time.
The communications markets are characterized by:
. extreme price competition;
. rapid technological change;
. industry standards that are continually evolving; and
. in many cases, short product life cycles.
These markets frequently undergo transitions in which products rapidly
incorporate new features and performance standards on an industry-wide basis.
If our products are unable to support the new features or performance levels
required by OEMs in these markets, we would be likely to lose business from an
existing or potential customer and, moreover, would not have the opportunity
to compete for new design wins until the next product transition occurs. If we
fail to develop products with required features or performance standards for
the telecommunications or data communications markets, or if we experience a
delay as short as a few months in bringing a new product to market, or if our
telecommunications or data communications customers fail to achieve market
acceptance of their products, our revenues could be significantly reduced for
a substantial period.
16
<PAGE>
A significant portion of our revenues in recent periods has been, and is
expected to continue to be, derived from sales of products based on the
Synchronous Optical Network, or SONET, and Synchronous Digital Hierarchy, or
SDH, transmission standards and the Asynchronous Transfer Mode, or ATM,
transmission standard. If the communications market evolves to new standards,
we may not be able to successfully design and manufacture new products that
address the needs of our customers or gain substantial market acceptance.
Although we have developed products for the Gigabit Ethernet and Fibre Channel
communications standards, volume sales of these products are modest, and we
may not be successful in addressing the market opportunities for products
based on these standards.
Our business could be adversely affected if we do not adequately address the
risks associated with our recent acquisition of Cimaron Communications
Corporation.
In March 1999, we completed the acquisition of Cimaron Communications
Corporation. This transaction is accompanied by a number of risks, including:
. the difficulty of assimilating the operations and personnel of Cimaron;
. the potential disruption of AMCC's and Cimaron's ongoing business and
distraction of management;
. possible unanticipated expenses related to technology integration;
. the potential impairment of relationships with employees and customers
as a result of any integration of new management personnel; and
. potential unknown liabilities associated with acquired businesses.
We may not be successful in addressing these risks or any other problems
encountered in connection with the Cimaron acquisition.
In addition, the market price of our common stock could decline as a result
of the merger if:
. the integration of AMCC and Cimaron is unsuccessful;
. the combined company does not achieve the perceived benefits of the
merger as rapidly or to the extent anticipated by financial analysts;
. the effect of the merger on the combined company financial results is
not consistent with the expectations of financial analysts; or
. the Company is unsuccessful in the management of Cimaron employees who
are geographically distant from the headquarters, but engaged in
developing technology and products that are vital for future revenues.
We have accounted for the merger under the pooling-of-interests accounting
method and financial reporting rules. To qualify the merger as a pooling-of-
interests for accounting purposes, AMCC and Cimaron and their respective
affiliates must meet the criteria for pooling-of-interests accounting
established in opinions published by the Accounting Principles Board and
interpreted by the Financial Accounting Standards Board and the Commission.
These opinions are complex, and the interpretation of them is subject to
change. However, the availability of pooling-of-interests accounting treatment
for the merger depends in part, upon circumstances and events occurring after
the effective time. For example, there must be no significant changes in the
business of the combined company, including significant dispositions of
assets, for a period of two years following the effective time. The failure of
the merger to qualify for pooling-of-interests accounting treatment for
financial reporting purposes for any reason would materially and adversely
affect our reported earnings and likely, the price of our common stock.
17
<PAGE>
Our business strategy is also based on increasing dependence on application-
specific standard products.
We have under development a number of ASSPs for the communications markets,
from which we expect to derive an increasing portion our future revenues.
However, we have a limited operating history in selling ASSPs, particularly to
customers in the communications markets. In addition, our relationships with
certain customers in these markets have only been established recently. Our
future success in selling ASSPs, and in particular, selling ASSPs to customers
in the telecommunications and data communications markets, will depend in
large part on whether our ASSPs are developed on a timely basis and whether
such products achieve market acceptance among new and existing customers, and
on the timing of the commencement of volume production of products
incorporating our ASSPs, if at all. We have in the past encountered
difficulties in introducing new products in accordance with customers'
delivery schedules and initial expectations. We may encounter similar
difficulties in the future, and we may not be able to develop and introduce
ASSPs in a timely manner so as to meet customer demands.
We currently depend on the automated test equipment market, and that market
has recently experienced declines in demand.
We have historically derived significant revenues from product sales to
customers in the Automated Test Equipment, or ATE, market and currently
anticipate that we will continue to derive revenues from sales to customers in
this market in the near term. During the past year, customers in the ATE
market have experienced decreased demand due primarily to slower growth in the
semiconductor industry and economic turmoil in Asia. Accordingly, our net
revenues in the ATE market has declined for four consecutive quarters as of
March 31, 1999, and it is possible that our revenue from the ATE market may
decline further.
We depend on the high-speed computing market, but we believe that the average
selling prices of our IC products for the high-speed computing market will
decline in future periods and that our gross margin on sales of such products
may also decline in future periods.
The market for high-speed computing IC products is subject to extreme price
competition, and we may not be able to reduce the costs of manufacturing high-
speed computing IC products in response to declining average selling prices.
Even if we successfully utilize new processes or technologies to reduce the
manufacturing costs of our high-speed computing products in a timely manner,
our customers in the high-speed computing market may not purchase these
products.
Furthermore, we expect that certain competitors may seek to develop and
introduce products that integrate the functions performed by our high-speed
computing IC products on a single chip. In addition, one or more of our
customers may choose to utilize discrete components to perform the functions
served by our high-speed computing IC products or may use their own design and
fabrication facilities to create a similar product. In either case, the need
for high-speed computing customers to purchase our IC products could be
eliminated.
Our markets are subject to rapid technological change, so our success depends
heavily on our ability to develop and introduce new products.
The markets for our products are characterized by:
. rapidly changing technologies;
. evolving and competing industry standards;
. short product life cycles;
. changing customer needs;
. emerging competition;
. frequent new product introductions and enhancements;
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. increased integration with other functions; and
. rapid product obsolescence.
To develop new products for the communications markets, we must develop,
gain access to and use leading technologies in a cost-effective and timely
manner and continue to develop technical and design expertise. In addition, we
must have our products designed into our customers' future products and
maintain close working relationships with key customers in order to develop
new products, particularly ASSPs, that meet customers' changing needs. We also
must respond to changing industry standards, trends towards increased
integration and other technological changes on a timely and cost-effective
basis. Furthermore, if we fail to achieve design wins with key customers our
business will be significantly hurt because once a customer has designed a
supplier's product into its system, the customer typically is extremely
reluctant to change its supply source due to significant costs associated with
qualifying a new supplier.
Products for communications applications, as well as for high-speed
computing applications, are based on industry standards that are continually
evolving. Our ability to compete in the future will depend on our ability to
identify and ensure compliance with these evolving industry standards. The
emergence of new industry standards could render our products incompatible
with products developed by major systems manufacturers. As a result, we could
be required to invest significant time and effort and to incur significant
expense to redesign our products to ensure compliance with relevant standards.
If our products are not in compliance with prevailing industry standards for a
significant period of time, we could miss opportunities to achieve crucial
design wins. We may not be successful in developing or using new technologies
or in developing new products or product enhancements that achieve market
acceptance. Our pursuit of necessary technological advances may require
substantial time and expense.
The markets in which we compete are highly competitive and subject to rapid
technological change, price erosion and heightened international competition.
The communications, ATE and high-speed computing industries are intensely
competitive. We believe that the principal factors of competition in our
markets are price, product performance, product quality and time-to-market.
Our ability to compete successfully in our markets depends on a number of
factors, including:
. success in designing and subcontracting the manufacture of new products
that implement new technologies;
. product quality;
. reliability;
. price;
. the efficiency of production;
. design wins for our IC products;
. expansion of production of our products for particular systems
manufacturers;
. end-user acceptance of the systems manufacturers' products;
. market acceptance of competitors' products; and
. general economic conditions.
In addition, our competitors may offer enhancements to existing products or
offer new products based on new technologies, industry standards or customer
requirements that are available to customers on a more timely basis than
comparable products from us or that have the potential to replace or provide
lower-cost alternatives to our products. The introduction of enhancements or
new products by our competitors could render our existing and future products
obsolete or unmarketable. In addition, we expect that certain of our
competitors and other semiconductor companies may seek to develop and
introduce products that integrate the functions performed by our IC products
on a single chip, thus eliminating the need for our products.
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In the communications markets, we compete primarily against Giga, Hewlett-
Packard, Lucent, Maxim, Philips, Sony, Texas Instruments, Conexant, TriQuint
and Vitesse. Some of these companies use gallium arsenide ("GaAs") process
technologies for certain products. In certain circumstances, most notably with
respect to ASICs supplied to Nortel, our customers or potential customers have
internal IC manufacturing capabilities. In the ATE market, our products
compete primarily against GaAs based products offered by Vitesse and silicon
ECL and BiCMOS products offered principally by semiconductor manufacturers
such as Analog Devices, Lucent Technologies and Maxim. In the high-speed
computing market, we compete primarily against Chrontel, Cypress, ICS, PLX and
Tundra. Many of these companies and potential new competitors have
significantly greater financial, technical, manufacturing and marketing
resources than we do.
If we are not successful in expanding our manufacturing capacity, on time, we
may face serious capacity constraints.
We currently manufacture a majority of our IC products at our four-inch
wafer fabrication facility located in San Diego, California. We believe that
we will be able to satisfy our production needs from this fabrication facility
through fiscal 2001, although this date may vary depending on, among other
things, our rate of growth. However, if we cannot expand our capacity on a
timely basis, we could experience significant capacity constraints that could
render us unable to meet customer demand or force us to spend more to make
wafers to meet demand. We will be required to hire, train and manage
additional production personnel in order to increase production capacity as
scheduled.
The Company is exploring alternatives for the expansion of its manufacturing
capacity which would likely occur after fiscal year 2000, including expanding
its current 4" wafer fabrication facility, building a new wafer fabrication
facility, purchasing a wafer fabrication facility and entering into strategic
relationships to obtain additional capacity. Any of these alternatives could
require a significant investment by the Company including an investment in
excess of $80.0 million if the Company chose to or was required to build a new
wafer fabrication facility. There can be no assurance that any of the
alternatives for expansion of its manufacturing capacity will be available on
a timely basis, the Company will be able to manage its growth or effectively
integrate its proposed expansion into its current operations.
The cost of any investment the Company may have to make in expanding its
manufacturing capacity is expected to be funded through a combination of
available cash, cash equivalents and short-term investments, cash from
operations and additional debt, lease or equity financing. We may not be able
to obtain the additional financing necessary to fund the expansion of our
manufacturing capacity. Our existing wafer fabrication facility is, and the
potential new wafer fabrication facility may be, located in California and
these facilities may be subject to natural disasters such as earthquakes or
floods. In addition, the depreciation and other expenses that we will incur in
connection with the expansion of our manufacturing capacity may adversely
affect our gross margin in any future fiscal period.
Expanding our current 4" wafer fabrication facility, building a new wafer
fabrication facility or purchasing a wafer fabrication facility entails
significant risks, including:
. shortages of materials and skilled labor;
. unforeseen environmental or engineering problems;
. work stoppages;
. weather interferences; and
. unanticipated cost increases.
Any one of these risks could have a material adverse effect on the building,
equipping and production start-up of the new facility or the expansion of the
existing facility. In addition, unexpected changes or concessions required by
local, state or federal regulatory agencies with respect to necessary
licenses, land use permits, site
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approvals and building permits could involve significant additional costs and
delay the scheduled opening of the expansion or new facility and could reduce
our anticipated revenues. Also, the timing of commencement of operation of
expansion or new facility will depend upon the availability, timely delivery
and successful installation and testing of the necessary process equipment. As
a result of the foregoing and other factors, the expansion or new facility may
not be completed and in volume production within its current budget or within
the period currently scheduled. Furthermore, we may be unable to achieve
adequate manufacturing yields in expansion or new facility in a timely manner,
and our revenues may not increase commensurate with the anticipated increase
in manufacturing capacity associated with the expansion or new facility. In
addition, in the future, we may be required for competitive reasons to make
capital investments in the existing wafer fabrication facility or to
accelerate the timing of the construction of a new wafer fabrication facility
in order to expedite the manufacture of products based on more advanced
manufacturing processes.
The successful operation of a potential new 6" wafer fabrication facility,
if completed, as well as our overall production operations, will also be
subject to numerous risks. We have no prior experience with the operation of
the equipment or the processes involved in producing finished six-inch wafers,
which differ significantly from those involved in the production of four-inch
wafers. We will be required to hire, train and manage production personnel in
order to effectively operate the new facility. We do not have sufficient
excess production capacity at our existing San Diego facility to fully offset
any failure of the proposed new wafer fabrication facility to meet planned
production goals. We may transfer current San Diego manufacturing operations
into the proposed new wafer fabrication facility subsequent to its completion.
Should this transfer occur, we may experience delays in completing product
testing and documentation required by customers to qualify or requalify our
products from this facility. We will also have to effectively coordinate and
manage two manufacturing facilities to successfully meet overall production
goals. We have no experience in coordinating and managing production
facilities that are located at different sites or in the transfer of
manufacturing operations from one facility to another. As a result of these
and other factors, our failure to successfully operate the proposed new wafer
fabrication facility, to successfully coordinate and manage the two sites or
to transfer our manufacturing operations could adversely affect our overall
production.
The markets for our products are characterized by rapid changes in
manufacturing process technologies; therefore, to provide competitive
products to our target markets, we must develop or otherwise gain access to
improved process technologies.
Our future success will depend, in large part, upon our ability to continue
to improve existing process technologies, to develop new process technologies
including silicon germanium, or SiGe, processes, and to adapt our process
technologies to emerging industry standards. In the future, we may be required
to transition one or more of our products to process technologies with smaller
geometries, other materials or higher speeds in order to reduce costs and/or
improve product performance. We may not be able to improve our process
technologies and develop or otherwise gain access to new process technologies,
including, but not limited to SiGe process technologies, in a timely or
affordable manner. In addition, products based on these technologies may not
achieve market acceptance.
Our dependence on third-party manufacturing and supply relationships
increases the risk that we will not have an adequate supply of products to
meet demand or that our cost of goods will be higher than expected.
We rely on outside foundries for the manufacture of certain products,
including all of our products designed on CMOS processes and all products that
we anticipate will be designed on silicon germanium processes. We generally do
not have long-term wafer supply agreements with our outside foundries that
guarantee wafer or product quantities, prices or delivery lead times. Instead,
our products that are manufactured by outside foundries are manufactured on a
purchase order basis. We expect that, for the foreseeable future, certain
products will be manufactured by a single outside foundry. Because
establishing relationships with new outside foundries takes several months,
there is no readily available alternative source of supply for these products.
A manufacturing disruption experienced by one or more of our outside foundries
would impact the production of certain of our
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products for a substantial period of time. Furthermore, the transition to the
next generation of manufacturing technologies at one or more of our outside
foundries could be unsuccessful or delayed.
There are additional risks associated with our dependence upon third-party
manufacturers for certain products. These include, but are not limited to:
. reduced control over delivery schedules and quality;
. risks of inadequate manufacturing yields and excessive costs;
. the potential lack of adequate capacity during periods of excess demand;
. limited warranties on wafers or products supplied to us;
. potential increases in prices; and
. potential misappropriation of our intellectual property.
With respect to certain of our products, we depend upon external foundries
to produce wafers and, in some cases, finished products of acceptable quality,
to deliver those wafers and products to us on a timely basis and to allocate
to us a portion of their manufacturing capacity sufficient to meet our needs.
On occasion, we have experienced difficulties with our suppliers failing to
produce goods of sufficient quality or quantity or failing to meet delivery
deadlines. Our wafer and product requirements typically represent a very small
portion of the total production of these external foundries. As a result, we
are subject to the risk that a producer will cease production on an older or
lower-volume process that is used to produce our parts. Additionally, we
cannot be certain our external foundries will continue to devote resources to
the production of our products or continue to advance the process design
technologies on which the manufacturing of our products are based.
Certain of our products are assembled and packaged by third-party
subcontractors. We do not have long-term agreements with any of these
subcontractors. Assembly and packaging is conducted on a purchase order basis.
As a result, we cannot directly control product delivery schedules. This could
lead to product shortages or quality assurance problems that could increase
the costs of manufacturing, assembly or packaging of our products. In
addition, we may, from time to time, be required to accept price increases for
assembly or packaging services. Due to the amount of time normally required to
qualify assembly and packaging subcontractors, product shipments could be
delayed significantly if we are required to find alternative subcontractors.
In the future, we may contract with third parties for the testing of our
products. Any problems associated with the delivery, quality or cost of the
assembly, testing or packaging of our products could have a material adverse
effect on our business.
Due to an industry transition to six-inch and eight-inch wafer fabrication
facilities, there is a limited number of suppliers of the four-inch wafers
that we use to build products in our existing manufacturing facility, and we
rely on a single supplier for these wafers. Although we believe that we will
have sufficient access to four-inch wafers to support production in our
existing fabrication facility for the foreseeable future, we cannot be certain
that our current supplier will continue to supply us with four-inch wafers on
a long-term basis. Additionally, the availability of manufacturing equipment
needed for a four-inch process is limited, and certain new equipment required
for more advanced processes may not be available for a four-inch process.
Our customers are concentrated, so the loss of one or more key customers
could significantly reduce our revenues and profits.
Historically, a relatively small number of customers has accounted for a
significant portion of our revenues in any particular period. For example, our
five largest customers accounted for approximately 44%, 46%, and 59% of our
revenues in fiscal 1997, 1998, and 1999, respectively, and sales to Nortel
accounted for approximately 20%, 21%, and 20% of our revenues in each of these
periods. However, we have no long-term volume purchase commitments from any of
our major customers. We anticipate that sales of products to relatively few
customers will continue to account for a significant portion of our revenues.
A reduction, delay or cancellation of orders from one or more significant
customers or the loss of one or more key customers could
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significantly reduce our revenues and profits. We cannot assure you that our
current customers will continue to place orders with us, that orders by
existing customers will continue at current or historical levels or that we
will be able to obtain orders from new customers.
Our strategy is based on growth, and periods of rapid growth and expansion
have placed, and could continue to place, a significant strain on our limited
personnel and other resources
To manage expanded operations effectively, we will be required to continue
to improve our operational, financial and management systems and to
successfully hire, train, motivate and manage our employees. In addition, the
integration of past and future potential acquisitions, the expansion of our
manufacturing capacity will require significant management, technical and
administrative resources. We cannot be certain that we will be able to manage
our growth or effectively integrate our planned wafer fabrication facility
into our current operations.
Our future success depends in part on the continued service of our key design
engineering, sales, marketing and executive personnel and our ability to
identify, hire and retain additional personnel.
There is intense competition for qualified personnel in the semiconductor
industry, in particular design engineers, and we may not be able to continue
to attract and train engineers or other qualified personnel necessary for the
development of our business or to replace engineers or other qualified
personnel who may leave our employ in the future. Our anticipated growth is
expected to place increased demands on our resources and will likely require
the addition of new management personnel and the development of additional
expertise by existing management personnel. Although we have entered into an
"at-will" employment agreement with David M. Rickey, the President and Chief
Executive Officer, we have not entered into fixed term employment agreements
with any of our executive officers except for one-year employment agreements
with Ram Sudireddy, Vice President, Cimaron, and Gary Martin, Vice President
and Chief Technical Officer, Cimaron. In addition, we have not obtained key-
person life insurance on any of our executive officers or key employees. Loss
of the services of, or failure to recruit, key design engineers or other
technical and management personnel could be significantly detrimental to our
product and process development programs.
We anticipate that we will need to raise additional capital in the future,
and we cannot be certain that additional debt, lease or equity financing will
be available on commercially reasonable terms or at all.
We require substantial working capital to fund our business, particularly to
finance inventories and accounts receivable and for capital expenditures. We
believe that our available cash, cash equivalents and short-term investments
and cash generated from operations, will be sufficient to meet our capital
requirements through the next 12 months, although we could be required, or
could elect, to seek to raise additional financing during this period. Our
future capital requirements will depend on many factors, including:
. the costs associated with the expansion of manufacturing operations;
. the rate of revenue growth;
. the timing and extent of spending to support research and development
programs and expansion of sales and marketing;
. the timing of introductions of new products and enhancements to existing
products; and
. market acceptance of our products.
Additionally, we may elect to acquire other businesses, which would entail
the issuance of stock and the payment of cash. We may elect to raise
additional cash to finance such transactions. We may need to raise additional
debt or equity financing in the future, primarily for purposes of financing
the acquisition of property for our proposed new wafer fabrication facility,
the construction of the proposed new wafer fabrication facility and the
purchase of equipment for the proposed new wafer fabrication facility.
23
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We may not be able to protect our intellectual property adequately.
We rely in part on patents to protect our intellectual property. There can
be no assurance that our pending patent applications or any future
applications will be approved, or that any issued patents will provide us with
competitive advantages or will not be challenged by third parties, or that if
challenged, will be found to be valid or enforceable, or that the patents of
others will not have an adverse effect on our ability to do business.
Furthermore, others may independently develop similar products or processes,
duplicate our products or processes or design around any patents that may be
issued to us.
To protect our intellectual property, we also rely on the combination of
mask work protection under the Federal Semiconductor Chip Protection Act of
1984, trademarks, copyrights, trade secret laws, employee and third-party
nondisclosure agreements and licensing arrangements. Despite these efforts, we
cannot be certain that others will not independently develop substantially
equivalent intellectual property or otherwise gain access to our trade secrets
or intellectual property, or disclose such intellectual property or trade
secrets, or that we can meaningfully protect our intellectual property.
Our business, operating results and financial condition could be materially
adversely affected by litigation involving patents and proprietary rights.
As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property
rights. We have, in the past and may, in the future be notified that we may be
infringing the intellectual property rights of third parties. We have certain
indemnification obligations to customers with respect to the infringement of
third-party intellectual property rights by our products. We cannot be certain
that infringement claims by third parties or claims for indemnification by
customers or end users of our products resulting from infringement claims will
not be asserted in the future or that such assertions, if proven to be true,
will not materially adversely affect our business. On July 31, 1998, the
Lemelson Medical, Education & Research Foundation Limited Partnership filed a
lawsuit in the U.S. District Court for the District of Arizona against 26
companies, including us, engaged in the manufacture and/or sale of IC
products. The complaint alleges infringement by the defendants of certain U.S.
patents held by the Lemelson Partnership relating to certain semiconductor
manufacturing processes. On November 25, 1998, we were served a summons
pursuant to this lawsuit. The complaint seeks, among other things, injunctive
relief and unspecified treble damages. Previously, the Lemelson Partnership
has offered us a license under the Lemelson patents. We are monitoring this
matter and, although the ultimate outcome of this matter is not currently
determinable, we believe, based in part on the licensing terms previously
offered by the Lemelson Partnership, that the resolution of this matter will
not have a material adverse effect on our financial position or liquidity;
however, there can be no assurance that the ultimate resolution of this matter
will not have a material adverse effect on our results of operations for any
quarter. Furthermore, there can be no assurance that we would prevail in any
such litigation.
Any litigation relating to the intellectual property rights of third
parties, including the Lemelson Patents, whether or not determined in our
favor or settled by us, would at a minimum be costly and could divert the
efforts and attention of our management and technical personnel. In the event
of any adverse ruling in any such litigation, we could be required to pay
substantial damages, cease the manufacturing, use and sale of infringing
products, discontinue the use of certain processes or obtain a license under
the intellectual property rights of the third party claiming infringement. A
license might not be available on reasonable terms or at all.
Our operating results are subject to fluctuations because we rely
substantially on foreign customers.
International sales (including sales to Canada) accounted for 40%, 42% and
41% of revenues in fiscal 1997, fiscal 1998 and fiscal 1999, respectively.
International sales may increase in future periods and may account for an
increasing portion of our revenues. As a result, an increasing portion of our
revenues may be subject to certain risks, including:
. changes in regulatory requirements;
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. tariffs and other barriers;
. timing and availability of export licenses;
. political and economic instability;
. difficulties in accounts receivable collections;
. natural disasters;
. difficulties in staffing and managing foreign subsidiary and branch
operations;
. difficulties in managing distributors;
. difficulties in obtaining governmental approvals for communications and
other products;
. foreign currency exchange fluctuations;
. the burden of complying with a wide variety of complex foreign laws and
treaties; and
. potentially adverse tax consequences.
Although less than seven percent of our revenues were attributable to sales
in Asia during the year ended March 31, 1999, the recent economic instability
in certain Asian countries could adversely affect our business, financial
condition and operating results, particularly to the extent that this
instability impacts the sales of products manufactured by our customers. We
are also subject to the risks associated with the imposition of legislation
and regulations relating to the import or export of high technology products.
We cannot predict whether quotas, duties, taxes or other charges or
restrictions upon the importation or exportation of our products will be
implemented by the United States or other countries. Because sales of our
products have been denominated to date primarily in United States dollars,
increases in the value of the United States dollar could increase the price of
our products so that they become relatively more expensive to customers in the
local currency of a particular country, leading to a reduction in sales and
profitability in that country. Future international activity may result in
increased foreign currency denominated sales. Gains and losses on the
conversion to United States dollars of accounts receivable, accounts payable
and other monetary assets and liabilities arising from international
operations may contribute to fluctuations in our results of operations. Some
of our customer purchase orders and agreements are governed by foreign laws,
which may differ significantly from United States laws. Therefore, we may be
limited in our ability to enforce our rights under such agreements and to
collect damages, if awarded.
We could incur substantial fines or litigation costs associated with our
storage, use and disposal of hazardous materials.
We are subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our manufacturing process.
Any failure to comply with present or future regulations could result in the
imposition of fines, the suspension of production or a cessation of
operations. In addition, these regulations could restrict our ability to
expand our facilities at the present location or construct or operate our
planned wafer fabrication facility or could require us to acquire costly
equipment or incur other significant expenses to comply with environmental
regulations or clean up prior discharges. Since 1993 we have been named as a
potentially responsible party, or PRP, along with a large number of other
companies that used Omega Chemical Corporation in Whittier, California to
handle and dispose of certain hazardous waste material. We are a member of a
large group of PRPs that has agreed to fund certain remediation efforts at the
Omega site, which efforts are ongoing. To date, our payment obligations with
respect to these funding efforts have not been material, and we believe that
our future obligations to fund these efforts will not have a material adverse
effect on our business, financial condition or operating results. Although we
believe that we are currently in material compliance with applicable
environmental laws and regulations, we cannot assure you that we are or will
be in material compliance with these laws or regulations or that our future
obligations to fund any remediation efforts, including those at the Omega
site, will not have a material adverse effect on our business.
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Our ability to manufacture sufficient wafers to meet demand could be severely
hampered by a shortage of water.
We use significant amounts of water throughout our manufacturing process.
Previous droughts in California have resulted in restrictions being placed on
water use by manufacturers and residents in California. In the event of future
drought, reductions in water use may be mandated generally, and it is unclear
how such reductions will be allocated among California's different users. We
cannot be certain that near term reductions in water allocations to
manufacturers will not occur.
Our stock price is volatile.
The market price of our common stock has fluctuated significantly to date.
In addition, the market price of the common stock could be subject to
significant fluctuations due to general market conditions and in response to
quarter-to-quarter variations in:
. our anticipated or actual operating results;
. announcements or introductions of new products;
. technological innovations or setbacks by us or our competitors;
. conditions in the semiconductor, telecommunications, data
communications, ATE, high-speed computing or military markets;
. the commencement of litigation;
. changes in estimates of the Company's performance by securities
analysts;
. announcements of merger or acquisition transactions; and
. other events or factors.
In addition, the stock market in recent years has experienced extreme price
and volume fluctuations that have affected the market prices of many high
technology companies, particularly semiconductor companies, and that have
often been unrelated or disproportionate to the operating performance of
companies. These fluctuations, as well as general economic and market
conditions, may affect adversely the market price of our common stock.
If we are not adequately prepared for the transition to Year 2000, our
business, operating results and financial condition could suffer.
As a semiconductor manufacturer with our own wafer fabrication facility, we
are dependent on computer systems and manufacturing equipment with embedded
hardware or software to conduct our business. We have developed and are
currently executing a plan designed to make our computer systems,
applications, computer and manufacturing equipment and facilities Year 2000
ready. The plan covers five stages including:
(i) inventory;
(ii) assessment;
(iii) remediation;
(iv) testing; and
(v) contingency planning.
The inventory and assessment stages were completed in March 1999. The
remediation, testing and contingency planning stages are targeted to be
completed in October 1999. We will primarily utilize internal resources to
reprogram, or replace where necessary, and test the software for Year 2000
modifications.
We have initiated communications with our critical external suppliers to
determine the extent to which we may be vulnerable to their failure to resolve
their own Year 2000 issues. Where practicable, we will assess and
26
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attempt to mitigate our risks with respect to the failure of these entities to
be Year 2000 ready. The effect, if any, on our results of operations from the
failure of such parties to be Year 2000 ready, is not reasonably estimable.
As of March 31, 1999, we have incurred and expensed approximately $200,000
related to the Year 2000 project and expect to incur an additional $700,000 on
completing the Year 2000 project. Approximately one-half the costs associated
with the Year 2000 project will be internal resources that have been
reallocated from other projects, with the balance of costs reflecting
incremental spending for equipment and software upgrades. The costs of the
Year 2000 Project will be funded through operating cash flows, with the cost
of internal resources expensed as incurred and the cost of equipment and
software upgrades capitalized or expensed in accordance with our policy on
property and equipment.
The costs of the project and the date on which we plan to complete the Year
2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates
will be achieved, and actual results could differ materially from those plans.
Among the factors that might cause such material differences are:
. the availability and cost of personnel trained in this area;
. the ability to locate and correct all relevant computer codes; and
. the ability to identify and correct equipment with embedded hardware or
software and similar uncertainties.
The anti-takeover provisions of our certificate of incorporation and of the
Delaware General Corporation Law may delay, defer or prevent a change of
control.
Our board of directors has the authority to issue up to 2,000,000 shares of
preferred stock and to determine the price, rights, preferences and privileges
and restrictions, including voting rights, of those shares without any further
vote or action by our stockholders. The rights of the holders of common stock
will be subject to, and may be adversely affected by, the rights of the
holders of any shares of preferred stock that may be issued in the future. The
issuance of preferred stock may delay, defer or prevent a change in control of
AMCC, as the terms of the preferred stock that might be issued could
potentially prohibit our consummation of any merger, reorganization, sale of
substantially all of our assets, liquidation or other extraordinary corporate
transaction without the approval of the holders of the outstanding shares of
preferred stock. In addition, the issuance of preferred stock could have a
dilutive effect on stockholders of AMCC. Section 203 of the Delaware General
Corporation Law, to which we are subject, restricts certain business
combinations with any "interested stockholder" as defined by this statute. The
statute may also delay, alter or prevent a change of control.
Item 2. Properties.
The Company's executive offices, marketing and engineering functions are
located in San Diego, California in a 90,000 square foot building that is
leased by the Company under a lease that expires in 2007. In addition, the
Company occupies a 21,000 square foot building in San Diego, which houses the
Company's manufacturing facilities under a lease that expires in 2003, but
provides the Company with an option to extend the lease for one additional
five year period.
In July 1998 the Company acquired the right to purchase, in the form of a
ground lease, a parcel of land as a site for a potential new wafer fabrication
facility. This parcel of land is located approximately one quarter mile from
the Company's headquarters in San Diego, California. The Company has made
payments of $1.0 million related to this transaction. In December 1998, the
Company exercised this right to acquire the land and made additional payments
of approximately $3.7 million in May 1999 to acquire the land.
The Company leases additional space for sales offices and design centers in
Burlington and Andover, Massachusetts; Raleigh, North Carolina; Plano, Texas;
San Jose, California; Edina, Minnesota; Munich, Germany and Milan, Italy.
27
<PAGE>
Item 3. Legal Proceedings.
From time to time, the Company may be involved in litigation relating to
claims arising out of its operations on the normal course of business. As of
the date of this Annual Report on Form 10-K, the Company is not engaged in any
legal proceedings that are expected, individually or in the aggregate, to have
a material adverse effect on the Company's business, financial condition or
operating results.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year ended March 31, 1999.
28
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
(a) The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "AMCC" since the Company's initial public offering on
November 25, 1997. The following table sets forth the high and low sales
prices of the Company's Common Stock as reported by the Nasdaq National Market
for the periods indicated.
<TABLE>
<CAPTION>
Fiscal year ended March 31, 1998 High Low
-------------------------------- ------ ------
<S> <C> <C>
Third Quarter............................................... $13.50 $ 8.00
Fourth Quarter.............................................. $24.38 $12.25
<CAPTION>
Fiscal year ended March 31, 1999 High Low
-------------------------------- ------ ------
<S> <C> <C>
First Quarter............................................... $30.00 $17.63
Second Quarter.............................................. $30.00 $12.88
Third Quarter............................................... $40.63 $12.25
Fourth Quarter.............................................. $46.75 $32.94
</TABLE>
At March 31, 1999, there were approximately 394 holders of record of the
Company's Common Stock.
The Company has not paid cash dividends on its Common Stock and presently
intends to continue this policy.
(b) Recent Sales of Unregistered Securities
(1) From December 31, 1997 until March 2, 1998, 26,997 shares of Common
Stock were issued upon exercise of options with an average exercise price
of $.45 per share, all of which were paid in cash, and 56,645 shares of
Common Stock were issuable upon exercise of outstanding options with an
average exercise price of $.46 per share pursuant to grants to certain
employees and Directors of the Company under the Company's 1982 Incentive
Stock Option Plan (the "1982 Plan"). On March 2, 1998, the Company filed a
Registration Statement on Form S-8 to cover the shares of Common Stock
issuable upon exercise of options under the 1992 Plan.
(2) From December 31, 1997 until March 2, 1998, 120,719 shares of Common
Stock were issued upon exercise of options with an average exercise price
of $.53 per share, all of which were paid in cash, and 1,978,922 shares of
Common Stock were issuable upon exercise of outstanding options with an
average exercise price of $1.87 per share pursuant to grants to certain
employees and Directors of the Company under the Company's 1992 Incentive
Stock Option Plan (the "1992 Plan"). On March 2, 1998, the Company filed a
Registration Statement on Form S-8 to cover the shares of Common Stock
issuable upon exercise of options under the 1982 Plan.
(3) On March 17, 1999, AMCC acquired all the outstanding stock of Cimaron
Communications, pursuant to a merger of AMCC and Cimaron Communications
Corporation ("Cimaron"). Under the terms of the related merger agreement,
all of the outstanding stock and stock equivalents of Cimaron were
exchanged for approximately three million shares of the Company's Common
Stock. At the time of the transaction, the shares of the Company's Common
Stock issued to the former Cimaron stockholders were not registered under
the Securities Act because the transaction involved a non-public offering
exempt from registration under Section 4(2) of the Securities Act and
Regulation D promulgated thereunder. On April 13, 1999, the Company filed a
registration statement on Form S-3 to cover the shares of Common Stock
issued pursuant to the merger agreement.
There were no underwritten offerings in connection with any of the
transactions set forth in Items 5(b)(1) through 5(b)(3) above. The issuances
described in Items 5(b)(1) and 5(b)(2) above were deemed to be exempt from
registration under the Securities Act in reliance upon Rule 701 promulgated
thereunder in that they were
29
<PAGE>
offered and sold pursuant to a written compensation plan. In addition, such
issuances were deemed to be exempt from registration under the Securities Act
under Section 4(2) of the Securities Act as transactions not involving any
public offering. The recipients of securities in each of the transactions
described in Items 5(b)(1) and 5(b)(2) above represented their intentions to
acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof, and appropriate legends were
affixed to the securities issued in such transactions. All recipients had
adequate access, through their relationships with the Company, to information
about the Company.
(c) Use of Proceeds
(1) Initial Public Offering
The Company filed a Registration Statement on Form S-1 (the "Registration
Statement"), File No. 333-37609, which was declared effective by the
Securities and Exchange Commission on November 24, 1997, relating to the
initial public offering (IPO) of the Company's Common Stock. The managing
underwriters of the offering were BankAmerica Robertson Stephens, NationsBanc
Montgomery Securities LLC, and Cowen & Company. The Registration Statement
registered an aggregate 5,553,000 shares of Common Stock and the price to the
public was $8.00 per share. Of such shares, 3,538,448 were sold by The Company
(which includes the underwriter's over-allotment of 832,950 shares) and
2,847,502 were sold by certain shareholders of the Company.
The Company incurred $3,196,718 of total expenses in connection with the IPO
consisting of $1,981,531 in underwriting discounts and commissions and
$1,215,187 in other expenses. All such expenses were direct or indirect
payments to others. The net offering proceeds to the Company after deducting
the $3,196,718 of total expenses were $25,110,866.
The Company has invested the net offering proceeds of $25,110,866 in short-
term investments consisting of United States Treasury Notes, obligations of
United States government agencies and corporate bonds with maturities ranging
from April 1, 1999 to March 31, 2001. The use of proceeds described herein
does not represent a material change in the use of proceeds described in the
prospectus of the Registration Statement.
(2) Secondary Public Offering
The Company filed a Registration Statement on Form S-1, File No. 333-46071
(the "Secondary Registration Statement"), which was declared effective by the
Securities and Exchange Commission on March 12, 1998, relating to the
secondary public offering of the Company's Common Stock. The managing
underwriters for the Offering were BancAmerica Robertson Stephens, NationsBanc
Montgomery Securities LLC, and Cowen & Company. The Registration Statement
registered an aggregate of 3,530,000 shares of the Common Stock and the price
to the public was $19.375 per share. Of such shares, 1,500,000 shares were
sold by the Company, and 2,559,500 shares were sold by certain stockholders of
the Company (which includes the underwriter's overallotment of 529,500
shares).
The expenses incurred by the Company in connection with the Offering were
approximately $2,181,000, of which $1,515,000 constituted underwriting
discounts and commissions and approximately $666,000 constituted other
expenses including registration and filing fees, printing, accounting and
legal expenses. No direct or indirect payments were made to any directors,
officers, owners of ten percent or more of any class of the Company's equity
securities, or other affiliates of the Company other than for reimbursement of
expense incurred on the road show. Net offering proceeds to the Company after
deducting these expenses were approximately, $26,882,000.
The Company has invested the net offering proceeds in short-term investments
consisting of United States Treasury Notes, obligations of United States
government agencies and corporate bonds with maturities ranging from April 1,
1999 to March 31, 2001. The use of proceeds described herein does not
represent a material change in the use of proceeds described in the prospectus
of the Secondary Registration Statement.
30
<PAGE>
Item 6. Selected Financial Data.
(in thousands, except per share data)
<TABLE>
<CAPTION>
March 31,
--------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Net revenues...................... $46,950 $50,264 $57,468 $ 76,618 $105,000
Cost of revenues.................. 27,513 34,169 30,057 34,321 37,937
------- ------- ------- -------- --------
Gross profit...................... 19,437 16,095 27,411 42,297 67,063
Operating Expenses:
Research and development........ 10,108 8,283 7,870 13,268 22,472
Selling, general and
administrative................. 10,112 11,232 12,537 14,278 18,325
Merger-related costs............ -- -- -- -- 2,350
------- ------- ------- -------- --------
Total operating expenses...... 20,220 19,515 20,407 27,546 43,147
------- ------- ------- -------- --------
Operating income (loss)........... (783) (3,420) 7,004 14,751 23,916
Interest income (expense), net.... 358) (242) (29) 871 3,450
------- ------- ------- -------- --------
Income (loss) before income taxes. (1,141) (3,662) 6,975 15,622 27,366
Provision (benefit) for income
taxes............................ (70) 32 659 406 10,233
------- ------- ------- -------- --------
Net income (loss)................. (1,071) $(3,694) $ 6,316 $ 15,216 $ 17,133
======= ======= ======= ======== ========
Basic earnings (loss) per share:
Earnings (loss) per share....... $ (0.25) $ (0.81) $ 1.26 $ 1.44 $ 0.70
======= ======= ======= ======== ========
Shares used in calculating basic
earnings (loss) per share...... 4,365 4,566 5,006 10,594 24,514
======= ======= ======= ======== ========
Diluted earnings (loss) per share:
Earnings (loss) per share....... $ (0.06) $ (0.21) $ 0.35 $ 0.75 $ 0.62
======= ======= ======= ======== ========
Shares used in calculating
diluted earnings (loss) per
share.......................... 17,194 17,394 17,907 20,294 27,430
======= ======= ======= ======== ========
Consolidated Balance Sheet Data:
Working capital................... $16,753 $13,977 $19,364 $ 77,417 $103,617
Total assets...................... 40,180 37,836 41,814 112,834 150,655
Long-term debt and capital lease
obligations...................... 10,458 8,091 5,854 6,711 10,495
Total stockholders' equity........ 24,805 21,512 27,743 91,634 121,694
</TABLE>
31
<PAGE>
Quarterly Comparisons
The following table sets forth consolidated statements of operations for
each of the Company's last eight quarters. This quarterly information is
unaudited and has been prepared on the same basis as the annual consolidated
financial statements. In management's opinion, this quarterly information
reflects all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the periods
presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
QUARTERLY FINANCIAL INFORMATION FOR FISCAL 1999 AND FISCAL 1998
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1999*
------------------------------- -------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $17,053 $18,155 $19,666 $21,744 $23,814 $25,472 $26,972 $28,742
Cost of revenues........ 8,156 8,378 8,836 8,951 9,399 9,347 9,669 9,522
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 8,897 9,777 10,830 12,793 14,415 16,125 17,303 19,220
Operating expenses:
Research and
development.......... 2,525 3,477 3,337 3,929 4,893 5,454 5,847 6,278
Selling, general and
administrative....... 3,339 3,391 3,530 4,018 4,164 4,296 4,573 5,292
Merger-related costs.. -- -- -- -- -- -- -- 2,350
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses............ 5,864 6,868 6,867 7,947 9,057 9,750 10,420 13,920
------- ------- ------- ------- ------- ------- ------- -------
Operating income........ 3,033 2,909 3,963 4,846 5,358 6,375 6,883 5,300
Interest income, net.... 66 85 143 577 853 877 883 837
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes.................. 3,099 2,994 4,106 5,423 6,211 7,252 7,766 6,137
Provision for income
taxes.................. 81 78 103 144 2,227 2,584 2,646 2,776
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $ 3,018 $ 2,916 $ 4,003 $ 5,279 $ 3,984 $ 4,668 $ 5,120 $ 3,361
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share
(diluted).............. $ 0.16 $ 0.16 $ 0.20 $ 0.23 $ 0.15 $ 0.17 $ 0.19 $ 0.12
======= ======= ======= ======= ======= ======= ======= =======
Shares used in
calculating diluted
earnings per share..... 18,941 18,594 20,383 23,257 26,665 27,296 27,619 28,140
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
- --------
* The quarterly information for the fiscal year ended March 31, 1999 has been
restated from the information presented in the Company's Quarterly 10-Q
filings for the quarters ended June 30, 1998, September 30, 1998 and
December 31, 1998 to reflect the acquisition of Cimaron Communications
Corporation completed on March 17, 1999 as if the companies had been
combined for the full year.
32
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in the Company's
Annual Report on Form 10-K. This discussion contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to,
those set forth under "Factors That May Affect Future Results" in the
Company's Form 10-K. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis only as
of the date hereof. The Company assumes no obligation to update these forward-
looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements.
Overview
AMCC designs, develops, manufactures and markets high-performance, high-
bandwidth silicon solutions for the world's communications infrastructure. The
Company tailors solutions to customer and market requirements by using a
combination of high-frequency analog, mixed-signal and digital design
expertise coupled with system-level knowledge and multiple silicon process
technologies. AMCC believes that its internal bipolar and BiCMOS processes,
complemented by advanced CMOS and silicon germanium processes from external
foundries, enable the Company to offer high-performance, high- speed solutions
optimized for specific applications and customer requirements. The Company
further believes that its products provide significant cost, power,
performance and reliability advantages for system OEMs in addition to
accelerating time-to-market. The Company also leverages its technology to
provide products for the automated test equipment (ATE), high-speed computing
and military markets.
On March 17, 1999, the Company acquired Cimaron Communications Corporation
("Cimaron") in a business combination accounted for as a pooling-of-interests.
Cimaron, which also designs and develops high-bandwidth silicon solutions for
communications equipment manufacturers, became a wholly owned subsidiary of
the Company through the exchange of approximately three million shares of the
Company's Common Stock for all the outstanding stock and options of Cimaron.
The financial statements for fiscal 1999 have been prepared as if the
companies had been combined for the full year and the prior year financial
statements did not require restatement as a result of this business
combination.
33
<PAGE>
Results of Operations
The following table sets forth certain selected consolidated statements of
Income data in dollars and as a percentage of revenues for the periods
indicated:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------------------------
1997 1998 1999
-------------- ------------- --------------
(in thousands, except per share data)
$ % $ % $ %
------- ----- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Net revenues.................... $57,468 100.0% $76,618 100.0% $105,000 100.0%
Cost of revenues................ 30,057 52.3 34,321 44.8 37,937 36.1
------- ----- ------- ----- -------- -----
Gross profit.................... 27,411 47.7 42,297 55.2 67,063 63.9
Operating expenses:
Research and development...... 7,870 13.7 13,268 17.3 22,472 21.4
Selling, general and
administrative............... 12,537 21.8 14,278 18.6 18,325 17.5
Merger-related costs.......... -- -- -- -- 2,350 2.2
------- ----- ------- ----- -------- -----
Total operating expenses.... 20,407 35.5 27,546 35.9 43,147 41.1
------- ----- ------- ----- -------- -----
Operating income................ 7,004 12.2 14,751 19.3 23,916 22.8
Net interest income (expense)... (29) (0.1) 871 1.1 3,450 3.3
------- ----- ------- ----- -------- -----
Income before provision for
income taxes................... 6,975 12.1 15,622 20.4 27,366 26.1
Provision for income taxes...... 659 1.1 406 0.5 10,233 9.8
------- ----- ------- ----- -------- -----
Net income...................... $ 6,316 11.0% $15,216 19.9% $ 17,133 16.3%
======= ===== ======= ===== ======== =====
Diluted earnings per share:
Earnings per share............ $ 0.35 $ 0.75 $ 0.62
======= ======= ========
Shares used in calculating
diluted earnings per share... 17,907 20,294 27,430
======= ======= ========
</TABLE>
Comparison of the Year Ended March 31, 1999 to the Year Ended March 31, 1998
Net Revenues. Net revenues for the year ended March 31, 1999 were
approximately $105.0 million, representing an increase of 37% over net
revenues of approximately $76.6 million for the year ended March 31, 1998.
Revenues from sales of communications products increased 56% in the year ended
March 31, 1999 from $36.6 million or 48% of net revenues for the year ended
March 31, 1998 to $57.3 million or 55% of net revenues for the year ended
March 31, 1999, reflecting unit growth in shipments of existing products, as
well as the introduction of new products for these markets. Revenues from
sales of products to other markets, consisting of the ATE, high-speed
computing and military markets, decreased from 52% of net revenues for the
year ended March 31, 1998, to 45% of net revenues for the year ended March 31,
1999, although revenues from sales to these other markets increased in
absolute dollars. The increase in absolute dollars in revenues attributed to
these other markets was primarily due to $10.0 million of shipments in the
year ended March 31, 1999, relating to the partial fulfillment of an end-of-
life order from Raytheon Systems Co. Total sales to Raytheon Systems Co.
accounted for 16% of net revenues in the year ended March 31, 1999 and were
less than 10% of net revenues in the year ended March 31, 1998. Sales to
Nortel accounted for 20% and 21% of net revenues for the years ended March 31,
1999 and 1998, respectively. In the years ended March 31, 1999 and 1998,
Insight Electronics, Inc., the Company's domestic distributor, accounted for
13% and 11% of net revenues, respectively. Sales outside of North America
accounted for 24% and 23% of net revenues for the years ended March 31, 1999
and 1998, respectively. Although less than seven percent of the Company's
revenues were attributable to sales in Asia for the year ended March 31, 1999,
the recent economic instability in certain Asian countries could adversely
affect the Company's business, financial condition and operating results,
particularly to the extent that this instability impacts the sales of products
manufactured by the Company's customers.
34
<PAGE>
Gross Margin. Gross margin was 63.9% for the year ended March 31, 1999, as
compared to 55.2% for the year ended March 31, 1998. The increase in gross
margin resulted from increased utilization of the Company's wafer fabrication
facility. The Company's gross margin is primarily impacted by factory
utilization, manufacturing yields, product mix and the Company's timing of
depreciation expense and other costs associated with expanding its
manufacturing capacity. Although AMCC does not expect its gross margin to
continue to increase at the rate reflected above, its strategy is to maximize
factory utilization whenever possible, maintain or improve its manufacturing
yields, and focus on the development and sales of high-performance products
that can have higher gross margins. There can be no assurance, however, that
the Company will be successful in achieving these objectives. In addition,
these factors can vary significantly from quarter to quarter, which would
likely result in fluctuations in quarterly gross margin and net income.
Research and Development. Research and development ("R&D") expenses
increased 69% to approximately $22.5 million, or 21.4% of revenues, for the
year ended March 31, 1999, from approximately $13.3 million, or 17.3% of net
revenues, for the year ended March 31, 1998. The substantial increase in R&D
expenses was due to the Company's acquisition of Cimaron, which incurred
approximately $2.5 million of R&D expenses during its fiscal year, and
accelerated new product and process development efforts, including a
$3.2 million increase in compensation costs, and a $3.9 million increase in
prototyping and outside contractor costs. The Company believes that a
continued commitment to R&D is vital to maintain a leadership position with
innovative communications products. Accordingly, the Company expects R&D
expenses to increase in absolute dollars and possibly as a percentage of net
revenues in the future. Currently, R&D expenses are focused on the development
of products and processes for the communications markets, and the Company
expects to continue this focus.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses were approximately $18.3 million, or 17.5% of revenues, for
the year ended March 31, 1999, as compared to approximately $14.3 million, or
18.6% of net revenues, for the year ended March 31, 1998. The increase in SG&A
expenses for the year ended March 31, 1999 was primarily due to a $2.1 million
increase in personnel costs, a $500,000 increase in commissions earned by
third-party sales representatives, a $500,000 increase in product promotion
expenses and, a $400,000 increase in legal and accounting costs. A portion of
such increases was due to the Company's acquisition of Cimaron. The decrease
in SG&A expenses as a percentage of net revenues for the year ended March 31,
1999 was a result of net revenues increasing more rapidly than SG&A expenses.
The Company expects SG&A expenses to increase in the future due principally to
additional staffing in the Company's sales and marketing departments, as well
as increased spending on information technology, and increased product
promotion expenses.
Merger-related costs. In March 1999, the Company acquired all of the
outstanding common stock and common stock equivalents of Cimaron
Communications Corporation ("Cimaron") in exchange for approximately three
million shares of the Company's common stock. The acquisition has been
accounted for using the pooling-of-interests method of accounting. Costs
associated with this merger of $2.3 million or $0.08 per diluted share were
expensed in the quarter ended March 31, 1999.
Operating Margin. The Company's operating margin increased to 22.8% of net
revenues for the year ended March 31, 1999, compared to 19.3% for the year
ended March 31, 1998, principally as a result of the increase in gross margin
and decrease in SG&A expenses as a percentage of net revenues, partially
offset by the increase in R&D expenses as a percentage of net revenues.
Net Interest Income. Net interest income increased to $3.5 million for the
year ended March 31, 1999 compared to $871,000 for the year ended March 31,
1998. This increase was due principally to higher interest income from larger
cash and short-term investment balances generated from operations and the
proceeds from the Company's public offerings completed during the second half
of the year ended March 31, 1998.
Income Taxes. The Company's annual effective tax rate for the year ended
March 31, 1999, which approximated statutory rates, was 37.4%, compared to an
effective tax rate of 2.6% for the year ended March 31,
35
<PAGE>
1998. The effective tax rate for the year ended March 31, 1998 was decreased
from statutory rates due to the reduction of a valuation allowance recorded
against deferred tax assets for net operating loss carryforwards and credits.
The Company expects the tax rate for fiscal 2000 to approximate statutory
rates.
Diluted Earnings per share. Diluted earnings per share decreased 17% to
$0.62 in the year ended March 31, 1999, compared to $0.75 for the year ended
March 31, 1998. The decrease reflects the merger related costs of 2.3 million,
the increase in the effective tax rate, and the greater number of shares
outstanding due in part to the Cimaron acquisition, offset in part by the
increase in operating income in fiscal 1999.
Deferred Compensation. In connection with the grant of certain stock options
to employees during the six months ended September 30, 1997, the Company
recorded aggregate deferred compensation of $599,000, representing the
difference between the deemed fair value of the Common Stock at the date of
grant for accounting purposes and the option exercise price of such options.
Additionally, during the year ended March 31, 1999, the Company recorded
deferred compensation of $2.5 million related to restricted stock and options
granted to founders and employees of Cimaron. Such amounts are presented as a
reduction of stockholders' equity and amortized ratably over the vesting
period of the applicable options. Amortization of deferred compensation
recorded for the years ended March 31, 1998 and 1999 were $127,000 and
$860,000, respectively. The Company currently expects to record amortization
of deferred compensation with respect to these option grants of approximately
$658,000, $543,000, $414,000, $330,000 and $178,000 during the fiscal years
ended March 31, 2000, 2001, 2002, 2003 and 2004, respectively.
Backlog. The Company's sales are made primarily pursuant to standard
purchase orders for delivery of products. Quantities of the Company's products
to be delivered and delivery schedules are frequently revised to reflect
changes in customer needs, and customer orders can be canceled or rescheduled
without significant penalty to the customer. For these reasons, the Company's
backlog as of any particular date is not representative of actual sales for
any succeeding period, and the Company therefore believes that backlog is not
a good indicator of future revenue. The Company's backlog for products
requested to be shipped and non-recurring engineering services to be completed
in the next six months was $38.2 million on March 31, 1999, compared to
$30.1 million on March 31, 1998. Included in backlog at March 31, 1999 is the
$9.3 million balance of an order received from Raytheon Systems Co. related to
an end-of-life buy for integrated circuits used in its high speed radar
systems.
Year 2000 Compliance. As a semiconductor manufacturer with its own wafer
fabrication facility, the Company is dependent on computer systems and
manufacturing equipment with embedded hardware or software to conduct its
business. The Company has developed and is currently executing a plan designed
to make its computer systems, applications, computer and manufacturing
equipment and facilities Year 2000 ready. The plan covers five stages
including (i) inventory, (ii) assessment, (iii) remediation, (iv) testing, and
(v) contingency planning. The Company has completed the inventory and
assessment stages. The remediation, testing and contingency planning stages
are targeted to be completed by October 1999. The Company will primarily
utilize internal resources to reprogram, or replace where necessary, and test
the software for Year 2000 modifications.
The Company is in the process of communicating with its critical external
suppliers to determine the extent to which the Company may be vulnerable to
such parties' failure to resolve their own Year 2000 issues. Where
practicable, the Company will assess and attempt to mitigate its risks with
respect to the failure of these entities to be Year 2000 ready. The effect, if
any, on the Company's results of operations from the failure of such parties
to be Year 2000 ready cannot reasonably be estimated.
The Company has developed contingency plans for certain critical
applications and is working on such plans for others. These contingency plans
involve, among other actions, manual workarounds, and adjusting staffing
strategies.
The Company has incurred and expensed approximately $200,000 related to the
Year 2000 project and expects to incur an additional $700,000 on completing
the Year 2000 project. Approximately one-half of the costs associated with the
Year 2000 project are expected to relate to internal resources that have been
reallocated
36
<PAGE>
from other projects, with the balance of costs reflecting incremental spending
for equipment and software upgrades. The costs of the Year 2000 project are
expected to be funded through operating cash flows, with the cost of internal
resources expensed as incurred and the cost of equipment and software upgrades
capitalized or expensed in accordance with the Company's policy on property
and equipment.
The costs of the project and the date on which the Company plans to complete
the Year 2000 modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes and the ability
to identify and correct equipment with embedded hardware or software and
similar uncertainties.
Comparison of the Year Ended March 31, 1998 to the Year Ended March 31, 1997
Net Revenues. Net revenues for the year ended March 31, 1998 were
approximately $76.6 million, representing an increase of 33% over net revenues
of approximately $57.5 million for the year ended March 31, 1997. Revenues
from sales of communications products increased from 44% of net revenues for
the year ended March 31, 1997 to 48% of net revenues for the year ended March
31, 1998, reflecting unit growth in shipments of existing products, as well as
the introduction of new products for these markets. Revenues from sales of
products to other markets, consisting of the ATE, high-speed computing and
military markets, decreased from 56% of net revenues for the year ended March
31, 1997, to 52% of net revenues for the year ended March 31, 1998, although
revenues from sales to these other markets increased in absolute dollars. The
increase in absolute dollars in revenues attributed to these other markets was
primarily due to an increase in shipments of PCI bus products for high-speed
computing applications and to increased shipments of products to the ATE
market. Sales to Nortel accounted for 21% and 20% of net revenues for the
years ended March 31, 1998 and 1997, respectively. In the year ended March
31,1998, one other customer, Insight Electronics, Inc., the Company's domestic
distributor, accounted for 11% of net revenues. Sales outside of North America
accounted for 23% and 21% of net revenues for the years ended March 31, 1998
and 1997, respectively.
Gross Margin. Gross margin was 55.2% for the year ended March 31, 1998, as
compared to 47.7% for the year ended March 31, 1997. The significant increase
in gross margin primarily resulted from increased utilization of the Company's
wafer fabrication facility, as well as a $1.1 million improvement in
manufacturing yields.
Research and Development. Research and development ("R&D") expenses
increased 69% to approximately $13.3 million, or 17.3% of net revenues, for
the year ended March 31, 1998, from approximately $7.9 million, or 13.7% of
net revenues, for the year ended March 31, 1997. The substantial increase in
R&D expenses was due to accelerated new product and process development
efforts including a $3.4 million increase in compensation costs, and a $1.6
million increase in prototyping and outside contractor costs.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses were approximately $14.3 million, or 18.6% of net revenues,
for the year ended March 31, 1998, as compared to approximately $12.5 million,
or 21.8% of net revenues, for the year ended March 31, 1997. The increase in
SG&A expenses for the year ended March 31, 1998 was primarily due to a
$700,000 increase in compensation costs and a $600,000 increase in commissions
earned by third-party sales representatives. The decrease in SG&A expenses as
a percentage of net revenues for the year ended March 31, 1998 was a result of
net revenues increasing more rapidly than SG&A expenses.
Operating Margin. The Company's operating margin increased to 19.3% of net
revenues for the year ended March 31, 1998, compared to 12.2% for the year
ended March 31, 1997, principally as a result of the increase in gross margin
and decrease in SG&A expenses as a percentage of net revenues, partially
offset by the increase in R&D expenses as a percentage of net revenues.
37
<PAGE>
Net Interest Income. Net interest income increased to $871,000 for the year
ended March 31, 1998 from a net interest expense of $29,000 for the year ended
March 31, 1997. This increase was due principally to a $600,000 increase in
interest income resulting from larger cash and short-term investment balances
generated by the proceeds from the Company's public offerings completed during
the year ended March 31, 1998, as well as a $300,000 decrease in interest
expense associated with outstanding capital lease and debt obligations.
Income Taxes. The Company's annual effective tax rate for the year ended
March 31, 1998 was 2.6%. This was due primarily to the reduction of a
valuation allowance recorded against deferred tax assets for net operating
loss carryforwards and credits in the prior two years. This reduction results
from sufficient levels of income for fiscal 1998, which made the realization
of these deferred tax assets more likely than not. The effective tax rate of
9.5% for the year ended March 31, 1997 was attributable primarily to
alternative minimum taxes ("AMT").
Diluted Earnings per share. Diluted earnings per share increased 114% to
$0.75 in the year ended March 31, 1998, compared to $0.35 for the year ended
March 31, 1997.
Liquidity and Capital Resources
The Company's principal source of liquidity as of March 31, 1999 consisted
of $86.5 million in cash, cash equivalents and short-term investments. Working
capital as of March 31, 1999 was $103.6 million, compared to $77.4 million as
of March 31, 1998. This increase in working capital was primarily due to cash
provided by operating activities and the proceeds from the sale of common
stock, offset by the purchase of property, equipment and other assets.
For the years ended March 31, 1999, 1998 and 1997, net cash provided by
operating activities was $22.0 million, $16.9 million and $11.7 million,
respectively. Net cash provided by operating activities in fiscal 1999
primarily reflected net income before depreciation and amortization expense
plus increased accrued liabilities less increases in accounts receivable and
inventories. Net cash provided by operating activities in fiscal 1998
primarily reflected net income before depreciation and amortization expense
plus increases in accounts payable and accrued liabilities less increases in
accounts receivable and deferred income taxes. Net cash provided by operating
activities in fiscal 1997 primarily reflected net income before depreciation
and amortization expense.
Capital expenditures and the purchase of other assets totaled $16.5 million,
$11.6 million and $4.1 million for the years ended March 31, 1999, 1998 and
1997, respectively, of which $6.7 million, $3.6 million and $1.2 million for
the years ended March 31, 1999, 1998 and 1997, respectively, were financed
using debt or capital leases. In fiscal year 2000, the Company expects to
incur approximately $14.0 million in capital expenditures for manufacturing
and test equipment, computer hardware and software and the acquisition of land
as a site for a potential new wafer fabrication facility. The Company is
exploring alternatives for the expansion of its manufacturing capacity which
would likely occur after fiscal year 2000, including expanding its current 4"
wafer fabrication facility, building a new wafer fabrication facility,
purchasing a wafer fabrication facility and entering into strategic
relationships to obtain additional capacity. Any of these alternatives could
require a significant investment by the Company including an investment in
excess of $80.0 million if the Company chose to or was required to build a new
wafer fabrication facility. The Company would anticipate financing any such
investment through a combination of available cash, cash equivalents and short
term investments, cash from operations and debt and lease financing. Although
the Company believes that it will be able to obtain financing for a
significant portion of the planned capital expenditures at competitive rates
and terms from its existing and new financing sources, there can be no
assurance that the Company will be successful in these efforts. Furthermore,
there can be no assurance that any of the alternatives for expansion of its
manufacturing capacity will be available on a timely basis or at all.
The Company believes that its available cash, cash equivalents and short-
term investments, and cash generated from operations, will be sufficient to
meet the Company's capital requirements for the next 12 months, although the
Company could be required, or could elect, to seek to raise additional capital
during such period. The Company expects that it will need to raise additional
debt or equity financing in the future. There can be no
38
<PAGE>
assurance that such additional debt or equity financing will be available on
commercially reasonable terms or at all.
Factors That May Affect Future Results
The Company's results of operations have varied significantly in the past
and may continue to do so in the future. These variations have been, and may
in the future be, due to a number of factors, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. These factors include, but are not limited to: the
rescheduling or cancellation of orders by customers; fluctuations in the
timing and amount of customer requests for product shipments; fluctuations in
manufacturing yields and inventory levels; changes in product mix; the
Company's ability to introduce new products and technologies on a timely
basis; the introduction of products and technologies by the Company's
competitors; the availability of external foundry capacity, purchased parts
and raw materials; competitive pressures on selling prices; the timing of
investments in research and development; market acceptance of the Company's
and its customers' products; the integration of operations and personnel as
the result of the Company's recent acquisition of Cimaron; the timing of
depreciation and other expenses to be incurred by the Company in connection
with the increase of capacity for its existing manufacturing facility and in
connection with its proposed new manufacturing facility; the timing and amount
of recruiting and relocation expenses, prototyping costs and product
promotional expenses; costs associated with future litigation, if any,
including without limitation, litigation relating to the use or ownership of
intellectual property; costs associated with compliance with applicable
environmental regulations; general semiconductor industry conditions; and
general economic conditions. Historically, average selling prices in the
semiconductor industry have decreased over the life of a product, and as a
result, the average selling prices of the Company's products may be subject to
significant pricing pressures in the future. Because the Company is continuing
to increase its operating expenses for personnel and new product development,
and because the Company is limited in its availability to reduce expenses
quickly in response to any revenue short falls, the Company's business,
financial condition and operating results would be adversely affected if
increased sales are not achieved. In addition, the Company's operating results
may be below the expectations of public market analysts or investors, which
could have a material adverse effect on the market price of the Common Stock.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
At March 31, 1999, the Company's investment portfolio includes fixed-income
securities of $73 million. These securities are subject to interest rate risk
and will decline in value if interest rates increase. Due to the short
duration of the Company's investment portfolio, an immediate 100 basis point
increase in interest rates would have no material impact on the Company's
financial condition or results of operations.
The Company generally conducts business, including sales to foreign
customers, in U.S. dollars and as a result, has limited foreign currency
exchange rate risk. The effect of an immediate 10 percent change in foreign
exchange rates would not have a material impact on the Company's financial
condition or results of operations.
Item 8. Financial Statements and Supplementary Data.
Refer to the Index on Page F-l of the Financial Report included herein.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
39
<PAGE>
PART III
Certain information required by Part III is omitted from this report because
the Company will file a definitive proxy statement within 120 days after the
end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for
its Annual Meeting of Stockholders to be held August 3, 1999, and the
information included in the Proxy Statement is incorporated herein by
reference.
Item 10. Directors and Executive Officers of the Registrant.
(a) Executive Officers--See the section entitled "Executive Officers of the
Registrant" in Part I, Item 1 hereof.
(b) Directors--the information required by this Item is incorporated by
reference to the section entitled "Election of Directors" in the Registrant's
Proxy Statement.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the
sections entitled "Compensation of Executive Officers" and the stock benefit
plan proposals in the Registrant's Proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated by reference to the
sections entitled "Common Stock Ownership of Certain Beneficial Owners and
Management" of the Registrant's Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is incorporated by reference to the
section entitled "Transactions with Management" in the Registrant's Proxy
Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
<TABLE>
<C> <S> <C>
(1) Financial Statements
The financial statements of the Company are included herein as
required under Item 8 of this Annual Report on Form 10-K. See
Index on page F-l.
(2) Financial Statement Schedules:
The financial statement schedules of the Company are included in
Part IV of this report:
For the three fiscal years ended March 31, 1999 -- II Valuation
and Qualifying Accounts
(3) Exhibits (numbered in accordance with Item 601 of Regulated S-K)
</TABLE>
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
The following exhibits are filed or incorporated by reference into this
report.
(a) Exhibits
<TABLE>
<C> <S>
2.1(8) Agreement and Plan of Merger dated as of March 3, 1999 among Applied
Micro Circuits Corporation, Wiley Acquisition Corporation and Cimaron
Communications Corporation.
3.1(1) Restated Certificate of Incorporation of the Company.
3.2(2) Amended and Restated Bylaws of the Company.
4.1(3) Specimen Stock Certificate.
10.1(3) Form of Indemnification Agreement between the Company and each of its
Officers and Directors.
10.2(3) 1982 Employee Incentive Stock Option Plan, as amended, and form of
Option Agreement.
10.3(3) 1992 Stock Option Plan, as amended, and form of Option Agreement.
</TABLE>
40
<PAGE>
<TABLE>
<C> <S>
10.4(3) 1997 Employee Stock Purchase Plan and form of Subscription Agreement.
10.5(3) 1997 Directors' Stock Option Plan and form of Option Agreement.
10.6(3) 401(k) Plan, effective April 1, 1985, and form of Enrollment
Agreement.
10.7(3) Convertible Preferred Stock, Series 1 and Series 2, Purchase
Agreement, dated December 8, 1983.
10.8(3) Convertible Preferred Stock Series 3 Purchase Agreement, dated
September 16, 1987.
10.9(3) Industrial Real Estate Lease, dated October 29, 1996, between the
Registrant and ADI Mesa Partners AMCC, L.P. (the Sequence Drive
Lease).
10.10(3) Industrial Real Estate Lease, dated April 8, 1992 between the
Registrant and Mira Mesa Business Park (the Oberlin Drive Lease).
10.11(3) Security Agreements, dated January 30, 1992 by and between the
Registrant and Roger Smullen.
10.12(3) Promissory Notes, dated January 30, 1992, as amended, by and between
the Registrant and Roger Smullen.
10.13(3) Loan Agreement, dated May 1, 1996, and Exercise Notice and Restricted
Stock Purchase Agreements, dated July 23, 1997 by and between
Registrant and David Rickey.
10.14(3) Promissory Notes, dated February 12, 1996, May 1, 1996, April 1, 1997
and July 23, 1997 by and between the Registrant and David Rickey.
10.15(3) Patent License Agreement, dated January 1, 1998, as amended by and
between Registrant and Motorola, Inc.
10.16(3) Patent License Agreement, dated March 1, 1991, as amended, by and
between Registrant and International Business Machines Corporation.
10.17(3) Patent License Agreement, dated June 1, 1997 by and between
Registrant and International Business Machines Corporation.
10.18(3) Letter Agreement, dated January 30, 1996 by and between the
Registrant and David Rickey.
10.19(3) Patent License Agreement, dated October 19, 1992, as amended by and
between Registrant and Alcatel Network Systems, Inc.
10.20(3) Amendment No. 1 to Convertible Preferred Stock, Series 1 and Series 2
Purchase Agreement, dated September 16, 1987 and Convertible
Preferred Stock, Series 3 Purchase Agreement, dated September 16,
1987.
10.21(4) Loan Agreement Secured by Property, dated February 19, 1998 by and
between Registrant and Laszlo Gal and Agnes Gal.
10.22(4) Note Secured by Deed of Trust, dated February 19, 1998 by and between
Registrant and Laszlo Gal and Agnes Gal.
10.23(4) Loan and Pledge Agreement, dated February 19, 1998 by and between
Registrant and Anil Bedi.
10.24(6) 1998 Employee Stock Purchase Plan and form of Subscription Agreement
10.25(7) Agreements related to the Company's right to acquire land:
a) Ground Lease, by and between Applied Micro Circuits Corporation
and Kilroy Realty L.P.
b) Agreement for Consulting Services
10.26 1998 Stock Incentive Plan of Cimaron Communications Corporation
adopted by Registrant in merger transaction, effective March 17,
1999.
10.27 Employment Agreement by and between Registrant and Gary Martin.
10.28 Employment Agreement by and between Registrant and Ramakrishna
Sudireddy.
10.29 Agreement to Sell and Purchase and Escrow Instructions to Acquire
Land by and between Kilroy Realty, L.P. and Registrant dated January
8, 1999.
10.30 Lease of Engineering Building by and between Kilroy Realty, L.P. and
Registrant dated February 17, 1999.
</TABLE>
41
<PAGE>
<TABLE>
<C> <S>
10.31 *Custom Sales Agreement by and between Registrant and International
Business Machines
11.1(5) Computation of Per Share Data under SFAS No. 128.
21.1 Subsidiary of the Registrant.
23.1 Consent of Ernst & Young LLP, Independent Auditors
24.1 Power of Attorney (see page 42).
27.1 Financial Data Schedules.
</TABLE>
- --------
* Confidential treatment has been requested with respect to certain portions
of this exhibit.
(1) Incorporated by reference to Exhibit 3.2 filed with the Company's
Registration Statement (No. 333-37609) filed October 10, 1997, or with any
Amendments thereto, which registration statement became effective November
24, 1997.
(2) Incorporated by reference to Exhibit 3.4 filed with the Company's
Registration Statement (No. 333-37609) filed October 10, 1997, or with any
Amendments thereto, which registration statement became effective November
24, 1997.
(3) Incorporated by reference to identically numbered exhibits filed with the
Company's Registration Statement (No. 333-37609) filed October 10, 1997,
or with any Amendments thereto, which registration statement became
effective November 24, 1997.
(4) Incorporated by reference to identically numbered exhibits filed with the
Company's Registration Statement (No. 333-46071) filed February 11, 1998,
or with any Amendments thereto, which registration statement became
effective March 12, 1998.
(5) The Computation of Per Share Data under SFAS No. 128 is included on page
F-10 of this report.
(6) Incorporated by reference to Appendix I filed with the Registrant's Proxy
Statement for the 1998 Annual Meeting of Stockholders filed on June 15,
1998.
(7) Incorporated by reference to identically numbered exhibits filed with the
Company's Quarterly Report, Form 10-Q filed November 16, 1998.
(8) Incorporated by reference to identically numbered exhibit filed with the
Company's Registration Statement on Form S-3 (No. 333-76185) filed April
13, 1998.
The following exhibits are filed or incorporated by reference into this
report.
(b) Current reports on Form 8-K. The Registrant filed the following current
reports on Form 8-K with the Commission during the fourth quarter of the
fiscal year ended March 31, 1999:
None.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
APPLIED MICRO CIRCUITS CORPORATION
/s/ David M. Rickey
By:__________________________________
David M. Rickey
President and Chief Executive
Officer
Date: June 21, 1999
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints David M. Rickey and William E. Bendush, jointly
and severally, his or her attorneys-in-fact, each with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-
in-fact, or his or her substitute or substitutes may do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ David M. Rickey President and Chief June 21, 1999
- ----------------------------------- Executive Officer
David M. Rickey
/s/ William E. Bendush Chief Financial June 21, 1999
- ----------------------------------- Officer
William E. Bendush
/s/ Roger A. Smullen, Sr. Director and June 21, 1999
- ----------------------------------- Chairman of the
Roger A. Smullen, Sr. Board of Directors
/s/ William K. Bowes, Jr. Director June 21, 1999
- -----------------------------------
Williams K. Bowes, Jr.
/s/ R. Clive Ghest Director June 21, 1999
- -----------------------------------
R. Clive Ghest
/s/ Franklin P. Johnson, Jr. Director June 21, 1999
- -----------------------------------
Franklin P. Johnson, Jr.
/s/ Arthur B. Stabenow Director June 21, 1999
- -----------------------------------
Arthur B. Stabenow
/s/ Harvey P. White Director June 21, 1999
- -----------------------------------
Harvey P. White
43
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................... F-2
Consolidated Balance Sheets as of March 31, 1998 and 1999............. F-3
Consolidated Statements of Income for the fiscal years ended March 31,
1997, 1998 and 1999.................................................. F-4
Consolidated Statements of Stockholders' Equity for the fiscal years
ended March 31, 1997, 1998 and 1999.................................. F-5
Consolidated Statements of Cash Flows for the fiscal years ended March
31, 1997, 1998 and 1999.............................................. F-6
Notes to Consolidated Financial Statements............................ F-7-F-18
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Applied Micro Circuits Corporation
We have audited the accompanying consolidated balance sheets of Applied
Micro Circuits Corporation as of March 31, 1998 and 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for
each of the three years in the period ended March 31, 1999. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Applied Micro Circuits Corporation at March 31, 1998 and 1999, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended March 31, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
San Diego, California
April 21, 1999
F-2
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
<TABLE>
<CAPTION>
March 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 6,460 $ 13,530
Short-term investments--available-for-sale............... 61,436 73,010
Accounts receivable, net of allowance for doubtful
accounts of $350 and $177 at March 31, 1998 and 1999,
respectively............................................ 12,179 19,275
Inventories.............................................. 8,185 9,813
Deferred income taxes.................................... 3,882 4,573
Notes receivable from officer and employees.............. 87 815
Other current assets..................................... 2,297 4,004
-------- --------
Total current assets................................... 94,526 125,020
Property and equipment, net................................ 17,218 23,128
Other assets............................................... 1,090 2,507
-------- --------
Total assets............................................. $112,834 $150,655
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................... $ 5,215 $ 5,131
Accrued payroll and related expenses..................... 5,057 4,689
Other accrued liabilities................................ 2,344 7,207
Deferred revenue......................................... 1,873 1,439
Current portion of long-term debt........................ 567 1,862
Current portion of capital lease obligations............. 2,053 1,075
-------- --------
Total current liabilities.............................. 17,109 21,403
Long-term debt, less current portion....................... 2,736 4,995
Long-term capital lease obligations, less current portion.. 1,355 2,563
Commitments and contingencies (Notes 7 and 11).............
Stockholders' equity:
Preferred Stock, $0.01 par value:
Authorized shares--2,000, none issued and outstanding... -- --
Common Stock, $0.01 par value:
Authorized shares--60,000 at March 31, 1998 and 1999,
respectively...........................................
Issued and outstanding shares--22,536 and 26,612 at
March 31, 1998 and 1999, respectively.................. 225 266
Additional paid-in capital............................... 86,660 102,525
Deferred compensation, net............................... (472) (2,123)
Accumulated other comprehensive income (loss)............ -- (33)
Retained earnings........................................ 5,722 21,514
Notes receivable from stockholders....................... (501) (455)
-------- --------
Total stockholders' equity............................. 91,634 121,694
-------- --------
Total liabilities and stockholders' equity............... $112,834 $150,655
======== ========
</TABLE>
See accompanying notes
F-3
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Fiscal Year ended March
31,
-------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net revenues......................................... $57,468 $76,618 $105,000
Cost of revenues..................................... 30,057 34,321 37,937
------- ------- --------
Gross profit......................................... 27,411 42,297 67,063
Operating expenses:
Research and development........................... 7,870 13,268 22,472
Selling, general and administrative................ 12,537 14,278 18,325
Merger-related costs............................... -- -- 2,350
------- ------- --------
Total operating expenses......................... 20,407 27,546 43,147
------- ------- --------
Operating income..................................... 7,004 14,751 23,916
Interest income (expense), net....................... (29) 871 3,450
------- ------- --------
Income before income taxes........................... 6,975 15,622 27,366
Provision for income taxes........................... 659 406 10,233
------- ------- --------
Net income........................................... $ 6,316 $15,216 $ 17,133
======= ======= ========
Basic earnings per share:
Earnings per share................................. $ 1.26 $ 1.44 $ 0.70
======= ======= ========
Shares used in calculating basic earnings per
share............................................. 5,006 10,594 24,514
======= ======= ========
Diluted earnings per share:
Earnings per share................................. $ 0.35 $ 0.75 $ 0.62
======= ======= ========
Shares used in calculating diluted earnings per
share............................................. 17,907 20,294 27,430
======= ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Convertible
Preferred Accumulated Notes
Stock Common Stock Additional Other Retained Receivable Total
-------------- -------------- Paid-In Deferred Comprehensive Earnings From Stockholders'
Shares Amount Shares Amount Capital Compensation Income (Loss) (Deficit) Stockholders Equity
------ ------ ------ ------ ---------- ------------ ------------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, March 31,
1996.............. 1,223 $ 12 4,968 $ 49 $ 36,971 $ -- $ -- $(15,444) $ (76) $ 21,512
Issuance of stock
pursuant to
exercise of stock
options.......... -- -- 93 1 41 -- -- -- -- 42
Repurchase of
common stock..... -- -- (36) -- (38) -- -- (107) -- (145)
Payments on
notes............ -- -- -- -- -- -- -- -- 18 18
Net income....... -- -- -- -- -- -- -- 6,316 -- 6,316
------ ---- ------ ---- -------- ------- ---- -------- ----- --------
Balance, March 31,
1997.............. 1,223 12 5,025 50 36,974 -- -- (9,235) (58) 27,743
Issuance of
Common Stock, net
of issuance
costs............ -- -- 5,039 51 51,942 -- -- -- -- 51,993
Conversion of
convertible
preferred stock
to common Stock.. (1,051) (11) 10,717 107 (96) -- -- -- -- --
Issuance of stock
pursuant to
exercise of stock
options.......... -- -- 1,702 17 858 -- -- -- (455) 420
Net exercise of
warrants......... -- -- 53 -- -- -- -- -- -- --
Payments on
notes............ -- -- -- -- -- -- -- -- 12 12
Repurchase of
convertible
preferred stock.. (172) (1) -- -- (3,617) -- -- (259) -- (3,877)
Deferred
compensation
related to stock
options.......... -- -- -- -- 599 (599) -- -- -- --
Amortization of
deferred
compensation..... -- -- -- -- -- 127 -- -- -- 127
Net Income....... -- -- -- -- -- -- -- 15,216 -- 15,216
------ ---- ------ ---- -------- ------- ---- -------- ----- --------
Balance, March 31,
1998.............. -- -- 22,536 225 86,660 (472) -- 5,722 (501) 91,634
Issuance of stock
upon formation of
Cimaron.......... -- -- 2,344 24 4,640 (230) -- -- -- 4,434
Issuance of
common stock
under employee
stock purchase
plans............ -- -- 417 4 3,175 -- -- -- -- 3,179
Issuance of stock
pursuant to
exercise of stock
options.......... -- -- 1,315 13 2,524 (964) -- -- -- 1,573
Tax Benefit of
disqualifying
dispositions..... -- -- -- -- 4,209 -- -- -- -- 4,209
Payment on notes. -- -- -- -- -- -- -- -- 46 46
Deferred
compensation
related to stock
options and
restricted stock. -- -- -- -- 1,317 (1,317) -- -- -- --
Amortization of
deferred
compensation..... -- -- -- -- -- 860 -- -- -- 860
Adjustment for
change in Cimaron
Communications
Corporation's
year end......... -- -- -- -- -- -- -- (1,341) -- (1,341)
Comprehensive
Income:
Net income...... -- -- -- -- -- -- -- 17,133 -- 17,133
Unrealized loss
on short-term
investments, net
of tax benefit.. -- -- -- -- -- -- (33) -- -- (33)
--------
Total
comprehensive
income........... -- -- -- -- -- -- -- -- -- 17,100
------ ---- ------ ---- -------- ------- ---- -------- ----- --------
Balance, March 31,
1999.............. -- $ -- 26,612 $266 $102,525 $(2,123) $(33) $ 21,514 $(455) $121,694
====== ==== ====== ==== ======== ======= ==== ======== ===== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Fiscal Year ended March 31,
------------------------------
1997 1998 1999
-------- --------- ---------
<S> <C> <C> <C>
Operating Activities
Net income................................... $ 6,316 $ 15,216 $ 17,133
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization................ 5,185 5,174 7,045
Write-offs of inventories.................... 452 600 180
Amortization of deferred compensation........ -- 127 860
Loss on disposals of property................ -- -- 221
Adjustment for change in Cimaron year end.... -- -- (1,341)
Changes in operating assets and liabilities:
Accounts receivables........................ 1,058 (3,761) (7,096)
Inventories................................. (1,146) (1,255) (1,808)
Other current assets........................ (116) (1,607) (678)
Accounts payable............................ (1,553) 2,787 (84)
Accrued payroll and other accrued
liabilities................................ 1,562 2,418 8,704
Deferred income taxes....................... -- (3,882) (691)
Deferred revenue............................ (25) 1,067 (434)
-------- --------- ---------
Net cash provided by operating activities.. 11,733 16,884 22,011
Investing Activities
Proceeds from sales and maturities of short-
term investments............................ 7,944 66,547 187,787
Purchase of short-term investments........... (11,512) (119,874) (199,394)
Repayments and (advances) on notes receivable
from officers and employees................. (608) (366) 262
Purchase of property, equipment and other
assets...................................... (2,855) (11,342) (16,490)
-------- --------- ---------
Net cash used for investing activities..... (7,031) (65,035) (27,835)
Financing Activities
Proceeds from issuance of common stock, net.. 42 52,413 9,062
Repurchase of common stock................... (145) -- --
Repurchase of convertible preferred stock.... -- (3,877) --
Payments on notes receivable from
stockholders................................ 18 12 46
Payments on capital lease obligations........ (2,824) (2,691) (2,110)
Payments on long-term debt................... (582) (37) (792)
Proceeds from equipment financed under
capital leases.............................. -- -- 2,342
Issuance of long-term debt................... -- 3,303 4,346
-------- --------- ---------
Net cash provided by (used for) financing
activities................................ (3,491) 49,123 12,894
-------- --------- ---------
Net increase in cash and cash equivalents.. 1,211 972 7,070
Cash and cash equivalents at beginning of year. 4,277 5,488 6,460
-------- --------- ---------
Cash and cash equivalents at end of year....... $ 5,488 $ 6,460 $ 13,530
======== ========= =========
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest..................................... $ 656 $ 380 $ 542
======== ========= =========
Income taxes................................. $ 770 $ 3,251 $ 4,274
======== ========= =========
</TABLE>
Supplemental schedule of noncash investing and financing activities:
Capital lease obligations of approximately $1.2 million and $282,000 were
incurred during fiscal years 1997 and 1998, respectively. During the fiscal
year 1998, notes were received for the exercise of stock options totaling
$455,000.
See accompanying notes.
F-6
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business
The Company designs, develops, manufactures and markets high-performance,
high-bandwidth silicon solutions for the world's communications
infrastructure.
Basis of Presentation
The consolidated financial statements include all the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. On March 17,
1999, the Company acquired Cimaron Communications Corporation ("Cimaron") in a
business combination accounted for as a pooling-of-interests. Cimaron, which
also designs and develops high-bandwidth silicon solutions for communications
equipment manufacturers, became a wholly owned subsidiary of the Company
through the exchange of approximately three million shares of the Company's
common stock for all the outstanding stock and stock options of Cimaron. The
accompanying financial statements for fiscal 1999 have been prepared as if the
companies had been combined for the full year, and as more fully discussed in
Note 2, the prior year financial statements did not require restatement as a
result of this business combination.
Cash, Cash Equivalents and Short-Term Investments
Cash and cash equivalents consist of money market type funds and highly
liquid debt instruments with original maturities of three months or less at
the date of acquisition. Short-term investments consist of United States
Treasury notes, obligations of U.S. government agencies and corporate bonds.
The Company maintains its excess cash in financial institutions with strong
credit ratings and has not experienced any significant losses on its
investments.
The Company classifies its short-term investments as "Available-for-Sale"
and records such assets at the estimated fair value with unrealized gains and
losses excluded from earnings and reported, net of tax, in comprehensive
income. The basis for computing realized gains or losses is by specific
identification.
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
Gross Unrealized
Amortized ------------------ Estimated
Cost Gains Losses Fair Value
--------- -------- -------- ----------
<S> <C> <C> <C> <C>
At March 31, 1999:
U.S. treasury securities and
obligations of U.S. government
agencies........................ $21,740 $ 22 $ 72 $21,690
U.S. corporate debt securities... 51,321 16 17 51,320
------- -------- -------- -------
$73,061 $ 38 $ 89 $73,010
======= ======== ======== =======
At March 31, 1998:
U.S. treasury securities and
obligations of U.S. government
agencies........................ $15,908
U.S. corporate debt securities... 45,528
-------
$61,436
=======
</TABLE>
The estimated fair value of the short term investments was equal to the
amortized cost at March 31, 1998.
F-7
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Available-for-sale securities by contractual maturity are as follows (in
thousands):
<TABLE>
<CAPTION>
March 31,
1999
---------
<S> <C>
Due in one year or less.......................................... $48,918
Due after one year through two years............................. 16,775
Greater than two years........................................... 7,317
-------
$73,010
=======
</TABLE>
Fair Value of Financial Instruments
The carrying value of cash equivalents, short-term investments, accounts
receivable, accounts payable, accrued liabilities and long term debt
approximates fair value.
Concentration of Credit Risk
The Company believes that the concentration of credit risk in its trade
receivables is mitigated by the Company's credit evaluation process,
relatively short collection terms and dispersion of its customer base. The
Company generally does not require collateral and has not experienced
significant losses on trade receivables from any particular customer or
geographic region for any period presented.
The Company invests its excess cash in debt instruments of the U.S.
Treasury, governmental agencies and corporations with strong credit ratings.
The Company has established guidelines relative to diversification and
maturities that attempt to maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in yields and
interest rates. The Company has not experienced any significant losses on its
cash equivalents or short-term investments.
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
disclosures made in the accompanying notes to the financial statements. These
estimates include assessing the collectability of accounts receivable, the use
and recoverability of inventory, estimates to complete engineering contracts,
costs of future product returns under warranty and provisions for
contingencies expected to be incurred. Actual results could differ from those
estimates.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. The Company's inventory valuation process is done
on a part-by-part basis. Lower of cost or market adjustments, specifically
identified on a part-by-part basis, reduce the carrying value of the related
inventory and take into consideration reductions in sales prices, excess
inventory levels and obsolete inventory. Once established, these adjustments
are considered permanent and are not reversed until the related inventory is
sold or disposed.
Property and Equipment
Property and equipment are stated at cost and depreciated over the estimated
useful lives of the assets (3 to 7 years) using the straight line method.
Leasehold improvements are stated at cost and amortized over the useful life
of the asset. Property and equipment under capital leases are recorded at the
net present value of the minimum lease payments and are amortized over the
useful life of the assets. Leased assets purchased at the expiration of the
lease term are capitalized at acquisition cost.
F-8
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Impairment of Long-Lived Assets
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of", the Company records impairment losses on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amounts. SFAS No. 121 also addresses the accounting
for long-lived assets that are expected to be disposed of. Through March 31,
1999, the Company has not experienced any such impairments.
Advertising Cost
Advertising costs are expensed as incurred.
Revenues
Revenues related to product sales are generally recognized when the products
are shipped to the customer. Recognition of revenues and the related cost of
revenues on shipments to distributors that are subject to terms of sale
allowing for price protection and right of return on products unsold by the
distributor are deferred until the distributor's ability to return the
products or its' rights to price protection lapse or have been limited.
Revenues on engineering design contracts are recognized using the percentage-
of-completion method based on actual cost incurred to date compared to total
estimated costs of the project. Deferred revenue represents both the margin on
shipments of products to distributors that will be recognized when the
distributors ship the products to their customers or the right of return has
lapsed and billings in excess and estimated earnings on uncompleted
engineering design contracts.
Warranty Reserves
Estimated expenses for warranty obligations are accrued as revenue is
recognized. Reserve estimates are adjusted periodically to reflect actual
experience.
Research and Development
Research and development costs are expensed as incurred. Substantially all
research and development expenses are related to new product development,
designing significant improvements to existing products and new process
development.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for its employee and director stock options
because the alternative fair value accounting provided for under SFAS No. 123,
Accounting for Stock-Based Compensation ("SFAS 123"), requires the use of
option valuation models that were not developed for use in valuing employee
and director stock options. Under SFAS 123 compensation cost is determined
using the fair value of stock-based compensation determined as of the grant
date, and is recognized over the periods in which the related services are
rendered. The statement also permits companies to elect to continue using the
current implicit value accounting method specified in APB 25 to account for
stock-based compensation and disclose in the footnotes to the financial
statements the pro forma effect of using the fair value method for its stock
based compensation.
Reclassification
Certain prior period amounts have been reclassified to conform to the
current period presentation.
F-9
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Earnings Per Share
Earnings per share are computed in accordance with SFAS No. 128 "Earnings
Per Share." Basic earnings per share are computed using the weighted average
number of common shares outstanding during each period. Diluted earnings per
share includes the dilutive effect of common shares potentially issuable upon
the exercise of stock options.
The reconciliation of shares used to calculate basic and diluted earnings
per share consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31,
--------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Shares used in basic earnings per share computations--
weighted average common shares outstanding........... 5,006 10,594 24,514
Effect of assumed conversion of Preferred Stock from
date of issuance..................................... 12,828 7,434 --
Net effect of dilutive common share equivalents based
on treasury stock method............................. 73 2,266 2,916
------ ------ ------
Shares used in diluted earnings per share
computations......................................... 17,907 20,294 27,430
====== ====== ======
</TABLE>
New Accounting Standards
Effective April 1, 1998, the Company adopted SFAS No. 130 "Reporting
Comprehensive Income" and SFAS No. 131. "Segment Information". SFAS No. 130
requires that all components of comprehensive income, including net income, be
reported in the financial statements in the period in which they are
recognized. Comprehensive income is defined as the change in equity during a
period from transactions and other events and circumstances from non-owner
sources. Net income and other comprehensive income, including unrealized gains
and losses on investments is reported, net of their related tax effect, to
arrive at comprehensive income. SFAS No. 131 amends the requirements for
public enterprises to report financial and descriptive information about its
reportable operating segments. Operating segments, as defined in SFAS No. 131,
are components of an enterprise for which separate financial information is
available and is evaluated regularly by the Company in deciding how to
allocate resources and in assessing performance. The financial information is
required to be reported on the basis that is used internally for evaluating
the segment performance. The Company believes it operates in one business and
operating segment.
2. ACQUISITIONS
On March 17, 1999, AMCC acquired all of the outstanding Common Stock and
Common Stock equivalents of Cimaron in exchange for approximately three
million shares of the Company's Common Stock. The acquisition has been
accounted for using the pooling-of-interests method of accounting. Prior to
the combination, Cimaron, which was incorporated on January 2, 1998, had a
fiscal year end of December 31, 1998. In recording the business combination,
Cimaron's results of operations for the fiscal year ended December 31, 1998
were combined with AMCC's for the fiscal year ended March 31, 1999. Cimaron's
net sales and net loss for the three month period ended March 31, 1999 were
$110,000 and $(1,341,000), respectively. In accordance with Accounting
Principles Board Opinion No. 16 ("APB No. 16"), Cimaron's results of
operations and cash flows for the three month period ended March 31, 1999 have
been added directly to the retained earnings and cash flows of AMCC and
excluded from reported fiscal 1999 results of operations.
The combined Company realized a charge in the fourth quarter of fiscal 1999
of approximately $3.1 million related to the estimated costs of the merger.
Approximately $700,000 of these total merger costs were incurred
F-10
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
by Cimaron and are not reflected in the Company's results of operations for
the fourth quarter of fiscal 1999 because they are included in Cimaron's
results of operations which are reflected as a charge directly to retained
earnings.
In April 1998, the Company acquired Ten Mountains Design which designs and
develops high bandwidth analog devices for communications equipment suppliers
and optical module manufacturers. The purchase price was approximately
$330,000 and resulted in recording intangible assets of approximately $280,000
which will be amortized over three years. The financial statements include the
results of operation for Ten Mountains Design from the date of acquisition.
3. CERTAIN FINANCIAL STATEMENT INFORMATION
<TABLE>
<CAPTION>
March 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Inventories (in thousands):
Finished goods......................................... $ 1,817 $ 975
Work in process........................................ 5,161 7,688
Raw materials.......................................... 1,207 1,150
-------- --------
$ 8,185 $ 9,813
======== ========
Property and equipment (in thousands):
Machinery and equipment................................ $ 25,983 $ 34,413
Leasehold improvements................................. 7,476 7,641
Computers, office furniture and equipment.............. 13,219 16,654
-------- --------
46,678 58,708
Less accumulated depreciation and amortization........... (29,460) (35,580)
-------- --------
$ 17,218 $ 23,128
======== ========
Other accrued liabilities (in thousands):
Income taxes payable................................... $ 888 $ 3,329
Accrued merger-related costs........................... -- 1,893
Other.................................................. 1,456 1,985
-------- --------
$ 2,344 $ 7,207
======== ========
</TABLE>
The cost and accumulated amortization of machinery and equipment under
capital leases at March 31, 1999 were approximately $10.5 million and $8.5
million, respectively ($10.0 million and $7.2 million, at March 31, 1998,
respectively). Amortization of assets held under capital leases is included
with depreciation expense.
During the years ended March 31, 1997, 1998 and 1999, the Company earned
interest income of $627,000, $1,252,000 and $3,992,000, respectively, and
incurred interest expense of $656,000, $381,000 and $542,000, respectively.
4. LONG-TERM DEBT
During Fiscal 1999, the Company had an equipment line of credit with a bank
which expired on March 31, 1999. Borrowings of $7.1 million under the line of
credit were converted into term notes, with payments totaling $141,000,
payable over 53 to 60 months, and interest rates between 6.44% to 7.42%. At
March 31, 1999, $6.3 million was outstanding on the notes.
F-11
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On July 31, 1998, the Company entered into an equipment line of credit with
a bank. The line of credit provided for borrowings of up to $1,000,000 at the
bank's prime rate plus .5% (8.25% at March 31, 1999). The Company paid off the
outstanding balance of $565,000 including accrued interest on April 1, 1999.
Principal maturities of the notes payable at March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Year ending March 31, (in thousands):
<S> <C>
2000............................................................. $1,862
2001............................................................. 1,394
2002............................................................. 1,495
2003............................................................. 1,603
2004 ............................................................ 503
------
$6,857
======
</TABLE>
5. STOCKHOLDERS' EQUITY
Stock Offerings
In December 1997, the Company completed an initial public offering of its
Common Stock. The offering raised net proceeds to the Company of approximately
$25.1 million. In March 1998, the Company completed a secondary public
offering of Common Stock in which the Company raised net proceeds of
approximately $26.9 million.
Convertible Preferred Stock
On April 24, 1997 the Board authorized the Company to repurchase up to $4.0
million of Convertible Preferred Stock, with priority given to the holders of
Convertible Preferred Stock that submitted bids for the sale of their shares
of Convertible Preferred Stock at the lowest price per share. On June 20,
1997, the Company repurchased an aggregate of 172,300 shares of Convertible
Preferred Stock for approximately $3.9 million at prices between $1.20 and
$2.61 per share on an as converted to common stock basis. In connection with
the initial public offering, all then outstanding shares of Convertible
Preferred Stock immediately converted into 10,717,317 shares of Common Stock.
Preferred Stock
In November 1997, the Certificate of Incorporation was amended to allow the
issuance of up to 2,000,000 shares of preferred stock in one or more series
and to fix the rights, preferences, privileges and restriction thereof,
including dividend rights, dividend rates, conversion rights, voting rights,
terms of redemption, redemption prices, liquidation preferences and the number
of shares constituting any series of the designation of such series, without
further vote or action by the stockholders.
Stock Options and Other Stock Awards
The Company's 1992 Stock Option Plan ("1992 Plan") provides for the granting
of incentive and nonqualified stock options to employees. Generally, options
are granted at prices at least equal to fair value of the Company's Common
Stock on the date of grant. In addition, certain officers, employees and
directors have been granted nonqualified stock options. The Company's 1982
Employee Incentive Stock Option Plan expired in 1992.
In connection with the Company's acquisition of Cimaron, the Company assumed
options and other stock awards granted under Cimaron's 1998 Stock Incentive
Plan ("The Incentive Plan") covering 657,153 shares of
F-12
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common Stock at a weighted average exercise price of $.23 per share. The terms
of the plan provides for the granting of options, restricted stock, or other
stock based awards ("stock awards") to employees, officers, directors,
consultants and advisors. Generally, the stock awards are granted at prices at
least equal to the fair value of the Company's Common Stock on the date of
grant. A total of 1,016,365 shares of Common Stock were authorized for
issuance under the Incentive Plan. At March 31, 1999, 564,358 restricted
shares had been issued under the Incentive Plan.
Options and other stock awards under the plans expire not more than ten
years from the date of grant and are either immediately exercisable after the
date of grant but are subject to certain repurchase rights by the Company, at
the Company's option, until such ownership rights have vested or exercisable
upon vesting. Vesting generally occurs over four to five years. At March 31,
1998 and 1999, 651,842 and 869,626 shares of Common Stock were subject to
repurchase, respectively.
Pursuant to an employment agreement entered into during January 1996,
between the Company and an executive, the Company granted an option to
purchase 800,000 shares of the Company's Common Stock at $0.53 per share under
the 1992 Stock Option Plan. The option vests ratably over four years. In the
event the Company is acquired, the agreement stipulates that under certain
circumstances the executive is eligible for certain additional compensation.
These options as well as 66,667 additional options issued in April 1997 were
exercised in July 1997. The exercise was paid for with various notes, which
aggregated $455,000 and bear interest at rates between 5.98% and 6.54%, and
are due at the earlier of February 12, 2000 ($420,000) and April 9, 2001
($35,000) or the termination of employment.
Pro forma information regarding net income and net income per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value of the options was estimated at the date of grant
using the minimum value method for grants prior to the initial public offering
and the Black Scholes method for grants after the initial public offering
using the following weighted average assumptions for fiscal year 1997 and
1998; risk free interest rate of 6%; an expected option life of four years; no
annual dividends, and an expected volatility of .92 (used only for the options
valued using the Black Scholes method.). For options granted in fiscal year
1999, the fair value of the options was estimated at the date of the grant
using the following assumptions; risk free interest rate of 6%; an expected
life of four to five years; no annual dividends and an expected volatility of
.89.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized ratably to expenses over the vesting period of such
options. The effects of applying SFAS No. 123 for pro forma disclosure
purposes are not likely to be representative of the effects on pro forma net
income in future years because they do not take into consideration pro forma
compensation expenses related to grants made prior to 1996.
The Company's pro forma information follows (in thousands):
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------
1997 1998 1999
------ ------- -------
<S> <C> <C> <C>
Net income:
As reported......................................... $6,316 $15,216 $17,133
Pro forma........................................... $6,225 $14,856 $13,202
Earnings per share:
As reported:
Basic............................................. $ 1.26 $ 1.44 $ 0.70
Diluted........................................... $ 0.35 $ 0.75 $ 0.62
Pro forma:
Basic............................................. $ 1.24 $ 1.40 $ 0.54
</TABLE>
F-13
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year Ended March
31,
------------------
1997 1998 1999
----- ----- ------
<S> <C> <C> <C>
Diluted.............................................. $0.35 $0.73 $ 0.48
Weighted fair value of options granted during the year... $0.15 $6.84 $21.07
</TABLE>
A summary of the Company's stock option activity, including those issued
outside of the plans, and related information are as follows:
<TABLE>
<CAPTION>
March 31,
----------------------------------------------------------------
1997 1998 1999
-------------------- --------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 1,690,160 $0.51 2,842,293 $0.51 2,682,451 $ 6.87
Granted............... 1,457,285 0.53 1,798,873 10.00 1,520,141 18.46
Exercised............. (92,680) 0.45 (1,701,620) 0.51 (1,314,581) 1.19
Forfeited............. (212,472) 0.53 (257,095) 0.64 (214,667) 8.32
--------- ----- ---------- ----- ---------- ------
Outstanding at end of
year................... 2,842,293 $0.51 2,682,451 $6.87 2,673,344 $16.13
========= ===== ========== ===== ========== ======
Vested at end of year... 851,764 $0.51 635,050 $0.60 678,615 $ 7.25
========= ===== ========== ===== ========== ======
</TABLE>
The following is a further breakdown of the options outstanding at March 31,
1999:
<TABLE>
<CAPTION>
Weighted
Average Weighted
Remaining Average
Range of Number Contractual Exercise
Exercise Price Outstanding Life Price
-------------- ----------- ----------- --------
<S> <C> <C> <C>
$ 0.13--$ 0.98 1,043,660 7.60 $ 0.52
$ 3.90--$ 8.25 201,926 8.51 $ 7.69
$ 8.19--$23.63 665,774 9.03 $22.57
$23.88--$43.63 761,984 9.60 $34.10
-------------- --------- ---- ------
$ 0.13--$43.63 2,673,344 8.60 $16.13
============== ========= ==== ======
</TABLE>
From April 1, 1997 through September 30, 1997, the Company recorded deferred
compensation expense for the difference between the exercise price and the
fair value for financial statement presentation purposes of the Company's
Common Stock, as determined by the Board of Directors, for all options granted
in the period. This deferred compensation aggregates to $599,000, which is
being amortized ratably over the four year vesting period of the related
options. Additionally, during the year ended March 31, 1999, the Company
recorded deferred compensation related to restricted stock and stock options
granted to founders and employees of Cimaron of $2.5 million. Such amount is
being amortized over the related vesting period, generally five years.
Amortization of deferred compensation during fiscal years 1998 and 1999 was
$127,000 and $860,000, respectively.
Employee Stock Purchase Plans
The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan")
was adopted by the Board of Directors on October 6, 1997, and was subsequently
approved by the stockholders. A total of 400,000 shares of Common Stock are
reserved for issuance under the 1997 Purchase Plan. At March 31, 1999, 393,874
shares had been issued under the 1997 Purchase Plan.
F-14
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan")
was approved by the stockholders on August 4, 1998. A total of 400,000 shares
are authorized for issuance under the 1998 Purchase Plan. At March 31, 1999,
23,308 shares had been issued under the 1998 Purchase Plan.
Under the terms of the plans, purchases are made semiannually on January 31
and July 31 and the purchase price of the Common Stock is equal to 85% of the
fair market value of the Common Stock on the first or last day of the offering
period, whichever is lower.
1997 Directors' Stock Option Plan
The Company's 1997 Directors' Stock Option Plan (the "Directors' Plan") was
adopted by the Board of Directors on October 6, 1997, and was subsequently
approved by the stockholders. A total of 200,000 shares of Common Stock are
reserved for issuance under the Directors' Plan. The Directors' Plan provides
for the grant of non-statutory options to nonemployee directors of the
Company. At March 31, 1999, no shares had been issued under the Directors'
Plan.
Common Shares Reserved for Future Issuance
At March 31, 1999, the Company has the following shares of Common Stock
reserved for issuance upon the exercise of equity instruments:
<TABLE>
<S> <C>
Stock Options:
Issued and outstanding........................................... 2,673,344
Authorized for future grants..................................... 1,724,785
Stock purchase plans............................................... 382,818
---------
4,780,947
=========
</TABLE>
6. Income Taxes
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
---------------------
1997 1998 1999
---- ------- -------
<S> <C> <C> <C>
Current:
Federal............................................. $380 $ 3,606 $ 9,860
State............................................... 279 682 1,064
---- ------- -------
Total current..................................... 659 4,288 10,924
Deferred:
Federal............................................. -- (3,558) (362)
State............................................... -- (324) (329)
---- ------- -------
Total deferred.................................... -- (3,882) (691)
---- ------- -------
$659 $ 406 $10,233
==== ======= =======
</TABLE>
The provision for income taxes reconciles to the amount computed by applying
the federal statutory rate (35%) to income before income taxes as follows (in
thousands):
F-15
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
$ % $ % $ %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Tax at federal statutory rate......... $ 2,441 35% $ 5,468 35% $ 9,578 35%
Increase (decrease) in valuation
allowance of deferred tax assets..... (2,343) (34) (5,094) (32) -- --
Foreign sales corporation............. -- -- (309) (2) (387) (1)
Federal alternative minimum tax....... 380 5 -- -- -- --
State taxes, net of federal benefit... 181 3 233 1 478 1
Federal tax credits................... -- -- (281) (2) (1,216) (5)
Merger costs and deferred
compensation......................... -- -- -- -- 763 3
Other................................. -- -- 389 3 1,017 4
------- --- ------- --- ------- ---
$ 659 9% $ 406 3% $10,233 37%
======= === ======= === ======= ===
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
for federal and state income taxes as of March 31, 1998 and 1999 are as shown
below. At March 31, 1998, the effective tax rate is computed based on a full
reduction of the valuation allowance and realization of the deferred tax
asset.
<TABLE>
<CAPTION>
March 31,
-------------
1998 1999
------ ------
<S> <C> <C>
Deferred tax assets (in thousands):
Inventory write-downs and other reserves....................... $1,814 $1,850
Net operating loss carryforwards............................... -- 1,719
Capitalization of inventory and research and development costs. 242 313
Research and development credit carryforwards.................. 898 298
Depreciation and amortization.................................. 242 --
State income taxes............................................. 239 47
Other credit carryforwards..................................... 447 447
------ ------
Total deferred tax assets...................................... 3,882 4,674
Deferred tax liabilities:
Depreciation and amortization.................................. -- 101
------ ------
Net deferred tax assets.......................................... $3,882 $4,573
====== ======
</TABLE>
At March 31, 1999, the Company has federal alternative minimum tax and
federal and state research and development tax credit carryforwards of
approximately $447,000, $195,000 and $103,000, respectively, which will begin
to expire in 2007 unless previously utilized. The Company also has federal and
state net operating loss carryforwards of approximately $4,043,000 which will
expire in 2018 and 2003, respectively, unless previously utilized. These net
operating loss carryforwards are the result of the operating losses generated
by the Company's subsidiary, Cimaron, prior to the acquisition. Under Internal
Revenue Code Section 382 and 383, the Company's use of its tax loss
carryforwards and tax credit carryforwards could be limited in the event of
certain cumulative changes in the Company's stock ownership.
7. COMMITMENTS
In July 1998, the Company acquired the right to purchase, in the form of a
ground lease, a parcel of land as a site for a potential new wafer fabrication
facility. This parcel of land is located approximately one quarter mile from
the Company's headquarters in San Diego, California. The Company has made
payments of $1.0 million
F-16
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
related to this transaction. In December 1998, the Company exercised its right
to acquire the land which commits the Company to take title to the land by May
31, 1999 upon payment of an additional $3.7 million.
The Company leases certain of its facilities under long-term operating
leases which expire at various dates through 2011. The lease agreements
frequently include renewal provisions, which require the Company to pay taxes,
insurance and maintenance costs and contain escalation clauses based upon
increases in the Consumer Price Index or defined rent increases. The Company
also leases certain software under noncancellable operating leases expiring
through 2002.
Annual future minimum lease payments, including machinery and equipment
under capital leases as of March 31, 1999 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Year Ending March 31, Leases Leases
- --------------------- --------- -------
<S> <C> <C>
2000....................................................... $ 3,473 $1,332
2001....................................................... 3,713 907
2002....................................................... 4,581 765
2003....................................................... 4,052 478
2004....................................................... 1,998 835
Thereafter................................................. 6,155 --
------- ------
Total minimum lease payments............................. $23,972 4,317
=======
Less amount representing interest............................ 679
------
Present value of remaining minimum capital lease payments
(including current portion of $1,075)....................... $3,638
======
</TABLE>
Rent expense (including short-term leases and net of sublease income) for
the years ended March 31, 1997, 1998, and 1999 was $1.2 million, $1.2 million,
and $1.4 million, respectively. Sublease income was $208,000, $119,000 and $0
for the years ended March 31, 1997, 1998 and 1999, respectively.
8. RELATED PARTY TRANSACTIONS
At March 31, 1998 and 1999, the Company had outstanding notes receivables
from officer(s) of $1,065,000, and $915,000, respectively. These notes bear
interest at the rates of 4.62% to 5.76%, and are due at the earlier of one to
three years from the date of the note or termination of employment with the
Company.
9. EMPLOYEE RETIREMENT PLAN
Effective January 1, 1986, the Company established a 401(k) defined
contribution retirement plan (the "Retirement Plan") covering all full-time
employees with greater than three months of service. The Retirement Plan
provides for voluntary employee contributions from 1% to 20% of annual
compensation, subject to a maximum limit allowed by Internal Revenue Service
guidelines. The Company may contribute such amounts as determined by the Board
of Directors. Employer contributions vest to participants at a rate of 20% per
year of service, provided that after five years of service all past and
subsequent employer contributions are 100% vested. The contributions charged
to operations totaled $318,000, $412,000 and $573,000 for the years ended
March 31, 1997, 1998 and 1999, respectively.
10. SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION
During the years ended March 31, 1997, 1998, and 1999, 20%, 21% and 20%,
respectively, of net revenues were from Nortel. In 1998 and 1999, Insight
Electronics, the Company's domestic distributor, accounted for 11% and 13% of
net revenues. Additionally, in 1999, Raytheon Systems Co. accounted for 16% of
net revenues. No other customer accounted for more than 10% of revenues in any
period.
F-17
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net revenues by geographic region were as follows (in thousands):
<TABLE>
<CAPTION>
Year ended March 31,
------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net revenues:
United States........................................ $34,424 $44,448 $ 61,760
Canada............................................... 10,943 14,204 18,011
Europe and Israel.................................... 8,216 13,773 18,136
Asia................................................. 3,885 4,193 7,093
------- ------- --------
$57,468 $76,618 $105,000
======= ======= ========
</TABLE>
11. CONTINGENCIES
The Company is party to various claims and legal actions arising in the
normal course of business, including notification of possible infringement on
the intellectual property rights of third parties. In addition, since 1993 the
Company has been named as a potentially responsible party ("PRP") along with a
large number of other companies that used Omega Chemical Corporation ("Omega")
in Whittier, California to handle and dispose of certain hazardous waste
material. The Company is a member of a large group of PRPs that has agreed to
fund certain remediation efforts at the Omega site for which the Company has
accrued approximately $50,000. Although the ultimate outcome of these matters
is not presently determinable, management believes that the resolution of all
such pending matters, net of amounts accrued, will not have a material adverse
affect on the Company's financial position or liquidity; however, there can be
no assurance that the ultimate resolution of these matters will not have a
material impact on the Company's results of operations in any period.
On July 31, 1998, the Lemelson Medical, Education & Research Foundation
Limited Partnership (the "Lemelson Partnership") filed a lawsuit in the U.S.
District Court for the District of Arizona against 26 companies, including the
Company, engaged in the manufacture and/or sale of IC products. On
November 25, 1998 the Company was served a summons pursuant to this lawsuit.
The complaint alleges infringement by the defendants of certain U.S. patents
(the "Lemelson Patents") held by the Lemelson Partnership relating to certain
semiconductor manufacturing processes. The complaint seeks, among other
things, injunctive relief and unspecified treble damages. Previously, the
Lemelson Partnership has offered the Company a license under the Lemelson
patents. The Company is monitoring this matter and, although the ultimate
outcome of this matter is not currently determinable, the Company believes,
based in part on the licensing terms previously offered by the Lemelson
Partnership, that the resolution of this matter will not have a material
adverse effect on the Company's financial position or liquidity; however,
there can be no assurance that the ultimate resolution of this matter will not
have a material adverse effect on the Company's results of operations in any
period.
F-18
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
<TABLE>
<CAPTION>
Additions
------------------
Charged Charged
Balance at to Costs to Other Balance
Beginning and Accounts- at End
Description of Period Expenses Describe Deductions of Period
----------- ---------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended March 31, 1999:
Allowance for doubtful
accounts.................. $350 $ 50 $-- $223 $177
Year ended March 31, 1998:
Allowance for doubtful
accounts.................. $200 $157 $-- $ 7 $350
Year ended March 31, 1997:
Allowance for doubtful
accounts.................. $ 90 $198 $88 $ -- $200
</TABLE>
F-19
<PAGE>
EXHIBIT B
EXHIBIT 10.26
Cimaron Communications Corporation
1998 Stock Incentive Plan
-------------------------
1. Purpose
-------
The purpose of this 1998 Stock Incentive Plan (the "Plan") of Cimaron
Communications Corporation, a Delaware corporation (the "Company"), is to
advance the interests of the Company's stockholders by enhancing the Company's
ability to attract, retain and motivate persons who make (or are expected to
make) important contributions to the Company by providing such persons with
equity ownership opportunities and performance-based incentives and thereby
better aligning the interests of such persons with those of the Company's
stockholders. Except where the context otherwise requires, the term "Company"
shall include any present or future subsidiary corporations of Cimaron
Communications Corporation as defined in Section 424(f) of the Internal Revenue
Code of 1986, as amended, and any regulations promulgated thereunder (the
"Code").
2. Eligibility
-----------
All of the Company's employees, officers, directors, consultants and
advisors are eligible to be granted options, restricted stock, or other stock-
based awards (each, an "Award") under the Plan. Any person who has been granted
an Award under the Plan shall be deemed a "Participant".
3. Administration, Delegation
--------------------------
(a) Administration by Board of Directors. The Plan will be administered
------------------------------------
by the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Award. No director or person acting
pursuant to the authority delegated by the Board shall be liable for any action
or determination relating to or under the Plan made in good faith.
1
<PAGE>
(b) Delegation to Executive Officers. To the extent permitted by
--------------------------------
applicable law, the Board may delegate to one or more executive officers of the
Company the power to make Awards and exercise such other powers under the Plan
as the Board may determine, provided that the Board shall fix the maximum number
of shares subject to Awards and the maximum number of shares for any one
Participant to be made by such executive officers.
(c) Appointment of Committees. To the extent permitted by applicable law,
-------------------------
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). If and when the common
stock, $.001 par value per share, of the Company (the "Common Stock") is
registered under the Securities Exchange Act of 1934 (the "Exchange Act"), the
Board shall appoint one such Committee of not less than two members, each member
of which shall be an "outside director" within the meaning of Section 162(m) of
the Code and a "non-employee director" as defined in Rule 16b-3 promulgated
under the Exchange Act." All references in the Plan to the "Board" shall mean
the Board or a Committee of the Board or the executive officer referred to in
Section 3(b) to the extent that the Board's powers or authority under the Plan
have been delegated to such Committee or executive officer.
4. Stock Available for Awards
--------------------------
(a) Number of Shares. Subject to adjustment under Section 8, Awards may
----------------
be made under the Plan for up to 2,556,250 shares of Common Stock. If any Award
expires or is terminated, surrendered or canceled without having been fully
exercised or is forfeited in whole or in part or results in any Common Stock not
being issued, the unused Common Stock covered by such Award shall again be
available for the grant of Awards under the Plan, subject however, in the case
of Incentive Stock Options (as hereinafter defined), to any limitation required
under the Code. Shares issued under the Plan may consist in whole or in part of
authorized but unissued shares or treasury shares.
(b) Per-Participant Limit. Subject to adjustment under Section 8, for
---------------------
Awards granted after the Common Stock is registered under the Exchange Act, the
maximum number of shares with respect to which an Award may be granted to any
Participant under the Plan shall be 500,000 per calendar year. The per-
participant limit described in this Section 4(b) shall be construed and applied
consistently with Section 162(m) of the Code.
2
<PAGE>
5. Stock Options
-------------
(a) General. The Board may grant options to purchase Common Stock (each, an
-------
"Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive Stock
Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option".
(b) Incentive Stock Options. An Option that the Board intends to be an
-----------------------
incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereto which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) Exercise Price. The Board shall establish the exercise price at the
--------------
time each Option is granted and specify it in the applicable option agreement.
(d) Duration of Options. Each Option shall be exercisable at such times
-------------------
and subject to such terms and conditions as the Board may specify in the
applicable option agreement.
(e) Exercise of Option. Options may be exercised only by delivery to the
------------------
Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 5(f) for the number of shares for
which the Option is exercised.
(f) Payment Upon Exercise. Common Stock purchased upon the exercise of an
---------------------
Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may otherwise provide in an Option Agreement,
(i) delivery of an irrevocable and unconditional undertaking by a creditworthy
broker to deliver promptly to the Company sufficient funds to pay the exercise
price, (ii) delivery by the Participant to the Company of a copy of irrevocable
and unconditional instructions to a creditworthy broker to deliver promptly to
the Company cash or a check sufficient to pay the exercise price or (iii)
delivery of shares of Common Stock owned by the Participant valued at their fair
market value as
3
<PAGE>
determined by the Board in good faith ("Fair Market Value"), which Common Stock
was owned by the Participant at least six months prior to such delivery;
(3) to the extent permitted by the Board and explicitly provided in an
Option Agreement (i) by delivery of a promissory note of the Participant to the
Company on terms determined by the Board, or (ii) by payment of such other
lawful consideration as the Board may determine; or
(4) any combination of the above permitted forms of payment.
6. Restricted Stock
----------------
(a) Grants. The Board may grant Awards entitling recipients to acquire
------
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price (or to
require forfeiture of such shares if issued at no cost) from the recipient in
the event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable restriction period or periods
established by the Board for such Award (each, "Restricted Stock Award").
(b) Terms and Conditions. The Board shall determine the terms and any such
--------------------
Restricted Stock Award, including the conditions for repurchase (or forfeiture)
and the issue price, if any. Any stock certificates issued in respect of a
Restricted Stock Award shall be registered in the name of the Participant and,
unless otherwise determined by the Board, deposited by the Participant, together
with a stock power endorsed in blank, with the Company (or its designee). At the
expiration of the applicable restriction periods, the Company (or such designee)
shall deliver the certificates no longer subject to such restrictions to the
Participant or if the Participant has died, to the beneficiary designated, in a
manner determined by the Board, by a Participant to receive amounts due or
exercise rights of the Participant in the event of the Participant's death (the
"Designated Beneficiary"). In the absence of an effective designation by a
Participant, Designated Beneficiary shall mean the Participant's estate.
7. Other Stock-Based Awards
------------------------
The Board shall have the right to grant other Awards based upon the Common
Stock having such terms and conditions as the Board may determine, including the
grant of shares based upon certain conditions, the grant of securities
convertible into Common Stock and the grant of stock appreciation rights.
4
<PAGE>
8. Changes in Capitalization: Acquisition Events
---------------------------------------------
(a) Changes in Capitalization. In the event of any stock split, reverse
-------------------------
stock split, stock dividend, recapitalization, combination of shares,
reclassification of shares, liquidation, spin-off or other similar change in
capitalization or event, or any distribution to holders of Common Stock other
than a normal cash dividend, (i) the number and class of security available
under this Plan, (ii) the number and class of security and exercise price per
share subject to each outstanding Option, (iii) the repurchase price per share
subject to each outstanding Restricted Stock Award, and (iv) the terms of each
other outstanding stock-based Award shall be appropriately adjusted by the
Company (or substituted Awards may be made, if applicable) to the extent the
Board shall determine, in good faith, that such an adjustment (or substitution)
is necessary and appropriate. If this Section 8(a) applies and Section 8(b) also
applies to any event, Section 8(b) shall be applicable to such event, and this
Section 8(a) shall not be applicable.
(b) Acquisition Events
------------------
(1) Consequences of Acquisition Events. Upon the occurrence of an
----------------------------------
Acquisition Event (as defined below), or the execution by the Company of any
agreement with respect to an Acquisition Event, the Board shall provide that
outstanding Awards other than Restricted Stock Awards shall be assumed, or
equivalent awards shall be substituted, by the acquiring or succeeding
corporation (or an affiliate thereof), provided that any Options substituted for
Incentive Stock Options shall satisfy, in the determination of the Board, the
requirements of Section 424(a) of the Code; provided, however, that if the
-------- -------
acquiring or succeeding corporation (or an affiliate thereof) does not agree to
assume, or substitute for, such Awards, then:
(i) with respect to outstanding Options, the Board shall (x) upon written
notice to the Participants, provide that all then unexercised Options will
become exercisable in full as of a specified time (the "Acceleration Time")
prior to the Acquisition Event and will terminate immediately prior to the
consummation of such Acquisition Event except to the extent exercised by the
Participants before the consummation of such Acquisition Event and/or (y) in the
event of an Acquisition Event under the terms of which holders of Common Stock
will receive upon consummation thereof a cash payment for each share of Common
Stock surrendered pursuant to such Acquisition Event (the "Acquisition Price"),
provide that all outstanding Options shall terminate upon consummation of such
Acquisition Event and each Participant shall receive, in exchange therefor, a
cash payment equal to the amount (if any) by which (A) the Acquisition Price
multiplied by the number of shares of Common Stock subject to such outstanding
Options (whether or not then exercisable), exceeds (B) the aggregate exercise
price of such Options;
5
<PAGE>
(ii) with respect to outstanding Restricted Stock Awards, the repurchase
and other rights of the Company under such Award shall inure to the benefit of
the Company's successor and shall apply to the securities or other property
which the Common Stock was converted into or exchanged for pursuant to such
Acquisition Event in the same manner and to the same extent as they applied to
the Common Stock subject to such Award; and
(iii) with respect to other outstanding Awards, the Board shall specify the
effect of an Acquisition Event on any other Award granted under the Plan at the
time of the grant of such Award.
(2) Definition. An "Acquisition Event" shall mean: (a) any merger or
----------
consolidation of the Company with or into another entity, other than one in
which the Common Stock is not converted into or exchanged for the right to
receive cash, securities or other property, (b) any sale of all or substantially
all of the assets of the Company or (c) any exchange of shares of the Company
for cash, securities or other property pursuant to a statutory share exchange
transaction.
9. General Provisions Applicable to Awards
---------------------------------------
(a) Transferability of Awards. Except as the Board may otherwise
-------------------------
determine or provide in an Award, Awards shall not be sold, assigned,
transferred, pledged or otherwise encumbered by the person to whom they are
granted, either voluntarily or by operation of law, except by will or the laws
of descent and distribution, and, during the life of the Participant, shall be
exercisable only by the Participant. References to a Participant, to the extent
relevant in the context, shall include references to authorized transferees.
(b) Documentation. Each Award under the Plan shall be evidenced by a
-------------
written instrument in such form as the Board shall determine. Each Award may
contain terms and conditions in addition to those set forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each type
----------------
of Award may be made alone or in addition or in relation to any other type of
Award. The terms of each type of Award need not be identical, and the Board need
not treat Participants uniformly.
(d) Termination of Status. The Board shall determine the effect on an
---------------------
Award of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
6
<PAGE>
(e) Withholding. Each Participant shall pay to the Company, or make
-----------
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. Except as the Board may otherwise
provide in an Award, Participants may satisfy such tax obligations in whole or
in part in shares of Common Stock, including shares retained from the Award
creating the tax obligation, valued at their Fair Market Value. The Company may,
to the extent permitted by law, deduct any such tax obligations from any payment
of any kind otherwise due to a Participant.
(f) Amendment of Award. The Board may amend, modify or terminate any
------------------
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
(g) Conditions on Delivery of Stock. The Company will not be obligated to
-------------------------------
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
(h) Acceleration. The Board may at any time provide that any Options shall
------------
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of all restrictions or that any other stock-based Awards
may become exercisable in full or in part or free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may be.
10. Miscellaneous
-------------
(a) No Right To Employment or Other Status. No person shall have any
--------------------------------------
claim or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
7
<PAGE>
(b) No Rights As Stockholder. Subject to the provisions of the applicable
------------------------
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder of such shares.
Notwithstanding the foregoing, in the event the Company effects a split of the
Common Stock by means of a stock dividend and the exercise price of and the
number of shares subject to such Option is adjusted as of the date of the
distribution of the dividend (rather than as of the record date for such
dividend), then an optionee who exercises an Option between the close of
business on the record date for such stock dividend and the close of business on
the distribution date for such stock dividend shall be entitled to receive, on
the distribution date, the stock dividend with respect to the shares of Common
Stock acquired upon such Option exercise, notwithstanding the fact that such
shares were not outstanding as of the close of business on the record date for
such stock dividend.
(c) Effective Date and Term of Plan. The Plan shall become effective on the
-------------------------------
date on which it is adopted by the Board. No Awards shall be granted under the
Plan after the completion of ten years from the earlier of (i) the date on which
the Plan was adopted by the Board or (ii) the date the Plan was approved by the
Company's stockholders, but Awards previously granted may extend beyond that
date.
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan
-----------------
or any portion thereof at any time.
(e) Governing Law. The provisions of the Plan and all Awards made hereunder
-------------
shall be governed by and interpreted in accordance with the laws of the State of
Delaware, without regard to any applicable conflicts of law.
8
<PAGE>
Cimaron Communications Corporation
Restricted Stock Agreement
Granted Under 1998 Stock Incentive Plan
---------------------------------------
AGREEMENT made this ___ day of __________, 19__, between Cimaron
Communications Corporation, a Delaware corporation (the "Company"), and
________________________ (the "Participant").
For valuable consideration, receipt of which is acknowledged, the parties
hereto agree as follows:
1. Purchase of Shares.
-------------------
The Company shall issue and sell to the Participant, and the Participant
shall purchase from the Company, subject to the terms and conditions set
forth in this Agreement and in the Company's 1998 Stock Incentive Plan (the
"Plan")______ shares (the "Shares") of common stock, $.001 par value, of the
Company ("Common Stock"), at a purchase price of $._______ per share. The
aggregate purchase price for the Shares shall be paid by the Participant by
check payable to the order of the Company or such other method as may be
acceptable to the Company. Upon receipt by the Company of payment for the
Shares, the Company shall issue to the Participant one or more certificates
in the name of the Participant for that number of Shares purchased by the
Participant. The Participant agrees that the Shares shall be subject to the
Purchase Option set forth in Section 2 of this Agreement and the restrictions
on transfer set forth in Section 4 of this Agreement.
2. Purchase Option.
----------------
(a) In the event that the Participant ceases to be employed by the Company
for any reason or no reason, with or without cause, prior to ___________
[five years from employment
<PAGE>
or commencement], the Company shall have the right and option (the "Purchase
Option") to purchase from the Participant, for a sum of $______ per share
(the "Option Price"), some or all of the Unvested Shares. "Unvested Shares"
means the total number of Shares multiplied by the Applicable Percentage at
the time the Purchase Option becomes exercisable by the Company. The
"Applicable Percentage" shall begin as 100% and shall be reduced according to
the schedule on Exhibit A.
---------
(b) Notwithstanding the foregoing, in the event of an Acquisition of the
Company (as defined below), the Applicable Percentage shall, immediately
prior to the Closing of the Acquisition, be decreased by (i) 20% of the total
number of Shares, if the Participant has been employed by the Company for 12
or more months prior to the Acquisition, or (ii) 10% of the total number of
Shares, if the Participant has been employed by the Company for less than 12
months prior to the Acquisition. Thereafter, the Applicable Percentage shall
be reduced in accordance with the total schedule set forth in the immediately
preceding paragraph, except that such schedule shall be shortened by 12
months (in the case of an Applicable Percentage reduction under clause (i)
above) or six months (in the case of an Applicable Percentage reduction under
clause (ii) above).
(c) "Acquisition" shall mean (i) the consolidation or merger of the
Company (other than a merger to reincorporate the Corporation in a different
jurisdiction) into or with any other entity or entities in which the shares
of the Corporation outstanding immediately prior to the closing of such event
represent or are converted into shares of the surviving or resulting entity
that represent less than a majority of the total number of shares of the
surviving or resulting entity that are outstanding or are reserved for
issuance upon the exercise or conversion of outstanding securities
immediately after the closing of such event, or (ii) the sale or transfer of
fifty percent (50%) or more of the capital stock of the Corporation in a
single transaction or series of related transactions or (iii) the sale of all
or substantially all of the assets of the Company.
(d) For purposes of this Agreement, employment with the Company shall
include employment with a parent or subsidiary of the Company.
<PAGE>
3. Exercise of Purchase Option and Closing.
----------------------------------------
(a) The Company may exercise the Purchase Option by
delivering or mailing to the Participant (or his estate), within
60 days after the termination of the employment of the
Participant with the Company, a written notice of exercise of the
Purchase Option. Such notice shall specify the number of Shares
to be purchased. If and to the extent the Purchase Option is not
so exercised by the giving of such a notice within such 60-day
period, the Purchase Option shall automatically expire and
terminate effective upon the expiration of such 60-day period.
(b) Within 10 days after his receipt of the Company's
notice of the exercise of the Purchase Option pursuant to
subsection (a) above, the Participant (or his estate) shall
tender to the Company at its principal offices the certificate or
certificates representing the Shares which the Company has
elected to purchase in accordance with the terms of this
Agreement, duly endorsed in blank or with duly endorsed stock
powers attached thereto, all in form suitable for the transfer of
such Shares to the Company. Promptly following its receipt of
such certificate or certificates, the Company shall deliver or
mail to the Participant a check in the amount of the aggregate
Option Price therefor.
(c) After the time at which any Shares are required to be
delivered to the Company for transfer to the Company pursuant to
subsection (b) above, the Company shall not pay any dividend to
the Participant on account of such Shares or permit the
Participant to exercise any of the privileges or rights of a
stockholder with respect to such Shares, but shall, in so far as
permitted by law, treat the Company as the owner of such Shares.
(d) The Option Price may be payable, at the option of the
Company, in cancellation of all or a portion of any outstanding
indebtedness of the Participant to the Company or in cash (by
check) or both.
(e) The Company shall not purchase any fraction of a Share
upon exercise of the Purchase Option, and any fraction of a Share
resulting from a computation made pursuant to Section 2 of
<PAGE>
this Agreement shall be rounded to the nearest whole Share (with
any one-half Share being rounded upward).
4. Restrictions on Transfer.
------------------------
(a) The Participant shall not sell, assign, transfer,
pledge, hypothecate or otherwise dispose of, by operation of law
or otherwise (collectively "transfer"):
(b) any Shares, or any interest therein, that are subject
to the Purchase Option, except that the Participant may transfer
such Shares to or for the benefit of any parent, spouse, child or
grandchild, or to a trust for their benefit, provided that such
--------
Shares shall remain subject to this Agreement (including without
limitation the restrictions on transfer set forth in this Section
4, the Purchase Option and the right of first refusal set forth
in Section 5) and such permitted transferee shall, as a condition
to such transfer, deliver to the Company a written instrument
confirming that such transferee shall be bound by all of the
terms and conditions of this Agreement; or
(c) any Shares, or any interest therein, that are no longer
subject to the Purchase Option, except in accordance with Section
5 below.
5. Right of First Refusal.
----------------------
(a) If the Participant proposes to transfer any Shares that
are no longer subject to the Purchase Option (either because they
are no longer Unvested Shares or because the Purchase Option
expired unexercised), then the Participant shall first give
written notice of the proposed transfer (the "Transfer Notice")
to the Company. The Transfer Notice shall name the proposed
transferee and state the number of such Shares he proposes to
transfer the ("Offered Shares"), the price per share and all
other material terms and conditions of the transfer.
(b) For 30 days following its receipt of such Transfer
Notice, the Company shall have the option to purchase all (but
not less than all) of the Offered Shares at the price and upon
the terms set forth in the Transfer Notice. In the event the
Company elects to
<PAGE>
purchase all of the Offered Shares, it shall give written notice
of such election to the Participant within such 30-day period.
Within 10 days after his receipt of such notice, the Participant
shall tender to the Company at its principal offices the
certificate or certificates representing the Offered Shares, duly
endorsed in blank by the Participant or with duly endorsed stock
powers attached thereto, all in form suitable for transfer of the
Offered Shares to the Company. Promptly following receipt of such
certificate or certificates, the Company shall deliver or mail to
the Participant a check in payment of the purchase price for the
Offered Shares; provided that if the terms of payment set forth
-------- ----
in the Transfer Notice were other than cash against delivery, the
Company may pay for the Offered Shares on the same terms and
conditions as were set forth in the Transfer Notice.
(c) If the Company does not elect to acquire all of the
Offered Shares, the Participant may, within the 30-day period
following the expiration of the option granted to the Company
under subsection (b) above, transfer the Offered Shares to the
proposed transferee, provided that such transfer shall not be on
-------- ----
terms and conditions more favorable to the transferee than those
contained in the Transfer Notice. Notwithstanding any of the
above, all Offered Shares transferred pursuant to this Section 5
shall remain subject to this Agreement (including without
limitation the restrictions on transfer set forth in Section 4
and the right of first refusal set forth in this Section 5) and
such transferee shall, as a condition to such transfer, deliver
to the Company a written instrument confirming that such
transferee shall be bound by all of the terms and conditions of
this Agreement.
(d) After the time at which the Offered Shares are required
to be delivered to the Company for transfer to the Company
pursuant to subsection (b) above, the Company shall not pay any
dividend to the Participant on account of such Offered Shares or
permit the Participant to exercise any of the privileges or
rights of a stockholder with respect to such Shares, but shall,
in so far as permitted by law, treat the Company as the owner of
such Offered Shares.
(e) The following transactions shall be exempt from the
provisions of this Section 5:
<PAGE>
(i) a transfer of Shares to or for the benefit of any
parent, spouse, child or grandchild of the Participant, or
to a trust for their benefit;
(ii) any transfer pursuant to an effective registration
statement filed by the Company under the Securities Act of
1933, as amended (the "Securities Act"); and
(iii) any transfer of the shares pursuant to the sale of
all or substantially all of the business of the Company;
provided, however, that in the case of a transfer pursuant
-------- -------
to clause (1) above, such Shares shall remain subject to
this Agreement (including without limitation the
restrictions on transfer set forth in Section 4 and the
right of first refusal set forth in this Section 5) and such
transferee shall as a condition to such transfer, deliver to
the Company a written instrument confirming that such
transferee shall be bound by all of the terms and conditions
of this Agreement.
(f) The Company may assign its rights to purchase Offered
Shares in any particular transaction under this Section 5 to one
or more persons or entities.
(g) The provisions of this Section 5 shall terminate upon
the earlier of the following events:
(i) the closing of the sale of shares of Common Stock
in an underwritten public offering pursuant to an effective
registration statement filed by the Company under the
Securities Act at a price to the public of at least $5.00
per share (subject to appropriate adjustments for stock
splits, stock dividends, combinations and other similar
recapitalizations affecting such shares) resulting in gross
proceeds to the Company of at least $10,000,000; or
(ii) an Acquisition.
6. Agreement in Connection with Public Offering.
--------------------------------------------
The Participant agrees, in connection with the initial underwritten
public offering of the Company's securities pursuant to a registration
statement under the Securities Act, (i) not to sell, make short sale
of, loan, grant any
<PAGE>
options for the purchase of, or otherwise dispose of any shares of
Common Stock held by the Participant (other than those shares included
in the offering) without the prior written consent of the Company or
the underwriters managing such initial underwritten public offering of
the Company's securities for a period of 180 days from the effective
date of such registration statement, and (ii) to execute any agreement
reflecting clause (i) above as may be requested by the Company or the
managing underwriters at the time of such initial public offering.
7. Effect of Prohibited Transfer.
------------------------------
The Company shall not be required (a) to transfer on its books any of
the Shares which shall have been sold or transferred in violation of
any of the provisions set forth in this Agreement, or (b) to treat as
owner of such Shares or to pay dividends to any transferee to whom any
such Shares shall have been so sold or transferred.
8. Escrow.
-------
The Participant shall, upon the execution of this Agreement, execute
Joint Escrow Instructions in the form attached to this Agreement as
Exhibit B. The Joint Escrow Instructions shall be delivered to the
- ---------
Secretary of the Company, as escrow agent thereunder. The Participant
shall deliver to such escrow agent a stock assignment duly endorsed in
blank and hereby instructs the Company to deliver to such escrow
agent, on behalf of the Participant, the certificate(s) evidencing the
Shares issued hereunder. Such materials shall be held by such escrow
agent pursuant to the terms of such Joint Escrow Instructions.
9. Restrictive Legend.
-------------------
All certificates representing Shares shall have affixed thereto a
legend in substantially the following form, in addition to any other
legends that may be required under federal or state securities laws:
(i) "The shares of stock represented by this certificate
are subject to restrictions on transfer and an option to
purchase set forth in a certain Stock Restriction Agreement
between the corporation and the registered owner of these
shares (or his predecessor in interest), and such Agreement
is available for inspection without charge at the office of
the Secretary of the corporation."
<PAGE>
available for at least one year and even then will not be available unless
a public market then exists for the Common Stock, adequate information
concerning the Company is then available to the public, and other terms and
conditions of Rule 144 are complied with; and (iv) there is now no
registration statement on file with the Securities and Exchange Commission
with respect to any stock of the Company and the Company has no obligation
or current intention to register the Shares under the Securities Act.
12. Withholding Taxes; Section 83(b) Election.
------------------------------------------
(a) The Participant acknowledges and agrees that the Company has the
right to deduct from payments of any kind otherwise due to the Participant
any federal, state or local taxes of any kind required by law to be
withheld with respect to the purchase of the Shares by the Participant or
the lapse of the Purchase Option.
(b) The Participant acknowledges that he has been informed of the
availability of making an election in accordance with Section 83(b) of the
Internal Revenue Code of 1986, as amended; that such election must be filed
with the Internal Revenue Service within 30 days of the transfer of shares
to the Participant; and that the Participant is solely responsible for
making such election.
<PAGE>
(ii) "The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be sold, transferred or otherwise disposed of in the
absence of an effective registration statement under such
Act or an opinion of counsel satisfactory to the corporation
to the effect that such registration is not required."
10. Provisions of the Plan.
-----------------------
This Agreement is subject to the provisions of the Plan, a copy of which is
furnished to the Participant with this Agreement.
11. Investment Representations.
---------------------------
The Participant represents, warrants and covenants as follows:
(a) The Participant is purchasing the Shares for his own account for
investment only, and not with a view to, or for sale in connection with,
any distribution of the Shares in violation of the Securities Act, or any
rule or regulation under the Securities Act.
(b) The Participant has had such opportunity as he has deemed
adequate to obtain from representatives of the Company such information as
is necessary to permit him to evaluate the merits and risks of his
investment in the Company.
(c) The Participant has sufficient experience in business, financial
and investment matters to be able to evaluate the risks involved in the
purchase of the Shares and to make an informed investment decision with
respect to such purchase.
(d) The Participant can afford a complete loss of the value of the
Shares and is able to bear the economic risk of holding such Shares for an
indefinite period.
(e) The Participant understands that (i) the Shares have not been
registered under the Securities Act and are "restricted securities" within
the meaning of Rule 144 under the Securities Act, (ii) the Shares cannot be
sold, transferred or otherwise disposed of unless they are subsequently
registered under the Securities Act or an exemption from registration is
then available; (iii) in any event, the exemption from registration under
Rule 144 will not be
<PAGE>
13. Severability.
------------
The invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement,
and each other provision of this Agreement shall be severable and enforceable to
the extent permitted by law.
14. Waiver.
-------
Any provision for the benefit of the Company contained in this Agreement may be
waived, either generally or in any particular instance, by the Board of
Directors of the Company.
15. Binding Effect.
---------------
This Agreement shall be binding upon and inure to the benefit of the Company and
the Participant and their respective heirs, executors, administrators, legal
representatives, successors and assigns, subject to the restrictions on transfer
set forth in Sections 4 and 5 of this Agreement.
16. Notice.
-------
All notices required or permitted hereunder shall be in writing and deemed
effectively given upon personal delivery or five days after deposit in the
United States Post Office, by registered or certified mail, postage prepaid,
addressed to the other party hereto at the address shown beneath his or its
respective signature to this Agreement, or at such other address or addresses as
either party shall designate to the other in accordance with this Section 16.
17. Pronouns.
---------
Whenever the context may require, any pronouns used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
form of nouns and pronouns shall include the plural, and vice versa.
18. Entire Agreement.
-----------------
This Agreement and the Plan constitutes the entire agreement between the
parties, and supersedes all prior agreements and understandings, relating to the
subject matter of this Agreement.
<PAGE>
19. Amendment.
----------
This Agreement may be amended or modified only by a written instrument executed
by both the Company and the Participant.
<PAGE>
20. Governing Law.
-------------
This Agreement shall be construed, interpreted and enforced in accordance
with the internal laws of the State of Delaware without regard to any applicable
conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
CIMARON COMMUNICATIONS
CORPORATION
By:____________________________
Title:_________________________
200 Brickstone Square
Andover, MA 01810
PARTICIPANT
_______________________________
Name: _________________________
Address:_______________________
_______________________________
<PAGE>
Exhibit A
---------
<TABLE>
<CAPTION>
If Cessation of Employment Occurs: Applicable Percentage:
- --------------------------------------------------------------------------------
<S> <C>
Before [1 year from commencement] 100%
On or after [1 year] but before [1.25 years] 80%
On or after [1.25 years] but before [1.50 years] 75%
On or after [1.50 years] but before [1.75 years] 70%
On or after [1.75 years] but before [2 years] 65%
On or after [2 years] but before [2.25 years] 60%
On or after [2.25 years] but before [2.50 years] 55%
On or after [2.50 years] but before [2.75 years] 50%
On or after [2.75 years] but before [3 years] 45%
On or after [3 years] but before [3.25 years] 40%
On or after [3.25 years] but before [3.50 years] 35%
On or after [3.50 years] but before [3.75 years] 30%
On or after [3.75 years] but before [4 years] 25%
On or after [4 years] but before [4.25 years] 20%
On or after [4.25 years] but before [4.50 years] 15%
On or after [4.50 years] but before [4.75 years] 10%
On or after [4.75 years] but before [5 years] 5%
On or after [5 years] -0-
</TABLE>
<PAGE>
Exhibit B
---------
CIMARON COMMUNICATIONS CORPORATION
Joint Escrow Instructions
-------------------------
________________, 199__
Secretary
Cimaron Communications Corporation
200 Brickstone Square
Andover, MA 01810
Dear Sir:
As Escrow Agent for Cimaron Communications Corporation, a Delaware
corporation (the "Company"), and the undersigned Participant ("Holder"), you are
hereby authorized and directed to hold the documents delivered to you pursuant
to the terms of that certain Restricted Stock Agreement (the "Agreement") of
even date herewith, to which a copy of these Joint Escrow Instructions is
attached, in accordance with the following instructions:
1. Holder irrevocably authorizes the Company to deposit with you any
certificates evidencing Shares (as defined in the Agreement) to be held by you
hereunder and any additions and substitutions to said Shares. Holder does
hereby irrevocably constitute and appoint you as his attorney-in-fact and
agent for the term of this escrow to execute with respect to such Shares all
documents necessary or appropriate to make such Shares negotiable and to
complete any transaction herein contemplated. Subject to the provisions of
this paragraph 1 and the terms of the Agreement, Holder shall exercise all
rights and privileges of a stockholder of the Company while the Shares are
held by you.
2. Upon any purchase by the Company of the Shares pursuant to the
Agreement, the Company shall give to Holder and you a written notice
specifying the purchase price for the Shares, as determined pursuant to the
Agreement, and the time for a closing hereunder (the "Closing") at the
principal office of the
<PAGE>
Company. Holder and the Company hereby irrevocably authorize and direct you to
close the transaction contemplated by such notice in accordance with the terms
of said notice.
3. At the Closing, you are directed (a) to date the stock assignment form
or forms necessary for the transfer of the Shares, (b) to fill in on such form
or forms the number of Shares being transferred, and (c) to deliver same,
together with the certificate or certificates evidencing the Shares to be
transferred, to the Company against the simultaneous delivery to you of the
purchase price for the Shares being purchased pursuant to the Agreement.
4. The Holder shall have the right to withdraw from this escrow any
Shares as to which the Purchase Option (as defined in the Agreement) has
terminated or expired.
5. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
6. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying
or refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact of Holder while acting in
good faith and in the exercise of your own good judgment, and any act done or
omitted by you pursuant to the advice of your own attorneys shall be
conclusive evidence of such good faith.
7. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or Company,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree of any
court, you shall not be liable to any of the parties hereto or to any other
person, firm or Company by reason of such compliance, notwithstanding any such
order, judgment or decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
8. You shall not be liable in any respect on account of the identity,
authority or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or
called for hereunder.
<PAGE>
9. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder and may rely upon the advice of such counsel.
10. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be Secretary of the Company or if you shall resign by written
notice to each party. In the event of any such termination, the Company shall
appoint any officer of the Company as successor Escrow Agent.
11. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
12. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or
defend any such proceedings.
13. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit
in the United States Post Office, by registered or certified mail with postage
and fees prepaid, addressed to each of the other parties thereunto entitled at
the following addresses, or at such other addresses as a party may designate
by ten days' advance written notice to each of the other parties hereto.
COMPANY: Cimaron Communications Corporation
200 Brickstone Square
Andover, MA 01810
HOLDER: Notices to Holder shall be sent to the
address set forth below Holder's signature below.
ESCROW AGENT:
Secretary
Cimaron Communications Corporation
200 Brickstone Square
Andover, MA 01810
<PAGE>
By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions, and you do not become a
party to the Agreement.
This instrument shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
Very truly yours,
CIMARON COMMUNICATIONS
CORPORATION
By: _____________________________
Title:_____________________________
200 Brickstone Square
Andover, MA 01810
HOLDER:
___________________________________
Name: _____________________________
ESCROW AGENT: Address: Address: __________________________
______________________
______________________
_____________________________ Date Signed: ______________________
<PAGE>
Cimaron Communications Corporation
Restricted Stock Agreement
Granted Under 1998 Stock Incentive Plan
---------------------------------------
AGREEMENT made this ___ day of___________, 199___, between
Cimaron Communications Corporation, a Delaware corporation (the
"Company"), and __________________________ (the "Participant").
For valuable consideration, receipt of which is acknowledged, the
parties hereto agree as follows:
1. Purchase of Shares.
------------------
The Company shall issue and sell to the Participant, and the
Participant shall purchase from the Company, subject to the terms
and conditions set forth in this Agreement and in the Company's
1998 Stock Incentive Plan (the "Plan")______ shares (the
"Shares") of common stock, $.001 par value, of the Company
("Common Stock"), at a purchase price of $.___ per share. The
aggregate purchase price for the Shares shall be paid by the
Participant by check payable to the order of the Company or such
other method as may be acceptable to the Company. Upon receipt by
the Company of payment for the Shares, the Company shall issue to
the Participant one or more certificates in the name of the
Participant for that number of Shares purchased by the
Participant. The Participant agrees that the Shares shall be
subject to the Purchase Option set forth in Section 2 of this
Agreement and the restrictions on transfer set forth in Section 4
of this Agreement.
2. Purchase Option.
---------------
(a) In the event that the Participant ceases to be employed
by the Company for any reason or no reason, with or without
cause, prior to ___________ [five years from employment
<PAGE>
or commencement], the Company shall have the right and option
(the "Purchase Option") to purchase from the Participant, for a
sum of $___ per share (the "Option Price"), some or all of the
Unvested Shares. "Unvested Shares" means the total number of
Shares multiplied by the Applicable Percentage at the time the
Purchase Option becomes exercisable by the Company. The
"Applicable Percentage" shall begin as 100% and shall be reduced
according to the schedule on Exhibit A.
---------
(b) Notwithstanding the foregoing, in the event of an
Acquisition of the Company (as defined below), the Applicable
Percentage shall, immediately prior to the closing of the
Acquisition, be decreased by (i) 20% of the total number of
Shares, if the Participant has been employed by the Company for
12 or more months prior to the Acquisition, or (ii) 30% of the
total number of Shares, if the Participant has been employed by
the Company for less than 12 months prior to the Acquisition.
Thereafter, the Applicable Percentage shall be reduced in
accordance with the total schedule set forth in the immediately
preceding paragraph, except that such schedule shall be shortened
by 12 months (in the case of an Applicable Percentage reduction
under clause (i) above) or 18 months (in the case of an
Applicable Percentage reduction under clause (ii) above), and
further, if Participant's employment is terminated Without Cause
(as defined below) prior to the first anniversary of the date of
the Acquisition, 50% of such Participant's then remaining
Unvested Shares shall become vested as of such date of
termination.
For the purposes of this Section 2(b) "Without Cause" shall mean
(a) termination of the Participant's employment for any reason
other than (1) the breach by such Participant of either the
Noncompetition Agreement or the Nondisclosure and Developments
Agreement entered into by such Participant in favor of the
Company, (2) the commission by such Participant of an act of
fraud or embezzlement, (3) the deliberate disregard by such
Participant of the rules or policies of the Company, which
disregard is not remedied within 30 days after written notice
from the Company describing such disregard, or the commission by
the Participant of any other action with the intent to injure
materially the Company, (4) such Participant being found guilty
or entering a plea of nolo contendre in a criminal court of a
felony; or (5) such Participant's willful breach of duty or
habitual neglect of duty, or refusal to comply with any
reasonable or proper direction given by or on behalf of the Board
of Directors which breach, neglect or refusal is not remedied
within 30 days after written notice from the Company describing
such breach, neglect or refusal, and (b) a material reduction of
such Participant's
<PAGE>
responsibility or a reduction in such Participant's cash
compensation without a correlating increase in other compensation
or benefits or the required relocation of the Participant's
principal place of employment to a new location more than sixty
(60) miles distant from the immediately preceding principal place
of employment.
(c) "Acquisition" shall mean (i) the consolidation or merger of
the Company (other than a merger to reincorporate the Corporation
in a different jurisdiction) into or with any other entity or
entities in which the shares of the Corporation outstanding
immediately prior to the closing of such event represent or are
converted into shares of the surviving or resulting entity that
represent less than a majority of the total number of shares of
the surviving or resulting entity that are outstanding or are
reserved for issuance upon the exercise or conversion of
outstanding securities immediately after the closing of such
event, or (ii) the sale or transfer of fifty percent (50%) or
more of the capital stock of the Corporation in a single
transaction or series of related transactions or (iii) the sale
of all or substantially all of the assets of the Company.
(d) For purposes of this Agreement, employment with the Company
shall include employment with a parent or subsidiary of the
Company.
3. Exercise of Purchase Option and Closing.
----------------------------------------
(a) The Company may exercise the Purchase Option by delivering
or mailing to the Participant (or his estate), within 60 days
after the termination of the employment of the Participant with
the Company, a written notice of exercise of the Purchase Option.
Such notice shall specify the number of Shares to be purchased.
If and to the extent the Purchase Option is not so exercised by
the giving of such a notice within such 60-day period, the
Purchase Option shall automatically expire and terminate
effective upon the expiration of such 60-day period.
(b) Within 10 days after his receipt of the Company's notice of
the exercise of the Purchase Option pursuant to subsection (a)
above, the Participant (or his estate) shall tender to the
Company at its principal offices the certificate or certificates
representing the Shares which the Company has elected to purchase
in accordance with the terms of this Agreement, duly
<PAGE>
endorsed in blank or with duly endorsed stock powers attached
thereto, all in form suitable for the transfer of such Shares to
the Company. Promptly following its receipt of such certificate
or certificates, the Company shall deliver or mail to the
Participant a check in the amount of the aggregate Option Price
therefor.
(c) After the time at which any Shares are required to be
delivered to the Company for transfer to the Company pursuant to
subsection (b) above, the Company shall not pay any dividend to
the Participant on account of such Shares or permit the
Participant to exercise any of the privileges or rights of a
stockholder with respect to such Shares, but shall, in so far as
permitted by law, treat the Company as the owner of such Shares.
(d) The Option Price may be payable, at the option of the
Company, in cancellation of all or a portion of any outstanding
indebtedness of the Participant to the Company or in cash (by
check) or both.
(e) The Company shall not purchase any fraction of a Share upon
exercise of the Purchase Option, and any fraction of a Share
resulting from a computation made pursuant to Section 2 of this
Agreement shall be rounded to the nearest whole Share (with any
one-half Share being rounded upward).
4. Restrictions on Transfer.
-------------------------
(a) The Participant shall not sell, assign, transfer, pledge,
hypothecate or otherwise dispose of, by operation of law or
otherwise (collectively "transfer"):
(b) any Shares, or any interest therein, that are subject to the
Purchase Option, except that the Participant may transfer such
Shares to or for the benefit of any parent, spouse, child or
grandchild, or to a trust for their benefit, provided that such
--------
Shares shall remain subject to this Agreement (including without
limitation the restrictions on transfer set forth in this Section
4, the Purchase Option and the right of first refusal set forth
in Section 5) and such permitted transferee shall, as a condition
to such transfer, deliver to the Company a written instrument
confirming that such transferee shall be bound by all of the
terms and conditions of this Agreement; or
<PAGE>
(c) any Shares, or any interest therein, that are no longer subject to the
Purchase Option, except in accordance with Section 5 below.
5. Right of First Refusal.
-----------------------
(a) If the Participant proposes to transfer any Shares that are
no longer subject to the Purchase Option (either because they are
no longer Unvested Shares or because the Purchase Option expired
unexercised), then the Participant shall first give written
notice of the proposed transfer (the "Transfer Notice") to the
Company. The Transfer Notice shall name the proposed transferee
and state the number of such Shares he proposes to transfer the
("Offered Shares"), the price per share and all other material
terms and conditions of the transfer.
(b) For 30 days following its receipt of such Transfer Notice,
the Company shall have the option to purchase all (but not less
than all) of the Offered Shares at the price and upon the terms
set forth in the Transfer Notice. In the event the Company elects
to purchase all of the Offered Shares, it shall give written
notice of such election to the Participant within such 30-day
period. Within 10 days after his receipt of such notice, the
Participant shall tender to the Company at its principal offices
the certificate or certificates representing the Offered Shares,
duly endorsed in blank by the Participant or with duly endorsed
stock powers attached thereto, all in form suitable for transfer
of the Offered Shares to the Company. Promptly following receipt
of such certificate or certificates, the Company shall deliver or
mail to the Participant a check in payment of the purchase price
for the Offered Shares; provided that if the terms of payment set
-------- ----
forth in the Transfer Notice were other than cash against
delivery, the Company may pay for the Offered Shares on the same
terms and conditions as were set forth in the Transfer Notice.
(c) If the Company does not elect to acquire all of the Offered
Shares, the Participant may, within the 30-day period following
the expiration of the option granted to the Company under
subsection (b) above, transfer the Offered Shares to the proposed
transferee, provided that such transfer shall not be on
-------- ----
<PAGE>
terms and conditions more favorable to the transferee than
those contained in the Transfer Notice. Notwithstanding any of
the above, all Offered Shares transferred pursuant to this
Section 5 shall remain subject to this Agreement (including
without limitation the restrictions on transfer set forth in
Section 4 and the right of first refusal set forth in this
Section 5) and such transferee shall, as a condition to such
transfer, deliver to the Company a written instrument
confirming that such transferee shall be bound by all of the
terms and conditions of this Agreement.
(d) After the time at which the Offered Shares are required to
be delivered to the Company for transfer to the Company
pursuant to subsection (b) above, the Company shall not pay any
dividend to the Participant on account of such Offered Shares
or permit the Participant to exercise any of the privileges or
rights of a stockholder with respect to such Shares, but shall,
in so far as permitted by law, treat the Company as the owner
of such Offered Shares.
(e) The following transactions shall be exempt from the
provisions of this Section 5:
(i) a transfer of Shares to or for the benefit of any
parent, spouse, child or grandchild of the Participant,
or to a trust for theft benefit;
(ii) any transfer pursuant to an effective registration
statement filed by the Company under the Securities Act
of 1933, as amended (the "Securities Act"); and
(iii) any transfer of the shares pursuant to the sale of
all or substantially all of the business of the Company;
provided, however, that in the case of a transfer
pursuant to clause (1) above, such Shares shall remain
subject to this Agreement (including without limitation
the restrictions on transfer set forth in Section 4 and
the right of first refusal set forth in this Section 5)
and such transferee shall as a condition to such
transfer, deliver to the Company a written instrument
confirming that such transferee shall be bound by all of
the terms and conditions of this Agreement.
<PAGE>
(f) The Company may assign its rights to purchase Offered
Shares in any particular transaction under this Section 5 to
one or more persons or entities.
(g) The provisions of this Section 5 shall terminate upon the
earlier of the following events:
(i) the closing of the sale of shares of Common Stock
in an underwritten public offering pursuant to an effective
registration statement filed by the Company under the
Securities Act at a price to the public of at least $5.00
per share (subject to appropriate adjustments for stock
splits, stock dividends, combinations and other similar
recapitalizations affecting such shares) resulting in gross
proceeds to the Company of at least $10,000,000; or
(ii) an Acquisition.
6. Agreement in Connection with Public Offering.
--------------------------------------------
The Participant agrees, in connection with the initial underwritten
public offering of the Company's securities pursuant to a registration
statement under the Securities Act, (i) not to sell, make short sale
of, loan, grant any options for the purchase of, or otherwise dispose
of any shares of Common Stock held by the Participant (other than
those shares included in the offering) without the prior written
consent of the Company or the underwriters managing such initial
underwritten public offering of the Company's securities for a period
of 180 days from the effective date of such registration statement,
and (ii) to execute any agreement reflecting clause (i) above as may
be requested by the Company or the managing underwriters at the time
of such initial public offering.
7. Effect of Prohibited Transfer.
-----------------------------
The Company shall not be required (a) to transfer on its books any of
the Shares which shall have been sold or transferred in violation of
any of the provisions set forth in this Agreement, or (b) to treat as
owner of such Shares or to pay dividends to any transferee to whom any
such Shares shall have been so sold or transferred.
8. Escrow.
------
<PAGE>
The Participant shall, upon the execution of this Agreement, execute
Joint Escrow Instructions in the form attached to this Agreement as
Exhibit B. The Joint Escrow Instructions shall be delivered to the
- ---------
Secretary of the Company, as escrow agent thereunder. The Participant
shall deliver to such escrow agent a stock assignment duly endorsed in
blank and hereby instructs the Company to deliver to such escrow
agent, on behalf of the Participant, the certificate(s) evidencing the
Shares issued hereunder. Such materials shall be held by such escrow
agent pursuant to the terms of such Joint Escrow Instructions.
9. Restrictive Legend.
------------------
All certificates representing Shares shall have affixed thereto a
legend in substantially the following form, in addition to any other
legends that may be required under federal or state securities laws:
(i) "The shares of stock represented by this certificate are
subject to restrictions on transfer and an option to
purchase set forth in a certain Stock Restriction Agreement
between the corporation and the registered owner of these
shares (or his predecessor in interest), and such Agreement
is available for inspection without charge at the office of
the Secretary of the corporation."
(ii) "The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended,
and may not be sold, transferred or otherwise disposed of
in the absence of an effective registration statement under
such Act or an opinion of counsel satisfactory to the
corporation to the effect that such registration is not
required."
10. Provisions of the Plan.
----------------------
This Agreement is subject to the provisions of the Plan, a copy of
which is furnished to the Participant with this Agreement.
11. Investment Representations.
--------------------------
The Participant represents, warrants and covenants as follows:
(a) The Participant is purchasing the Shares for his own
account for investment only, and not with a view to, or for
sale in connection with, any
<PAGE>
distribution of the Shares in violation of the Securities Act, or any
rule or regulation under the Securities Act.
(b) The Participant has had such opportunity as he has deemed
adequate to obtain from representatives of the Company such information
as is necessary to permit him to evaluate the merits and risks of his
investment in the Company.
(c) The Participant has sufficient experience in business, financial
and investment matters to be able to evaluate the risks involved in the
purchase of the Shares and to make an informed investment decision with
respect to such purchase.
(d) The Participant can afford a complete loss of the value of the
Shares and is able to bear the economic risk of holding such Shares for
an indefinite period.
(e) The Participant understands that (i) the Shares have not been
registered under the Securities Act and are "restricted securities"
within the meaning of Rule 144 under the Securities Act, (ii) the Shares
cannot be sold, transferred or otherwise disposed of unless they are
subsequently registered under the Securities Act or an exemption from
registration is then available; (iii) in any event, the exemption from
registration under Rule 144 will not be available for at least one year
and even then will not be available unless a public market then exists
for the Common Stock, adequate information concerning the Company is then
available to the public, and other terms and conditions of Rule 144 are
complied with; and (iv) there is now no registration statement on file
with the Securities and Exchange Commission with respect to any stock of
the Company and the Company has no obligation or current intention to
register the Shares under the Securities Act.
12. Withholding Taxes; Section 83(b) Election.
------------------------------------------
(a) The Participant acknowledges and agrees that the Company has the
right to deduct from payments of any kind otherwise due to the
Participant any federal, state or local taxes of any kind required by law
to be withheld with respect to the purchase of the Shares by the
Participant or the lapse of the Purchase Option.
(b) The Participant acknowledges that he has been informed of the
availability of making an election in accordance with Section 83(b) of
the Internal Revenue Code of 1986, as amended; that such election must be
filed
<PAGE>
with the Internal Revenue Service within 30 days of the transfer of
shares to the Participant; and that the Participant is solely responsible
for making such election.
<PAGE>
13. Severability.
------------
The invalidity or unenforceability of any provision of this Agreement shall not
affect the validity or enforceability of any other provision of this Agreement,
and each other provision of this Agreement shall be severable and enforceable to
the extent permitted by law.
14. Waiver.
------
Any provision for the benefit of the Company contained in this Agreement may be
waived, either generally or in any particular instance, by the Board of
Directors of the Company.
15. Binding Effect.
--------------
This Agreement shall be binding upon and inure to the benefit of the Company and
the Participant and their respective heirs, executors, administrators, legal
representatives, successors and assigns, subject to the restrictions on transfer
set forth in Sections 4 and 5 of this Agreement.
16. Notice.
------
All notices required or permitted hereunder shall be in writing and deemed
effectively given upon personal delivery or five days after deposit in the
United States Post Office, by registered or certified mail, postage prepaid,
addressed to the other party hereto at the address shown beneath his or its
respective signature to this Agreement, or at such other address or addresses as
either party shall designate to the other in accordance with this Section 16.
17. Pronouns.
--------
Whenever the context may require, any pronouns used in this Agreement shall
include the corresponding masculine, feminine or neuter forms, and the singular
form of nouns and pronouns shall include the plural, and vice versa.
18. Entire Agreement.
----------------
This Agreement and the Plan constitutes the entire agreement between the
parties, and supersedes all prior agreements and understandings, relating to the
subject matter of this Agreement.
<PAGE>
19. Amendment.
---------
This Agreement may be amended or modified only by a written instrument executed
by both the Company and the Participant.
<PAGE>
20. Governing Law.
--------------
This Agreement shall be construed, interpreted and enforced in accordance
with the internal laws of the State of Delaware without regard to any applicable
conflicts of laws.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
CIMARON COMMUNICATIONS
CORPORATION
By:____________________________
Title:_________________________
200 Brickstone Square
Andover, MA 01810
PARTICIPANT
_______________________________
Name:__________________________
Address:_______________________
_______________________
<PAGE>
Exhibit A
---------
If Cessation of Employment Occurs: Applicable Percentage:
- --------------------------------------------------------------------------------
Before [1 year from commencement] 100%
On or after [1 year] but before [1.25 years] 80%
On or after [1.25 years] but before [1.50 years] 75%
On or after [1.50 years] but before [1.75 years] 70%
On or after [1.75 years] but before [2 years] 65%
On or after [2 years] but before [2.25 years] 60%
On or after [2.25 years] but before [2.50 years] 55%
On or after [2.50 years] but before [2.75 years] 50%
On or after [2.75 years] but before [3 years] 45%
On or after [3 years] but before [3.25 years] 40%
On or after [3.25 years] but before [3.50 years] 35%
On or after [3.50 years] but before [3.75 years] 30%
On or after [3.75 years] but before [4 years] 25%
On or after [4 years] but before [4.25 years] 20%
On or after [4.25 years] but before [4.50 years] 15%
On or after [4.50 years] but before [4.75 years] 10%
On or after [4.75 years] but before [5 years] 5%
On or after [5 years] -0-
<PAGE>
Exhibit B
---------
CIMARON COMMUNICATIONS CORPORATION
Joint Escrow Instructions
-------------------------
________________, 199__
Secretary
Cimaron Communications Corporation
200 Brickstone Square
Andover, MA 01810
Dear Sir:
As Escrow Agent for Cimaron Communications Corporation, a Delaware
corporation (the "Company"), and the undersigned Participant ("Holder"), you are
hereby authorized and directed to hold the documents delivered to you pursuant
to the terms of that certain Restricted Stock Agreement (the "Agreement") of
even date herewith, to which a copy of these Joint Escrow Instructions is
attached, in accordance with the following instructions:
1. Holder irrevocably authorizes the Company to deposit with you any
certificates evidencing Shares (as defined in the Agreement) to be held by
you hereunder and any additions and substitutions to said Shares. Holder
does hereby irrevocably constitute and appoint you as his attorney-in-fact
and agent for the term of this escrow to execute with respect to such
Shares all documents necessary or appropriate to make such Shares
negotiable and to complete any transaction herein contemplated. Subject to
the provisions of this paragraph 1 and the terms of the Agreement, Holder
shall exercise all rights and privileges of a stockholder of the Company
while the Shares are held by you.
2. Upon any purchase by the Company of the Shares pursuant to the
Agreement, the Company shall give to Holder and you a written notice
specifying the purchase price for the Shares, as determined pursuant to the
Agreement, and the time for a closing hereunder (the "Closing") at the
principal office of the
<PAGE>
Company. Holder and the Company hereby irrevocably authorize and direct you
to close the transaction contemplated by such notice in accordance with the
terms of said notice.
3. At the Closing, you are directed (a) to date the stock assignment form
or forms necessary for the transfer of the Shares, (b) to fill in on such
form or forms the number of Shares being transferred, and (c) to deliver
same, together with the certificate or certificates evidencing the Shares
to be transferred, to the Company against the simultaneous delivery to you
of the purchase price for the Shares being purchased pursuant to the
Agreement.
4. The Holder shall have the right to withdraw from this escrow any
Shares as to which the Purchase Option (as defined in the Agreement) has
terminated or expired.
5. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
6. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in
relying or refraining from acting on any instrument reasonably believed by
you to be genuine and to have been signed or presented by the proper party
or parties. You shall not be personally liable for any act you may do or
omit to do hereunder as Escrow Agent or as attorney-in-fact of Holder while
acting in good faith and in the exercise of your own good judgment, and any
act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.
7. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or Company,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any
court. In case you obey or comply with any such order, judgment or decree
of any court, you shall not be liable to any of the parties hereto or to
any other person, firm or Company by reason of such compliance,
notwithstanding any such order, judgment or decree being subsequently
reversed, modified, annulled, set aside, vacated or found to have been
entered without jurisdiction.
8. You shall not be liable in any respect on account of the identity,
authority or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or
called for hereunder.
<PAGE>
9. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder and may rely upon the advice of such counsel.
10. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be Secretary of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the
Company shall appoint any officer of the Company as successor Escrow Agent.
11. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
12. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities
held by you hereunder, you are authorized and directed to retain in your
possession without liability to anyone all or any part of said securities
until such dispute shall have been settled either by mutual written
agreement of the parties concerned or by a final order, decree or judgment
of a court of competent jurisdiction after the time for appeal has expired
and no appeal has been perfected, but you shall be under no duty whatsoever
to institute or defend any such proceedings.
13. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail
with postage and fees prepaid, addressed to each of the other parties
thereunto entitled at the following addresses, or at such other addresses
as a party may designate by ten days' advance written notice to each of the
other parties hereto.
COMPANY: Cimaron Communications Corporation
200 Brickstone Square
Andover, MA 01810
HOLDER: Notices to Holder shall be sent to the
address set forth below Holder's signature below.
ESCROW AGENT:
Secretary
Cimaron Communications Corporation
200 Brickstone Square
Andover, MA 01810
<PAGE>
By signing these Joint Escrow Instructions, you become a party hereto only
for the purpose of said Joint Escrow Instructions, and you do not become a party
to the Agreement.
This instrument shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
Very truly yours,
CIMARON COMMUNICATIONS
CORPORATION
By:_____________________________
Title:__________________________
200 Brickstone Square
Andover, MA 01810
HOLDER:
________________________________
Name:___________________________
ESCROW AGENT: Address:________________________
________________________
________________________ Date Signed: ___________________
<PAGE>
Cimaron Communications Corporation
Incentive Stock Option Agreement
Granted Under 1998 Stock Incentive Plan
---------------------------------------
1. Grant of Option.
---------------
This agreement evidences the grant by Cimaron Communications Corporation, a
Delaware corporation (the "Company") on GRANT DATE (the "Grant Date") to NAME
(the "Participant"), an employee of the Company, of an option to purchase, in
whole or in part, on the terms provided herein and in the Company's 1998 Stock
Incentive Plan (the "Plan"), a total of NUMBER shares of common stock (the
"Shares"), $.001 par value per share, of the Company ("Common Stock") at $PRICE
per Share. Unless earlier terminated, this option shall expire ten years from
the Grant Date (the "Final Exercise Date").
It is intended that the option evidenced by this agreement shall be an incentive
stock option as defined in Section 422 of the Internal Revenue Code of 1986, as
amended and any regulations promulgated thereunder (the "Code"). Except as
otherwise indicated by the context, the term "Participant", as used in this
option, shall be deemed to include any person who acquires the right to exercise
this option validly under its terms.
2. Vesting Schedule.
----------------
The date to be used for determining vesting of this option ("Vesting Effective
Date") shall be HIRE DATE. This option will become exercisable ("vest") as to
20% of the original number of Shares on the first anniversary of the Vesting
Effective Date and as to an additional 5% of the original number of Shares at
the end of each successive full three-month period following the first
anniversary of the Vesting Effective Date until the fifth anniversary of the
Vesting Effective Date. This option shall expire upon, and will not be
exercisable after, the Final Exercise Date.
The right of exercise shall be cumulative so that to the extent the option is
not exercised in any period to the maximum extent permissible it shall continue
to be exercisable, in whole or in part, with respect to all shares for which it
is vested until the earlier of the Final Exercise Date or the termination of
this option under Section 3 hereof or the Plan.
Notwithstanding the foregoing, in the event of an Acquisition of the Company (as
defined below), the number of Shares for which the option is vested shall,
immediately prior to the Closing of the Acquisition, be increased by (i) 20% of
the original number of Shares covered by this option, if the Participant has
been employed by the Company for 12 or more months prior to the Acquisition, or
(ii) 10% of the original number of Shares covered by this option, if the
Participant has been employed by the Company for less than 12 months prior to
the Acquisition. The remaining unvested shares shall vest in accordance with
their original vesting schedule, except that such schedule shall be shortened by
12 months (in the case of an acceleration under clause (i) above) or six months
(in the case of an acceleration under clause (ii) above).
"Acquisition" shall mean (i) the consolidation or merger of the Company (other
than a merger to reincorporate the Corporation in a different jurisdiction) into
or with any other entity or entities in which the shares of the Corporation
outstanding immediately prior to the closing of such event represent or are
converted into shares of
<PAGE>
the surviving or resulting entity that represent less than a majority of the
total number of shares of the surviving or resulting entity that are outstanding
or are reserved for issuance upon the exercise or conversion of outstanding
<PAGE>
securities immediately after the closing of such event, or (ii) the sale or
transfer of fifty percent (50%) or more of the capital stock of the Corporation
in a single transaction or series of related transactions or (iii) the sale of
all or substantially all of the assets of the Company.
3. Exercise of Option.
------------------
(a) Form of Exercise. Each election to exercise this option shall be in
----------------
writing, signed by the Participant, and received by the Company at its
principal office, accompanied by this agreement, and payment in full
in the manner provided in the Plan. The Participant may purchase less
than the number of shares covered hereby, provided that no partial
exercise of this option may be for any fractional share or for fewer
than ten whole shares.
(b) Continuous Relationship with the Company Required. Except as otherwise
-------------------------------------------------
provided in this Section 3, this option may not be exercised unless
the Participant, at the time he or she exercises this option, is, and
has been at all times since the Grant Date, an employee, officer or
director of, or consultant or advisor to, the Company or any parent or
subsidiary of the Company as defined in Section 424(e) or (1) of the
Code (an "Eligible Participant").
(c) Termination of Relationship with the Company. If the Participant
--------------------------------------------
ceases to be an Eligible Participant for any reason, then, except as
provided in paragraphs (d) and (e) below, the right to exercise this
option shall terminate three months after such cessation (but in no
event after the Final Exercise Date), provided that this option shall
-------- ----
be exercisable only to the extent that the Participant was entitled to
exercise this option on the date of such cessation. Notwithstanding
the foregoing, if the Participant, prior to the Final Exercise Date,
violates the non-competition or confidentiality provisions of any
employment contract, confidentiality and nondisclosure agreement or
other agreement between the Participant and the Company, the right to
exercise this option shall terminate immediately upon written notice
to the Participant from the Company describing such violation.
(d) Exercise Period Upon Death or Disability. If the Participant dies or
----------------------------------------
becomes disabled (within the meaning of Section 22(e)(3) of the Code)
prior to the Final Exercise Date while he or she is an Eligible
Participant and the Company has not terminated such relationship for
"cause" as specified in paragraph (e) below, this option shall be
exercisable, within the period of one year following the date of death
or disability of the Participant by the Participant, provided that
-------- ----
this option shall be exercisable only to the extent that this option
was exercisable by the Participant on the date of his or her death or
disability, and further provided that this option shall not be
exercisable after the Final Exercise Date.
(e) Discharge for Cause. If the Participant, prior to the Final Exercise
-------------------
Date, is discharged by the Company for "cause" (as defined below), the
right to exercise this option shall terminate immediately upon the
effective date of such discharge. "Cause" shall mean willful
misconduct by the Participant or willful failure by the Participant to
perform his or her responsibilities to the Company (including, without
limitation, breach by the Participant of any provision of any
employment, consulting, advisory, nondisclosure, non-competition or
other similar agreement between the Participant and the Company), as
determined by the Company, which determination shall be conclusive.
The Participant
<PAGE>
shall be considered to have been discharged for "Cause" if the Company
determines, within 30 days after the Participant's resignation, that
discharge for cause was warranted.
<PAGE>
4. Right of First Refusal.
----------------------
(a) If the Participant proposes to sell, assign, transfer, pledge,
hypothecate or otherwise dispose of, by operation of law or otherwise
(collectively, "transfer") any Shares acquired upon exercise of this
option, then the Participant shall first give written notice of the
proposed transfer (the "Transfer Notice") to the Company. The Transfer
Notice shall name the proposed transferee and state the number of such
Shares the Participant proposes to transfer (the "Offered Shares"),
the price per share and all other material terms and conditions of the
transfer.
(b) For 30 days following its receipt of such Transfer Notice, the Company
shall have the option to purchase all (but not less than all) of the
Offered Shares at the price and upon the terms set forth in the
Transfer Notice. In the event the Company elects to purchase all of
the Offered Shares, it shall give written notice of such election to
the Participant within such 30-day period. Within 10 days after his
receipt of such notice, the Participant shall tender to the Company at
its principal offices the certificate or certificates representing the
Offered Shares, duly endorsed in blank by the Participant or with duly
endorsed stock powers attached thereto, all in a form suitable for
transfer of the Offered Shares to the Company. Promptly following
receipt of such certificate or certificates, the Company shall deliver
or mail to the Participant a check in payment of the purchase price
for the Offered Shares; provided that if the terms of payment set
-------- ----
forth in the Transfer Notice were other than cash against delivery,
the Company may pay for the Offered Shares on the same terms and
conditions as were set forth in the Transfer Notice.
(c) At and after the time at which the Offered Shares are required to be
delivered to the Company for transfer to the Company pursuant to
subsection (b) above, the Company shall not pay any dividend to the
Participant on account of such Shares or permit the Participant to
exercise any of the privileges or rights of a stockholder with respect
to such Offered Shares, but shall, in so far as permitted by law,
treat the Company as the owner of such Offered Shares.
(d) If the Company does not elect to acquire all of the Offered Shares,
the Participant may, within the 30-day period following the expiration
of the option granted to the Company under subsection (b) above,
transfer the Offered Shares to the proposed transferee, provided that
-------- ----
such transfer shall not be on terms and conditions more favorable to
the transferee than those contained in the Transfer Notice.
Notwithstanding any of the above, all Offered Shares transferred
pursuant to this Section 4 shall remain subject to the right of first
refusal set forth in this Section 4 and such transferee shall, as a
condition to such transfer, deliver to the Company a written
instrument confirming that such transferee shall be bound by all of
the terms and conditions of this Section 4.
(e) The following transactions shall be exempt from the provisions of this
Section 4:
(1) any transfer of Shares to or for the benefit of any parent,
spouse, child or grandchild of the Participant, or to a trust for
their benefit;
(2) any transfer pursuant to an effective registration statement
filed by the Company under the Securities Act of 1933, as amended
(the "Securities Act"); and
<PAGE>
(3) any transfer of the Shares pursuant to the sale of all or
substantially all of the business of the Company;
<PAGE>
provided, however, that in the case of a transfer pursuant to
--------- -------
clause (1) above, such Shares shall remain subject to the right
of first refusal set forth in this Section 4 and such transferee
shall, as a condition to such transfer, deliver to the Company a
written instrument confirming that such transferee shall be bound
by all of the terms and conditions of this Section 4.
(f) The Company may assign its rights to purchase Offered Shares in any
particular transaction under this Section 4 to one or more persons or
entities.
(g) The provisions of this Section 4 shall terminate upon the earlier of
the following events:
(1) the closing of the sale of shares of Common Stock in an
underwritten public offering pursuant to an effective
registration statement filed by the Company under the Securities
Act at a price to the public of at least $5.00 per share (subject
to appropriate adjustments for stock splits, stock dividends,
combinations and other similar recapitalizations affecting such
shares) resulting in gross proceeds to the Company of at least
$10,000,000; or
(2) an Acquisition.
(h) The Company shall not be required (a) to transfer on its books any of
the Shares which shall have been sold or transferred in violation of
any of the provisions set forth in this Section 4, or (b) to treat as
owner of such Shares or to pay dividends to any transferee to whom any
such Shares shall have been so sold or transferred.
5. Agreement in Connection with Public Offering.
--------------------------------------------
The Participant agrees, in connection with the initial underwritten public
offering of the Company's securities pursuant to a registration statement under
the Securities Act, (i) not to sell, make short sale of, loan, grant any options
for the purchase of, or otherwise dispose of any shares of Common Stock held by
the Participant (other than those shares included in the offering) without the
prior written consent of the Company or the underwriters managing such initial
underwritten public offering of the Company's securities for a period of 180
days from the effective date of such registration statement, and (ii) to execute
any agreement reflecting clause (i) above as may be requested by the Company or
the managing underwriters at the time of such offering.
6. Withholding.
-----------
No Shares will be issued pursuant to the exercise of this option unless and
until the Participant pays to the Company, or makes provision satisfactory to
the Company for payment of, any federal, state or local withholding taxes
required by law to be withheld in respect of this option. The participant may
provide for the payment of withholding taxes with shares of Common Stock.
<PAGE>
7. Nontransferability of Option.
----------------------------
This option may not be sold, assigned, transferred, pledged or otherwise
encumbered by the Participant, either voluntarily or by operation of law, except
by will or the laws of descent and distribution, and, during the lifetime of the
Participant, this option shall be exercisable only by the Participant.
8. Disqualifying Disposition.
-------------------------
If the Participant disposes of Shares acquired upon exercise of this option
within two years from the Grant Date or one year after such Shares were acquired
pursuant to exercise of this option, the Participant shall notify the Company in
writing of such disposition.
9. Provisions of the Plan.
----------------------
This option is subject to the provisions of the Plan, a copy of which is
furnished to the Participant with this option.
IN WITNESS WHEREOF, the Company has caused this option to be executed under
its corporate seal by its duly authorized officer. This option shall take effect
as a sealed instrument.
CIMARON COMMUNICATIONS CORPORATION
Dated: ________________ By: _____________________
Name: Ram Sudireddy
Title: President & CEO
PARTICIPANTS ACCEPTANCE
The undersigned hereby accepts the foregoing option and agrees to the terms and
conditions thereof. The undersigned hereby acknowledges receipt of a copy of the
Company's 1998 Stock Incentive Plan.
PARTICIPANT: ______________________________
Address: ______________________________
______________________________
<PAGE>
Cimaron Communications Corporation
Incentive Stock Option Agreement
Granted Under 1998 Stock Incentive Plan
---------------------------------------
1. Grant of Option.
---------------
This agreement evidences the grant by Cimaron Communications Corporation, a
Delaware corporation (the "Company") on GRANT DATE (the "Grant Date") to NAME
(the "Participant"), an employee of the Company, of an option to purchase, in
whole or in part, on the terms provided herein and in the Company's 1998 Stock
Incentive Plan (the "Plan"), a total of NUMBER shares of common stock (the
"Shares"), $.001 par value per share, of the Company ("Common Stock") at $PRICE
per Share. Unless earlier terminated, this option shall expire ten years from
the Grant Date (the "Final Exercise Date").
It is intended that the option evidenced by this agreement shall be an incentive
stock option as defined in Section 422 of the Internal Revenue Code of 1986, as
amended and any regulations promulgated thereunder (the "Code"). Except as
otherwise indicated by the context, the term "Participant", as used in this
option, shall be deemed to include any person who acquires the right to exercise
this option validly under its terms.
2. Vesting Schedule.
----------------
The date to be used for determining vesting of this option ("Vesting Effective
Date") shall be HIRE DATE. This option will become exercisable ("vest") as to
20% of the original number of Shares on the first anniversary of the Vesting
Effective Date and as to an additional 5% of the original number of Shares at
the end of each successive full three-month period following the first
anniversary of the Vesting Effective Date until the fifth anniversary of the
Vesting Effective Date. This option shall expire upon, and will not be
exercisable after, the Final Exercise Date.
The right of exercise shall be cumulative so that to the extent the option is
not exercised in any period to the maximum extent permissible it shall continue
to be exercisable, in whole or in part, with respect to all shares for which it
is vested until the earlier of the Final Exercise Date or the termination of
this option under Section 3 hereof or the Plan.
(a) Notwithstanding the foregoing, in the event of an Acquisition of the
Company (as defined below), the number of Shares for which the option
is vested shall, immediately prior to the Closing of the Acquisition,
be increased by (i) 20% of the original number of Shares covered by
this option, if the Participant has been employed by the Company for
12 or more months prior to the Acquisition, or (ii) 30% of the
original number of Shares covered by this option, if the Participant
has been employed by the Company for less than 12 months prior to the
Acquisition. The remaining unvested shares shall vest in accordance
with their original vesting schedule, except that such schedule shall
be shortened by 12 months (in the case of an acceleration under clause
(i) above) or 18 months (in the case of an acceleration under clause
(ii) above), and further, if Participant's employment is terminated
Without Cause (as defined below) prior to the first anniversary of the
date of the Acquisition, 50% of such Participant's then remaining
Unvested Shares shall become vested as of such date of termination.
<PAGE>
(b) "Acquisition" shall mean (i) the consolidation or merger of the
Company (other than a merger to reincorporate the Corporation in a
different jurisdiction) into or with any other entity or entities in
which the shares of the Corporation outstanding immediately prior to
the closing of such event represent or are converted into shares of
the surviving or resulting entity that represent less than a majority
of the total number of shares of the surviving or resulting entity
that are outstanding or are reserved for issuance upon the exercise or
conversion of outstanding securities immediately after the closing of
such event, or (ii) the sale or transfer of fifty percent (50%) or
more of the capital stock of the Corporation in a single transaction
or series of related transactions or (iii) the sale of all or
substantially all of the assets of the Company.
3. Exercise of Option.
------------------
(a) Form of Exercise. Each election to exercise this option shall be in
----------------
writing, signed by the Participant, and received by the Company at its
principal office, accompanied by this agreement, and payment in full
in the manner provided in the Plan. The Participant may purchase less
than the number of shares covered hereby, provided that no partial
exercise of this option may be for any fractional share or for fewer
than ten whole shares.
(b) Continuous Relationship with the Company Required. Except as otherwise
-------------------------------------------------
provided in this Section 3, this option may not be exercised unless
the Participant, at the time he or she exercises this option, is, and
has been at all times since the Grant Date, an employee, officer or
director of, or consultant or advisor to, the Company or any parent or
subsidiary of the Company as defined in Section 424(e) or (f) of the
Code (an "Eligible Participant").
(c) Termination of Relationship with the Company. If the Participant
--------------------------------------------
ceases to be an Eligible Participant for any reason, then, except as
provided in paragraphs (d) and (e) below, the right to exercise this
option shall terminate three months after such cessation (but in no
event after the Final Exercise Date), provided that this option shall
-------- ----
be exercisable only to the extent that the Participant was entitled to
exercise this option on the date of such cessation. Notwithstanding
the foregoing, if the Participant, prior to the Final Exercise Date,
violates the non-competition or confidentiality provisions of any
employment contract, confidentiality and nondisclosure agreement or
other agreement between the Participant and the Company, the right to
exercise this option shall terminate immediately upon written notice
to the Participant from the Company describing such violation.
(d) Exercise Period Upon Death or Disability. If the Participant dies or
----------------------------------------
becomes disabled (within the meaning of Section 22(e)(3) of the Code)
prior to the Final Exercise Date while he or she is an Eligible
Participant and the Company has not terminated such relationship for
"cause" as specified in paragraph (e) below, this option shall be
exercisable, within the period of one year following the date of death
or disability of the Participant by the Participant, provided that
-------- ----
this option shall be exercisable only to the extent that this option
was exercisable by the Participant on the date of his or her death or
disability, and further provided that this option shall not be
exercisable after the Final Exercise Date.
(e) Discharge for Cause. If the Participant, prior to the Final Exercise
-------------------
Date, is discharged by the Company for "cause" (as defined below), the
right to exercise this option shall terminate immediately upon the
effective date of such discharge. "Cause" shall mean willful
misconduct by the Participant or
<PAGE>
willful failure by the Participant to perform his or her
responsibilities to the Company (including, without limitation, breach
by the Participant of any provision of any employment, consulting,
advisory, nondisclosure, non-competition or other similar agreement
between the Participant and the Company), as determined by the
Company, which determination shall be conclusive. The Participant
shall be considered to have been discharged for "Cause" if the Company
determines, within 30 days after the Participant's resignation, that
discharge for cause was warranted.
4. Right of First Refusal.
----------------------
(a) If the Participant proposes to sell, assign, transfer, pledge,
hypothecate or otherwise dispose of, by operation of law or otherwise
(collectively, "transfer") any Shares acquired upon exercise of this
option, then the Participant shall first give written notice of the
proposed transfer (the "Transfer Notice") to the Company. The Transfer
Notice shall name the proposed transferee and state the number of such
Shares the Participant proposes to transfer (the "Offered Shares"),
the price per share and all other material terms and conditions of the
transfer.
(b) For 30 days following its receipt of such Transfer Notice, the Company
shall have the option to purchase all (but not less than all) of the
Offered Shares at the price and upon the terms set forth in the
Transfer Notice. In the event the Company elects to purchase all of
the Offered Shares, it shall give written notice of such election to
the Participant within such 30-day period. Within 10 days after his
receipt of such notice, the Participant shall tender to the Company at
its principal offices the certificate or certificates representing the
Offered Shares, duly endorsed in blank by the Participant or with duly
endorsed stock powers attached thereto, all in a form suitable for
transfer of the Offered Shares to the Company. Promptly following
receipt of such certificate or certificates, the Company shall deliver
or mail to the Participant a check in payment of the purchase price
for the Offered Shares; provided that if the terms of payment set
-------- ----
forth in the Transfer Notice were other than cash against delivery,
the Company may pay for the Offered Shares on the same terms and
conditions as were set forth in the Transfer Notice.
(c) At and after the time at which the Offered Shares are required to be
delivered to the Company for transfer to the Company pursuant to
subsection (b) above, the Company shall not pay any dividend to the
Participant on account of such Shares or permit the Participant to
exercise any of the privileges or rights of a stockholder with respect
to such Offered Shares, but shall, in so far as permitted by law,
treat the Company as the owner of such Offered Shares.
(d) If the Company does not elect to acquire all of the Offered Shares,
the Participant may, within the 30-day period following the expiration
of the option granted to the Company under subsection (b) above,
transfer the Offered Shares to the proposed transferee, provided that
-------- ----
such transfer shall not be on terms and conditions more favorable to
the transferee than those contained in the Transfer Notice.
Notwithstanding any of the above, all Offered Shares transferred
pursuant to this Section 4 shall remain subject to the right of first
refusal set forth in this Section 4 and such transferee shall, as a
condition to such transfer, deliver to the Company a written
instrument confirming that such transferee shall be bound by all of
the terms and conditions of this Section 4.
(e) The following transactions shall be exempt from the provisions of this
Section 4:
<PAGE>
(1) any transfer of Shares to or for the benefit of any parent, spouse,
child or grandchild of the Participant, or to a trust for their
benefit;
(2) any transfer pursuant to an effective registration statement filed by
the Company under the Securities Act of 1933, as amended (the
"Securities Act"); and
(3) any transfer of the Shares pursuant to the sale of all or
substantially all of the business of the Company;
provided, however, that in the case of a transfer pursuant to clause (1)
--------- -------
above, such Shares shall remain subject to the right of first refusal set
forth in this Section 4 and such transferee shall, as a condition to such
transfer, deliver to the Company a written instrument confirming that such
transferee shall be bound by all of the terms and conditions of this
Section 4.
(f) The Company may assign its rights to purchase Offered Shares in any
particular transaction under this Section 4 to one or more persons or
entities.
(g) The provisions of this Section 4 shall terminate upon the earlier of
the following events:
(1) the closing of the sale of shares of Common Stock in an
underwritten public offering pursuant to an effective
registration statement filed by the Company under the Securities
Act at a price to the public of at least $5.00 per share (subject
to appropriate adjustments for stock splits, stock dividends,
combinations and other similar recapitalizations affecting such
shares) resulting in gross proceeds to the Company of at least
$10,000,000; or
(2) an Acquisition.
(h) The Company shall not be required (a) to transfer on its books any of
the Shares which shall have been sold or transferred in violation of
any of the provisions set forth in this Section 4, or (b) to treat as
owner of such Shares or to pay dividends to any transferee to whom any
such Shares shall have been so sold or transferred.
5. Agreement in Connection with Public Offering.
--------------------------------------------
The Participant agrees, in connection with the initial underwritten public
offering of the Company's securities pursuant to a registration statement under
the Securities Act, (i) not to sell, make short sale of, loan, grant any options
for the purchase of, or otherwise dispose of any shares of Common Stock held by
the Participant (other than those shares included in the offering) without the
prior written consent of the Company or the underwriters managing such initial
underwritten public offering of the Company's securities for a period of 180
days from the effective date of such registration statement, and (ii) to execute
any agreement reflecting clause (i) above as may be requested by the Company or
the managing underwriters at the time of such offering.
<PAGE>
6. Withholding.
-----------
No Shares will be issued pursuant to the exercise of this option unless and
until the Participant pays to the Company, or makes provision satisfactory to
the Company for payment of, any federal, state or local withholding taxes
required by law to be withheld in respect of this option. The participant may
provide for the payment of withholding taxes with shares of Common Stock.
7. Nontransferability of Option.
----------------------------
This option may not be sold, assigned, transferred, pledged or otherwise
encumbered by the Participant, either voluntarily or by operation of law, except
by will or the laws of descent and distribution, and, during the lifetime of the
Participant, this option shall be exercisable only by the Participant.
8. Disqualifying Disposition.
-------------------------
If the Participant disposes of Shares acquired upon exercise of this option
within two years from the Grant Date or one year after such Shares were acquired
pursuant to exercise of this option, the Participant shall notify the Company in
writing of such disposition.
9. Provisions of the Plan.
----------------------
This option is subject to the provisions of the Plan, a copy of which is
furnished to the Participant with this option.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this option to be executed under
its corporate seal by its duly authorized officer. This option shall take effect
as a sealed instrument.
CIMARON COMMUNICATIONS CORPORATION
Dated: ________________ By: _____________________
Name: Ram Sudireddy
Title: President & CEO
PARTICIPANTS ACCEPTANCE
The undersigned hereby accepts the foregoing option and agrees to the terms and
conditions thereof. The undersigned hereby acknowledges receipt of a copy of the
Company's 1998 Stock Incentive Plan.
PARTICIPANT: ______________________________
Address: ______________________________
______________________________
<PAGE>
Exhibit 10.27
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made as of the Effective
---------
Date indicated below by and between, Applied Micro Circuits Corporation, a
Delaware corporation ("Acquiror"), and Gary Martin ("Employee").
-------- --------
BACKGROUND
This Agreement is entered into in connection with and is ancillary to an
Agreement and Plan of Merger (the "Merger Agreement") dated as March 3, 1999
----------------
among Acquiror, Cimaron Communications Corporation, a Delaware corporation
("Target") and Wiley Acquisition Corporation, a Delaware corporation and a
------
wholly owned subsidiary of Acquiror ("Sub"), pursuant to which Sub will merge
---
with and into Acquiror (the "Merger"). The date on which the Merger becomes
------
effective will be the effective date of this Agreement (the "Effective Date").
----------------
Employee is a founder, principal stockholder and Chief Technical Officer of
Target. Acquiror intends to continue the business of Target after the Merger and
integrate such business into Acquiror's ongoing business. To preserve and
protect the assets of Target, including Target's goodwill, customers and trade
secrets of which Employee has and will have knowledge in Employee's role as an
employee of Acquiror and to preserve and protect Acquiror's goodwill and
business interests going forward, and in consideration for Acquiror's entering
into and performing under the Merger Agreement, Employee has agreed to enter
into this Agreement.
In addition, as required by Section 7 below, Employee is concurrently
herewith entering into an Inventions, Confidentiality and Trade Secrets
Agreement in favor of Acquiror designed to protect Acquiror's proprietary
rights.
NOW, THEREFORE. in consideration of the foregoing and the mutual agreements
of the parties contained herein, Acquiror and Employee hereby agree as follows:
1. Employment. Acquiror will employ Employee, and Employee accepts
----------
employment with Acquiror, for a period of one year from the Effective Date (the
"Initial Period"), unless Employee's employment is sooner terminated in
--------------
accordance with this Agreement. Employee's employment may continue after this
Initial Period but will then be terminable by either party at will, with or
without cause.
2. Duties. Employee will be employed as a full-time employee of Acquiror
------
and initially will serve as Vice President and Chief Technical Officer,
reporting to Dave Rickey. Employee agrees that, to the best of Employee's
ability and experience, Employee will at all times conscientiously perform all
of the duties and obligations assigned to Employee under this Agreement.
Acquiror agrees that it will not relocate Employee outside of a twenty-five mile
radius of Andover. Massachusetts, without Employee's consent.
3. Full-time Employment. Employee's employment will be on a full-time
--------------------
basis, in accordance with standard employee policies for Acquiror. Employee will
not engage in any other business or render any commercial or professional
services, directly or indirectly, to any other person or organization, whether
for compensation or otherwise, provided that Employee may (i)
<PAGE>
provide incidental assistance to family members on matters of family business;
and (ii) sit on the boards of charitable and nonprofit organizations which do
not, at the time of Employee's appointment or election, to Employee's knowledge,
compete with Acquiror; provided in each case that such activities do not
conflict with or interfere with Employee's obligations to Acquiror.
4. Compensation
------------
(a) Salary. Employee's initial salary for the term of this Agreement
------
will be no less than $160,000 per year, payable on Acquiror's regular payroll
dates, less required withholdings.
(b) Bonus. Employee will be eligible for an Executive bonus of up to
-----
30 percent of Employee's initial salary, based on targets to be established by
the Company's Board of Directors.
(c) Stock Options. Employee will be granted stock options, under
-------------
Acquiror's 1992 Stock Option Plan, as amended, to purchase up to 100,000 shares
of Acquiror's Common Stock at a price equal to the per share market value of
such Common Stock on the last trading day prior to the closing date of the
Merger, as quoted on the Nasdaq National Market and as reported in the Wall
Street Journal. The stock options will be granted as nonqualified stock options.
If and when the Employee sells any shares issued upon exercise of any stock
options, the Employee will promptly notify Acquiror of such sale in writing. The
stock options will vest 25% on the first anniversary of the Effective Date and
the remainder will vest as to 1/48th of the option grant per month thereafter,
so that they will be fully vested on the fourth anniversary of the Effective
Date. The stock options will have a term of ten years and will be subject to the
terms and conditions set forth on the form of Stock Option Grant attached hereto
as Attachment A (to be completed at the closing of the Merger). Employee will
------------
also be eligible to participate in the Company's "refresh" stock option grant
programs consistent with other employees of similar responsibility and
compensation levels.
5. Employee Benefits. Employee will be entitled to insurance, vacation
-----------------
and other benefits commensurate with Employee's position in accordance with
Acquiror's standard employee policies in effect from time to time. For purposes
of satisfying the terms and conditions of such benefit plans, Acquiror shall
give full credit for eligibility, vesting or benefit accrual for each
participant's period of service with Target prior to the Effective Date.
Employee has received a summary of Acquiror's standard employee benefits
policies in effect as of the date hereof. Employee shall receive credit for a
maximum of 105 vacation hours accrued at Target through the Effective Date, in
accordance with Acquiror's standard employee policies. This credit shall be
adjusted for any vacation hours used during the period commencing on January 1,
1999 and ending on the Effective Date.
6. Reimbursement of Business Expenses. Acquiror will, in accordance with
-----------------------------------
Acquiror's policies in effect from time to time, reimburse Employee for all
reasonable business expenses incurred by Employee in connection with the
performance of Employee's duties under this Agreement including, without
limitation, reasonable expenditures for office space, supplies,
-2-
<PAGE>
equipment and expenses and for business entertainment and travel, upon
submission of the required documentation required pursuant to Acquiror's
standard policies and record keeping procedures.
7. Confidentiality. Simultaneously with the execution of this Agreement.
---------------
Employee is executing and delivering and hereby adopts and agrees to be bound by
Acquiror's standard Proprietary Information and Inventions Agreement, a copy of
which is attached to this Agreement as Attachment B (the "Inventions,
------------ -----------
Confidentiality and Trade Secrets Agreement").
- ---------------------------------------------
8. Termination.
-----------
(a) Acquiror may terminate Employee's employment at will, at any time
with or without Cause (as defined in Section 8(e) below) upon written notice to
Employee.
(b) Employee may terminate Employee's employment upon written notice
to Acquiror in the event that Acquiror is in material breach of this Agreement,
provided that such termination will become effective only upon the expiration of
30 days following such notice and then only if the alleged breach remains
uncured (provided that Acquiror shall not have more than one opportunity to cure
such breach). Such termination shall be deemed a termination by Acquiror of
Employee's employment under Section 8(a) for which Employee shall have the
remedy set forth in Section 8(c).
(c) Upon termination of Employee's employment pursuant to Section 8(a)
or (b) for any reason other than Cause: (1) Acquiror will pay to Employee an
amount equal to the product of employee's monthly salary (at the monthly rate
paid to Employee immediately prior to such termination) and the number of months
(including fractions thereof) that remain from the date of employee's
termination through the end of the Initial Period plus the target bonus
specified in Section 4(b) (the "Termination Payment") immediately upon such
-------------------
termination and (ii) the vesting of any options to purchase Acquiror Common
Stock granted to Employee subsequent to the consummation of the Merger shall be
accelerated by the number of months (including fractions thereof) that remain
from the date of employee's termination through the end of the Initial Period.
Acquiror's obligation to make the Termination Payment and accelerate vesting of
stock options pursuant to this Section 8(c) is in lieu of any damages or any
other payment or benefits, including without limitation stock benefits (except
that with regard to the vesting and termination of stock options, such stock
options will vest and terminate according to the terms of specific stock option
grant agreements), which Acquiror might otherwise be obligated to pay Employee
as a result of Employee's termination of employment. Acquiror and Employee agree
that, in view of the nature of the issues likely to arise in the event of such a
termination, it would be impracticable or extremely difficult to fix the actual
damages resulting from such termination and proving actual damages, causation
and foreseeability in the case of such termination would be costly, inconvenient
and difficult. In requiring Acquiror to make the Termination Payment and to
accelerate the vesting of stock options as set forth herein, it is the intent of
the parties to provide, as of the date of this Agreement, for a liquidated
amount of damages to be paid by Acquiror to Employee. Such liquidated amount
shall be deemed full and adequate damages for such termination and is not
intended by either party to be a penalty.
-3-
<PAGE>
(d) Upon Death. If Employee dies during the term of this Agreement,
-----------
Acquiror will pay Employee's estate an amount equal to all salary, bonuses and
benefits accrued as of the date of Employee's death.
(e) Definition of Cause. For purposes of this Agreement, "Cause" for
------------------- -----
Employee's termination will exist at any time after the happening of one or more
of the following events:
(i) an act of personal dishonesty constituting willful and
material misconduct.
(ii) a violation of employment obligations (including
confidentiality or noncompetition obligations) which is demonstrably willful and
material misconduct which has not been cured within 30 days after written notice
of such violation has been given to Employee.
(iii) the willful engaging in illegal conduct that is materially
and demonstrably injurious to the Company,
(iv) Employee's continued failure to substantially perform his
or her duties for a period of 90 days after written notice thereof setting forth
in reasonable detail the respects in which the Company believes Employee has so
failed, or
(v) Employee being convicted of a felony or misappropriating
property of the Company.
(f) Survival. Employee's and Acquiror's obligations under Sections 5,
--------
6, 7, 8 and 9 (h) of this Agreement will survive the termination of Employee's
employment by Acquiror.
9. Miscellaneous.
-------------
(a) Notices. Any and all notices permitted or required to be given
--------
under this Agreement must be in writing. Notices will be deemed given (i) when
personally received or when sent by facsimile transmission (to the receiving
party's facsimile number), (ii) on the first business day after having been sent
by commercial overnight courier with written verification of receipt, or (iii)
on the third business day after having been sent by registered or certified mail
from a location on the United States mainland, return receipt requested, postage
prepaid, whichever occurs first, at the address set forth below or at any new
address, notice of which will have been given in accordance with this Section
9(a):
If to Acquiror. Applied Micro Circuits Corporation
Attn: President
6290 Sequence Drive
San Diego, CA 92121
-4-
<PAGE>
with a copy to: Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Attn: Mark A. Medearis
If to Employee: Gary Martin
15 Kittredge Road
No. Andover, MA 01845
with a copy to: Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: Patrick Rondeau
(b) Amendments. This Agreement, including the Exhibits hereto,
----------
contains the entire agreement and supersedes and replaces all prior agreements
between Acquiror and Employee or Target and Employee concerning Employee's
employment. This Agreement may not be changed or modified in whole or in part
except by a writing signed by the party against whom enforcement of the change
or modification is sought.
(c) Successors and Assigns. This Agreement will not be assignable by
----------------------
either Employee or Acquiror, except that the rights and obligations of Acquiror
under this Agreement may be assigned to a corporation which becomes the
successor to Acquiror as the result of a merger or other corporate
reorganization and which continues the business of Acquiror, or any other
subsidiary of Acquiror, provided that Acquiror guarantees the performance by
such assignee of Acquiror's obligations hereunder.
(d) Governing Law. This Agreement will be governed by and interpreted
-------------
according to the substantive laws of the Commonwealth of Massachusetts without
regard to such state's conflicts law.
(e) No Waiver. The failure of either party to insist on strict
---------
compliance with any of the terms of this Agreement in any instance or instances
will not be deemed to be a waiver of any term of this Agreement or of that
party's right to require strict compliance with the terms of this Agreement in
any other instance.
(f) Severability. Employee and Acquiror recognize that the limitations
------------
contained herein are reasonably and properly required for the adequate
protection of the interests of Acquiror. If for any reason a court of competent
jurisdiction or binding arbitration proceeding finds any provision of this
Agreement, or the application thereof, to be unenforceable, the remaining
provisions of this Agreement will be interpreted so as best to reasonably effect
the intent of the parties. The parties further agree that the court or
arbitrator shall replace any such invalid or unenforceable provisions with valid
and enforceable provisions designed to achieve, to the extent possible, the
business purposes and intent of such unenforceable provisions.
-5-
<PAGE>
(g) Counterparts. This Agreement may be executed in counterparts which
-------------
when taken together will constitute one instrument. Any copy of this Agreement
with the original signatures of all parties appended will constitute an
original.
(h) Expenses. The reasonable fees and expenses of either party which
--------
may be reasonably incurred by such party as the result of any claim or contest
by the Employee to enforce his or her rights under this Agreement shall be paid
promptly, to the full extent permitted by law, by the party prevailing in such
claim or contest.
(i) Dispute Resolution.
------------------
(i) Arbitration of Disputes. Any dispute under this Agreement
-----------------------
shall be resolved by arbitration in Boston, Massachusetts, and, except as herein
specifically stated, in accordance with the commercial arbitration rules of the
American Arbitration Association ("AAA Rules") then in effect. However, in all
---------
events, these arbitration provisions shall govern over any conflicting rules
which may now or hereafter be contained in the AAA Rules. Any judgment upon the
award rendered by the arbitrator may be entered in any court having jurisdiction
over the subject matter thereof. The arbitrator shall have the authority to
grant any equitable and legal remedies that would be available in any judicial
proceeding instituted to resolve such dispute.
(ii) Compensation of Arbitrator. Any such arbitration will be
--------------------------
conducted before a single arbitrator who will be compensated for his or her
services at a rate to be determined by the parties or by the American
Arbitration Association, but based upon reasonable hourly or daily consulting
rates for the arbitrator in the event the parties are not able to agree upon his
or her rate of compensation.
(iii) Selection of Arbitrator. The American Arbitration
----------------------
Association will have the authority to select an arbitrator from a list of
arbitrators who are partners in a nationally recognized firm of independent
certified public accountants from the management advisory services department
(or comparable department or group) of such firm: provided, however, that such
firm cannot be the firm of certified public accountants then auditing the books
and records of either party or providing management or advisory services for
either party, that each party will have the opportunity to make such reasonable
objection to any of the arbitrators listed as such party may wish and that the
American Arbitration Association will select the arbitrator from the list of
arbitrators as to whom neither party makes any such objection. In the event that
the foregoing procedure is not followed, each party will choose one person from
the list of arbitrators provided by the American Arbitration Association
(provided that such person does not have a conflict of interest), and the two
persons so selected will select from the list provided by the American
Arbitration Association the person who will act as the arbitrator.
(iv) Payment of Costs. Acquiror and Employee will bear the
------------------
expense of deposits and advances required by the arbitrator in equal
proportions, but either party may advance such amounts, subject to recovery as
an addition or offset to any award. The arbitrator will award to the prevailing
party, as determined by the arbitrator, all costs, fees and expenses
-6-
<PAGE>
related to the arbitration, including reasonable fees and expenses of attorneys,
accountants and other professionals incurred by the prevailing party.
(v) Burden of Proof. For any dispute submitted to
---------------
arbitration, the burden of proof will be as it would be if the claim were
litigated in a judicial proceeding.
(vi) Award. Upon the conclusion of any arbitration proceedings
------
hereunder, the arbitrator will render findings of fact and conclusions of law
and a written opinion setting forth the basis and reasons for any decision
reached and will deliver such documents to each party to this Agreement along
with a signed copy of the award.
(vii) Terms of Arbitration. The arbitrator chosen in accordance
--------------------
with these provisions will not have the power to alter, amend or otherwise
affect the terms of these arbitration provisions or the provisions of this
Agreement.
(viii) Exclusive Remedy. Except as specifically otherwise
----------------
provided in this Agreement, arbitration will be the sole and exclusive remedy of
the parties for any dispute arising out of this Agreement.
-7-
<PAGE>
IN WITNESS WHEREOF, this Agreement is made and effective as of the
Effective Date.
APPLIED MICRO CIRCUITS EMPLOYEE
CORPORATION
By: /s/ [SIGNATURE ILLEGIBLE] /s/ Gary Martin
----------------------------- --------------------------
Title: Pres./CEO Gary Martin
--------------------------
Signature Page to Employment Agreement
<PAGE>
List of Exhibits:
- ----------------
Attachment A Stock Option Grant
Attachment B Inventions, Confidentiality and Trade Secrets Agreement
<PAGE>
Applied Micro Circuits Corporation
Notice of Grant of Stock Options ID: 94-2586591
and Option Agreement 6290 Sequence Drive
San Diego, CA 92121
Gary D. Martin Option Number: 99030010
15 Kittredge Road Plan: 92
No. Andover, MA 01845 Id: ###-##-####
Effective 3/17/99, you have been granted a(n) Incentive Stock Option to buy
10,239 Shares of Applied Micro Circuits Corporation (the Company) stock at
$39.06250 per share.
The total option price of the shares granted is $399,960.94.
Shares in each period will become fully vested on the date shown.
<TABLE>
<CAPTION>
Shares Vest Type Full Vest Expiration
-------------------- ------------ --------- ----------
<S> <C> <C> <C>
1,462 On Vest Date 3/17/00 3/17/09
1,097 Monthly 12/17/00 3/17/09
2,560 Monthly 12/17/01 3/17/09
2,560 Monthly 12/17/02 3/17/09
2,560 Monthly 3/17/03 3/17/09
</TABLE>
- --------------------------------------------------------------------------------
By your signature and the Company's signature below, you and the Company agree
that these options are granted under and governed by the terms and conditions of
the Company's Stock Option Plan as amended and the Option Agreement, all of
which are attached and made a part of this document.
- --------------------------------------------------------------------------------
/s/ [SIGNATURE ILLEGIBLE] 3/18/99
- ----------------------------------------- ------------------------------
Applied Micro Circuits Corporation Date
/s/ Gary D. Martin 3/24/99
- ----------------------------------------- ------------------------------
Gary D. Martin Date
Date: 3/18/99
Time: 2:00:01 PM
<PAGE>
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the shares may then be listed.
Assuming such compliance, for income tax purposes the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
4. Optionee's Representations. In the event this Option and the Shares
--------------------------
purchasable pursuant to the exercise of this Option have not been registered
under the Securities Act of 1933, as amended, at the time this Option is
exercised, Optionee shall, if required by the Company, concurrently with the
exercise of all or any portion of this Option, deliver to the Company an
investment representation statement in the customary form, a copy of which is
available for Optionee's review from the Company upon request.
5. Method of Payment. Payment of the exercise price shall be by any of
-----------------
the following, or a combination thereof, at the election of the Board, in its
sole discretion:
(i) cash;
(ii) check;
(iii) surrender of other shares of Common Stock of the Company
at a value equal to the exercise price of the Shares as to which the Option is
being exercised; or
(iv) delivery of a property executed Exercise Notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price.
6. Restrictions on Exercise. This Option may not be exercised until such
-------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.
7. Termination of Status as an Employee. In the event of termination of
------------------------------------
Optionee's Continuous Status as an Employee, the Optionee may, but only within
thirty (30) days after the date of such termination (but in no event later than
the date of expiration of the term of this Option as set forth in Section 11
below), exercise this Option to the extent exercisable at the date of such
termination. Optionee's employment shall be deemed terminated on such date, if
any, as Optionee becomes a part-time employee, as defined in the Company's then
current employment guidelines. To the extent this Option was not exercisable at
the date of such termination, or if the Optionee does not exercise this Option
within the time specified herein, the Option shall terminate.
-2-
<PAGE>
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
NOTICE OF GRANT AND SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT AT
THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS
OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY, NOR SHALL IT INTERFERE IN
ANY WAY WITH SUCH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE SUCH
OPTIONEE'S EMPLOYMENT AT ANY TIME, WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and certain related
information and represents that Optionee is familiar with the terms and
provisions of these documents, and hereby accepts this Option subject to all of
those terms and provisions. Optionee has reviewed the Plan and this Option in
their entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Option and fully understands all provisions of the Option.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Board upon any questions arising under the Plan.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
Dated: 3-24-99
--------------
/s/ Gary Martin
-----------------------------------
(Optionee) Gary Martin
Residence Address:
15 Kittredge Road
No. Andover, MA 01845
-4-
<PAGE>
EXHIBIT B
---------
NOTICE OF DISQUALIFYING DISPOSITION
To: Applied Micro Circuits Corporation
Attn: Stock Option Administrator
Subject: Notice of Disqualifying Disposition
-----------------------------------
This is official notice that the undersigned disposed of Shares of Applied
Micro Circuits Corporation Common Stock acquired by exercise of an incentive
stock option, under and pursuant to the Company's 1992 Stock Option Plan, as
follows:
<TABLE>
<CAPTION>
Option Market Total Shares
Option Date of Exercise Price (Per Transfer Value (Per Transferred/
Number Grant Date Share) Date Share) Sold
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
I understand that for Federal Income Tax Purposes, AMCC is required to
report on a Form W-2 the compensation of employees who dispose of Incentive
Stock Options shares within one year from the Date of Exercise, or within two
years from the date of grant.
Optionee's Signature:________________________________________
Print Name:__________________________________________________
Home Address:________________________________________________
City, State, Zip Code:_______________________________________
Daytime Phone:_______________________________________________
Social Security Number:______________________________________
You must use this form if you have disposed of ISO shares within two years of
the grant date or one year of the exercise date.
-6-
<PAGE>
================================================================================
Applied Micro Circuits Corporation
Notice of Grant of Stock Options ID: 94-2588591
and Option Agreement 6290 Sequence Drive
San Diego, CA 92121
================================================================================
Gary D. Martin Option Number: 99030010
15 Kittredge Road Plan: 92
No. Andover, MA 01845 ID: ###-##-####
================================================================================
Effective 3/17/99, you have been granted a(n) Non-Qualified Stock Option to buy
89,761 shares of Applied Micro Circuits Corporation (the Company) stock at
$39.06250 per share.
The total option price of the shares granted is $3,506,289.06.
Shares in each period will become fully vested on the date shown.
Shares Vest Type Full Vest Expiration
---------- ------------- ------------- ------------
23,539 On Vest Date 3/17/00 3/17/09
17,652 Monthly 12/17/00 3/17/09
22,440 Monthly 12/17/01 3/17/09
22,440 Monthly 12/17/02 3/17/09
3,690 Monthly 3/17/03 3/17/09
===============================================================================
By Your signature and the Company's signature below, you and the Company agree
that these options are granted under and governed by the terms and conditions of
the Company's Stock Option Plan as amended and the Option Agreement, all of
which are attached and made a part of this document.
================================================================================
/s/ [SIGNATURE ILLEGIBLE] 3/18/79
- ---------------------------------- ---------------------------------------
Applied Micro Circuits Corporation Date
/s/ Gary D. Martin 3-24-99
- ---------------------------------- --------------------------------------
Gary D. Martin Date
Date: 3/18/99
Time: 2:00:01 PM
<PAGE>
holder's investment intent with respect to such Shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company or the Secretary's designee. The
Exercise Notice shall be accompanied by payment of the exercise price. This
Option shall be deemed to be exercised upon receipt by the company of such
Exercise Notice accompanied by the exercise price.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the Shares may then be listed.
Assuming such compliance, for income Tax purposes the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
4. Optionee's Representations. In the event this Option and the Shares
--------------------------
purchasable pursuant to the exercise of this Option have not been registered
under the Securities Act of 1933, as amended, at the time this Option is
exercised, Optionee shall, if required by the Company concurrently with the
exercise of all or any portion of this Option, deliver to the Company an
investment representation statement in the customary form, a copy of which is
available for Optionee's review from the Company upon request.
5. Method of Payment. Payment of the exercise price shall be by any of
-----------------
the following, or a combination thereof, at the election of the Board, in its
sole discretion:
(i) cash;
(ii) check;
(iii) surrender of other shares of Common Stock of the Company at
a value equal to the exercise price of the Shares as to which the Option is
being exercised; or
(iv) delivery of a property executed Exercise Notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price.
6. Restrictions of Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.
7. Termination of Status as an Employee or Consultant. In the event of
--------------------------------------------------
termination of Optionee's Continuous Status as an Employee or Consultant, the
Optionee may, but only within thirty (30) days after the date of such
termination (but in no event later than the date of expiration of
2
<PAGE>
to be withheld by the Company as a result of any exercise of the Option from
amounts payable to such person, subject to the following limitations:
(i) such election shall be irrevocable;
(ii) such election shall be subject to the disapproval of the Board
at any time;
(iii) such election may not be made within six months of the grant
date of the Option (except that this limitation shall not apply in the event of
death or disability of such person occurring prior to the expiration of the six-
month period); and
(iv) such election must be made either (A) six months prior to the
date that the amount of tax to be withheld upon such exercise is determined or
(B) in any ten-day period beginning on the third business day following the date
of release by the Company for publication of quarterly or annual summary
statements of sales or earnings of the Company.
Any securities so withheld or tendered will be valued by the Company as of
the date of exercise.
APPLIED MICRO CIRCUITS CORPORATION
a Delaware corporation
By: /s/ Joel O. Holliday
---------------------
Joel O. Holliday
Title: Vice President
Finance & Administration
THIS SPACE INTENTIONALLY
LEFT BALNK - SIGNATURE OF
OPTIONEE ON FOLLOWING PAGE
4
<PAGE>
EXHIBIT A
---------
STOCK OPTION NOTICE OF EXERCISE
To: Applied Micro Circuits Corporation
Attn: Stock Option Administrator
Subject: Notice of Intention to Exercise Stock Option
--------------------------------------------
This is official notice that the undersigned ("Optionee") intends to
exercise Optionee's option to purchase Shares of Applied Micro Circuits
Corporation Common Stock, all of which are vested, under and pursuant to the
Company's 1992 Stock option Plan, as follows:
<TABLE>
<CAPTION>
Type of Number of Option
Option Option Option Shares Being Price Tax Due * Total Amount
Number Date ISO/NSO Purchased, (Per Share) (if applicable) Due AMCC
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
*AMCC is required to withhold taxes when employees exercise an NSO. Under
current tax law, U.S. income tax withholding is not required when exercising an
ISO.
I am paying the cost to exercise as specified below by method a, b or c
(circle one below)
a. Cash Payment: Enclosed is my check # ______ in the amount of _______.
b. Cashless Exercise and Same-Day Sale: I will call my stock broker (check
one below) to authorize them to issue a check payable to AMCC from my account #
__________.
_______ BancBoston Robertson Stephens - Corporate Services, Ron
Smolokoff, 555 California Street, Suite 2600, San Francisco, CA 94104,
TEL: (415)693-3510, FAX: (415)956-5265, E-MAIL: [email protected]
_______ SG Cowen & Company - Private Client Group, Matthew O. Casey,
Four Embarcadero Center, Suite 1200, San Francisco, CA 94111, TEL:
(415)646-7394 or (800)858-9316, FAX: (415)646-7316, E-MAIL: caseym@co
wen.com
c. Surrender of AMCC Shares: (Shares acquired from AMCC must have been held
for at least six months.)
I certify that the stock purchased through the exercise of these options will
not be sold in a manner that would violate the Company's policy on Insider
Trading.
Optionee's Signature:_________________________________________
Print Name:___________________________________________________
Home Address:_________________________________________________
City, State, Zip Code:________________________________________
Daytime Phone:________________________________________________
Social Security Number:_______________________________________
6
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION
INVENTIONS,CONFIDENTIALITY AND TRADE SECRETS AGREEMENT
AGREEMENT between APPLIED MICRO CIRCUITS CORPORATION, a California
Corporation ("AMCC"), and ________________________________ ("Employee").
In consideration of the employment of the Employee by AMCC and the salary
or wages to be paid him/her during the period of employment it is agreed as
follows:
1. OWNERSHIP OF INVENTIONS. Every invention, discovery, improvement,
device, design, apparatus, practice, process, method, concept, original work of
authorship, trade secret or product (each of which is called an "invention"),
whether patentable or not, made, developed, perfected, devised, conceived or
first reduced to practice by the Employee, either solely or in collaboration
with others, during the period of employment by AMCC, whether or not during
regular working hours, shall be the sole and exclusive property of AMCC except
as may otherwise be required as provided in paragraph 4 below. The Employee
shall hold each and every such invention in fiduciary capacity for the sole
benefit of AMCC and shall promptly disclose in writing full information
concerning each and every such invention to AMCC, which shall receive employee's
disclosure in confidence. Nothing in this Agreement shall obligate AMCC to apply
for any patent. If AMCC in its sole discretion chooses, it will seek patent
protection where appropriate. THE PROVISIONS OF THIS ARTICLE DO NOT APPLY TO AN
INVENTION WHICH QUALIFIES FULLY UNDER THE PROVISIONS OF SECTION 2870 of the
LABOR CODE OF THE STATE OF CALIFORNIA, a copy of this section and associated
Sections 2871 and 2872 are attached to this Agreement. The provisions of this
paragraph 1 are subordinate to paragraph 4 of this Agreement.
2. OWNERSHIP OF OTHER WORKS. All works of authorship, developments,
concepts, know-how, improvements or trade secrets which an Employee shall create
during employment that relate to AMCC's business, products or research or that
relate to any work performed by Employee for AMCC, including without limitation
all writings, programs and art produced by Employee, such works of authorship
shall constitute a "work for hire" pursuant to title 17, United States Code,
Sections 101 and 201 (b.), a copy of which is attached to this Agreement.
3. WORK OUTSIDE THE COMPANY. At the time of execution of this Agreement
and from time to time thereafter during employment as necessary, Employee agrees
to notify AMCC, in advance, of his intent and/or plan to engage in research,
development and/or inventive work at any time not within regular working hours,
and from time to time to advise AMCC of the results thereof. Such notification
shall be in writing and shall identify the area(s) of activity contemplated.
4. ASSISTANCE IN OBTAINING AND DISPOSING OF PATENTS. At the request of
AMCC at any time after submittal of the invention disclosure form pertaining to
an invention and without further compensation (except that the Employee shall be
reimbursed for expenses necessary and related to the invention not covered by
his salary) the Employee shall:
<PAGE>
(a) assist AMCC, its attorneys and nominees in preparing and prosecuting in the
United States and all foreign countries applications for patents covering all
inventions, (b) execute, acknowledge and deliver any and all instruments deemed
necessary or proper by AMCC, its attorneys or nominees to make, file, or
prosecute all applications or in connection with their continuation, renewal or
reissuance or in the conduct of all proceedings or litigation regarding them,
(c) execute any and all documents deemed necessary or proper by AMCC, its
attorneys or nominees to transfer title in and to the applications or title in
and to all patents, copyrights, trademarks, maskwork rights, moral rights or
other intellectual property rights covering the inventions to AMCC or its
nominees, and (d) execute any other documents AMCC may request so it may
transfer or dispose of the invention. If AMCC is unable because of mental or
physical incapacity, unavailability or for any other reason, to secure
Employee's signature to apply for or to pursue any application for any United
States or foreign patents or copyright registrations covering inventions or
original works of authorship assigned to AMCC as above, then Employee hereby
irrevocably designates and appoints AMCC and its duly authorized officers and
agents as agent and attorney in fact, to act for and in Employee's behalf and
stead to execute and file any such applications and to do all other lawfully
permitted acts to further the application for, prosecution, issuance,
maintenance or transfer of letters patent or copyright registrations thereon
with the same legal force and effect as if originally executed by Employee. The
Employee hereby waives and irrevocably quitclaims to AMCC any and all claims, of
any nature whatsoever, which Employee now or hereafter has for infringement of
any and all proprietary rights assigned to AMCC.
5. RIGHTS OF THE UNTIED STATES GOVERNMENT. The Employee understands that
AMCC has entered into, or from time to time in the future may enter into,
agreements or arrangements with agencies of the United States Government and
that AMCC may be subject to laws and regulations which impose obligations,
restrictions and limitations on it wit respect to inventions and patents
acquired by it or conceived or developed by employees, consultants and other
agents rendering services to AMCC. The Employee shall be bound by all such
obligations, restrictions and limitations applicable to any invention conceived
or developed by the Employee during the period of employment and shall take any
obligations and to comply with the restrictions and limitations.
6. RECORDS. The Employee will keep complete, accurate and authentic
accounts, notes, data and records of all inventions in the manner and form
requested by AMCC. The Employee acknowledges That California Labor Code Section
2860 provides that everything that an employee acquires by virtue of his/her
employment belongs to the employer. Upon termination of Employee's employment,
Employee agrees to promptly surrender to the company documents and materials
Employee acquired, received or developed during his/her employment, including,
but not limited to, all correspondence, drawings, blueprints, manuals, letters,
notes, reports, flow charts, diagrams, programs, proposals, or any other
physical items or documents relating to the Company's Trade Secrets, and agrees
that he/she will not make or retain any unauthorized copies or other
reproductions of such materials. The Employee recognizes that the unauthorized
taking of any of the Company's Trade Secrets is a crime under California penal
Code Section 499(c) and is punishable by imprisonment for a period not exceeding
one year, or by a fine not exceeding five thousand dollars ($5,000.00), or both.
The Employee further
-2-
<PAGE>
acknowledges that such unauthorized misappropriation of the company's Trade
Secrets could also result in civil liability under California Civil Code Section
3426, and that willful misappropriation may result in an award against employee
for double the amount of the Company's damages and the Company's fees in
collecting such damages.
7. CONFIDENTIAL DISCLOSURE. The Company intends to and has expended
substantial sums of money and devoted a great deal of time, labor and effort to
the development, creation and acquisition of a large body of confidential
information that is used by it in its business and is not generally known or
available to the public. Such confidential information gives the Company a
valuable advantage over its competitors and prospective competitors and is
proprietary to the Company. Such confidential and proprietary information
includes, but is not limited to, lists of actual or potential customers, clients
or candidates; techniques and formulas; marketing and sales plans; materials
relating to other employees; financial information; cost rate and pricing
information; business plans; diagrams; sources of supplies; drawings; plans;
processes; proposals; codes; notebooks; and the content of any contracts or
proposals involving the Company which are made, developed, perfected, devised,
conceived or first reduced to practice by Employee, the company or its
employees, agents, consultants, affiliates or assistants, either alone or
jointly with others (collectively "Secrets" Employee agrees that he/she will,
both during and after the period of employment, treat any information of the
company which is not readily publicly available as a Trade Secret of the Company
unless the company advises Employee otherwise in writing. Employee acknowledges
that Trade Secrets include not only technical information, but any business
information that the Company treats as confidential. Employee recognizes that
AMCC has received and in the future will receive confidential or proprietary
information from third parties subject to a duty on AMCC's part to maintain the
confidentiality of such information and to use it only for certain limited
purposes. Employee agrees to hold all such confidential or proprietary
information in the strictest confidence and not to disclose it to any person,
firm or corporation or to use it except as necessary in carrying out work for
AMCC consistent with AMCC's agreement with such third party.
8. PRE-EXISTING INVENTIONS. Except as to reserved inventions, if any,
identified in Exhibit A, attached, (a) Employee has no inventions previously
made or conceived by the Employee which the Employee wants to be excluded from
the scope of this Agreement and (b) the Employee releases AMCC from any and all
claims, known or unknown, by the Employee by reasons of any use by AMCC of any
innovation previously made or conceived by the Employee. If, in the course of
employment with AMCC, Employee incorporates into an AMCC product, process or
machine a pre-existing invention owned by the Employee or in which Employee has
an interest, AMCC is hereby granted and shall have a nonexclusive, royalty-free,
irrevocable, perpetual, worldwide license (with the rights to sublicense) to
make, have made, copy, modify, make derivative works of, use, sell and otherwise
distribute such pre-existing invention as part of or in connection with such
product, process or machine.
9. NO CONFLICTING AGREEMENT. The Employee represents that performance of
all terms of this Agreement as an Employee or consultant of AMCC has not
breached and will not breach any agreement to keep in confidence proprietary
information, knowledge or data acquired by the Employee in confidence or trust
prior or subsequent to the commencement of
-3-
<PAGE>
employment with AMCC, and Employee will not disclose to AMCC, or induce AMCC to
use, any inventions, confidential proprietary information or material belonging
to any previous employer or any other party.
10. EMPLOYMENT WITH AFFILIATED COMPANY. If Employee's employment is with
an affiliated company of AMCC, then apart from this paragraph 10, whenever the
term AMCC or Applied Micro Circuits Corporation appears in this Agreement, the
name of the affiliated company is to be substituted. Employee agrees that AMCC
may exercise any right conferred on, or perform any duty under this Agreement
for, the affiliated company. An affiliated company is an entity at least 50%
owned by AMCC.
11. SOLICITATION OF EMPLOYEES. Employee will be called upon to work
closely with employees of AMCC in performing services for AMCC. Employee
expressly agrees that he/she will not, during his/her employment with AMCC and
for one year thereafter, solicit or take away or assist any other individual or
business in soliciting any employee of AMCC. In addition, all information about
such employees which becomes known to Employee during the course of his/her
employment with AMCC, and which is not otherwise known to the public, is a trade
secret of AMCC and shall not be used by Employee in soliciting or taking away
employees of AMCC at any time during or after termination of his/her employment
with AMCC.
12. AT-WILL EMPLOYMENT. Employee understands and expressly agrees that
his/her employment is not for a specified term and that his/her employment may
be terminated by AMCC at anytime, with or without cause and with or without
notice. Employee expressly acknowledges that this provision is included in the
employee handbook, was reviewed during new hire orientation, and is to be the
complete and final expression of AMCC's and employee's understanding regarding
the terms and conditions under which his/her employment may be terminated.
Employee further understands and agrees that no representations contrary to this
provision are valid, and that this provision may not be augmented, contradicted
or modified in any way, except by a writing signed by the employee and the
President of AMCC. This employment at-will relationship may not be modified by
any oral or implied agreement.
13. TERM. This Agreement shall become effective as of the date of the
commencement of the Employee's employment by AMCC, and except as provided in
paragraph 14, shall terminate as of the termination of employment.
14. NOTIFICATION OF OTHER PARTIES. In the event that the Employee leaves
the employ of AMCC, the Employee hereby consents to notification by AMCC to
his/her new employer about the Employee's rights and obligations under this
Agreement.
15. SURVIVAL OF OBLIGATIONS. The obligations of the parties shall survive
the termination of this Agreement and of the Employee's employment by AMCC.
16. SUCCESSORS, ASSIGNS, ETC. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of AMCC, but not assignable to
the heirs, executors and administrators of the Employee.
-4-
<PAGE>
17. AMENDMENT. This Agreement may be amended only by a written amendment
executed by the Employee and the President of AMCC acting on behalf of AMCC.
18. ENTITLEMENT OF INJUNCTIVE RELIEF. Employee agrees and acknowledges
that violation of any of the provisions in this Agreement would cause
irreparable injury to AMCC, that the remedy at law for any violation or
threatened violation of this Agreement would be inadequate, and that AMCC shall
be entitled to temporary and permanent injunctive or other equitable relief
without the necessity of proving actual damages. In any proceeding by AMCC to
enforce any of the provisions contained in this Agreement, the prevailing party
shall be entitled to reimbursement of all costs and reasonable attorneys' fees
incurred in such litigation.
19. GOVERNING LAW. This Agreement shall be interpreted, construed,
governed and enforced in accordance with the laws of the State of California.
20. SEPARATE TERMS. Each term, condition, covenant or provision of this
Agreement shall be viewed as separate and distinct, and in the event that any
such term, covenant or provision shall be held by a court of competent
jurisdiction to be invalid, the remaining provisions shall continue to be in
full force and effect.
21. WAIVER. A waiver by either party of a breach of provision or
provisions of this Agreement shall not constitute a general waiver, or prejudice
the other party's right otherwise to demand strict compliance with that
provision or any other provision in this Agreement.
22. ENTIRE AGREEMENT. Employee acknowledges receipt of this Agreement and
agrees that this Agreement and attached exhibits represent the entire agreement
with AMCC concerning the subject matter hereof, and supersedes any previous oral
or written communications, representations, understandings or agreements with
AMCC or any officer or agent thereof. Employee understands that no
representative of AMCC has been authorized to enter into any agreement or
commitment with employee that this inconsistent in any way with the terms of
this Agreement.
23. CONSTRUCTION. This Agreement shall not be construed against any party
on the grounds that such party drafted the Agreement or caused it to be drafted.
-5-
<PAGE>
24. ACKNOWLEDGMENT. Employee acknowledges that he/she has been advised by
AMCC to consult with independent counsel of his/her own choice, at his/her own
expense, concerning this agreement, that he/she has had the opportunity to do
so, and that he/she has taken advantage of that opportunity to the extent that
he/she desires. Employee further acknowledges that he/she has read and
understands this agreement, is fully aware of its legal effect, and has entered
into it freely based on his/her own judgment.
EXECUTED by the parties hereto as of ___________________, 19 ___
APPLIED MICRO CIRCUITS CORPORATION
BY: /s/ [SIGNATURE ILLEGIBLE]
-------------------------------
Witness:
/s/ [SIGNATURE ILLEGIBLE] /s/ Gary Martin
- ------------------------------- -------------------------------
Employee's Signature
Gary Martin
-------------------------------
Employee'Name (Printed)
EXHIBIT A
RESERVED INVENTIONS MADE OR CONCEIVED PRIOR
TO EMPLOYMENT AND BRIEF DESCRIPTION THEREOF
4
<PAGE>
Exhibit 10.28
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is made as of the Effective
---------
Date indicated below by and between, Applied Micro Circuits Corporation, a
Delaware corporation ("Acquiror"), and Ramakrishna Sudireddy ("Employee").
-------- --------
BACKGROUND
This Agreement is entered into in connection with and is ancillary to an
Agreement and Plan of Merger (the "Merger Agreement") dated as March 3, 1999
----------------
among Acquiror, Cimaron Communications Corporation, a Delaware corporation
("Target") and Wiley Acquisition Corporation, a Delaware corporation and a
------
wholly owned subsidiary of Acquiror ("Sub"), pursuant to which Sub will merge
with and into Acquiror (the "Merger") The date on which the Merger becomes
------
effective will be the effective date of this Agreement (the "Effective Date").
--------------
Employee is a founder, principal stockholder and President and CEO of
Target. Acquiror intends to continue the business of Target after the Merger and
integrate such business into Acquiror's ongoing business. To preserve and
protect the assets of Target, including Target's goodwill, customers and trade
secrets of which Employee has and will have knowledge in Employee's role as an
employee of Acquiror and to preserve and protect Acquiror's goodwill and
business interests going forward, and in consideration for Acquiror's entering
into and performing under the Merger Agreement. Employee has agreed to enter
into this Agreement.
In addition, as required by Section 7 below, Employee is concurrently
herewith entering into an Inventions, Confidentiality and Trade Secrets
Agreement in favor of Acquiror designed to protect Acquiror's proprietary
rights.
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements
of the parties contained herein, Acquiror and Employee hereby agree as follows:
1. Employment. Acquiror will employ Employee, and Employee accepts
----------
employment with Acquiror, for a period of one year from the Effective Date (the
"Initial Period"), unless Employee's employment is sooner terminated in
accordance with this Agreement. Employee's employment may continue after this
Initial Period but will then be terminable by either party at will, with or
without cause.
2. Duties. Employee will be employed as a full-time employee of Acquiror
------
and initially will serve as Vice President Cimaron, reporting to Dave Rickey.
Employee agrees that, to the best of Employee's ability and experience. Employee
will at all times conscientiously perform all of the duties and obligations
assigned to Employee under this Agreement. Acquiror agrees that it will not
relocate Employee outside of a twenty-five mile radius of Andover.
Massachusetts, without Employee's consent.
3. Full-time Employment. Employee's employment will be on a full-time
--------------------
basis, in accordance with standard employee policies for Acquiror. Employee will
not engage in any other business or render any commercial or professional
services, directly or indirectly, to any other person or organization, whether
for compensation or otherwise, provided that Employee may (i)
<PAGE>
provide incidental assistance to family members on matters of family business;
and (ii) sit on the boards of charitable and nonprofit organizations which do
not, at the time of Employee's appointment or election, to Employee's knowledge,
compete with Acquiror; provided in each case that such activities do not
conflict with or interfere with Employee's obligations to Acquiror.
4. Compensation
------------
(a) Salary. Employee's initial salary for the term of this Agreement
------
will be no less than S 160,000 per year, payable on Acquiror's regular payroll
dates, less required withholdings.
(b) Bonus. Employee will be eligible for an Executive bonus of up to
-----
40 percent of Employee's initial salary, based on targets to be established by
the Company's Board of Directors.
(c) Stock Options. Employee will be granted stock options, under
-------------
Acquiror's 1992 Stock Option Plan, as amended, to purchase up to 100,000 shares
of Acquiror's Common Stock at a price equal to the per share market value of
such Common Stock on the last trading day prior to the closing date of the
Merger, as quoted on the Nasdaq National Market and as reported in the Wall
Street Journal. The stock options will be granted as nonqualified stock options.
If and when the Employee sells any shares issued upon exercise of any stock
options, the Employee will promptly notify Acquiror of such sale in writing. The
stock options will vest 25% on the first anniversary of the Effective Date and
the remainder will vest as to 1/48th of the option grant per month thereafter,
so that they will be fully vested on the fourth anniversary of the Effective
Date. The stock options will have a term of ten years and will be subject to the
terms and conditions set forth on the form of Stock Option Grant attached hereto
as Attachment A (to be completed at the closing of the Merger). Employee will
------------
also be eligible to participate in the Company's "refresh" stock option grant
programs consistent with other employees of similar responsibility and
compensation levels.
5. Employee Benefits. Employee will be entitled to insurance, vacation
-----------------
and other benefits commensurate with Employee's position in accordance with
Acquiror's standard employee policies in effect from time to time. For purposes
of satisfying the terms and conditions of such benefit plans, Acquiror shall
give full credit for eligibility, vesting or benefit accrual for each
participant's period of service with Target prior to the Effective Date.
Employee has received a summary of Acquiror's standard employee benefits
policies in effect as of the date hereof. Employee shall receive credit for a
maximum of 105 vacation hours accrued at Target through the Effective Date, in
accordance with Acquiror's standard employee policies. This credit shall be
adjusted for any vacation hours used during the period commencing on January 1,
1999 and ending on the Effective Date.
6. Reimbursement of Business Expenses. Acquiror will, in accordance with
-----------------------------------
Acquiror's policies in effect from time to time, reimburse Employee for all
reasonable business expenses incurred by Employee in connection with the
performance of Employee's duties under this Agreement. including, without
limitation, reasonable expenditures for office space, supplies,
-2-
<PAGE>
equipment and expenses and for business entertainment and travel, upon
submission of the required documentation required pursuant to Acquiror's
standard policies and record keeping procedures.
7. Confidentiality. Simultaneously with the execution of this Agreement.
---------------
Employee is executing and delivering and hereby adopts and agrees to be bound by
Acquiror's standard Proprietary Information and Inventions Agreement, a copy of
which is attached to this Agreement as Attachment B (the "Inventions,
------------ ----------
Confidentiality and Trade Secrets Agreement").
- -------------------------------------------
8. Termination.
-----------
(a) Acquiror may terminate Employee's employment at will, at any time
with or without Cause (as defined in Section 8(e) below) upon written notice to
Employee.
(b) Employee may terminate Employee's employment upon written notice
to Acquiror in the event that Acquiror is in material breach of this Agreement,
provided that such termination will become effective only upon the expiration of
30 days following such notice and then only if the alleged breach remains
uncured (provided that Acquiror shall not have more than one opportunity to cure
such breach). Such termination shall be deemed a termination by Acquiror of
Employee's employment under Section 8(a) for which Employee shall have the
remedy set forth in Section 8(c).
(c) Upon termination of Employee's employment pursuant to Section
8(a) or (b) for any reason other than Cause: (1) Acquiror will pay to Employee
an amount equal to the product of employee's monthly Salary (at the monthly rate
paid to Employee immediately prior to such termination) and the number of months
(including fractions thereof) that remain from the date of employee's
termination through the end of the Initial Period plus the target bonus
specified in Section 4(b) (the "Termination Payment") immediately upon such
-------------------
termination and (ii) the vesting of any options to purchase Acquiror Common
Stock granted to Employee subsequent to the consummation of the Merger shall be
accelerated by the number of months (including fractions thereof) that remain
from the date of employee's termination through the end of the Initial Period.
Acquiror's obligation to make the Termination Payment and accelerate vesting of
stock options pursuant to this Section 8(c) is in lieu of any damages or any
other payment or benefits, including without limitation stock benefits (except
that with regard to the vesting and termination of stock options. such stock
options will vest and terminate according to the terms of specific stock option
grant agreements), which Acquiror might otherwise be obligated to pay Employee
as a result of Employee's termination of employment. Acquiror and Employee agree
that, in view of the nature of the issues likely to arise in the event of such a
termination, it would be impracticable or extremely difficult to fix the actual
damages resulting from such termination and proving actual damages. causation
and foreseeability in the case of such termination would be costly, inconvenient
and difficult. In requiring Acquiror to make the Termination Payment and to
accelerate the vesting of stock options as set forth herein, it is the intent of
the parties to provide, as of the date of this Agreement. for a liquidated
amount of damages to be paid by Acquiror to Employee. Such liquidated amount
shall be deemed full and adequate damages for such termination and is not
intended by either party to be a penalty.
-3-
<PAGE>
(d) Upon Death. If Employee dies during the term of this Agreement,
----------
Acquiror will pay Employee's estate an amount equal to all salary, bonuses and
benefits accrued as of the date of Employee's death.
(e) Definition of Cause. For purposes of this Agreement. "Cause" for
------------------- -----
Employee's termination will exist at any time after the happening of one or more
of the following events:
(i) an act of personal dishonesty constituting willful and
material misconduct,
(ii) a violation of employment obligations (including
confidentiality or noncompetition obligations) which is demonstrably willful and
material misconduct which has not been cured within 30 days after written notice
of such violation has been given to Employee,
(iii) the willful engaging in illegal conduct that is materially
and demonstrably injurious to the Company,
(iv) Employee's continued failure to substantially perform his
or her duties for a period of 90 days after written notice thereof setting forth
in reasonable detail the respects in which the Company believes Employee has so
failed, or
(v) Employee being convicted of a felony or misappropriating
property of the Company.
(f) Survival. Employee's and Acquiror's obligations under Sections 5,
--------
6, 7, 8 and 9 (h) of this Agreement will survive the termination of Employee's
employment by Acquiror.
9. Miscellaneous.
-------------
(a) Notices. Any and all notices permitted or required to be given
--------
under this Agreement must be in writing. Notices will be deemed given (i) when
personally received or when sent by facsimile transmission (to the receiving
party's facsimile number), (ii) on the first business day after having been sent
by commercial overnight courier with written verification of receipt, or (iii)
on the third business day after having been sent by registered or certified mail
from a location on the United States mainland, return receipt requested, postage
prepaid, whichever occurs first, at the address set forth below or at any new
address, notice of which will have been given in accordance with this Section
9(a):
If to Acquiror: Applied Micro Circuits Corporation
Attn: President
6290 Sequence Drive
San Diego, CA 92121
-4-
<PAGE>
with a copy to: Venture Law Group
2800 Sand Hill Road
Menlo Park, CA 94025
Attn: Mark A. Medearis
If to Employee: Ramakrishna Sudireddy
15 Messinia Drive
Andover, MA 01810
with a copy to: Hale and Dorr LLP
60 State Street
Boston. MA 02109
Attention: Patrick Rondeau
(b) Amendments. This Agreement, including the Exhibits hereto,
----------
contains the entire agreement and supersedes and replaces all prior agreements
between Acquiror and Employee or Target and Employee concerning Employee's
employment. This Agreement may not be changed or modified in whole or in part
except by a writing signed by the party against whom enforcement of the change
or modification is sought.
(c) Successors and Assigns. This Agreement will not be assignable by
----------------------
either Employee or Acquiror, except that the rights and obligations of Acquiror
under this Agreement may be assigned to a corporation which becomes the
successor to Acquiror as the result of a merger or other corporate
reorganization and which continues the business of Acquiror, or any other
subsidiary of Acquiror, provided that Acquiror guarantees the performance by
such assignee of Acquiror's obligations hereunder.
(d) Governing Law. This Agreement will be governed by and interpreted
-------------
according to the substantive laws of the Commonwealth of Massachusetts without
regard to such state's conflicts law.
(e) No Waiver. The failure of either party to insist on strict
---------
compliance with any of the terms of this Agreement in any instance or instances
will not be deemed to be a waiver of any term of this Agreement or of that
party's right to require strict compliance with the terms of this Agreement in
any other instance.
(f) Severability. Employee and Acquiror recognize that the
------------
limitations contained herein are reasonably and properly required for the
adequate protection of the interests of Acquiror. If for any reason a court of
competent jurisdiction or binding arbitration proceeding finds any provision of
this Agreement, or the application thereof, to be unenforceable, the remaining
provisions of this Agreement will be interpreted so as best to reasonably effect
the intent of the parties. The parties further agree that the court or
arbitrator shall replace any such invalid or unenforceable provisions with valid
and enforceable provisions designed to achieve, to the extent possible, the
business purposes and intent of such unenforceable provisions.
-5-
<PAGE>
(g) Counterparts. This Agreement may be executed in counterparts
------------
which when taken together will constitute one instrument. Any copy of this
Agreement with the original signatures of all parties appended will constitute
an original.
(h) Expenses. The reasonable fees and expenses of either party which
--------
may be reasonably incurred by such party as the result of any claim or contest
by the Employee to enforce his or her rights under this Agreement shall be paid
promptly, to the full extent permitted by law, by the party prevailing in such
claim or contest.
(i) Dispute Resolution.
------------------
(i) Arbitration of Disputes. Any dispute under this Agreement
-----------------------
shall be resolved by arbitration in Boston, Massachusetts, and, except as herein
specifically stated, in accordance with the commercial arbitration rules of the
American Arbitration Association ("AAA Rules") then in effect. However, in all
---------
events, these arbitration provisions shall govern over any conflicting rules
which may now or hereafter be contained in the AAA Rules. Any judgment upon the
award rendered by the arbitrator may be entered in any court having jurisdiction
over the subject matter thereof. The arbitrator shall have the authority to
grant any equitable and legal remedies that would be available in any judicial
proceeding instituted to resolve such dispute.
(ii) Compensation of Arbitrator. Any such arbitration will be
--------------------------
conducted before a single arbitrator who will be compensated for his or her
services at a rate to be determined by the parties or by the American
Arbitration Association, but based upon reasonable hourly or daily consulting
rates for the arbitrator in the event the parties are not able to agree upon his
or her rate of compensation.
(iii) Selection of Arbitrator. The American Arbitration
-----------------------
Association will have the authority to select an arbitrator from a list of
arbitrators who are partners in a nationally recognized firm of independent
certified public accountants from the management advisory services department
(or comparable department or group) of such firm; provided, however, that such
firm cannot be the firm of certified public accountants then auditing the books
and records of either party or providing management or advisory services for
either party, that each patty will have the opportunity to make such reasonable
objection to any of the arbitrators listed as such party may wish and that the
American Arbitration Association will select the arbitrator from the list of
arbitrators as to whom neither party makes any such objection. In the event that
the foregoing procedure is not followed, each party will choose one person from
the list of arbitrators provided by the American Arbitration Association
(provided that such person does not have a conflict of interest), and the two
persons so selected will select from the list provided by the American
Arbitration Association the person who will act as the arbitrator.
(iv) Payment of Costs. Acquiror and Employee will bear the
----------------
expense of deposits and advances required by the arbitrator in equal
proportions, but either party may advance such amounts, subject to recovery as
an addition or offset to any award. The arbitrator will award to the prevailing
party, as determined by the arbitrator, all costs, fees and expenses
-6-
<PAGE>
related to the arbitration, including reasonable fees and expenses of attorneys,
accountants and other professionals incurred by the prevailing party.
(v) Burden of Proof. For any dispute submitted to arbitration,
---------------
the burden of proof will be as it would be if the claim were litigated in a
judicial proceeding.
(vi) Award. Upon the conclusion of any arbitration proceedings
-----
hereunder, the arbitrator will render findings of fact and conclusions of law
and a written opinion setting forth the basis and reasons for any decision
reached and will deliver such documents to each party to this Agreement along
with a signed copy of the award.
(vii) Terms of Arbitration. The arbitrator chosen in accordance
--------------------
with these provisions will not have the power to alter, amend or otherwise
affect the terms of these arbitration provisions or the provisions of this
Agreement.
(viii) Exclusive Remedy. Except as specifically otherwise
----------------
provided in this Agreement, arbitration will be the sole and exclusive remedy of
the parties for any dispute arising out of this Agreement.
-7-
<PAGE>
IN WITNESS WHEREOF, this Agreement is made and effective as of the
Effective Date.
APPLIED MICRO CIRCUITS EMPLOYEE
CORPORATION
By: /s/ [SIGNATURE ILLEGIBLE] /s/ Ram Sudireddy
----------------------------- ------------------------
Title: PRES/CEO RAM SUDIREDDY
--------------------------
Signature page to Employment Agreement
<PAGE>
List of Exhibits:
- ----------------
Attachment A Stock Option Grant
Attachment B Inventions, Confidentiality and Trade Secrets Agreement
<PAGE>
================================================================================
Applied Micro Circuits Corporation
Notice of Grant of Stock Options ID: 94-2586591
and Option Agreement 6290 Sequence Drive
San Diego, CA 92121
================================================================================
Ramakrishna R. Sudireddy Option Number: 99030015
15 Messinia Drive Plan: 92
Andover, MA 01810 ID: ###-##-####
================================================================================
Effective 3/17/99, you have been granted a(n) Incentive Stock Option to buy
10,239 shares of Applied Micro Circuits Corporation (the Company) stock at
$39.06250 per share.
The total option price of the shares granted is $399,960.94.
Shares in each period will become fully vested on the date shown.
<TABLE>
<CAPTION>
Shares Vest Type Full Vest Expiration
-------- ------------ --------- ----------
<S> <C> <C> <C>
1,462 On Vest Date 3/17/00 3/17/09
1,097 Monthly 12/17/00 3/17/09
2,560 Monthly 12/17/01 3/17/09
2,560 Monthly 12/17/02 3/17/09
2,560 Monthly 3/17/03 3/17/09
</TABLE>
================================================================================
By your signature and the Company's signature below, you and the Company agree
that these options are granted under and governed by the terms and conditions of
the Company's Stock Option Plan as amended and the Option Agreement, all of
which are attached and made a part of this document.
================================================================================
/s/ [SIGNATURE ILLEGIBLE] 3/18/99
- -------------------------------------- ----------------------------
Applied Micro Circuits Corporation Date
/s/ R. R. Sudireddy 3/18/99
- -------------------------------------- ----------------------------
Ramakrishna R. Sudireddy Date
<PAGE>
No Shares will be issued pursuant to the exercise of an Option
unless such issuance and such exercise shall comply with all relevant provisions
of law and the requirements of any stock exchange upon which the Shares may then
be listed. Assuming such compliance, for income tax purposes the Shares shall be
considered transferred to the Optionee on the date on which the Option is
exercised with respect to such Shares.
4. Optionee's Representations. In the event this Option and the Shares
--------------------------
purchasable pursuant to the exercise of this Option have not been registered
under the Securities Act of 1933, as amended, at the time this Option is
exercised, Optionee shall, if required by the Company, concurrently with the
exercise of all or any portion of this Option, deliver to the Company an
investment representation statement in the customary form, a copy of which is
available for Optionee's review from the Company upon request.
5. Method of Payment. Payment of the exercise price shall be by any of
-----------------
the following, or a combination thereof, at the election of the Board, in its
sole discretion:
(i) cash;
(ii) check;
(iii) surrender of other shares of Common Stock of the Company at a
value equal to the exercise price of the Shares as to which the Option is being
exercised; or
(iv) delivery of a property executed Exercise Notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price.
6. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.
7. Termination of Status as an Employee. In the event of termination of
------------------------------------
Optionee's Continuous Status as an Employee, the Optionee may, but only within
thirty (30) days after the date of such termination (but in no event later than
the date of expiration of the term of this Option as set forth in Section 11
below), exercise this Option to the extent exercisable at the date of such
termination. Optionee's employment shall be deemed terminated on such date, if
any, as Optionee becomes a part-time employee, as defined in the Company's then
current employment guidelines. To the extent this Option was not exercisable at
the date of such termination, or if the Optionee does not exercise this Option
within the time specified herein, the Option shall terminate.
-2-
<PAGE>
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
NOTICE OF GRANT AND SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT AT
THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS
OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY, NOR SHALL IT INTERFERE IN
ANY WAY WITH SUCH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE SUCH
OPTIONEE'S EMPLOYMENT AT ANY TIME, WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and certain related
information and represents that Optionee is familiar with the terms and
provisions of these documents, and hereby accepts this Option subject to all of
those terms and provisions. Optionee has reviewed the Plan and this Option in
their entirety, has had an opportunity to obtain the advice of counsel prior to
executing this Option and fully understands all provisions of the Option.
Optionee hereby agrees to accept as binding, conclusive and final all decisions
or interpretations of the Board upon any questions arising under the Plan.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
Dated: 3/18/99
-----------------
/s/ R. R. Sudireddy
---------------------------------------------
(Optionee) Ramakrishna Sudireddy
Residence Address:
15 Messinia Drive
Andover, MA 01810
-4-
<PAGE>
EXHIBIT B
---------
NOTICE OF DISQUALIFYING DISPOSITION
To: Applied Micro Circuits Corporation
Attn: Stock Option Administrator
Subject: Notice of Disqualifying Disposition
-----------------------------------
This is official notice that the undersigned disposed of Shares of Applied
Micro Circuits Corporation Common Stock acquired by exercise of an incentive
stock option, under and pursuant to the Company's 1992 Stock Option Plan, as
follows:
<TABLE>
<CAPTION>
Option Market Total Shares
Option Date of Exercise Price (Per Transfer Value (Per Transferred/
Number Grant Date Share) Date Share) Sold
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
I understand that for Federal Income Tax Purposes, AMCC is required to
report on a Form W-2 the compensation of employees who dispose of Incentive
Stock Options shares within one year from the Date of Exercise, or within two
years from the date of grant.
Optionee's Signature: /s/ R. R. Sudireddy
--------------------------------
Print Name:___________________________________________
Home Address:_________________________________________
City, State, Zip Code:________________________________
Daytime Phone:________________________________________
Social Security Number:_______________________________
You must use this form if you have disposed of ISO shares within two years of
the grant date or one year of the exercise date.
-6-
<PAGE>
================================================================================
Applied Micro Circuits Corporation
Notice of Grant of Stock Options ID: 94.2586591
and Option Agreement 6290 Sequence Drive
San Diego, CA 92121
================================================================================
Ramakrishna R. Sudireddy Option Number: 99030016
15 Messinia Drive Plan: 92
Andover, MA 01810 ID: ###-##-####
================================================================================
Effective 3/17/99, you have been granted a(n) Non-Qualified Stock Option to buy
89,761 shares of Applied Micro Circuits Corporation (the Company) stock at
$39,06250 per share.
The total option price of the shares granted is $3,506,289.06
Shares in each period will become fully vested on the date shown.
<TABLE>
<CAPTION>
Shares Vest Type Full Vest Expiration
--------------- ------------- --------- ----------
<S> <C> <C> <C>
23,539 On Vest Date 3/17/00 3/17/09
17,652 Monthly 12/17/00 3/17/09
22,440 Monthly 12/17/01 3/17/09
22,440 Monthly 12/17/02 3/17/09
3,690 Monthly 3/17/03 3/17/09
</TABLE>
================================================================================
By your signature and the Company's signature below, you and the Company agree
that these options are granted under and governed by the terms and conditions of
the Company's Stock Option Plan as amended and the Option Agreement, all of
which are attached and made a part of this document.
================================================================================
/s/ Joel O. Holliday 3/18/99
- ---------------------------------------- ------------------------
Applied Micro Circuits Corporation Date
/s/ R. R. Sudireddy 3/18/99
- ---------------------------------------- ------------------------
Ramakrishna R. Sudireddy Date
Date: 3/18/99
Time: 2:00:01 PM
<PAGE>
holder's investment intent with respect to such Shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company or the Secretary's designee. The
Exercise Notice shall be accompanied by payment of the exercise price. This
Option shall be deemed to be exercised upon receipt by the Company of such
Exercise Notice accompanied by the exercise price.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the Shares may then be listed.
Assuming such compliance, for income tax purposes the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
4. Optionee's Representations. In the event this Option and the Shares
--------------------------
purchasable pursuant to the exercise of this Option have not been registered
under the Securities Act of 1933, as amended, at the time this Option is
exercised, Optionee shall, if required by the Company concurrently with the
exercise of all or any portion of this Option, deliver to the Company an
investment representation statement in the customary form, a copy of which is
available for Optionee's review from the Company upon request.
5. Method of Payment. Payment of the exercise price shall be by any of
-----------------
the following, or a combination thereof, at the election of the Board, in its
sole discretion:
(i) cash;
(ii) check;
(iii) surrender of other shares of Common Stock of the Company at a
value equal to the exercise price of the Shares as to which the Option is being
exercised; or
(iv) delivery of a property executed Exercise Notice together with
such other documentation as the Administrator and the broker, if applicable,
shall require to effect an exercise of the Option and delivery to the Company of
the sale or loan proceeds required to pay the exercise price.
6. Restrictions of Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.
7. Termination of Status as an Employee or Consultant. In the event of
--------------------------------------------------
termination of Optionee's Continuous Status as an Employee or Consultant, the
Optionee may, but only within thirty (30) days after the date of such
termination (but in no event later than the date of expiration of
2
<PAGE>
to be withheld by the Company as a result of any exercise of the Option from
amounts payable to such person, subject to the following limitations:
(i) such election shall be irrevocable;
(ii) such election shall be subject to the disapproval of the Board
at any time;
(iii) such election may not be made within six months of the grant
date of the Option (except that this limitation shall not apply
in the event of death or disability of such person occurring
prior to the expiration of the six-month period); and
(iv) such election must be made either (A) six months prior to the
date that the amount of tax to be withheld upon such exercise is
determined or (B) in any ten-day period beginning on the third
business day following the date of release by the Company for
publication of quarterly or annual summary statements of sales
or earnings of the Company.
Any securities so withheld or tendered will be valued by the Company as of
the date of exercise.
APPLIED MICRO CIRCUITS CORPORATION
a Delaware corporation
By: /s/ Joel O. Holliday
--------------------
Joel 0. Holliday
Title: Vice President
Finance & Administration
THIS SPACE INTENTIONALLY
LEFT BALNK-SIGNATURE OF
OPTIONEE ON FOLLOWING PAGE
4
<PAGE>
EXHIBIT A
---------
STOCK OPTION NOTICE OF EXERCISE
To: Applied Micro Circuits Corporation
Attn: Stock Option Administrator
Subject: Notice of Intention to Exercise Stock Option
--------------------------------------------
This is official notice that the undersigned ("Optionee") intends to
exercise Optionee's option to purchase Shares of Applied Micro Circuits
Corporation Common Stock, all of which are vested, under and pursuant to the
Company's 1992 Stock Option Plan, as follows:
<TABLE>
<CAPTION>
Type of Number of Option Total
Option Option Option Shares Being Price Tax Due* Amount
Number Date ISO/NSO Purchased (Per Share) (if applicable) Due AMCC
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
* AMCC is required to withhold taxes when employees exercise an NSO. Under
current tax law, U.S. income tax withholding is not required when exercising
an ISO.
I am paying the cost to exercise as specified below by method a, b or c
(circle one below)
a. Cash Payment: Enclosed is my check # _______________ in the amount of
___________________.
b. Cashless Exercise and Same-Day Sale: I will call my stock broker
(check one below) to authorize them to issue a check payable to AMCC from my
account # _____________________.
_____ BancBoston Robertson Stephens-Corporate Services, Pon Smolokoff,
555 California Street, Suite 2600, San Francisco, CA 94104, TEL: (415)
693-3510, FAX: (415) 956-5265, E-MAIL: [email protected]
_____ SG Cowen & Company-Private Client Group, Matthew O. Casey, Four
Embarcadero Center, Suite 1200, San Francisco, CA 94111, TEL:
(415)646-7394 or (800)858-9316, FAX: (415)646-7316, E-MAIL:
[email protected]
c. Surrender of AMCC Shares: (Shares acquired from AMCC must have been
held for at least six months.)
I certify that the stock purchased through the exercise of these options will
not be sold in a manner that would violate the Company's policy on Insider
Trading.
Optionee's Signature: /s/ R. R. Sudireddy
--------------------------------
Print Name:___________________________________________
Home Address:_________________________________________
City, State, Zip Code:________________________________
Daytime Phone:________________________________________
Social Security Number:_______________________________
6
<PAGE>
APPLIED MICRO CIRCUITS CORPORATION INVENTIONS,
CONFIDENTIALITY AND TRADE SECRETS AGREEMENT
AGREEMENT between APPLIED MICRO CIRCUITS CORPORATION, a California
Corporation ("AMCC"), and ________________________________ ("Employee").
In consideration of the employment of the Employee by AMCC and the salary
or wages to be paid him/her during the period of employment it is agreed as
follows:
1. OWNERSHIP OF INVENTIONS. Every invention, discovery, improvement,
device, design, apparatus, practice, process, method, concept, original work of
authorship, trade secret or product (each of which is called an "invention"),
whether patentable or not, made, developed, perfected, devised, conceived or
first reduced to practice by the Employee, either solely or in collaboration
with others, during the period of employment by AMCC, whether or not during
regular working hours, shall be the sole and exclusive property of AMCC except
as may otherwise be required as provided in paragraph 4 below. The Employee
shall hold each and every such invention in fiduciary capacity for the sole
benefit of AMCC and shall promptly disclose in writing full information
concerning each and every such invention to AMCC, which shall receive employee's
disclosure in confidence. Nothing in this Agreement shall obligate AMCC to apply
for any patent. If AMCC in its sole discretion chooses, it will seek patent
protection where appropriate. THE PROVISIONS OF THIS ARTICLE DO NOT APPLY TO AN
INVENTION WHICH QUALIFIES FULLY UNDER THE PROVISIONS OF SECTION 2870 of the
LABOR CODE OF THE STATE OF CALIFORNIA, a copy of this section and associated
Sections 2871 and 2872 are attached to this Agreement. The provisions of this
paragraph 1 are subordinate to paragraph 4 of this Agreement.
2. OWNERSHIP OF OTHER WORKS. All works of authorship, developments,
concepts, know-how, improvements or trade secrets which an Employee shall create
during employment that relate to AMCC's business, products or research or that
relate to any work performed by Employee for AMCC, including without limitation
all writings, programs and art produced by Employee, such works of authorship
shall constitute a "work for hire" pursuant to title 17, United States Code,
Sections 101 and 201 (b.), a copy of which is attached to this Agreement.
3. WORK OUTSIDE THE COMPANY. At the time of execution of this Agreement
and from time to time thereafter during employment as necessary, Employee agrees
to notify AMCC, in advance, of his intent and/or plan to engage in research,
development and/or inventive work at any time not within regular working hours,
and from time to time to advise AMCC of the results thereof. Such notification
shall be in writing and shall identify the area(s) of activity contemplated.
4. ASSISTANCE IN OBTAINING AND DISPOSING OF PATENTS. At the request of
AMCC at any time after submittal of the invention disclosure form pertaining to
an invention and without further compensation (except that the Employee shall be
reimbursed for expenses necessary and related to the invention not covered by
his salary) the Employee shall:
<PAGE>
(a) assist AMCC, its attorneys and nominees in preparing and prosecuting in the
United States and all foreign countries applications for patents covering all
inventions, (b) execute, acknowledge and deliver any and all instruments deemed
necessary or proper by AMCC, its attorneys or nominees to make, file, or
prosecute all applications or in connection with their continuation, renewal or
reissuance or in the conduct of all proceedings or litigation regarding them,
(c) execute any and all documents deemed necessary or proper by AMCC, its
attorneys or nominees to transfer title in and to the applications or title in
and to all patents, copyrights, trademarks, maskwork rights, moral rights or
other intellectual property rights covering the inventions to AMCC or its
nominees, and (d) execute any other documents AMCC may request so it may
transfer or dispose of the invention. If AMCC is unable because of mental or
physical incapacity, unavailability or for any other reason, to secure
Employee's signature to apply for or to pursue any application for any United
States or foreign patents or copyright registrations covering inventions or
original works of authorship assigned to AMCC as above, then Employee hereby
irrevocably designates and appoints AMCC and its duly authorized officers and
agents as agent and attorney in fact, to act for and in Employee's behalf and
stead to execute and file any such applications and to do all other lawfully
permitted acts to further the application for, prosecution, issuance,
maintenance or transfer of letters patent or copyright registrations thereon
with the same legal force and effect as if originally executed by Employee. The
Employee hereby waives and irrevocably quitclaims to AMCC any and all claims, of
any nature whatsoever, which Employee now or hereafter has for infringement of
any and all proprietary rights assigned to AMCC.
5. RIGHTS OF THE UNTIED STATES GOVERNMENT. The Employee understands that
AMCC has entered into, or from time to time in the future may enter into,
agreements or arrangements with agencies of the United States Government and
that AMCC may be subject to laws and regulations which impose obligations,
restrictions and limitations on it with respect to inventions and patents
acquired by it or conceived or developed by employees, consultants and other
agents rendering services to AMCC. The Employee shall be bound by all such
obligations, restrictions and limitations applicable to any invention conceived
or developed by the Employee during the period of employment and shall take any
obligations and to comply with the restrictions and limitations.
6. RECORDS. The Employee will keep complete, accurate and authentic
accounts, notes, data and records of all inventions in the manner and form
requested by AMCC. The Employee acknowledges that California Labor Code Section
2860 provides that everything that an employee acquires by virtue of his/her
employment belongs to the employer. Upon termination of Employee's employment,
Employee agrees to promptly surrender to the company documents and materials
Employee acquired, received or developed during his/her employment, including,
but not limited to, all correspondence, drawings, blueprints, manuals, letters,
notes, reports, flow charts, diagrams, programs, proposals, or any other
physical items or documents relating to the Company's Trade Secrets, and agrees
that he/she will not make or retain any unauthorized copies or other
reproductions of such materials. The Employee recognizes that the unauthorized
taking of any of the Company's Trade Secrets is a crime under California penal
Code Section 499(c) and is punishable by imprisonment for a period not exceeding
one year, or by a fine not exceeding five thousand dollars ($5,000.00), or both.
The Employee further
-2-
<PAGE>
acknowledges that such unauthorized misappropriation of the company's Trade
Secrets could also result in civil liability under California Civil Code Section
3426. and that willful misappropriation may result in an award against employee
for double the amount of the Company's damages and the Company's fees in
collecting such damages.
7. CONFIDENTIAL DISCLOSURE. The Company intends to and has expended
substantial sums of money and devoted a great deal of time, labor and effort to
the development, creation and acquisition of a large body of confidential
information that is used by it in its business and is not generally known or
available to the public. Such confidential information gives the Company a
valuable advantage over its competitors and prospective competitors and is
proprietary to the Company. Such confidential and proprietary information
includes, but is not limited to, lists of actual or potential customers, clients
or candidates; techniques and formulas; marketing and sales plans; materials
relating to other employees; financial information; cost rate and pricing
information; business plans; diagrams; sources of supplies; drawings; plans;
processes; proposals; codes; notebooks; and the content of any contracts or
proposals involving the Company which are made, developed, perfected, devised,
conceived or first reduced to practice by Employee, the company or its
employees, agents, consultants, affiliates or assistants, either alone or
jointly with others (collectively "Trade Secrets"). Employee agrees that he/she
will, both during and after the period of employment, treat any information of
the company which is not readily publicly available as a Trade Secret of the
Company unless the company advises Employee otherwise in writing. Employee
acknowledges that Trade Secrets include not only technical information, but any
business information that the Company treats as confidential. Employee
recognizes that AMCC has received and in the future will receive confidential or
proprietary information from third parties subject to a duty on AMCC's part to
maintain the confidentiality of such information and to use it only for certain
limited purposes. Employee agrees to hold all such confidential or proprietary
information in the strictest confidence and not to disclose it to any person,
firm or corporation or to use it except as necessary in carrying out work for
AMCC consistent with AMCC's agreement with such third party.
8. PRE-EXISTING INVENTIONS. Except as to reserved inventions, if any,
identified in Exhibit A, attached, (a) Employee has no inventions previously
made or conceived by the Employee which the Employee wants to be excluded from
the scope of this Agreement and (b) the Employee releases AMCC from any and all
claims, known or unknown, by the Employee by reasons of any use by AMCC of any
innovation previously made or conceived by the Employee. If, in the course of
employment with AMCC, Employee incorporates into an AMCC product, process or
machine a pre-existing invention owned by the Employee or in which Employee has
an interest, AMCC is hereby granted and shall have a nonexclusive, royalty-free,
irrevocable, perpetual, worldwide license (with the rights to sublicense) to
make, have made, copy, modify, make derivative works of, use, sell and otherwise
distribute such pre-existing invention as part of or in connection with such
product, process or machine.
9. NO CONFLICTING AGREEMENT. The Employee represents that performance of
all terms of this Agreement as an Employee or consultant of AMCC has not
breached and will not breach any agreement to keep in confidence proprietary
information, knowledge or data acquired by the Employee in confidence or trust
prior or subsequent to the commencement of
-3-
<PAGE>
employment with AMCC, and Employee will not disclose to AMCC, or induce AMCC to
use, any inventions, confidential proprietary information or material belonging
to any previous employer or any other party.
10. EMPLOYMENT WITH AFFILIATED COMPANY. If Employee's employment is with
an affiliated company of AMCC, then apart from this paragraph 10, whenever the
term AMCC or Applied Micro Circuits Corporation appears in this Agreement, the
name of the affiliated company is to be substituted. Employee agrees that AMCC
may exercise any right conferred on, or perform any duty under this Agreement
for, the affiliated company. An affiliated company is an entity at least 50%
owned by AMCC.
11. SOLICITATION OF EMPLOYEES. Employee will be called upon to work
closely with employees of AMCC in performing services for AMCC. Employee
expressly agrees that he/she will not, during his/her employment with AMCC and
for one year thereafter, solicit or take away or assist any other individual or
business in soliciting any employee of AMCC. In addition, all information about
such employees which becomes known to Employee during the course of his/her
employment with AMCC, and which is not otherwise known to the public, is a trade
secret of AMCC and shall not be used by Employee in soliciting or taking away
employees of AMCC at any time during or after termination of his/her employment
with AMCC.
12. AT-WILL EMPLOYMENT. Employee understands and expressly agrees that
his/her employment is not for a specified term and that his/her employment may
be terminated by AMCC at anytime, with or without cause and with or without
notice. Employee expressly acknowledges that this provision is included in the
employee handbook, was reviewed during new hire orientation, and is to be the
complete and final expression of AMCC's and employee's understanding regarding
the terms and conditions under which his/her employment may be terminated.
Employee further understands and agrees that no representations contrary to this
provision are valid, and that this provision may not be augmented, contradicted
or modified in any way, except by a writing signed by the employee and the
President of AMCC. This employment at-will relationship may not be modified by
any oral or implied agreement.
13. TERM. This Agreement shall become effective as of the date of the
commencement of the Employee's employment by AMCC, and except as provided in
paragraph 14, shall terminate as of the termination of employment.
14. NOTIFICATION OF OTHER PARTIES. In the event that the Employee leaves
the employ of AMCC, the Employee hereby consents to notification by AMCC to
his/her new employer about the Employee's rights and obligations under this
Agreement.
15. SURVIVAL OF OBLIGATIONS. The obligations of the parties shall survive
the termination of this Agreement and of the Employee's employment by AMCC.
16. SUCCESSORS, ASSIGNS, ETC. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of AMCC, but not assignable to
the heirs, executors and administrators of the Employee.
-4-
<PAGE>
17. AMENDMENT. This Agreement may be amended only by a written amendment
executed by the Employee and the President of AMCC acting on behalf of AMCC.
18. ENTITLEMENT OF INJUNCTIVE RELIEF. Employee agrees and acknowledges
that violation of any of the provisions in this Agreement would cause
irreparable injury to AMCC, that the remedy at law for any violation or
threatened violation of this Agreement would be inadequate, and that AMCC shall
be entitled to temporary and permanent injunctive or other equitable relief
without the necessity of proving actual damages. In any proceeding by AMCC to
enforce any of the provisions contained in this Agreement, the prevailing party
shall be entitled to reimbursement of all costs and reasonable attorneys' fees
incurred in such litigation.
19. GOVERNING LAW. This Agreement shall be interpreted, construed,
governed and enforced in accordance with the laws of the State of California.
20. SEPARATE TERMS. Each term, condition, covenant or provision of this
Agreement shall be viewed as separate and distinct, and in the event that any
such term, covenant or provision shall be held by a court of competent
jurisdiction to be invalid, the remaining provisions shall continue to be in
full force and effect.
21. WAIVER. A waiver by either party of a breach of provision or
provisions of this Agreement shall not constitute a general waiver, or prejudice
the other party's right otherwise to demand strict compliance with that
provision or any other provision in this Agreement.
22. ENTIRE AGREEMENT. Employee acknowledges receipt of this Agreement and
agrees that this Agreement and attached exhibits represent the entire agreement
with AMCC concerning the subject matter hereof, and supersedes any previous oral
or written communications, representations, understandings or agreements with
AMCC or any officer or agent thereof. Employee understands that no
representative of AMCC has been authorized to enter into any agreement or
commitment with employee that this inconsistent in any way with the terms of
this Agreement.
23. CONSTRUCTION. This Agreement shall not be construed against any party
on the grounds that such party drafted the Agreement or caused it to be drafted.
24. ACKNOWLEDGMENT. Employee acknowledges that he/she has been advised by
AMCC to consult with independent counsel of his/her own choice, at his/her own
expense, concerning this agreement, that he/she has had the opportunity to do
so, and that he/she has taken advantage of that opportunity to the extent that
he/she desires. Employee further acknowledges that he/she has read and
understands this agreement, is fully aware of its legal effect, and has entered
into it freely based on his/her own judgment.
-5-
<PAGE>
24. ACKNOWLEDGMENT. Employee acknowledges that he/she has been advised by
AMCC to consult with independent counsel of his/her own choice, at his/her own
expense, concerning this agreement, that he/she has had the opportunity to do
so, and that he/she has taken advantage of that opportunity to the extent that
he/she desires. Employee further acknowledges that he/she has read and
understands this agreement, is fully aware of its legal effect, and has entered
into it freely based on his/her own judgment.
EXECUTED by the parties hereto as of__________________, 19____.
APPLIED MICRO CIRCUITS CORPORATION
By: /s/ [SIGNATURE ILLEGIBLE]
------------------------------
Witness:
/s/ [SIGNATURE ILLEGIBLE] /s/ R. R.Sudireddy
- ----------------------------- ------------------------------
Employee's Signature
/s/ RAM SUDIREDDY
------------------------------
Employee's Name (Printed)
EXHIBIT A
RESERVED INVENTIONS MADE OR CONCEIVED PRIOR
TO EMPLOYMENT AND BRIEF DESCRIPTION THEREOF
4
<PAGE>
Exhibit 10.29
AGREEMENT TO SELL
AND PURCHASE
AND ESCROW INSTRUCTIONS
Between
KILROY REALTY, L.P.
as
"Seller"
and
APPLIED MICRO CIRCUITS CORPORATION
as
"Purchaser"
<PAGE>
AGREEMENT TO SELL AND PURCHASE
AND ESCROW INSTRUCTIONS
-----------------------
THIS AGREEMENT TO SELL AND PURCHASE AND ESCROW INSTRUCTIONS (this
"Agreement") is dated as of January 8, 1999 (the "Effective Date") and entered
into by and between KILROY REALTY, L.P., a Delaware limited partnership
("Seller"), and APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation
("Purchaser"), with reference to the following facts and intentions:
R E C I T A L S:
- - - - - - - -
A. Seller, as Landlord, and Purchaser, as Tenant, are parties to that
certain Ground Lease effective as of January 1, 1998 (the "Ground Lease").
Capitalized terms used herein and not separately defined shall have the meanings
ascribed to them in the Ground Lease.
B. The parties have caused this Agreement to be executed and
delivered pursuant to the exercise of the Purchase Option by Purchaser as
provided under the Ground Lease.
NOW, THEREFORE, for the consideration hereafter set forth, and other
good and valuable consideration the receipt and sufficiency of which is hereby
acknowledged, Seller and Purchaser hereby agree as follows:
1. Agreement of Purchase and Sale.
------------------------------
Seller shall convey, and Purchaser shall purchase and acquire in
accordance with the terms set forth herein:
A. That certain real property located in the City of San
Diego., County of San Diego, State of California, more particularly described in
Exhibit A attached hereto and incorporated herein by this reference (the "Land")
B. All of Seller's right, title and interest in and to any
improvements, if any, affixed to the Land (collectively the "Improvements").
C. All of Seller's rights, privileges, entitlements, easements,
approvals, licenses, permits and appurtenances pertaining to the Land and the
Improvements, including any right, title and interest of Seller (but without
-1-
<PAGE>
warranty whether statutory, express or implied) in and to adjacent streets,
alleys or rights-of-way.
D. All of Seller's right, title and interest in and to any
intangible warranties, guaranties, contract rights and/or other claims, to the
extent assignable, relating to the Land and/or the Improvements.
The items described in Sections 1(A) through 1(C) above are
--------
hereinafter called the "Real Property;" the items described in Section 1(D) are
called the "Intangible Property;" and the Real Property and the Intangible
Property are collectively referred to as the "Property."
2. Purchase Price.
--------------
The purchase price ("Purchase Price") for the Property shall be
$3,636,036.
3. Payment of Purchase Price.
-------------------------
The Purchase Price shall be paid as follows:
A. As part of the Opening of Escrow (as defined below),
Purchaser shall deliver to Chicago Title Company ("Escrow Holder" and "Title
Company") a deposit of One Thousand Dollars ($1,000.00) (the "Deposit"). The
Deposit shall be in the form of wire transfer, cash or a certified or bank
cashier's check for immediately available funds. Escrow Holder shall place the
Deposit in an interest-bearing account acceptable to Purchaser and Seller. All
interest earned on the Deposit shall be included within the meaning of the term
"Deposit" in this Agreement such that Purchaser shall receive the benefit of any
interest earned thereon through a credit at the Close of Escrow.
B. Upon the Close of Escrow, Purchaser shall deposit or cause
to be deposited with Escrow Holder, in cash, by a certified or bank cashier's
check made payable to Escrow Holder or by a confirmed wire transfer of funds,
the balance of the Purchase Price plus closing costs and other charges payable
by Purchaser pursuant to this Agreement.
4. Escrow Instructions.
-------------------
A. Opening of Escrow. As soon as reasonably practicable following
-----------------
the mutual execution of this Agreement, but in no event later than two (2)
business days thereafter, the parties shall open an escrow ("Escrow") with the
Escrow Holder in order to consummate the purchase and sale of the Property in
accordance with the terms and provisions hereof by depositing the
-2-
<PAGE>
Deposit and a signed original of this Agreement in the Escrow. The provisions
hereof shall constitute joint primary escrow instructions to the Escrow Holder;
provided, however, that the parties shall execute such additional instructions
- --------- -------
as requested by the Escrow Holder not inconsistent with the provisions hereof
unless such additional instructions state that these instructions are being
modified, state the modification in full and are signed by both parties. The
date as of which the Escrow Holder shall receive (i) the Deposit and (ii) an
original of this Agreement executed on behalf of both Seller and Purchaser
(which execution may be effected in multiple counterparts) shall constitute the
"opening of Escrow." Escrow Holder shall deliver written confirmation of the
date of the Opening of Escrow to the parties in the manner set forth in Section
-------
14 of this Agreement.
B. Documents and Funds Delivered to or by Escrow. The following
---------------------------------------------
shall be delivered into the Escrow or by Escrow in connection with the transfer
of the Property:
(1) Delivery by Seller into Escrow. At least two (2) business
------------------------------
days prior to the Closing Date (as defined below), Seller shall deposit into
Escrow:
(a) a grant deed (the "Grant Deed") to the Property in
recordable form, duly executed and acknowledged by Seller in substantially the
same form as set forth in Exhibit "B" attached hereto;
----------
(b) two (2) originals of an assignment and assumption of
intangible property (the "Assignment of Intangible Property"), duly executed by
Seller in substantially the same form as set forth in Exhibit "C" attached
----------
hereto;
(c) two (2) originals of an affidavit from Seller which
satisfies the requirements of Section 1445 of the Internal Revenue Code, as
amended (the "Section 1445 Affidavit") in substantially the same form as set
forth in Exhibit "D" attached hereto;
----------
(d) two (2) originals of a Withholding Exemption
Certificate, California Form 590 (the "Certificate"), in substantially the same
form as set forth in Exhibit "E" attached hereto;
----------
(e) two (2) originals of the Termination of Ground Lease and
Termination of Memorandum of Ground Lease in substantially the same forms as set
forth in Exhibits "F-1" and "F-2" attached hereto (the "Termination of Ground
Lease");
-3-
<PAGE>
(f) a duly executed certificate of Seller ("Seller's
Bringdown Certificate") in the form of Exhibit "G" and
----------
(g) such other instruments and documents as may be
reasonably requested by Escrow Holder relating to Seller, to the Property and/or
as otherwise required to transfer the Property to Purchaser.
(2) Delivery of Documents by Purchaser into Escrow. Prior to the
----------------------------------------------
Closing Date, Purchaser shall deposit into Escrow executed counterparts of the
documents referred under Subsections B(l) (b), (e) and (g) above.
-----------
(3) Delivery by Escrow. At least two (2) business days prior to
------------------
the Close of Escrow, Escrow Holder shall deliver to Purchaser and Seller a pro
forma closing statement which sets forth, in a manner satisfactory to Purchaser
and Seller, the prorations and other credits and debits contemplated by this
Agreement.
C. Conditions to Close. Escrow shall not close unless and until the
-------------------
following conditions precedent and contingencies have been satisfied or waived
in writing by the party for whose benefit the conditions have been included:
(1) All funds and instruments described in this Section 4 have
-------
been delivered to the Escrow Holder.
(2) The Title Company is in a position and is unconditionally
committed to issue to Purchaser the Title Policy described in Section 6 below.
------- -
(3) All representations and warranties made by Seller in Section
-------
8 below and Purchaser in Section 9 below shall be true and correct in all
------- -
material respects as of the Closing Date.
(4) Except as expressly provided in this Section 4(c) (4),
Seller and Purchaser shall each have performed, observed and complied with all
of their respective covenants, agreements and conditions required by this
Agreement to be performed, observed and/or complied with by Seller and
Purchaser, as the case may be, prior to, or as of, the Closing. If Seller fails
to deposit into Escrow the Section 1445 Affidavit or the Certificate as required
by this Agreement, Purchaser may at its option either (i) delay Close of Escrow
until such time as Seller has complied with the conditions set forth herein
(which adjournment shall not place Purchaser in default of its obligations
hereunder) or (ii) withhold from the Purchase Price and remit to the Internal
Revenue Service, a sum equal to ten
-4-
<PAGE>
percent (10%) of the gross selling price of the Property and such other sum as
shall be required in accordance with the withholding obligations imposed upon
Purchaser pursuant to Section 1445 of the Internal Revenue Code, as amended, and
the laws of the State of California. Such withholding shall not place Purchaser
in default under this Agreement, and Seller shall not be entitled to claim that
such withholding shall excuse Seller's performance under this Agreement.
If Closing shall have occurred with the consent of both parties, any
non-material condition not otherwise satisfied or waived as of the Closing
shall be deemed fully satisfied or waived by the party for whose benefit the
condition had been included.
D. Recordation and Transfer. Upon satisfaction of the
------------------------
conditions set forth in Section 4(C) above, Escrow Holder shall transfer the
-------
Property as follows:
(1) Cause the Termination of Memorandum of Ground Lease and
Grant Deed to be recorded in the Official Records of San Diego County,
California and deliver conformed copies thereof to each of Seller and Purchaser;
(2) Deliver to Purchaser one (1) fully executed original of
the Termination of Ground Lease, the Section 1445 Affidavit, the Assignment of
Intangible Property, the Seller's Bringdown Certificate, and the Certificate;
(3) Deliver to Seller one (l) fully executed original of
the Termination of Ground Lease, the Section 1445 Affidavit, the Assignment of
Intangible Property, the Seller's Bringdown Certificate, and the Certificate;
(4) Deliver to the parties entitled thereto any other
closing documents, including, without limitation, the final closing statement
for the Escrow (the "Final Statement"), which shall contain no material
differences from the pro forma closing statement, previously delivered to, and
approved by, each party;
(5) Disburse all funds deposited with Escrow Holder by
Purchaser pursuant to Section 3 as follows:
(a) deliver to Seller the Purchase Price less amounts
chargeable to Seller pursuant to instructions to be delivered by Seller to
Escrow Holder; and
(b) disburse any remaining balance of the funds
deposited by Purchaser to Purchaser upon the Close of
-5-
<PAGE>
Escrow pursuant to instructions to be delivered by Purchaser to Escrow Holder
less amounts chargeable to Purchaser.
E. Close of Escrow. Escrow shall close upon the recordation of
---------------
the Grant Deed in accordance with the terms and conditions hereof ("Close of
Escrow" or "Closing Date" or "Closing") . The Close of Escrow shall be May 31,
1999.
5. Condition of Title. It shall be a condition to the Close of Escrow
------------------
for Purchaser's benefit that title to the Real Property be conveyed to Purchaser
by Seller subject only to the following approved condition of title ("Approved
Condition of Title"):
(a) The matters referred to in Part 1, Schedule B of the Title
Policy;
(b) Non-delinquent general and special real estate taxes;
(c) The Permitted Exceptions described in Exhibit "C" to the Ground
Lease and any additional matters expressly approved by Purchaser arising from or
relating to the Approved Lot Line Adjustment; and
(d) Such other matters created by Purchaser.
Upon the Opening of Escrow, Seller, at its sole cost and expense,
shall cause the Title Company to prepare and deliver to Seller and Purchaser an
updated preliminary title report for the Real Property (the "Title Report") and
shall cause Latitude 33 to prepare, issue and certify to Purchaser and Title
Company a revised ALTA/ACSM survey of the Real Property consistent with the
Approved Lot Line Adjustment (the "Survey") Purchaser shall reimburse Seller at
Closing, for the cost of the Survey.
Seller covenants and agrees that during the term of the Escrow, it
will not cause or permit (without objection) title to the Real Property to
differ from the Approved Condition of Title described in this Section 5. Any
liens, encumbrances, encroachments, easements, restrictions, conditions,
covenants, rights, rights-of-way, or matters other than those contained with
the Approved Condition of Title shall also be subject to Purchaser's approval
and must be eliminated or ameliorated to Purchaser's satisfaction and for
Purchaser's benefit prior to the Close of Escrow as a condition of the Close of
Escrow.
6. Title Policy. Title to the Real Property shall be evidenced by the
------------
unconditional commitment of the Title Company to
-6-
<PAGE>
issue its ALTA Extended Coverage (Form 8-1970) Owner's Policy of Title Insurance
("Title Policy") in the amount of the Purchase Price, insuring fee title to the
Real Property vested in Purchaser subject only to the Approved Condition of
Title. The issuance of the Title Policy shall be in lieu of any express or
implied warranty of Seller concerning title to the Property. Purchaser agrees
that its only remedy for damages incurred by reason of any defect in title shall
be against the Title Company.
7. AS-IS SALE. EXCEPT AS OTHERWISE PROVIDED FOR IN THIS
----------
AGREEMENT, IT IS UNDERSTOOD AND AGREED THAT WITH RESPECT TO THE LEGAL,
PHYSICAL AND ENVIRONMENTAL CONDITION OF THE PROPERTY, THE PROPERTY IS BEING
SOLD AND CONVEYED HEREUNDER AND PURCHASER AGREES TO ACCEPT THE PROPERTY "AS
--
IS," "WHERE IS" AND "WITH ALL FAULTS" AND SUBJECT TO ANY PHYSICAL
- -- ----- -- ---- --- ------
CONDITION, INCLUDING ANY ENVIRONMENTAL CONDITION, WHICH MAY EXIST, WITHOUT
ANY REPRESENTATION OR WARRANTY BY SELLER EXCEPT AS EXPRESSLY SET FORTH IN
SECTION 8 OF THIS AGREEMENT. PURCHASER HEREBY EXPRESSLY ACKNOWLEDGES AND
AGREES THAT (i) PURCHASER SHALL BE SOLELY RESPONSIBLE FOR DETERMINING THE
STATUS AND CONDITION OF THE PROPERTY, INCLUDING, WITHOUT LIMITATION,
EXISTING ZONING CLASSIFICATIONS, BUILDING REGULATIONS AND GOVERNMENTAL
ENTITLEMENT AND DEVELOPMENT REQUIREMENTS APPLICABLE TO THE PROPERTY AND
PURCHASER HAS OR WILL HAVE PRIOR TO THE CLOSING DATE, THOROUGHLY INSPECTED
AND EXAMINED THE PROPERTY TO THE EXTENT DEEMED NECESSARY BY PURCHASER IN
ORDER TO ENABLE PURCHASER TO EVALUATE THE PURCHASE OF THE PROPERTY AND (ii)
PURCHASER IS RELYING SOLELY UPON SUCH INSPECTIONS, EXAMINATION, AND
EVALUATION. PURCHASER SHALL NOT BE RELIEVED OF ITS OBLIGATIONS UNDER THIS
AGREEMENT BY THE PENDENCY, THREATENING OR PASSING, OF ANY INITIATIVE, OR BY
THE IMPOSITION OF ANY MORATORIUM ON DEVELOPMENT, OR SIMILAR ACTIONS
ADVERSELY AFFECTING THE PROPERTY, AND SUCH INITIATIVES, MORATORIA AND
ACTIONS SHALL NOT BE CONSIDERED AS PART OF PURCHASER'S INSPECTION OF THE
PROPERTY. PURCHASER HEREBY ASSUMES THE RISK THAT CERTAIN CONDITIONS,
INCLUDING ENVIRONMENTAL CONDITIONS, MAY EXIST ON THE PROPERTY AND HEREBY
RELEASES SELLER OF AND FROM ANY AND ALL CLAIMS, ACTIONS, DEMANDS, RIGHTS,
DAMAGES, COSTS OR EXPENSES WHICH MIGHT ARISE OUT OF OR IN CONNECTION WITH
THE CONDITION OF THE PROPERTY.
As used herein, the term "Environmental Condition" shall mean any
condition with respect to the Property which could or does result in any damage,
loss, cost, expense or liability to or against the owner of the Property by any
third party (including without limitation any governmental entity) including,
without limitation, any condition resulting from operations conducted on the
Property or on property adjacent thereto.
-7-
<PAGE>
8. Representations and Warranties of Seller.
----------------------------------------
A. Seller represents and warrants to Purchaser that as of
the date hereof and as of the Close of Escrow:
(1) Seller is a limited partnership, duly organized,
validly existing and in good standing under the laws of the Sate of Delaware.
Seller is qualified to do business and is in good standing under the laws of the
State of California. Seller has the right, power and authority to make and
perform its obligations under this Agreement, and the execution, delivery and
performance of this Agreement (i) does not violate the partnership agreement of
Seller or any contract, agreement or commitment to which Seller is a party or by
which Seller is bound and is evidence that the general partner of Seller has
approved this transaction and (ii) have been duly authorized by all necessary
action on the part of Seller and its partners, shareholders and/or board of
directors, as applicable. In addition, the person executing this Agreement on
behalf of Seller has the authority to do so.
(2) Other than Purchaser as Tenant under the Ground
Lease, there are no parties in possession of any portion of the property as
lessees, tenants at sufferance or trespassers.
(3) Seller has received no written notice from
any governmental authority advising that the Property is not in compliance with
applicable building codes, zoning, subdivision, and land use laws and other
local, state and federal laws and regulations.
(4) This Agreement constitutes the legal, valid and
binding obligation of Seller, enforceable in accordance with its terms, subject
to laws applicable generally to applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles affecting or
limiting the right of contracting parties generally.
(5) The Property is not presently the subject of any
pending claims, litigation, legal action, or eminent domain proceeding, and to
Seller's knowledge, no such claim, litigation or proceeding is currently
threatened or planned.
(6) There are no management, service, supply or
maintenance contracts affecting the Property in effect on the date of this
Agreement or which shall affect the Property on or following the Close of
Escrow.
-8-
<PAGE>
(7) Seller is not a "foreign person" within the meaning
of Section 1445 of the Internal Revenue Code of 1986 (i.e., Seller is not a non-
resident alien, foreign corporation, foreign partnership, foreign trust or
foreign estate as those terms are defined in the Code and regulations
promulgated thereunder).
(8) Seller (a) is not in receivership or dissolution;
(b) has not made any assignment for the benefit of creditors; (c) has not
admitted in writing its inability to pay its debts as they mature; (d) has not
been adjudicated a bankrupt; (e) has not filed a petition in voluntary
bankruptcy, a petition or answer seeking reorganization, or an arrangement with
creditors under the Federal Bankruptcy Law or any other similar law or statute
of the United States or any state; or (f) does not have any such petition
described in Subparagraph (e) above filed against Seller.
(9) Seller shall immediately give Purchaser notice of
any event or occurrence which would cause any of Seller's above representations
and warranties to cease to be true or correct in any respect.
B. As used in this Section 8, the term "to Seller's
-------
knowledge" (i) shall mean and apply to the knowledge of Steven L. Black and
Steve Scott of Kilroy Realty Corporation (collectively, the "Involved Parties"),
who are the representatives of Seller who are or were directly engaged in the
acquisition by Seller of the Property, the management of the Property and/or the
sale and purchase transaction described herein, and not to any other parties,
(ii) shall mean the current knowledge of such Involved Parties, or the knowledge
such Involved Parties would have had following a reasonable investigation or
inquiry; and (iii) shall not mean such Involved Parties are charged with
knowledge of the acts, omissions and/or knowledge of the predecessors in title
to the Property or with knowledge of the acts, omissions and/or knowledge of
Seller's agents, consultants or employees. The Involved Parties shall be
reasonably available to Purchaser during Seller's normal business hours to
confirm such matters as are identified in this Section 8 as subject to Seller's
-------
knowledge thereof.
C. The representations of Seller herein shall survive the
Close of Escrow for a period of two (2) years.
D. PURCHASER ACKNOWLEDGES AND AGREES THAT, OTHER THAN THE
LIMITED REPRESENTATIONS SET FORTH IN THIS SECTION 8, SELLER MAKES NO
-------
REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AS TO THE PROPERTY.
PURCHASER HEREBY WAIVES AND RELINQUISHES ALL RIGHTS AND PRIVILEGES ARISING
OUT OF, OR WITH
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<PAGE>
RESPECT OR IN RELATION TO, ANY REPRESENTATIONS (OTHER THAN THE LIMITED
REPRESENTATIONS SET FORTH IN THIS SECTION 8), WARRANTIES OR COVENANTS,
---------
WHETHER EXPRESS OR IMPLIED, WHICH MAY HAVE BEEN MADE OR GIVEN, OR WHICH MAY
BE DEEMED TO HAVE BEEN MADE OR GIVEN, BY SELLER EXCEPT FOR THOSE COVENANTS
SET FORTH HEREIN WHICH ARE EXPRESSLY TO SURVIVE THE CLOSING. PURCHASER
HEREBY FURTHER ACKNOWLEDGES AND AGREES THAT WARRANTIES OF MERCHANTABILITY
AND FITNESS FOR A PARTICULAR PURPOSE ARE EXCLUDED FROM THE TRANSACTION
CONTEMPLATED HEREBY, AS ARE ANY WARRANTIES ARISING FROM A COURSE OF DEALING
OR USAGE OF TRADE, AND THAT THE SELLER HAS NOT WARRANTED, AND DOES NOT
HEREBY WARRANT, THAT THE PROPERTY NOW OR IN THE FUTURE WILL MEET OR COMPLY
WITH THE REQUIREMENTS OF ANY SAFETY CODE OR REGULATION OF ANY APPLICABLE
GOVERNMENTAL AUTHORITY OR JURISDICTION. WITHOUT LIMITING THE GENERALITY OF
THE FOREGOING, PURCHASER HEREBY ASSUMES ALL RISK AND LIABILITY (AND AGREES
THAT SELLER SHALL NOT BE LIABLE FOR ANY SPECIAL, DIRECT, INDIRECT,
CONSEQUENTIAL, OR OTHER DAMAGES) RESULTING OR ARISING FROM OR RELATING TO
THE OWNERSHIP, USE, CONDITION, LOCATION, MAINTENANCE, REPAIR, OR OPERATION
OF THE PROPERTY. PURCHASER ACKNOWLEDGES AND AGREES THAT THE SALE PROVIDED
FOR HEREIN IS MADE, WITHOUT ANY WARRANTY BY SELLER AS TO THE NATURE OR
QUALITY OF THE PROPERTY; THE DEVELOPMENT POTENTIAL OF THE PROPERTY; THE
PRIOR HISTORY OF OR ACTIVITIES ON THE PROPERTY; THE QUALITY OF LABOR AND/OR
MATERIALS INCLUDED IN ANY OF THE IMPROVEMENTS; THE FITNESS OF THE PROPERTY
FOR AND/OR THE SOIL CONDITIONS EXISTING AT THE PROPERTY FOR ANY PARTICULAR
PURPOSE OR DEVELOPMENT POTENTIAL; THE PRESENCE OR SUSPECTED PRESENCE OF
HAZARDOUS WASTE OR SUBSTANCES ON, ABOUT, OR UNDER THE PROPERTY OR THE
IMPROVEMENTS; OR THE ZONING OR OTHER LEGAL STATUS OF THE PROPERTY. EXCEPT
AS SPECIFICALLY SET FORTH IN THIS AGREEMENT, NO PERSON ACTING ON BEHALF OF
SELLER IS AUTHORIZED TO MAKE, AND BY THE EXECUTION HEREOF PURCHASER HEREBY
ACKNOWLEDGES THAT NO PERSON HAS MADE, ANY REPRESENTATION, AGREEMENT,
STATEMENT, WARRANTY, GUARANTY OR PROMISE REGARDING THE PROPERTY, OR THE
TRANSACTION CONTEMPLATED HEREIN, OR REGARDING THE ZONING, CONSTRUCTION,
PHYSICAL CONDITION OR OTHER STATUS OF THE PROPERTY, AND NO REPRESENTATION,
WARRANTY, AGREEMENT, STATEMENT, GUARANTY OR PROMISE, IF ANY, MADE BY ANY
PERSON ACTING ON BEHALF OF SELLER WHICH IS NOT CONTAINED HEREIN SHALL BE
VALID OR BINDING UPON SELLER.
9. Representations and Warranties of Purchaser.
-------------------------------------------
A. Purchaser represents and warrants to Seller
that:
(1) Purchaser is a corporation, duly organized,
validly existing and in good standing under the laws of Delaware. The
execution and delivery by Purchaser of, and Purchaser's performance under,
this Agreement, are within Purchaser's powers and Purchaser (and the
person(s) executing
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<PAGE>
this Agreement on behalf of Purchaser) has the authority to execute and deliver
this Agreement.
(2) This Agreement constitutes the legal, valid and binding
obligation of Purchaser enforceable in accordance with its terms, subject to
laws applicable generally to applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws or equitable principles affecting or limiting the
rights of contracting parties generally.
(3) Execution and performance of this Agreement will not result in
any breach of, or constitute any default under, any agreement or other
instrument to which Purchaser is a party.
(4) Purchaser (a) is not in receivership or dissolution, (b) has not
made any assignment for the benefit of creditors, (c) has not admitted in
writing its inability to pay its debts as they mature, (d) has not been
adjudicated a bankrupt, (e) has not filed a petition in voluntary bankruptcy, a
petition or answer seeking reorganization, or an arrangement with creditors
under the federal bankruptcy law, or-any other similar law or statute of the
United States or any state, or (f) does not have any such petition described in
(e) filed against Purchaser.
B. The representations of Purchaser herein shall survive the
Close of Escrow for a period of two (2) years.
10. Condemnation.
------------
Promptly upon obtaining knowledge of the institution of the
proceedings for the condemnation of part of the Property, Seller or Purchaser
will notify the other of the pendency of such proceedings. In the event of the
condemnation or threatened condemnation of any material (i.e., more than 10% of
the Property) or the sale of any material portion of the Property in lieu of
condemnation prior to the Closing which would entitle Purchaser to terminate the
Ground Lease, Purchaser may elect to terminate this Agreement (provided
Purchaser also elects to terminate the Ground Lease) by notice in writing to
Seller within ten (10) business days following the date on which Purchaser or
Seller received actual notice of such condemnation of the Property or conveyance
in lieu thereof, in which event the Deposit and all Rent and other charges paid
by Purchaser pursuant to the Ground Lease or this Agreement shall be returned to
Purchaser and the parties shall have no further right or obligation hereunder
except as specifically provided herein. If Purchaser does not elect to terminate
within said ten (10) business day period, Purchaser shall be deemed to waive all
rights to terminate pursuant to this provision and this Agreement shall remain
in full force and effect, without reduction in the
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<PAGE>
purchase Price, but with any condemnation award or proceeds being paid and/or
assigned to Purchaser. In all events, Seller shall solely be entitled to any
award attributed to any property, other than the Property, which is owned by
Seller.
11. Prorations and Costs Upon Closing.
---------------------------------
A. Impositions relating to the Property shall be prorated as of
October 1, 1998. If the Closing shall occur before the actual taxes for the then
current fiscal year are known, the apportionment of taxes shall be upon the
basis of taxes for the Property for the immediately preceding year, provided
that, if the taxes for the current fiscal year are thereafter determined to be
more or less than the taxes for the preceding fiscal year (after any appeal of
the assessed valuation thereof is concluded), Seller and Purchaser promptly
shall adjust the proration of such taxes and Seller or Purchaser, as the case
may be, shall pay to the other any amount required as a result of such
adjustment. All Impositions assessed for the period from and after October 1,
1998, shall be paid or reimbursed by Purchaser at the Closing. Purchaser shall
only be obligated to pay those Impositions and assessments prorated hereunder
applicable to the Property. To the extent the tax bills upon which the
prorations are based include real property in addition to the Property, the
amount of such taxes and assessments to be prorated between the parties shall be
that fraction which the aggregate square footage of the Property bears to the
aggregate square footage of all real property covered by such tax bills.
(1) At Closing, Purchaser shall pay
(1) documentary transfer tax (or any other taxes imposed on account of the
conveyance of the Property to Purchaser) in the amount Escrow Holder determines
to be required by law: (2) the cost of the Title Policy described in Section 6
above and any endorsements requested by Purchaser; (3) Escrow Holder's escrow
fee; and (4) other closing charges, recording fees and expenses imposed by
Escrow Holder.
(2) If Escrow shall fail to close because of failure of Seller
to comply with its obligations hereunder, without limitation of Purchaser's
other rights and remedies against Seller by reason thereof, the costs
customarily charged and incurred in connection with Escrow, including the cost
of any cancellation fees or other costs of Title company, shall be paid by
Seller (excluding any special Escrow cost incurred by Purchaser prior to the
Close of Escrow, premiums or fees paid for a commitment, or any other title
insurance product). If Escrow shall fail to close because of failure of
Purchaser to comply with its obligations hereunder, such costs shall be paid by
Purchaser. If Escrow shall fail to close for any other reason,
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<PAGE>
such costs shall be equally divided between the parties (excluding any special
Escrow cost incurred by Purchaser prior to the Close of Escrow, premiums or fees
paid for a commitment, or any other title insurance product)
12. Remedies.
--------
A. IN THE EVENT THE CLOSE OF ESCROW FAILS TO OCCUR AS A RESULT
OF SELLER'S DEFAULT UNDER THIS AGREEMENT AND NOT DUE TO PURCHASER'S MATERIAL
DEFAULT, PURCHASER, AS ITS SOLE AND EXCLUSIVE REMEDY UNDER THIS AGREEMENT,
EXCEPT AS OTHERWISE PROVIDED HEREIN, SHALL RECEIVE A REFUND OF THE DEPOSIT AND
SHALL BE ENTITLED TO (i) PURSUE THE SPECIFIC PERFORMANCE OF THE CONVEYANCE OF
THE PROPERTY PURSUANT TO THIS AGREEMENT OR (ii) PURSUE SELLER FOR ACTUAL
DAMAGES; PROVIDED, HOWEVER, (1) IN NO EVENT SHALL PURCHASER BE ENTITLED TO A
--------- -------
RECOVERY OR CLAIM AGAINST SELLER FOR ACTUAL DAMAGES IN EXCESS OF AN AMOUNT EQUAL
TO THE AMOUNT OF THE RENT PAID UNDER THE GROUND LEASE AND (2) SELLER SHALL NOT
BE LIABLE TO PURCHASER FOR ANY PUNITIVE, SPECULATIVE OR CONSEQUENTIAL DAMAGES.
B. PROVIDED PURCHASER HAS NOT ELECTED TO TERMINATE THIS
AGREEMENT PURSUANT TO ANY OF PURCHASER'S RIGHTS TO DO SO CONTAINED HEREIN, IF
PURCHASER COMMITS A DEFAULT UNDER THIS AGREEMENT AND THE CLOSE OF ESCROW FAILS
TO OCCUR SOLELY BY REASON OF SUCH DEFAULT, THEN SELLER, AS ITS SOLE AND
EXCLUSIVE REMEDY, MAY TERMINATE THIS AGREEMENT BY NOTIFYING PURCHASER THEREOF
AND RECEIVE OR RETAIN THE DEPOSIT. THE PARTIES AGREE THAT SELLER WILL SUFFER
DAMAGES IN THE EVENT OF PURCHASER'S DEFAULT ON ITS OBLIGATIONS. ALTHOUGH THE
AMOUNT OF SUCH DAMAGES IS DIFFICULT OR IMPOSSIBLE TO DETERMINE, THE PARTIES
AGREE THAT THE AMOUNT OF THE DEPOSIT IS A REASONABLE ESTIMATE OF SELLER'S LOSS
IN THE EVENT OF PURCHASER'S DEFAULT. THUS, SELLER SHALL ACCEPT AND RETAIN THE
DEPOSIT AS LIQUIDATED DAMAGES BUT NOT AS A PENALTY. SUCH LIQUIDATED DAMAGES
SHALL CONSTITUTE SELLER'S SOLE AND EXCLUSIVE REMEDY IN LIEU OF ANY OTHER RELIEF,
RIGHT OR REMEDY, AT LAW OR IN EQUITY TO WHICH SELLER WOULD OTHERWISE BE ENTITLED
BY REASON OF PURCHASER'S DEFAULT, INCLUDING WITHOUT LIMITATION, ANY AND ALL
RIGHTS SELLER WOULD HAVE OTHERWISE HAD UNDER CALIFORNIA CIVIL CODE SECTION 3389.
PURCHASER ACKNOWLEDGES AND AGREES THAT NO TECHNICAL OR NON-MATERIAL DEFAULT BY
SELLER UNDER THIS AGREEMENT SHALL IN ANY WAY AFFECT THE RIGHTS OR REMEDIES OF
SELLER AGAINST PURCHASER HEREUNDER. IN THE EVENT SELLER IS ENTITLED TO THE
DEPOSIT AS LIQUIDATED DAMAGES AND TO THE EXTENT SELLER HAS NOT ALREADY RECEIVED
THE DEPOSIT, THE DEPOSIT SHALL BE IMMEDIATELY PAID TO SELLER BY THE ESCROW
HOLDER UPON RECEIPT OF WRITTEN NOTICE FROM SELLER THAT PURCHASER HAS DEFAULTED
UNDER THIS AGREEMENT, AND PURCHASER AGREES TO TAKE ALL SUCH ACTIONS AND TO
EXECUTE AND DELIVER ALL SUCH DOCUMENTS NECESSARY OR APPROPRIATE TO EFFECT SUCH
PAYMENT. IN CONSIDERATION OF SELLER RECEIVING THE
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LIQUIDATED DAMAGES, SELLER WILL BE DEEMED TO HAVE WAIVED ALL OF ITS RIGHTS AND
REMEDIES AGAINST PURCHASER FOR DAMAGES WITH RESPECT TO SUCH BREACH OR DEFAULT.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS SECTION 12(B), IF
PURCHASER BRINGS AN ACTION AGAINST SELLER FOR AN ALLEGED BREACH OR DEFAULT BY
SELLER OF ITS OBLIGATIONS UNDER THIS AGREEMENT, AND, IN CONNECTION WITH THAT
ACTION, RECORDS A LIS PENDENS OR OTHERWISE ENJOINS OR RESTRICTS SELLER'S ABILITY
TO SELL OR TRANSFER THE PROPERTY ("PURCHASER'S ACTION"), SELLER SHALL NOT BE
RESTRICTED BY THE PROVISIONS OF THIS SECTION 12(B) FROM SEEKING EXPUNGEMENT OR
RELIEF FROM THAT LIS PENDENS, INJUNCTION OR OTHER RESTRAINT, AND RECOVERING
DAMAGES, COSTS OR EXPENSES (INCLUDING ATTORNEYS' FEES) WHICH SELLER MAY SUFFER
OR INCUR AS A RESULT OF PURCHASER' S ACTION, AND THE AMOUNT OF ANY SUCH DAMAGES
AWARDED TO SELLER SHALL NOT BE LIMITED TO THE LIQUIDATED DAMAGES SET FORTH
HEREIN. FURTHERMORE, IN NO EVENT SHALL THIS SECTION 12(B) HAVE ANY APPLICATION
TO OR LIMIT SELLER'S RIGHTS AGAINST PURCHASER IN CONNECTION WITH ANY OF THE
FOLLOWING: (i) SECTION 13 OF THIS AGREEMENT, (ii) SECTION 15 OF THIS AGREEMENT,
(iii) SECTION 24 OF THIS AGREEMENT, OR (iv) ANY DUTY OR OBLIGATION OF PURCHASER
TO INDEMNIFY SELLER AS PROVIDED IN THIS AGREEMENT AND WHICH DUTY OR OBLIGATION
EXPRESSLY SURVIVES TERMINATION OF THIS AGREEMENT.
SELLER AND PURCHASER ACKNOWLEDGE THAT THEY HAVE READ AND
UNDERSTAND THE PROVISIONS OF THE FOREGOING LIQUIDATED DAMAGES PROVISION AND BY
THEIR SIGNATURES IMMEDIATELY BELOW AGREE TO BE BOUND BY ITS TERMS.
Seller: Purchaser:
KILROY REALTY, L.P. APPLIED MICRO CIRCUITS
CORPORATION
By: KILROY REALTY CORPORATION
Its: General Partner
By: ______________________________ By: /s/ [SIGNAYURE ILLEGIBLE]
-------------------------------------
Its: ______________________________ Its: V.P.
-------------------------------------
C. Except as provided below, in the event the Close of Escrow fails
to occur for any reason, and in addition to the respective rights and
obligations of the parties set forth in subsections A and B above, Purchaser may
exercise the Rescission Option as more particularly set forth in Article 14 of
the Ground Lease. If Purchaser exercised the Extension Option along with its
Purchase Option, and the Approved Lot Line Adjustment had been recorded prior to
December 30, 1998, Purchaser may not exercise such Rescission Option.
-14-
<PAGE>
13. Real Estate Commissions.
-----------------------
Except for David Marino of The Irving Hughes Group, Inc. whom
Purchaser has retained as its agent and will compensate pursuant to a separate
agreement, each party hereto represents to the other that it has not authorized
any broker or finder to act on its behalf in connection with the sale and
purchase hereunder and that such party has not dealt with any broker or finder
purporting to act on behalf of any other party. Each party hereto agrees to
indemnify, defend and hold harmless the other party from and against any and all
losses, liens, claims, judgments, liabilities, costs, expenses or damages
(including reasonable attorneys' fees and court costs) of any kind or character
arising out of or resulting from any agreement, arrangement or understanding
(except as set forth above with respect to the Agent) alleged to have been made
by such party or on its behalf with any broker or finder in connection with this
Agreement or the transaction contemplated hereby.
14. Notices.
-------
Any notice or communication required or permitted hereunder shall be
given in writing, sent by (a) personal delivery delivered by a representative of
the party giving such notice, or (b) delivery service with proof of delivery, or
(c) United States mail, postage prepaid, registered or certified mail, or (d)
telecopier, addressed as follows:
If to Purchaser, to: Applied Micro Circuits Corporation
6290 Sequence Drive
San Diego, California 92121
Attention: Mr. Joel Holliday
Chief Financial Officer
Telecopier: (619) 535-6800
With a copy to: Luce, Forward, Hamilton & Scripps, LLP
600 W. Broadway, Suite 2600
San Diego, California 92101
Attention: David Hymer, Esq.
Telecopier: (619) 232-8311
With additional copy to: Brobeck, Phleger & Harrison, LLP
550 West "C" Street, Suite 1300
San Diego, CA 92101
Attention: Todd J. Anson, Esq.
Telecopier: (619) 234-3848
-15-
<PAGE>
If to Seller, to: Kilroy Realty L.P.
4365 Executive Drive, Suite 850
San Diego, California 92121-2130
Attention: Mr. Steven L. Black,
Executive Vice-President
Telecopier: (619) 550-1935
With a copy to: Kilroy Realty Corporation
2250 E. Imperial Highway
El Segundo, California 90245
Attention: Mr. Jeffrey C. Hawken
Executive Vice--President
and Chief Operating Officer
Telecopier: (310) 322-5981
With an additional Allen, Matkins, Leck, Gamble &
copy to: Mallory LLP
501 W. Broadway, Suite 900
San Diego, California 92101
Attention: Vernon C. Gauntt, Esq.
Telecopier: (619) 233-1158
or to such other address or to the attention of such other person as
hereafter shall be designated in writing by the applicable party sent in
accordance herewith. Any such notice or communication shall be deemed to have
been delivered either at the time of personal delivery when actually received by
the addressee or a representative of the addressee at the address provided above
or, if delivered on a business day in the case of delivery service or as to
certified or registered mail, as of the earlier of the date delivered or the
date 72 hours following the date deposited in the United States mail at the
address provided herein, or if by telecopier, upon electronic confirmation of
good receipt by the receiving telecopier.
15. Assignment.
----------
Purchaser shall not have the right to assign its interest in this
Agreement without obtaining the prior written consent of Seller except to an
entity controlled by, under common control with, or controlling, Purchaser.
Notwithstanding the foregoing, Seller expressly consents to an assignment of
this Agreement to an entity affiliated with any bank, trust or financial
institution as may be required in connection with Purchaser' s financing.
-16-
<PAGE>
16. Section Headings.
----------------
The Section headings contained in this Agreement are for convenience
only and shall in no way enlarge or limit the scope or meaning of the various
and several Sections hereof.
17. Entire Agreement.
----------------
This Agreement and the Ground Lease embodies the entire agreement
between the parties hereto and supersedes any prior understandings or written or
oral agreements between the parties concerning the Property. Further, this
Agreement cannot be varied, modified, amended, altered or terminated except by
the written agreement of the parties.
18. Applicability.
-------------
The terms and provisions of this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective permitted
successors and assigns, except as expressly set forth herein.
19. Time.
----
TIME IS OF THE ESSENCE IN THE PERFORMANCE OF THE PARTIES' OBLIGATIONS
UNDER THIS AGREEMENT.
20. Gender and Number.
-----------------
Within this Agreement, words of any gender shall be held and construed
to include any other gender, and words in the singular number shall be held and
construed to include the plural, unless the context otherwise requires.
21. Reporting of Foreign Investment.
-------------------------------
Seller and Purchaser agree to comply with any and all reporting
requirements applicable to the transaction which is the subject of this
Agreement which are set forth in any law, statute, ordinance, rule, regulation,
order or determination of any governmental authority, including, but not limited
to, The International Investment Survey Act of 1976, The Agricultural Foreign
Investment Disclosure Act of 1978, The Foreign Investment in Real Property Tax
Act of 1980 and the Tax Reform Act of 1984 and further agree upon request of one
party to furnish the other party with evidence of such compliance.
-17-
<PAGE>
22. Counterpart Execution.
---------------------
This Agreement may be executed in multiple counterparts, each of which
shall be deemed to be an original and all of which together shall constitute one
document.
23. Applicable Law.
--------------
This Agreement shall be construed and interpreted in accordance with
the laws of the State of California.
24. Confidentiality.
---------------
Notwithstanding anything to the contrary contained elsewhere herein,
Purchaser hereby agrees and acknowledges that all information furnished by
Seller to Purchaser or obtained by Purchaser in the course of Purchaser's
investigation and inspection of the Property, or in any way arising from or
relating to any and all studies or entries upon the Property by Purchaser, its
agents or representatives, shall be treated as confidential information.
Purchaser further hereby agrees and acknowledges that if any such confidential
information is disclosed to third parties, Seller may suffer damages and
irreparable harm. In connection therewith, Purchaser hereby expressly
understands, acknowledges, covenants and agrees (a) that unless such disclosure
is reasonably required to comply with securities rules or regulations applicable
to Purchaser or any of its affiliates, Purchaser will not make any press release
or other public disclosure concerning this transaction or disclose any of the
contents or information contained in or obtained as a result of any reports or
any other studies made in connection with Purchaser's investigation of the
Property, in any form whatsoever (including, but not limited to, any oral
information received by Purchaser during the course of Purchaser's inspection
and investigation of the Property), to any party other than (i) the Seller,
seller's employees, agents or representatives, or Purchaser's agents, employees,
representatives, attorneys, accountants, or consultants, without the prior
express written consent of Seller (which consent shall not file unreasonably
withheld), (ii) in response to lawful process or subpoena or other valid or
enforceable order of a court of competent jurisdiction or as otherwise required
to comply with laws; (iii) or to Purchaser's lenders or Prospective lenders and
their affiliates, respective directors, officers, employees, agents and
consultants; and (iv) to any permitted transferee or assignee of Purchaser and
their respective directors, officers, employees and agents; (b) that in making
any disclosure of such information as permitted hereunder except for a
disclosure reasonably required to comply with securities rules or regulations,
Purchaser will advise said parties of the confidentiality of such information
-18-
<PAGE>
and the potential of damage to Seller and the liability of Purchaser and such
other party as a result of any disclosure of such information by said party and
be responsible for said party's compliance; (c) to furnish Seller with copies of
all reports or studies made in connection with Purchaser's inspection, study or
investigation of the Property (other than internal analyses and any confidential
attorney client or attorney work product privileged documents) within a
reasonable time (not to exceed ten (10) days) of receipt of Seller's written
request by Purchaser; and (d) that Seller is relying on Purchaser's covenant not
to disclose any of the contents or information contained in any such reports or
investigations to third parties (all of which is deemed to be confidential
information by the provisions of this Section) except in accordance with this
Agreement. In the event this Agreement is terminated, Purchaser agrees to return
to Seller all information, studies, and Due Diligence Reports Purchaser or
Purchaser's agents have obtained or commissioned with respect to the Property or
the condition of the Property. The provisions of this Section 24 shall terminate
-------
and be of no further force or effect upon the Close of Escrow. The parties
consent and understand that either of them may desire or be required to file
this Agreement, the Ground Lease, the Consulting Agreement and other agreements
related to this transaction with the Securities and Exchange Commission or other
regulatory authorities.
25. Time Calculations.
-----------------
Should the calculation of any of the various time periods provided for
herein result in an obligation becoming due on a Saturday, Sunday or legal
holiday, then the due date of such obligation or scheduled time of occurrence of
such event shall be delayed until the next business day.
26. No Recordation.
--------------
Seller and Purchaser hereby agree and acknowledge that neither this
Agreement nor any memorandum or affidavit thereof shall be recorded with the
county recorder of the applicable California county.
27. Merger Provision.
----------------
Except as expressly set forth herein, any and all rights of action of
Purchaser for any breach by Seller of any representation, warranty or covenant
contained in this Agreement shall not merge with the Grant Deed and other
instruments executed at Closing, and shall survive the Closing.
-19-
<PAGE>
28. Further Assurances.
------------------
Purchaser and Seller agree to execute all documents and instruments
reasonably required in order to consummate the purchase and sale herein
contemplated.
29. Severability.
------------
If any portion of this Agreement is held to be unenforceable by a
court of competent jurisdictions the remainder of this Agreement shall remain in
full force and effect.
30. Additional Instructions to Escrow Holder.
----------------------------------------
Notwithstanding anything to the contrary contained in this Agreement,
Escrow Holder's General Provisions, are incorporated by reference herein to the
extent they are not inconsistent with the provisions of this Agreement. If there
is any inconsistency between those General Provisions and any of the provisions
of this Agreement, the provisions of this Agreement shall control. If any
requirements relating to the duties or obligations of Escrow Holder are
unacceptable to Escrow Holder, or if Escrow Holder requires additional
instructions, the parties agree to make any deletions, substitutions and
additions, as counsel for Purchaser and Seller shall mutually approve, and which
do not materially alter the terms of this Agreement. Any supplemental
instructions shall be signed only as an accommodation to Escrow Holder and shall
not be deemed to modify or amend the rights of Purchaser and Seller, as between
Purchaser and Seller, unless those signed supplemental instructions expressly so
provide. If Escrow Holder is the prevailing party in any action or proceeding
between Escrow Holder and one or both of the parties to the Escrow, Escrow
Holder shall be entitled to all costs, expenses and reasonable attorneys' fees
expended or incurred in connection therewith. If Escrow Holder is required to
respond to any legal summons or proceedings not involving a breach or fault upon
Escrow Holder's part, the parties to this Agreement agree to share equally all
costs, expenses and reasonable attorneys' fees expended or incurred by Escrow
Holder. In the event costs, expenses and attorneys' fees are reimbursed to
Escrow Holder, Purchaser and Seller agree that the prevailing party between
Purchaser and Seller shall be awarded reimbursement of such costs, expenses and
attorneys' fees paid by it to Escrow Holder hereunder.
31. Amendments.
----------
This Agreement may be amended only by written agreement signed by both
of the parties hereto.
-20-
<PAGE>
32. Exhibits Incorporated by Reference.
-----------------------------------
All exhibits attached to this Agreement are incorporated into this
Agreement by reference.
33. Preliminary Change of Ownership Report.
--------------------------------------
Purchaser shall be fully responsible for all matters in connection
with the filing of a Preliminary Change of Ownership Report in accordance with
the California Revenue and Taxation Code Section 480.3.
34. Attorneys' Fees.
---------------
In any action to enforce the terms of this Agreement, the prevailing
party shall be entitled to an award of reasonable attorneys' fees and court
costs from the non-prevailing party. As used herein, the term "prevailing party"
shall mean the party which obtains the principal relief it has sought, whether
by compromise, settlement or judgment. If the party which shall have instituted
suit shall dismiss it as against the other party without the concurrence of such
other party, such other party shall be deemed the prevailing party.
35. New Association and CC&Rs.
-------------------------
Purchaser acknowledges that the Property is currently not subject to
governance by the Lusk Mira Mesa Business Park East II Owners' Association (the
"Existing Association"), established for the purpose of owning, operating and
maintaining certain landscape maintenance areas, structural maintenance areas
and common areas pursuant to a certain Declaration of Covenants, Conditions and
Restrictions for Lusk Mira Mesa Business Park East II (the "Existing CC&Rs"),
and as contemplated under the articles of incorporation and bylaws of the
Existing Association. Purchaser further acknowledges that Seller has provided
Purchaser with drafts of a declaration of covenants, conditions and restrictions
and formation documents for an owners' association to be formed and to be
effective against the Land together with certain other property, including other
property owned by Seller, adjacent to the Land. Seller and certain other
adjoining land owners currently contemplate entering into such covenants,
conditions and restrictions (the "New CC&Rs") and forming an owners' association
for the enforcement thereof (the "New Association"). Purchaser shall reasonably
consider subjecting the Property to the New CC&Rs; provided, however, the New
CC&Rs do not adversely affect the value or utility of the Property.
Notwithstanding the foregoing, Seller agrees that the recording and
implementation of the New CC&Rs will be subject to Purchaser's prior written
approval of
-21-
<PAGE>
the New CC&Rs, as well as Purchaser's demand that certain provisions of the New
CC&Rs which may affect the improvements Purchaser plans to build on the Property
be waived with respect to Purchaser (e.g., any design approval). In the event
Purchaser does not enter into the New CC&Rs or join the New Association, or
Seller and said other adjoining land owners are unable, or elect not, to form
the New Association and cause their properties to be subject to the New CC&Rs,
Purchaser may voluntarily or, upon written demand from Seller (if Purchaser's
failure to do so would subject Seller to liability therefor) or the City (which
demand may be contested by Purchaser in good faith) Purchaser shall, subject the
Property to the lien of the Existing CC&Rs and shall join the Existing
Association; provided, however, that Purchaser receive an estoppel certificate
from an authorized officer of the Existing Association stating that Purchaser is
not in violation of the Existing CC&Rs.
IN WITNESS WHEREOF, this Agreement is executed as of
the date set forth above.
"PURCHASER"
APPLIED MICRO CIRCUITS CORPORATION,
a Delaware corporation
By: /s/ [SIGNATURE ILLEGIBLE]
-------------------------------
Name: /s/ [SIGNATURE ILLEGIBLE]
-----------------------------
Title: V.P.
----------------------------
"SELLER"
KILROY REALTY, L.P., a Delaware
limited partnership
By: KILROY REALTY CORPORATION, a
Maryland corporation.
Its: General Partner
Name:______________________________
Title:_____________________________
-22-
<PAGE>
An original fully executed copy of this Agreement, together with the
Deposit, has been received by the Escrow Holder this _____ day of January, 1999,
and by the execution hereof the Escrow Holder hereby covenants and agrees to be
bound by the terms of this Agreement.
"Escrow Holder"
CHICAGO TITLE COMPANY
By:___________________________
Name:_________________________
Title:________________________
Escrow No.
- ---------
-23-
<PAGE>
EXHIBIT "A"
----------
PROPERTY DESCRIPTION
THE LAND REFERRED TO HEREIN IS SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF
SAN DIEGO, AND IS DESCRIBED AS FOLLOWS:
PARCEL 1 OF PARCEL MAP NO. 18118 OF MAPS WITHIN THE CITY OF SAN DIEGO, COUNTY OF
SAN DIEGO, STATE OF CALIFORNIA FILED WITH THE OFFICIAL RECORDS OF SAN DIEGO
COUNTY, CALIFORNIA ON SEPTEMBER 25, 1998, AS FILE NO. 1998--613615.
EXHIBIT "A"
----------
<PAGE>
EXHIBIT "B"
----------
FORM OF GRANT DEED
RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:
___________________________
___________________________
___________________________
Attention: ________________
================================================================================
(Space Above For Recorder's Use)
GRANT DEED
----------
For valuable consideration, receipt of which is acknowledged, KILROY
REALTY, L.P., a Delaware limited partnership (Grantor"), hereby grants to
______________________________, a _______________________ ("Grantee"), all
right, title and interest in (i) the real property in the City of San Diego,
County of San Diego, State of California, described in Exhibit A attached hereto
and made a part hereof, (ii) any improvements permanently affixed to said real
property, and (iii) all entitlements, easements and appurtenances that pertain
to said real property, including over adjacent streets, alleys or rights-of-way
(the "Property").
IN WITNESS WHEREOF, Grantor has caused this instrument to be executed
by its authorized agent "hereunto duly authorized.
Dated: ___________, 1998 KILROY REALTY, L.P., a Delaware
limited partnership
By: Kilroy Realty Corporation, a Maryland
corporation
Its General Partner
By:_______________________________
Name:__________________________
Title:_________________________
EXHIBIT "B"
-----------
<PAGE>
- OPTIONAL SECTION -
CAPACITY CLAIMED BY SIGNER
Although statute does not require the Notary to fill in the data below, doing so
may prove invaluable to persons relying on the document.
[_] INDIVIDUAL
[_] CORPORATE OFFICER(S)
_______________________________________
Title (s)
_______________________________________
Title (s)
[_] PARTNER(s) [_] LIMITED
[_] GENERAL
[_] ATTORNEY-IN-FACT
[_] TRUSTEE(S)
[_] GUARDIAN/CONSERVATOR
[_] OTHER: _____________________________________________
SIGNOR IS REPRESENTING:
NAME OF PERSON(S) OR ENTITY(IES)
______________________________________
______________________________________
______________________________________
STATE OF _________________)
)
ss.
COUNTY OF _____________________)
On ________________________, before me, ________________________ a Notary Public
in and for said state, personally appeared _______________________, personally
known to me (or proved to me on the basis of satisfactory evidence) to be the
person whose name is subscribed to the within instrument and acknowledged to me
that he/she executed the same in his/her authorized capacity, and that by
his/her signature on the instrument, the person, or the entity upon behalf of
which the person acted, executed the instrument.
WITNESS my hand and official seal.
_______________________________________________________
Notary Public in and for said State
EXHIBIT "B"
-----------
<PAGE>
EXHIBIT "A"
-----------
LEGAL DESCRIPTION
-----------------
[TO BE ATTACHED]
EXHIBIT "A"
<PAGE>
EXHIBIT "C"
-----------
FORM OF ASSIGNMENT OF INTANGIBLE PROPERTY
-----------------------------------------
ASSIGNMENT OF INTANGIBLE PROPERTY
---------------------------------
THIS ASSIGNMENT OF INTANGIBLE PROPERTY (the "Assignment") is made this
_____ day of _____________________, 19 ___, by and between KILROY REALTY, L.P.,
a Delaware limited partnership ("Assignor") and
___________________________________,a ______________ corporation ("Assignee"),
with reference to the following facts:
A. Assignor has used or acquired (or may have acquired) certain
intangible rights in connection with the Property described on the attached
Exhibit "A", including, but not limited to, any licenses, permits, air rights,
building rights and other entitlements, certificates of occupancy, rights of
way, sewer agreements, water line agreements, utility agreements, water rights
and oil, gas and mineral rights (collectively, the "Intangibles").
B. Pursuant to the terms of that certain Agreement of Purchase and
Sale and Escrow Instructions entered into by Assignor, as Seller, and Assignee,
as Purchaser (the "Purchase Agreement"), Assignor now desires to assign and
transfer to Assignee all of its right, title and interest in and to the
Intangibles, to the extent such right, title and interest may exist and is
assignable by Assignor, and Assignee desires to accept any such Intangibles to
the extent they exist and are assignable.
NOW THEREFORE, in consideration of the mutual covenants and conditions
hereinbelow set forth, it is agreed:
1. Assignment. Effective as of the Close of Escrow, as that phrase is
----------
defined in the Purchase Agreement, Assignor assigns and transfers to Assignee
and its successors and assigns, all of Assignor's right, title and interest in
and to the Intangibles, to the extent such right, title and interest may exist
and is assignable by Assignor.
2. Assumption. Effective as of the Close of Escrow, Assignee accepts
----------
the assignment of the Intangibles and shall be entitled to all rights and
benefits accruing to Assignor thereunder and hereby assumes all obligations
thereunder from and after the Close of Escrow.
3. No Rights in Trade Names. Nothing herein shall be construed to
------------------------
allow Assignee any right, title or interest in
EXHIBIT "C"
-----------
<PAGE>
Assignor's trade names or marks, or to use said names or marks in any manner.
4. Counterparts. This Assignment may be executed in counterparts which
------------
taken together shall constitute one and the same instrument.
5. Successors and Assigns. The provisions of this instrument shall be
----------------------
binding upon and inure to the benefit of Assignor and Assignee and their
respective successors and assigns.
6. Further Assurances. Assignor hereby covenants that it will, at any
------------------
time and from time to time, at no material cost or expense to Assignor, execute
any documents and take such additional actions as Assignee or its successors or
assigns shall reasonably require in order to more completely or perfectly carry
out the transfers intended to be accomplished by this Assignment.
IN WITNESS WHEREOF, Assignor and Assignee have executed this
Assignment of Intangible Property as of the date set forth above.
"ASSIGNOR"
KILROY REALTY, L.P., a Delaware
limited partnership
By: Kilroy Realty Corporation,
a Maryland corporation
Its: General Partner
By:_____________________________
Name:________________________
Title: ______________________
"ASSIGNEE"
_____________________________________
a ___________________________________
By: ________________________________
Name: _______________________________
Title:_______________________________
EXHIBIT "C"
-----------
<PAGE>
EXHIBIT "A"
----------
TO
ASSIGNMENT OF INTANGIBLE PROPERTY
LEGAL DESCRIPTION
-----------------
EXHIBIT "A"
<PAGE>
EXHIBIT "D"
-----------
TRANSFEROR'S CERTIFICATION OF NON-FOREIGN STATUS
------------------------------------------------
To inform _____________________________________, a
____________________, (the "Transferee") that withholding of tax under Section
1445 of the Internal Revenue Code of 1954, as amended ("Code") will not be
required by KILROY REALTY, L.P., a Delaware limited partnership, (the
"Transferor"), the undersigned hereby certifies the following on behalf of the
Transferor:
1. The Transferor is not a foreign corporation, foreign partnership,
foreign trust, foreign estate or foreign person (as those terms are defined in
the Code and the Income Tax Regulations promulgated thereunder);
2. The Transferor's U.S. employer or tax identification number is
______________________;
The Transferor understands that this Certification may be disclosed to
the Internal Revenue Service by the Transferee and that any false statement
contained herein could be punished by fine, imprisonment, or both.
Under penalty of perjury I declare that I have examined this
Certification and to the best of my knowledge and belief it is true, correct and
complete, and I further declare that I have authority to sign this document on
behalf of the Transferor.
"Transferor" KILROY REALTY, L.P.,
a Delaware limited partnership
By: KILROY REALTY CORPORATION
a Maryland corporation,
General Partner
By: ________________________
Dated: _________________
EXHIBIT "D"
-----------
<PAGE>
EXHIBIT "F-1"
-------------
TERMINATION OF GROUND LEASE
---------------------------
THIS TERMINATION OF GROUND LEASE (this "Agreement") is entered into as
of the _______ day of __________, _____, by and between KILROY REALTY L.P., a
Delaware limited partnership ("Landlord") and ____________________________, a
____________________________ ("Tenant").
R E C I T A L S :
- - - - - - - -
A. Landlord and Applied Micro Circuits Corporation, a Delaware
corporation, as predecessor to Tenant, entered into that certain Ground Lease
made effective January 1, 1998 (the "Lease") whereby Landlord ground leased to
Tenant, and Tenant ground leased from Landlord, that certain real property
located in the City of San Diego, County of San Diego, State of California, more
particularly described on Exhibit "A" attached hereto (the "Premises"). The
Lease is incorporated herein by this reference.
B. Pursuant to Article 13 of the Lease, Tenant has exercised its
Purchase Option (as defined in the Lease) with respect to a portion of the
Premises, and Landlord and Tenant have entered into that certain Agreement to
Sell and Purchase and Escrow Instructions dated January___, 1999, in order to
effectuate such purchase and sale (the "Purchase Agreement")
C. Tenant and Landlord desire to enter into this Agreement in order
to terminate the Lease and to release one another from their respective
obligations thereunder, except as otherwise provided herein.
A G R E E M E N T :
- - - - - - - - -
NOW, THEREFORE, in consideration of the foregoing recitals and the
conditions and the covenants hereinafter contained, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1. Termination of the Lease. Landlord and Tenant hereby agree that
------------------------
the Lease shall terminate and be of no further force or effect as of the date
hereof (the "Termination Date").
EXHIBIT "F-1"
------------
<PAGE>
EXHIBIT "E"
<TABLE>
Withholding Exemption Certificate for
YEAR Real Estate Sales (For use by sellers of California real estate) CALIFORNIA FORM
---------- ---------------------------
1998 590-RE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
File this form with your withholding agent or buyer. Withholding agent's name
- ------------------------------------------------------------------------------------------------------------------------------------
Seller's name
Kilroy Realty, L.P., a Delaware limited partnership
- ------------------------------------------------------------------------------------------------------------------------------------
Seller's address (number and street) Seller's daytime telephone number
4365 Executive Drive, Suite 850 ( )
- ------------------------------------------------------------------------------------------------------------------------------------
City State Zip Code
San Diego CA 92121-2130
- ------------------------------------------------------------------------------------------------------------------------------------
Read the following carefully and check the box that applies to the seller:
[_] Certificate of Residency -- Individuals:
---------------------------------------
I am a resident of California and I reside at the address shown above. See Side 2 for the definition of a resident.
[_] Certificate of Principal Residence -- Individuals:
-------------------------------------------------
The California reel property located at _________________________________________________________________ qualifies as my
principal residence within the meaning of the Internal Revenue Code Section 1034. See Side 2 for the definition of a
principal residence.
[_] Corporations:
------------
The above-named corporation has a permanent place of business in California at the address shown above or is
qualified to do business in California. See Side 2 for the definition of a permanent place of business.
[X] Partnerships:
------------
The above-named entity is a partnership and the recorded title to the property is in the name of the partnership. The
partnership will file a California return to report the sale and will withhold on foreign and domestic nonresident
partners when required.
[_] Limited Liability Companies (LLC's):
-----------------------------------
The above-named entity is an LLC and the recorded title to the property is in the name of the LLC. The LLC will file a
California return to report the sale and will withhold on foreign and domestic nonresident partners when required.
[_] Tax-Exempt Entitles and Nonprofit Organizations:
-----------------------------------------------
The above-named entity is exempt from tax under California or federal law.
[_] Irrevocable Trusts:
------------------
At least one trustee of the above-named irrevocable trust is a California resident The trust will file a California
fiduciary return reporting the sale and will withhold on foreign and domestic nonresident beneficiaries when required.
[_] Certificate of Residency of Deceased Person -- Estates:
------------------------------------------------------
I am the executor of the above-named person's estate. The decedent was
a California resident at the time of death. The estate will file a
California fiduciary return reporting the sale and will withhold on
foreign end domestic nonresident beneficiaries when required.
- -------------------------------------------------------------------------------
</TABLE>
CERTIFICATE: Please complete and sign below.
Under penalties of perjury, I hereby certify that the information provided
herein in, to the best of my knowledge, true and correct. If conditions change,
I will promptly inform the withholding agent.
KILROY REALTY, L.P.
a Delaware limited partnership
By: KILROY REALTY CORPORATION,
a Maryland corporation, General Partner
By: ________________________________
Date _______________________
Seller's social security number, California corporation number,
FEIN or California Secretary of State file number _____________________
(NOTE: Failure to provide your identification number will render this
certificate void.)
EXHIBIT "E"
-----------
<PAGE>
2. Release of Liability.
--------------------
(a) Landlord and Tenant shall, as of the Termination Date, be
fully and unconditionally released and discharged from their respective
obligations arising after the Termination Date from or connected with the
provisions of the Lease; and
(b) this Agreement shall fully and finally settle all demands,
charges, claims, accounts or causes of action of any nature, including, without
limitation, both known and unknown claims and causes of action that may arise
out of or in connection with the obligations of the parties under the Lease.
Each of the parties expressly waives the provisions of California
Civil Code Section 1542, which provides:
"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."
Each party acknowledges that it has received the advice of legal
counsel with respect to the aforementioned waiver and understands the terms
thereof.
3. Representations of Landlord and Tenant. Landlord and Tenant each
--------------------------------------
represent and warrant to the other (except, in the case of Tenant, or Tenant's
predecessor, as permitted in the Lease or the Purchase Agreement) that: (a) it
has not heretofore assigned or sublet all or any portion of its interest in the
Lease; (b) no other person, firm or entity has any right, title or interest as
landlord or tenant in or under the Lease; and (c) it has the full right, legal
power and actual authority to enter into this Agreement and to terminate the
Lease without the consent of any other person, firm or entity. Notwithstanding
the termination of the Lease and the release of liability provided for herein,
the representations and warranties set forth in this Paragraph 3 shall survive
the Termination Date and Landlord and Tenant shall be liable to each other for
any inaccuracy or any breach thereof.
4. Attorney's Fees. Should any dispute arise between the parties
---------------
hereto or their legal representatives, successors and assigns concerning any
provision of this Agreement or the rights
EXHIBIT "F-1"
-------------
-2-
<PAGE>
and duties of any person in relation thereto, the party prevailing in such
dispute shall be entitled, in addition to such other relief that may be granted,
to recover reasonable attorneys' fees and legal costs in connection with such
dispute.
5. Governing Law. This Agreement shall be governed and construed
-------------
under the laws of the State of California.
6. Counterparts. This Agreement may be executed in counterparts, each
------------
of which shall be deemed an original, but such counterparts, when taken
together, shall constitute one agreement.
7. Binding Effect. This Agreement shall inure to the benefit of, and
--------------
shall be binding upon, the parties hereto and their respective legal
representatives, successors and assigns.
8. Time of the Essence. Time is of the essence of this Agreement and
-------------------
the provisions contained herein.
9. Further Assurances. Landlord and Tenant hereby agree to execute
------------------
such further documents or instruments as may be necessary or appropriate to
carry out the intention of this Agreement.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Agreement
as of the day and year first above written.
"Tenant" ___________________________________,
a ________________________________________
By: _____________________________________
Name:________________________________
Title:_______________________________
"Landlord" KILROY REALTY L.P.,
a Delaware limited partnership
By: Kilroy Realty Corporation,
a Maryland corporation
Its General Partner
By:_______________________________________
Name: _______________________________
Title:_______________________________
EXHIBIT "F-1"
-------------
-3-
<PAGE>
EXHIBIT "A"
-----------
LEGAL DESCRIPTION OF THE PREMISES
---------------------------------
EXHIBIT "A"
-----------
<PAGE>
EXHIBIT "F-2"
-------------
TERMINATION OF MEMORANDUM OF GROUND LEASE
-----------------------------------------
RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:
Kilroy Realty L.P.
4365 Executive Drive, Suite 850
San Diego, California 92121-2130
Attention: Mr. Steven L. Black
- --------------------------------------------------------------------------------
TERMINATION OF MEMORANDUM OF GROUND LEASE
-----------------------------------------
THIS TERMINATION OF MEMORANDUM OF GROUND LEASE (this "Agreement") is
entered into as of the _____ day of __________, 1999, by and between KILROY
REALTY L.P., a Delaware limited ("Landlord") and _____________________________,
a _______________________ ("Tenant").
R E C I T A L S :
- - - - - - - -
A. Landlord and Applied Micro Circuits Corporation, a Delaware
corporation, as predecessor to Tenant, entered into that certain Ground Lease
made effective January 1, 1998 (the "Lease") whereby Landlord ground leased to
Tenant, and Tenant ground leased from Landlord, that certain real property
located in the City of San Diego, County of San Diego, State of California, more
particularly described in Exhibit "A" attached hereto (the "Premises"). That
certain Memorandum of Ground Lease with regard to the Lease was recorded on July
28, 1998, as Instrument No. 1998-0470328, in the Official Records of San Diego
County, California (the "Memorandum").
B. In conjunction with Tenant's purchase of a portion of the
Premises, Tenant and Landlord entered into that certain Termination of Ground
Lease dated as of the date hereof (the "Termination"), terminating the Lease.
C. Landlord and Tenant desire to enter into this Agreement in order
to terminate of record the Memorandum.
EXHIBIT "F-2"
-------------
<PAGE>
A G R E E M E N T :
- - - - - - - - -
NOW, THEREFORE, in consideration of the foregoing recitals and the
conditions and the covenants hereinafter contained, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant hereby agree as follows:
1. Termination of the Memorandum. Landlord and Tenant hereby agree
-----------------------------
that the Lease has been terminated pursuant to the Termination and that the
Memorandum shall be and hereby is terminated and of no further force or effect
as of the date hereof.
2. Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but such counterparts, when taken
together, shall constitute one agreement.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Agreement
as of the day and year first above written.
"Tenant" _________________________________________,
a _________________________________________
By: ______________________________________
Name: ________________________________
Title: _______________________________
"Landlord" KILROY REALTY L.P.,
a Delaware limited partnership
By: Kilroy Realty Corporation, a Maryland
corporation
Its General Partner
By: _______________________________________
Name: _______________________________
Title:_______________________________
EXHIBIT "F-2"
-------------
<PAGE>
STATE OF )
________________
) ss.
COUNTY OF ________________)
On ________________________________, before me, ____________________, a Notary
Public in and for said state, personally appeared _______________________ and
______________________________, personally known to me (or proved to me on the
basis of satisfactory evidence) to be the persons whose names are subscribed to
the within instrument and acknowledged to me that they executed the same in
their authorized capacities, and that by their signatures on the instrument, the
persons, or the entity upon behalf of which the persons acted, executed the
instrument.
WITNESS my hand and official seal.
________________________________________
Notary Public in and for said State
STATE OF )
________________
) ss.
COUNTY OF ________________)
On ______________________________________, before me, ____________________, a
Notary Public in and for said state, personally appeared __________________ and
__________________, personally known to me (or proved to me on the basis of
satisfactory evidence) to be the persons whose names are subscribed to the
within instrument and acknowledged to me that they executed the same in their
authorized capacities, and that by their signatures on the instrument, the
persons, or the entity upon behalf of which the persons acted, executed the
instrument.
WITNESS my hand and official seal.
__________________________________________
Notary Public in and for said State
EXHIBIT "F-2"
-------------
<PAGE>
EXHIBIT "G"
-----------
BRING DOWN CERTIFICATE
This Certificate is dated and made effective _______, 199--, by K1LROY
REALTY, L.P., a Delaware limited partnership ("Seller") in favor of ____________
("Purchaser") and is delivered pursuant to the terms and provisions of that
Agreement to Sell and Purchase and Escrow Instructions by and between Seller and
Purchaser dated January --, 1999 (the "Purchase Agreement").
Seller hereby certifies, represents and warrants to Purchaser that
Seller's representations and warranties set forth in Article 8 of the Purchase
Agreement are true and correct as of the date hereof.
"Seller" KILROY REALTY, L.P., a Delaware limited
partnership
By: Kilroy Realty Corporation, a Maryland
corporation,
General Partner
By: __________________________________
Name:_____________________________
Title:____________________________
EXHIBIT "G"
-----------
<PAGE>
Exhibit 10.30
LEASE
KILROY REALTY, L.P.,
a Delaware limited partnership
Landlord
APPLIED MICRO CIRCUITS CORPORATION,
a Delaware corporation
Tenant
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - TERM OF LEASE................................................................................................. 1
1.1 Initial Term..................................................................................................... 1
1.2 Option to Extend................................................................................................. 2
ARTICLE II - CONSTRUCTION OF THE IMPROVEMENTS.............................................................................. 2
2.1 The Improvements................................................................................................. 2
2.2 Plans and Specifications......................................................................................... 3
2.3 Design Disputes.................................................................................................. 7
2.4 Substantial Completion of the Improvements....................................................................... 8
2.5 Delay in Substantial Completion.................................................................................. 9
2.6 Liquidated Damages for Delay in Substantial Completion........................................................... 10
2.7 Building Permit for the Improvements............................................................................. 11
2.8 Construction Warranties.......................................................................................... 11
2.9 Condition of Demised Premises; Limited Warranty.................................................................. 11
2.10 Tenant Improvement Allowance; Tenant Responsibility.............................................................. 12
2.11 Responsibility for Excess Shell Costs and Excess Tenant Improvement Costs........................................ 14
2.12 Contractor....................................................................................................... 15
2.13 Tenant's Entry Into the Building Prior to Substantial Completion................................................. 16
ARTICLE III - RENT......................................................................................................... 16
3.1 Base Rent........................................................................................................ 16
3.2 Base Rent During Option Term..................................................................................... 17
3.3 Additional Obligations; Additional Rent.......................................................................... 19
3.4 Delinquent Rental Payments....................................................................................... 20
ARTICLE IV - USE OF DEMISED PREMISES....................................................................................... 20
4.1 Permitted Use.................................................................................................... 20
4.2 Preservation of Demised Premises................................................................................. 21
4.3 Hazardous Substances............................................................................................. 21
4.4 Access Easement.................................................................................................. 24
ARTICLE V - PAYMENT OF TAXES, ASSESSMENTS, ETC............................................................................. 24
5.1 Payment of Impositions........................................................................................... 24
5.2 Tenant's Right to Contest Impositions............................................................................ 25
5.3 Levies and Other Taxes........................................................................................... 26
5.4 Evidence of Payment.............................................................................................. 27
5.5 Escrow for Taxes and Assessments................................................................................. 27
5.6 Landlord's Right to Contest Impositions.......................................................................... 27
ARTICLE VI - INSURANCE..................................................................................................... 27
6.1 Casualty Insurance............................................................................................... 27
6.2 Public Liability Insurance....................................................................................... 28
6.3 Other Insurance.................................................................................................. 28
6.4 Certain Insurance Provisions..................................................................................... 29
6.5 Waiver of Subrogation............................................................................................ 30
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
6.6 Tenant's Indemnification of Landlord............................................................................. 30
6.7 Unearned Premiums................................................................................................ 30
6.8 Blanket Insurance Coverage....................................................................................... 30
6.9 Landlord's Liability Insurance Coverage.......................................................................... 30
ARTICLE VII - UTILITIES.................................................................................................... 31
7.1 Payment of Utilities............................................................................................. 31
7.2 Additional Charges............................................................................................... 31
7.3 Landlord's Responsibility for Utility Hook-Up Charges and Fees................................................... 31
ARTICLE VIII - REPAIRS AND MAINTENANCE OF DEMISED PREMISES................................................................ 31
8.1 Tenant's Responsibilities........................................................................................ 31
8.2 Landlord's Responsibilities...................................................................................... 32
8.3 Sharing of Expenses of Capital Items............................................................................. 32
8.4 Tenant's Waiver of Claims Against Landlord....................................................................... 33
8.5 Prohibition Against Waste........................................................................................ 33
ARTICLE IX - COMPLIANCE WITH APPLICABLE LAWS AND RESTRICTIONS.............................................................. 33
9.1 Compliance with Applicable Laws and Restrictions................................................................. 33
9.2 Tenant's Obligations............................................................................................. 34
9.3 Tenant's Right to Contest Laws and Ordinances.................................................................... 34
ARTICLE X - MECHANIC'S LIENS AND OTHER LIENS............................................................................... 35
10.1 Mechanic's Liens................................................................................................. 35
10.2 Landlord's Indemnification....................................................................................... 36
10.3 Removal of Liens................................................................................................. 36
10.4 Equipment and Trade Fixtures..................................................................................... 36
ARTICLE XI - LANDLORD'S PERFORMANCE OF TENANT'S OBLIGATIONS................................................................ 37
ARTICLE XII - DEFAULTS OF TENANT........................................................................................... 37
12.1 Events of Default................................................................................................ 37
12.2 Landlord's Remedies.............................................................................................. 38
12.3 Right to Collect Rent as Due..................................................................................... 39
12.4 New Lease Following Termination.................................................................................. 39
12.5 Cumulative Rights; No Waiver..................................................................................... 39
12.6 Surrender of Demised Premises.................................................................................... 40
12.7 Interest on Unpaid Amounts....................................................................................... 40
ARTICLE XIII - DESTRUCTION AND RESTORATION................................................................................. 40
13.1 Destruction and Restoration...................................................................................... 40
13.2 Application of Insurance Proceeds................................................................................ 41
13.3 Continuance of Tenant's Obligations.............................................................................. 42
13.4 Availability of Insurance Proceeds............................................................................... 42
13.5 Completion of Restoration........................................................................................ 42
13.6 Termination of Lease............................................................................................. 42
ARTICLE XIV - CONDEMNATION................................................................................................. 44
14.1 Condemnation of Entire Demised Premises.......................................................................... 44
14.2 Partial Condemnation/Termination of Lease........................................................................ 44
14.3 Partial Condemnation/Continuation of Lease....................................................................... 45
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
14.4 Continuance of Obligations....................................................................................... 45
14.5 Adjustment of Rent............................................................................................... 45
ARTICLE XV - ASSIGNMENT, SUBLETTING, ETC.................................................................................... 45
15.1 Restriction on Transfer.......................................................................................... 45
15.2 Transfer to Affiliates; Sale or Merger........................................................................... 47
15.3 Restriction Against Further Assignment........................................................................... 47
15.4 Tenant's Failure to Comply....................................................................................... 47
ARTICLE XVI - SUBORDINATION, NONDISTURBANCE, NOTICE TO MORTGAGEE AND ATTORNMENT............................................. 48
16.1 Subordination by Tenant.......................................................................................... 48
16.2 Landlord's Default............................................................................................... 48
16.3 Attornment....................................................................................................... 48
ARTICLE XVII - SIGNS........................................................................................................ 49
ARTICLE XVIII - FINANCIAL STATEMENTS OF TENANT.............................................................................. 49
ARTICLE XIX - CHANGES AND ALTERATIONS....................................................................................... 49
ARTICLE XX - MISCELLANEOUS PROVISIONS....................................................................................... 52
20.1 Entry by Landlord................................................................................................ 52
20.2 Exhibition of Demised Premises................................................................................... 53
20.3 Indemnification by Tenant........................................................................................ 53
20.4 Notices.......................................................................................................... 53
20.5 Quiet Enjoyment.................................................................................................. 55
20.6 Landlord's Continuing Obligations................................................................................ 55
20.7 Estoppel......................................................................................................... 55
20.8 Delivery of Corporate Documents.................................................................................. 56
20.9 Memorandum of Lease.............................................................................................. 57
20.10 Severability..................................................................................................... 57
20.11 Successors and Assigns........................................................................................... 57
20.12 Captions......................................................................................................... 57
20.13 Relationship of Parties.......................................................................................... 57
20.14 Entire Agreement................................................................................................. 57
20.15 No Merger........................................................................................................ 57
20.16 Possession and Use............................................................................................... 57
20.17 Surrender of Demised Premises.................................................................................... 57
20.18 Holding Over..................................................................................................... 58
20.19 Survival......................................................................................................... 58
20.20 Broker's Commission.............................................................................................. 58
20.21 Applicable Law................................................................................................... 58
20.22 Counterparts..................................................................................................... 58
20.23 Attorney's Fees.................................................................................................. 59
</TABLE>
iii
<PAGE>
LEASE
THIS LEASE ("Lease") is made this 17/th/ day of February, 1999, by and
between KILROY REALTY, L.P., a Delaware limited partnership ("Landlord"), and
APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation ("Tenant").
WITNESSETH:
"Land" means that certain vacant lot located to the north of the building
currently occupied by Tenant at 6290 Sequence Drive located in San Diego,
California (the "Adjacent Building"), which is described in Exhibit "A" attached
hereto and made a part hereof.
"Building" means a building (known generally as the "Engineering Building")
which shall be comprised of approximately 58,000 rentable square feet of space
in two (2) stories with sixteen foot (16') minimum slab to slab clearance.
Rentable square footage shall be calculated according to BOMA standards for a
single tenant building, and any "drip line" area shall not exceed 200 rentable
square feet.
"Improvements" means the Building and all improvements, machinery,
equipment, fixtures and other property, real, personal or mixed (except Tenant's
trade fixtures, machinery and equipment) installed or constructed on the Land or
in the Building by Landlord (including, without limitation, the parking facility
and other site improvements and landscaping), together with all additions,
alterations and replacements thereof.
"Demised Premises" means the Land and the Improvements.
Landlord, for and in consideration of the rents, covenants and agreements
hereinafter reserved, mentioned and contained on the part of Tenant, its
successors and assigns, to be paid, kept, observed and performed under this
Lease, hereby leases, rents, lets and demises to Tenant, and upon and subject to
the conditions and limitations expressed in this Lease, Tenant takes and hires
from Landlord, the Demised Premises.
ARTICLE I
TERM OF LEASE
1.1 Initial Term. This Lease shall be effective and binding upon the
------------
parties hereto upon mutual execution hereof (the "Effective Date"). The term of
this Lease (the "Initial Term") shall commence upon the Commencement Date and
shall end one hundred twenty (120) months after the Commencement Date (as
defined below), subject to extension pursuant to Section 1.2, below. The
"Commencement Date" (as that term is used in this Lease) shall mean the date
upon which Substantial Completion (as defined in Section 2.3 below) of the
Improvements occurs. Substantial Completion of the Improvements and the
Commencement Date are currently anticipated to be not later than May 1, 2001
(the "Target Commencement Date"). In the event the Commencement Date is May 1,
2001, the Initial Term of this Lease would end on April 30, 2011. Tenant shall
have the right to advance the Target Commencement
1
<PAGE>
Date to a date earlier than May 1, 2001. Landlord has agreed to commence
construction of the Improvements at least one (1) year prior to the Target
Commencement Date. Accordingly, if Tenant desires to exercise its right to
advance the Target Commencement Date, Tenant shall deliver written notice of
such election ("Advance Notice") to Landlord no later than twelve (12) months
prior to the date which Tenant elects to have as the accelerated Target
Commencement Date. For example, if Tenant elects to advance the Target
Commencement Date to December 1, 2000, Tenant shall deliver the Advance Notice
to Landlord no later than December 1, 1999. If Tenant elects to advance the
Target Commencement Date, then all references herein to the Target Commencement
Date shall mean such date as advanced by Tenant pursuant to this Section 1.1. In
addition, if Tenant elects to advance the Target Commencement Date, Tenant shall
be entitled to a reduction in Base Rent as provided in Section 3.1 below.
1.2 Option to Extend. Tenant shall have three (3) options to extend (the
----------------
"Extension Options") the Initial Term for consecutive five (5) year periods (the
foregoing option terms shall be referred to hereinafter sometimes as the "Option
Terms"), by delivering a binding written notice of exercise to Landlord
("Extension Notice"), so that Landlord receives the Extension Notice with
respect to the first Option Term at least three hundred sixty (360) days prior
to the end of the Initial Term and with respect to the second Option Term, at
least three hundred sixty (360) days prior to the end of the first Option Term
and with respect to the third Option Term, at least three hundred sixty (360)
days prior to the end of the second Option Term. Tenant may exercise the
Extension Options only if this Lease is in full force and effect and there is no
uncured Event of Default, or any breach of Tenant's obligations under this Lease
which with the passage of time or the giving of notice, or both, would
constitute an Event of Default if not cured within any applicable cure period
(an "Incipient Default"), at the time of exercise of the right of renewal or at
the time of the commencement of the Option Term, but Landlord shall have the
right at its sole discretion to waive the non-default conditions herein;
provided, however, that if an Event of Default or Incipient Default exists at
the time Tenant exercises the Extension Option and Landlord does not elect to
waive, Landlord shall provide written notice to Tenant of the existence and
nature of such Event of Default or Incipient Default and Tenant shall be allowed
an amount of time to cure such Event of Default or Incipient Default as is
otherwise provided for curing defaults of that type under this Lease, and, if
timely cured, Tenant's exercise of the Extension Option shall be reinstated
effective as of the time of exercise. The Initial Term, together with any Option
Term, are referred to in this Lease as the "Term."
ARTICLE II
CONSTRUCTION OF THE IMPROVEMENTS
2.1 The Improvements. Landlord agrees to furnish all of the material,
----------------
labor and equipment for the construction of the Improvements in a good and
workmanlike manner in conformance with the Plans and Specifications (as defined
in Section 2.2) and in compliance with all covenants, conditions and
restrictions to which the Land is subject and all then applicable building laws,
ordinances, orders, rules, regulations and requirements of all federal, state
and municipal governments with jurisdictional authority over the development of
the Land and the construction of the Improvements, including, but not limited
to, the Americans With
2
<PAGE>
Disabilities Act and Title 24 (the "Applicable Land Use Laws and Restrictions").
Landlord shall use its diligent, best efforts to achieve Substantial Completion
of the Improvements by the Target Commencement Date.
2.2 Plans and Specifications. The Plans and Specifications for the
------------------------
development of the Property and the construction of the Improvements shall be
developed on a "two-track" basis, with one "track" related to the creation of
Plans and Specifications for the Shell Improvements (as defined in Section
2.10(a) hereof) and a second "track" related to the creation of Plans and
Specifications for the Tenant Improvements (as defined in Section 2.10(b)
hereof. Pacific Cornerstone Architects shall be the architect and space planner
for the Improvements (the "Architect").
(a) Shell Improvements Plans and Specifications. The Plans and
-------------------------------------------
Specifications for the development of the Shell Improvements shall be developed
as follows:
(i) As used in this Lease, the term "Shell Improvements Plans
and Specifications" shall mean collectively the "Preliminary Plans and
Specifications," the "Shell Improvements Schematic Design Drawings," the "Shell
Improvements Design Development Drawings", the "Shell Improvements Construction
Drawings" (all as defined herein) which shall be prepared by Architect, and all
related plans, drawings, specifications and notes. The Shell Improvements Plans
and Specifications shall be prepared by Landlord in compliance with all
Applicable Land Use Laws and Regulations.
(ii) Landlord and Tenant shall agree on a set of preliminary
plans and specifications ("Preliminary Plans") for the Shell Improvements which
shall (a) describe and depict the Shell Improvements, (b) specify the components
of the Shell Improvements, and (c) preliminarily depict the Tenant Improvements.
On or before May 1, 2000, or as soon as reasonably possible following Landlord's
receipt of the Advance Notice, whichever is earlier, Landlord shall submit to
Tenant proposed Preliminary Plans. Within fifteen (15) business days after
Landlord delivers to Tenant the Preliminary Plans, Tenant shall deliver to
Landlord written notice of its approval or disapproval thereof. Tenant shall not
unreasonably withhold its approval of the Preliminary Plans or use the approval
process as a vehicle for expanding the scope of the Shell Improvements. If
Tenant disapproves any portion of the Preliminary Plans, then Tenant shall
specifically and in writing (a) approve those portions which are acceptable to
Tenant and (b) disapprove those portions which are not acceptable to Tenant,
specifying the reasons for such disapproval and describing in detail the change
Tenant requests for each item disapproved. In the event the Preliminary Plans
have not been fully approved by Tenant, and Landlord and Tenant are unable to
resolve the basis for Tenant's disapproval after good faith efforts to do so
over a period of fifteen (15) business days after delivery of Tenant's notice
disapproving the Preliminary Plans, Landlord and Tenant shall resolve such
differences through binding arbitration as more particularly provided in Section
2.3 below.
(iii) As soon as is reasonably possible following approval of the
Preliminary Plans, Landlord shall submit to Tenant reasonably detailed and
dimensioned 1/8 scale preliminary schematic design drawings ("Shell Improvements
Schematic Design Drawings") for the Shell Improvements elements of the Demised
Premises, which Shell Improvements
3
<PAGE>
Schematic Design Drawings shall be consistent with the Preliminary Plans. Within
fifteen (15) business days after Landlord delivers to Tenant the Shell
ImprovementsSchematic Design Drawings, Tenant shall deliver to Landlord written
notice of its approval or disapproval thereof. Tenant shall not unreasonably
withhold its approval of the Shell Improvements Schematic Design Drawings or use
the approval process as a vehicle for expanding the scope of the Shell
Improvements. If Tenant disapproves any portion of the Shell Improvements
Schematic Design Drawings, then Tenant shall specifically and in writing (a)
approve those portions which are acceptable to Tenant and (b) disapprove those
portions which are not acceptable to Tenant, specifying the reasons for such
disapproval and describing in detail the change Tenant requests for each item
disapproved. In the event the Shell Improvements Schematic Design Drawings have
not been fully approved by Tenant, and Tenant and Landlord are unable to resolve
the basis for Tenant's disapproval after good faith efforts to do so over a
period of fifteen (15) business days after delivery of Tenant's notice
disapproving the Schematic Shell Improvements Design Drawings, Landlord and
Tenant shall resolve such differences through binding arbitration as more
particularly provided in Section 2.3 below.
(iv) As soon as is reasonably possible following approval of the
Shell Improvements Schematic Design Drawings, Landlord shall submit to Tenant
reasonably detailed preliminary construction drawings for the Shell Improvements
elements of the Demised Premises ("Shell Improvements Design Development
Drawings"), which Shell Improvements Design Development Drawings shall be
consistent with the Shell Improvements Schematic Design Drawings. Within fifteen
(15) business days after Tenant receives the Shell Improvements Design
Development Drawings, Tenant shall deliver to Landlord written notice of
Tenant's approval or disapproval of the Shell Improvements Design Development
Drawings. Tenant shall not unreasonably withhold its approval of the Shell
Improvements Design Development Drawings or use the approval process as a
vehicle for expanding the scope of the Shell Improvements. If Tenant disapproves
any portion of the Shell Improvements Design Development Drawings, then Tenant
shall specifically and in writing (a) approve those portions which are
acceptable to Tenant and (b) disapprove those portions which are not acceptable
to Tenant, specifying the reasons for such disapproval and describing in detail
the change Tenant requests for each item disapproved. In the event the Shell
Improvements Design Development Drawings have not been fully approved by Tenant,
and Tenant and Landlord are unable to resolve the basis for Tenant's disapproval
after good faith efforts to do so over a period of fifteen (15) business days
after delivery of Tenant's notice disapproving the Shell Improvements Design
Development Drawings, Landlord and Tenant shall resolve such differences through
binding arbitration as more particularly provided in Section 2.3 below.
(v) As soon as is reasonably possible following approval of the
Shell Improvements Design Development Drawings, Landlord shall submit to Tenant
1/4 or 1/8 scale construction drawings for the Shell Improvements elements of
the Demised Premises ("Construction Drawings"), which Construction Drawings
shall be consistent with the previously approved Shell Improvements Design
Development Drawings. These Construction Drawings shall include all information
reasonably necessary to construct the Shell Improvements. Within fifteen (15)
business days after Tenant receives the Shell Improvements Construction
Drawings, Tenant shall deliver to Landlord written notice of Tenant's approval
or disapproval of the Shell Improvements Construction Drawings. Tenant shall not
unreasonably withhold its approval of
4
<PAGE>
the Shell Improvements Construction Drawings or use the approval process as a
vehicle for expanding the scope of the Shell Improvements. If Tenant disapproves
any portion of the Shell Improvements Construction Drawings, then Tenant shall
specifically and in writing (a) approve those portions which are acceptable to
Tenant and (b) disapprove those portions which are not acceptable to Tenant,
specifying the reasons for such disapproval and describing in detail the change
Tenant requests for each item disapproved. In the event the Shell Improvements
Construction Drawings have not been fully approved by Tenant, and Tenant and
Landlord are unable to resolve the basis for Tenant's disapproval after good
faith efforts to do so over a period of fifteen (15) business days after
delivery of Tenant's notice disapproving the Shell Improvements Construction
Drawings, Landlord and Tenant shall resolve such differences through binding
arbitration as more particularly provided in Section 2.3 below.
(vi) Upon approval of the Shell Improvements Construction
Drawings, the Shell Improvements Plans and Specifications shall be deemed
approved by Landlord and Tenant and shall, thereafter, be the Shell Improvements
element of the Plans and Specifications for the construction of the
Improvements.
(b) Tenant Improvements Plans and Specifications. The Plans and
--------------------------------------------
Specifications for the development of the Tenant Improvements shall be developed
as follows:
(i) As used in this Lease, the term "Tenant Improvements Plans
and Specifications" shall mean collectively the "Preliminary Plans", the "Tenant
Improvements Schematic Design Drawings," the "Tenant Improvements Design
Development Drawings", the "Tenant Improvements Construction Drawings" (all as
defined herein) which shall be prepared by Architect, and all related plans,
drawings, specifications and notes. The Tenant Improvements Plans and
Specifications shall be prepared by Landlord in compliance with all Applicable
Land Use Laws and Regulations.
(ii) As soon as is reasonably possible following approval of the
Preliminary Plans, or as soon as reasonably possible following Landlord's
receipt of the Advance Notice, Landlord shall submit to Tenant reasonably
detailed and dimensioned 1/8 scale preliminary schematic design drawings
("Tenant Improvements Schematic Design Drawings") for the Tenant Improvements
elements of the Demised Premises consistent with the Preliminary Plans. Within
fifteen (15) business days after Landlord delivers to Tenant the Tenant
Improvements Schematic Design Drawings, Tenant shall deliver to Landlord written
notice of its approval or disapproval thereof. Tenant shall not unreasonably
withhold its approval of the Tenant Improvements Schematic Design Drawings. If
Tenant disapproves any portion of the Tenant Improvements Schematic Design
Drawings, then Tenant shall specifically and in writing (a) approve those
portions which are acceptable to Tenant and (b) disapprove those portions which
are not acceptable to Tenant, specifying the reasons for such disapproval and
describing in detail the change Tenant requests for each item disapproved. In
the event the Tenant Improvements Schematic Design Drawings have not been fully
approved by Tenant, and Tenant and Landlord are unable to resolve the basis for
Tenant's disapproval after good faith efforts to do so over a period of fifteen
(15) business days after delivery of Tenant's notice disapproving the Tenant
Improvements Schematic Design Drawings, Landlord and Tenant shall
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resolve such differences through binding arbitration as more particularly
provided in Section 2.3 below.
(iii) As soon as is reasonably possible following approval of the
Tenant Improvements Schematic Design Drawings, Landlord shall submit to Tenant
reasonably detailed preliminary construction drawings for the Tenant
Improvements elements of the Demised Premises ("Tenant Improvements Design
Development Drawings"), which Tenant Improvements Design Development Drawings
shall be consistent with the Tenant Improvements Schematic Design Drawings.
Within fifteen (15) business days after Tenant receives the Tenant Improvements
Design Development Drawings, Tenant shall deliver to Landlord written notice of
Tenant's approval or disapproval of the Tenant Improvements Design Development
Drawings. Tenant shall not unreasonably withhold its approval of the Tenant
Improvements Design Development Drawings. If Tenant disapproves any portion of
the Tenant Improvements Design Development Drawings, then Tenant shall
specifically and in writing (a) approve those portions which are acceptable to
Tenant and (b) disapprove those portions which are not acceptable to Tenant,
specifying the reasons for such disapproval and describing in detail the change
Tenant requests for each item disapproved. In the event the Tenant Improvements
Design Development Drawings have not been fully approved by Tenant, and Tenant
and Landlord are unable to resolve the basis for Tenant's disapproval after good
faith efforts to do so over a period of fifteen (15) business days after
delivery of Tenant's notice disapproving the Tenant Improvements Design
Development Drawings, Landlord and Tenant shall resolve such differences through
binding arbitration as more particularly provided in Section 2.3 below.
(iv) As soon as is reasonably possible following approval of the
Tenant Improvements Design Development Drawings, Landlord shall submit to Tenant
1/4 or 1/8 scale construction drawings for the Tenant Improvements elements of
the Demised Premises ("Construction Drawings"), which Construction Drawings
shall be consistent with the Tenant Improvements Design Development Drawings.
These Construction Drawings shall include all information reasonably necessary
to construct the Tenant Improvements. Within fifteen (15) business days after
Tenant receives the Tenant Improvements Construction Drawings, Tenant shall
deliver to Landlord written notice of Tenant's approval or disapproval of the
Tenant Improvements Construction Drawings. Tenant shall not unreasonably
withhold its approval of the Tenant Improvements Construction Drawings. If
Tenant disapproves any portion of the Tenant Improvements Construction Drawings,
then Tenant shall specifically and in writing (a) approve those portions which
are acceptable to Tenant and (b) disapprove those portions which are not
acceptable to Tenant, specifying the reasons for such disapproval and describing
in detail the change Tenant requests for each item disapproved. In the event the
Tenant Improvements Construction Drawings have not been fully approved by
Tenant, and Tenant and Landlord are unable to resolve the basis for Tenant's
disapproval after good faith efforts to do so over a period of fifteen (15)
business days after delivery of Tenant's notice disapproving the Tenant
Improvements Construction Drawings, Landlord and Tenant shall resolve such
differences through binding arbitration as more particularly provided in Section
2.3 below.
(v) Upon approval of the Tenant Improvements Construction
Drawings, the Tenant Improvements Plans and Specifications shall be deemed
approved by
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Landlord and Tenant and shall, thereafter, be the Tenant Improvements element of
the Plans and Specifications for the construction of the Improvements.
(vi) During the process of preparing and reviewing the Tenant
Improvements Schematic Design Drawings, Tenant Improvements Design Development
Drawings and Tenant Improvements Construction Drawings, Landlord shall
reasonably cooperate with Tenant, and Landlord shall cause its contractor and
design professionals to reasonably cooperate with Tenant, in Tenant's efforts to
control the cost of the Tenant Improvements through "value engineering." Nothing
in this subsection (vii) nor related to the "value engineering" of the Tenant
Improvements shall extend the dates by which Tenant must review the plans and
specifications delivered to it under this Section 2.2 or otherwise delay the
completion of the Tenant Improvements Plans and Specifications.
(c) Final Plans and Specifications. The final Shell Improvements
------------------------------
Plans and Specifications and the final Tenant Improvements Plans and
Specifications are sometimes collectively referred to in this Lease as the
"Plans and Specifications" and shall be the final plans and specifications for
the development of the Improvements. Tenant shall not assume any liability for
defects in the design of the Shell Improvements or the Tenant Improvements as a
result of Tenant's involvement in the process described in this Section 2.2 and
shall not diminish Landlord's responsibilities under this Lease for any such
defects.
2.3 Design Disputes. In the event Landlord and Tenant are unable to
---------------
resolve Tenant's disapproval of a phase of the development of the Plans and
Specifications under Section 2.2 above (a "Design Dispute"), they shall resolve
those differences through the binding arbitration of a neutral third-party in
accordance with the procedure set forth in this Section 2.3: Landlord and Tenant
shall immediately meet to make a good faith attempt to mutually appoint a single
party who shall be a licensed architect ("Arbitrating Architect"), with not less
than ten (10) years experience in commercial and industrial architecture and who
is not employed or otherwise previously affiliated with either party, to
arbitrate their differences and resolve the Design Dispute. If Landlord and
Tenant are unable to agree upon a single Arbitrating Architect, then each shall,
within two (2) business days after the meeting, select an architect that meets
the foregoing qualifications. The two (2) architects so appointed shall, within
two (2) business days after their appointment, appoint a third architect meeting
the foregoing qualifications who shall serve as the Arbitrating Architect. If
the two (2) architects so selected cannot agree on the selection of the
Arbitrating Architect within the time above specified, then either party, on
behalf of both parties, may request the appointment of the Arbitrating Architect
to the Presiding Judge of the San Diego County Superior Court. The procedures
for arbitrating and resolving the Design Dispute shall be established by the
Arbitrating Architect, provided, however, that the parties agree to the use of
the rules of the American Arbitration Association regarding resolution of
commercial disputes. The determination of the Arbitrating Architect shall be
limited solely to the issue of the Design Dispute and shall be made within ten
(10) business days of its submission by the parties for arbitration. The
decision of the Arbitrating Architect shall be binding on both parties. The
costs of the arbitration, including, without limitation, attorneys' fees and
costs, witness fees, expert witness fees, and costs of the arbitration
proceeding shall be awarded as determined to be reasonable by the Arbitrating
Architect. In the event of any judicial enforcement or confirmation proceeding
relating to an arbitration award, the prevailing party
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shall be entitled to recover from the other party all related costs, including
attorneys' fees and costs.
2.4 Substantial Completion of the Improvements.
------------------------------------------
(a) "Substantial Completion" of the Improvements shall be deemed to
have occurred on the earlier to occur of when (i) (A) the Improvements have been
completed in conformance with the Plans and Specifications, subject to the
completion of "punch-list" items (the "Punchlist") identified by Landlord and
Tenant as described in Section 2.3(c) below ("punch-list items" being defined to
mean minor items needing correction or repair which do not or will not
materially interfere with Tenant's use and enjoyment of the Building), (B) the
parking facilities to which Tenant is entitled under this Lease have been
completed other than as identified on the Punchlist, (C) all systems of the
Building are in good working order, and (D) Tenant can physically and legally
occupy the Demised Premises (e.g., a permanent Certificate of Occupancy or
temporary certificate of occupancy which is subsequently converted into or
replaced without any lapse by a permanent certificate of occupancy ("Certificate
of Occupancy") has been issued for the Demised Premises by the City of San Diego
("City")), or (ii) the Improvements would have been so completed and Tenant
legally entitled to occupy the Demised Premises but for any Tenant-Caused Delays
in Landlord (A) achieving Substantial Completion or (B) or obtaining the
Certificate of Occupancy. Landlord shall deliver to Tenant a copy of any
Certificate of Occupancy issued by City for the Demised Premises promptly upon
receipt. Landlord will use its best efforts to (i) keep Tenant informed on a
monthly basis following execution of this Lease of the anticipated Commencement
Date, and (ii) provide Tenant with no less than thirty (30) days advance notice
of the actual Commencement Date. Landlord shall deliver to Tenant a certificate
from the Architect (as defined below) certifying Substantial Completion of the
Improvements on or before the Commencement Date.
(b) "Tenant-Caused Delay" shall be defined as (i) the failure of
Tenant, its officers, directors, partners, agents, employees, or contractors to
(A) perform some act or pay some amount within the time provided in this Lease,
or (B) approve or reasonably disapprove any draft of the Plans and
Specifications within the time period specified in Section 2.2 above, (ii) any
change to the Plans and Specifications requested by Tenant, including both
during preparation of the Plans and Specifications and during construction of
the Demised Premises, including as a result of Tenant's efforts to control
Tenant Improvements Cost through "value engineering" (as provided in Section
2.2(b)(vii) hereof) (a "Tenant Change Order"), or (iii) any other act or
omission by Tenant, its officers, directors, partners, agents, employees, or
contractors to the extent it causes a delay in Substantial Completion or in the
issuance of the Certificate of Occupancy (including, without a limitation, a
delay caused by a delay in finalization of the Plans and Specifications);
provided, however, that Landlord shall have given written notice to Tenant of
the number of days of Tenant-Caused Delay due to such requested Tenant Change
Order. Tenant may revoke a Tenant Change Order if it notifies Landlord of such
revocation within two (2) business days following receipt of Landlord's written
notice. Landlord shall notify Tenant in writing of the occurrence of any Tenant-
Caused Delay within two (2) business days after learning of the same. If
Landlord fails to timely notify Tenant of an event which would otherwise be a
Tenant-Caused Delay, the Tenant-Caused Delay shall not commence until such
notice is delivered.
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(c) On or immediately before the Commencement Date, Landlord and
Tenant shall conduct a walk-through inspection of the Demised Premises and shall
jointly prepare the Punchlist which shall be a list of items which have not been
completed in substantial conformance with the Plans and Specifications that need
to be corrected. Landlord shall cause such items to be corrected within thirty
(30) days thereafter, provided, however, if by the nature of such punch-list
item, more than thirty (30) days is required to effect such correction, Landlord
shall not be in default hereunder if such correction is commenced within such
thirty (30) day period and is diligently pursued to completion. Approximately
thirty (30) days following the Commencement Date, Landlord and Tenant shall
again conduct a walk-through inspection to determine if any remaining punch-list
items require correction, and Landlord shall cause all such corrective work to
be undertaken and completed promptly thereafter. If, thereafter, Landlord fails
to diligently pursue completion of the Punchlist items with due diligence, and
such failure continues for five (5) days after notice from Tenant, Tenant may
complete such items and offset the reasonable cost thereof against Base Rent and
Additional Rent.
(d) Tenant shall not be liable to Landlord for the payment of Base
Rent, Additional Rent (as hereinafter defined) or any other amount to be paid by
Tenant under this Lease (except as specifically provided elsewhere in this
Lease) until the Commencement Date. The failure of Tenant to take possession of
or to occupy the Demised Premises on or after the Commencement Date shall not
serve to relieve Tenant of its obligations or delay Tenant's obligation to pay
Rent, Additional Rent, or any other amount to be paid by Tenant to Landlord
under this Lease.
(e) If the Commencement Date has not occurred by the Target
Commencement Date, as such Target Commencement Date may be extended pursuant to
Section 2.5, below) Landlord shall not be liable for any damages caused thereby,
except as provided in Section 2.5, below, and this Lease shall remain in full
force, except as provided in Section 2.5 below.
2.5 Delay in Substantial Completion. Landlord shall diligently proceed, in
-------------------------------
accordance with the Project Schedule, with the construction of the Improvements
and complete the same and deliver possession thereof to Tenant on the Target
Commencement Date, provided, however, to the extent (i) a Tenant-Caused Delay,
or (ii) a Force Majeure (as defined below), results in a delay in Substantial
Completion of the Improvements, the Target Commencement Date shall be extended
for the amount of time the Substantial Completion of the Improvements is delayed
thereby. "Force Majeure" shall be defined as any factor or condition which is
outside the control of either Tenant or Landlord and for which neither could
have reasonably been anticipated or expected to plan, including, without
limitation, (i) unusually inclement weather, or inclement weather which occurs
at unusual times, (ii) other acts of God, (iii) labor disputes, (iv) casualties,
(v) embargo, (vi) governmental restrictions, (vii) shortages of fuel, labor, or
building materials, (viii) civil unrest, (ix) action or non-action of public
utilities, or of local, state or federal governments which delay the Substantial
Completion of the Demised Premises, and (x) action or non-action of local, state
or federal governments which prevent, prohibit or stop construction of the
Demised Premises. Notwithstanding the foregoing, (A) those events described in
subsections (iii), (v), (vi), (vii), (ix) and (x) of the preceding sentence will
constitute
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Force Majeure events only if they are generally applicable to the construction
industry in San Diego, and (B) no Force Majeure event, or any combination
thereof, will result in a delay in the Target Commencement Date for more than
thirty (30) days, other than those described in subsections (ii), (viii) and (x)
of the preceding sentence. Landlord shall give written notice to Tenant of the
estimated number of days of delay due to Force Majeure within two (2) business
days after Landlord learns of such delay. If Landlord fails to timely notify
Tenant of an event which would otherwise be a delay due to Force Majeure, the
Force Majeure delay shall not commence until such notice is delivered.
2.6 Liquidated Damages for Delay in Substantial Completion. If the
------------------------------------------------------
Commencement Date has not occurred (or been deemed to have occurred) by the
Target Commencement Date, as it may be adjusted as described in Sections 1.1 or
2.4, above, then Landlord shall pay Tenant liquidated damages of Two Thousand
Five Hundred Dollars ($2,500.00) per day for each day the Commencement Date is
delayed beyond the Target Commencement Date (as adjusted pursuant to Section
2.4, above) for up to six (6) months after the Target Commencement Date (as
adjusted pursuant to Section 2.4, above). Such liquidated damages shall be paid
within thirty (30) days after the end of each month of delay beyond the Target
Commencement Date. In addition to Tenant's rights to such liquidated damages,
Tenant shall have the right to terminate this Lease if the delay in the
Commencement Date beyond the Target Commencement Date (as adjusted pursuant to
Section 2.4, above) exceeds six (6) months in length. If Tenant elects not to
terminate this Lease at that time, (i) Landlord's liability for such delay shall
be limited to the liquidated damages already paid or accrued, (ii) Landlord
shall not be liable for any additional liquidated damages, and (iii) Landlord
shall have no liability for damages related to the additional delay unless such
delay is caused by Landlord's intentional misconduct. If Tenant elects not to
terminate this Lease at the end of such six (6) month period, Landlord shall
endeavor to achieve Substantial Completion of the Demised Premises with due
diligence, provided Tenant may terminate the Lease at any time thereafter, which
termination shall be effective ninety (90) days following delivery by Tenant to
Landlord of a written notice of such termination, unless Substantial Completion
and the Commencement Date occurs within such ninety (90) day period, in which
case the termination notice shall be deemed withdrawn and of no further force or
effect. If the Commencement Date has not occurred (or been deemed to have
occurred) by one (1) year after the Target Commencement Date (as that date may
be adjusted pursuant to Section 2.4, above), either Tenant or Landlord provided
that Landlord may only so terminate this Lease if the delay is not within
Landlord's reasonable control), upon written notice to the other, may terminate
the Lease. If Landlord fails to timely pay Tenant the liquidated damages, Tenant
may, in addition to its other rights and remedies, offset the amount thereof
against any rent or other amount due hereunder to Landlord.
LANDLORD AND TENANT AGREE THAT TENANT'S ACTUAL DAMAGES IN THE
EVENT OF A DELAY IN THE COMMENCEMENT DATE BEYOND THE TARGET
COMMENCEMENT DATE (AS ADJUSTED PURSUANT TO SECTION 2.4, ABOVE),
WOULD BE EXTREMELY DIFFICULT OR IMPRACTICABLE TO DETERMINE AND
THAT THE AMOUNTS DESIGNATED ABOVE AS LIQUIDATED DAMAGES PAYABLE
BY LANDLORD TO TENANT IN SUCH EVENTS ARE EACH REASONABLE AMOUNTS
TO BE SET AS
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DAMAGES FOR SUCH EVENTS UNDER THE CIRCUMSTANCES EXISTING AT THE
TIME THIS LEASE HAS BEEN ENTERED INTO. IN CONSIDERATION OF THE
PAYMENT OF LIQUIDATED DAMAGES, TENANT SHALL BE DEEMED TO HAVE
WAIVED ALL OTHER CLAIMS FOR DAMAGES OR RELIEF AT LAW OR IN EQUITY
DUE TO SUCH DELAY INCLUDING ANY RIGHTS TO SPECIFIC PERFORMANCE
TENANT MAY OTHERWISE HAVE.
Tenant: /s/ [SIGNATURE ILLEGIBLE] Landlord: [SIGNATURE ILLEGIBLE]
--------------------------- ----------------------
2.7 Building Permit for the Improvements. Landlord shall be responsible
------------------------------------
(at its sole cost and expense) for obtaining from any relevant and
jurisdictional governmental authority necessary (generally an "Authority"), all
governmental approvals including a building permit for the construction of the
Improvements ("Building Permit"). If a change to the Plans and Specifications or
Approved Working Drawings is required by the Authority, such change shall be
made to the Plans and Specifications or Approved Working Drawings by Landlord.
Tenant shall not unreasonably withhold its consent to any such change.
2.8 Construction Warranties. Landlord shall obtain the manufacturer's
-----------------------
warranties for the elements or systems which are part of the Demised Premises
and which are customarily given by such manufacturers without additional cost to
Landlord and warranties and guaranties from the contractors and subcontractors
with respect to the Improvements and which are customarily given by such
contractors and subcontractors without additional cost to Landlord. Landlord
shall assign to Tenant (or, should Tenant not be legally capable of doing so
itself, at Tenant's expense, prosecute on Tenant's behalf), on a non-exclusive
basis, all statutory and contractual warranties and guaranties to which Landlord
is entitled in connection with the Demised Premises, express or implied,
including, without limitation the warranties arising under any construction
contract between Landlord and Landlord's contractors and/or subcontractors
involved in the construction of the Demised Premises. Other than the assignment
to Tenant of such warranties, or as otherwise specifically provided in this
Lease, Landlord shall have no obligation or responsibility to Tenant, or its
successors, with respect to any condition of the Improvements. Landlord, at no
cost or expense to Landlord, shall cooperate with Tenant in the enforcement by
Tenant, at Tenant's sole cost and expense, of any such warranties or guaranties.
2.9 Condition of Demised Premises: Limited Warranty. Except as
-----------------------------------------------
specifically provided in this Section 2.9, Landlord makes no warranties or
representations with regard to the Demised Premises, or any portion thereof, and
Tenant shall accept the Demised Premises in the condition in which they are
delivered on the Commencement Date, provided that (i) the Demised Premises shall
be constructed in (A) conformance with the Plans and Specifications and Approved
Working Drawings, and (B) conformance with all Applicable Land Use Laws and
Restrictions then in effect and (ii) for the Term of this Lease, the
Improvements shall be free of latent defects in design and construction of the
Demised Premises, including, without limitation, the drainage of surface water
runoff from adjacent properties, and Landlord shall be responsible, at
Landlord's sole cost and expense, for the prompt and diligent repair of any such
latent defects which manifest themselves during the Term.
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2.10 Tenant Improvement Allowance: Tenant Responsibility.
---------------------------------------------------
(a) Landlord shall be responsible for constructing, entirely at its
expense, subject to the provisions of Section 3.3 of this Lease, the Shell
Improvements (as that term is defined below). The Shell Improvements shall
consist of (and the term "Shell Improvements" shall be used in this Lease to
mean) those components of the Demised Premises which are identified as elements
of the basic Building shell or specifically as "Shell Improvements," land, land
preparation and landscaping or as otherwise mutually identified by Landlord and
Tenant, in writing, concurrent with or subsequent to the execution of this
Lease, including all utilities (including fiber optic cabling) stubbed to the
Building. The Base Rent specified in this Lease includes Landlord's obligation
to complete and deliver to Tenant the Shell Improvements in accordance with this
Lease. The cost of constructing the Shell Improvements are referred to in this
Lease as the "Shell Improvements Cost" Shell Improvements Cost shall include a
developer fee of $3.00 per rentable square foot, payable to Landlord, or an
affiliate (with no direct obligation to Tenant to pay such fee). The Shell
Improvements shall result in the construction by Landlord of a two (2) story
research and development and office concrete tilt-up building on a "cold shell"
basis. In addition, the Shell Improvements shall include, at Landlord's expense,
including:
(i) Water and sewer services to the Building and power of
3,000 amps of 277/480, 3 phases;
(ii) One (1) grade level loading door,
(iii) Column spacing of forty-eight (48) feet;
(iv) Exterior glazing wrapping around both floors of the
Building consistent with the Adjacent Building (i.e.,
the AMCC building at 6290 Sequence Drive);
(v) Approximately 4.0 parking spaces per 1,000 rentable
square feet of Building area to be paved and lighted
based upon the site plan which is attached to this
Lease as part of Exhibit "B;"
(vi) A distributed fire sprinkler system (excluding dropping
of heads);
(vii) Two percent (2%) roof skylight coverage;
(viii) A four (4)-ply roof;
(ix) All exterior landscaping and hardscaping consistent
with the Adjacent Building (i.e., the AMCC building at
6290 Sequence Drive) ;
(x) Second floor structure completed to code with any
stairways for fire exiting, main stairway structure and
a 3,000 pound elevator that complies with the Americans
With Disabilities Act;
(xi) One (1) trash enclosure with four (4) dumpsters;
(xii) Natural gas service (two (2)-inch diameter, low-
pressure) to the Building; and
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(xiii) All other items commonly included as part of a "cold
shell."
The specifications defined in this Section 2.10(a) shall take precedence over
the attached exhibits. The Building will be designed substantially in accordance
with the attached architectural Exhibit "B," which shall incorporate all of the
above items.
(b) Landlord shall be responsible for constructing, subject to the
provisions of this Section 2.10 and 2.11, the Tenant Improvements (as that term
is defined below). The Tenant Improvements shall consist of (and the term
"Tenant Improvements" shall be used in this Lease to mean) those portions of the
Demised Premises which are not Shell Improvements, are identified in the final
Plans and Specifications as part of the Tenant Improvements, or as otherwise
mutually identified by Landlord and Tenant, in writing, concurrent with or
subsequent to the execution of this Lease.
(c) Landlord shall provide an allowance to be applied by Landlord
towards paying the costs of designing and constructing the Tenant Improvements
(the "Tenant Improvements Cost"), in the amount of Twenty-Five Dollars ($25.00)
per rentable square foot of the Demised Premises, which is currently anticipated
to total One Million Four Hundred Fifty Thousand Dollars ($1,450,000.00) (the
"Allowance"). In the event the final square footage of the Building is more or
less than 58,000 square feet, the Allowance shall be adjusted to an amount which
reflects the increase or decrease in square footage. The Allowance shall be used
to pay the direct construction cost (excluding any overhead or profit to
Landlord or any affiliate) of the Tenant Improvements which are paid to the
Contractor (as defined below) or others performing such construction work,
Tenant Improvement permits and space planning fees and reimbursables. The
Allowance shall not be applied to the following items, the cost of which shall
be Landlord's responsibility: (i) the cost of the Land and financing or carry
costs associated with the Land; (ii) financing fees, imputed interest, costs of
carry and taxes/insurance during construction; (iii) brokerage commissions or
developer fees; or (iv) architectural or engineering fees and reimbursables for
the Shell Improvements. The Allowance shall not be applied to the following
items, the cost of which shall be Tenant's responsibility: (i) building signage,
(ii) security systems, (iii) specialized cabling; or (iv) Tenant's moving
expenses.
(d) In the event that the Allowance is insufficient in amount to pay
the Tenant Improvements Costs, Tenant shall pay such excess as Tenant's Share
pursuant to the procedure set forth in Section 2.11 below.
(e) Upon execution of this Lease and again, upon submittal of the
Tenant Improvements Schematic Design Drawings, the Tenant Improvements Design
Development Drawings, and the Tenant Improvements Construction Drawings,
Landlord shall also provide Tenant with an estimate of the Tenant Improvements
Cost. No later than ninety (90) days prior to the commencement of construction
of the Improvements, Landlord shall prepare and deliver to Tenant a Tenant
Improvements Budget Estimate ("Tenant Improvements Budget Estimate"), which
Landlord and Tenant shall then mutually finalize prior to the commencement of
construction. Within fifteen (15) days prior to the commencement of construction
of the Improvements, and no less than monthly thereafter during the course of
construction of the Improvements, Landlord shall deliver to Tenant a revised
Tenant Improvements Budget
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Estimate, whether reflecting an increase or a decrease in the Tenant Improvement
Costs, together with an explanation in reasonable detail of the cause of such
cost change and an accounting of actual costs to date ("Periodic Cost Report").
Additionally, prior to any Tenant Change Order being effective, Landlord will
provide Tenant with an estimate of the cost of said Tenant Change Order and
obtain Tenant's prior approval thereof, which Tenant shall grant or withhold
within two (2) business days following receipt of such estimated Tenant Change
Order cost. In addition, Landlord shall deliver a Periodic Cost Report to Tenant
no later than five (5) business days after Landlord learns of a material change
affecting the Tenant Improvements Budget Estimate. Similarly, Landlord shall
provide Tenant with an estimate of the cost of any Tenant-Caused Delay claimed
by Landlord as soon as reasonably possible after Landlord learns of the Tenant-
Caused Delay.
2.11 Responsibility for Excess Shell Costs and Excess Tenant Improvement
-------------------------------------------------------------------
Costs.
- -----
(a) The Base Rent has been determined based on the assumption
that the final Plans and Specifications will not be altered as a result of
Tenant Change Orders, and that no costs will be incurred in connection with the
construction of the Demised Premises resulting from Tenant-Caused Delays.
(b) Tenant shall be directly responsible, as additional rent, for
any increases in the cost to Landlord of the construction of the Shell
Improvements (including financing costs), (A) subject to Section 2.10(e) above,
resulting directly from Tenant Change Orders and which have not been offset by
savings resulting directly from Tenant Change Orders, or (B) subject to Section
2.10(e) above, resulting directly from Tenant-Caused Delays ("Excess Shell
Costs"). Each Periodic Cost Report and the Final Cost Report (as defined below),
shall include notification of any Excess Shell Costs and shall include
reasonably detailed documentation supporting the determination of such Excess
Shell Cost. Tenant shall pay the Excess Shell Costs to Landlord (i) upon
commencement of construction, if Landlord has notified Tenant of Excess Shell
Costs prior thereto, (ii) if later, within ten (10) business days after
notification to Tenant by Landlord of any Excess Shell Costs in a Periodic Cost
Notice, (iii) within ten (10) business days after the Final Cost Report, if such
report includes Excess Shell Costs which have not been previously paid to
Landlord, or (iv) as otherwise required by Landlord's construction lender, but
in no event prior to the construction of the Shell Improvements.
(c) Tenant shall be responsible, as additional rent, for any
Tenant Improvements Costs to the extent they exceed the Allowance ("Excess
Tenant Improvements Costs"). Tenant shall pay the Excess Tenant Improvements
Costs to Landlord upon the earlier to occur of (i) funding of Landlord's
construction loan or commencement of construction, whichever is later, if the
then applicable Tenant Improvements Budget Estimate reflects that the Allowance
will be insufficient to fully fund the Tenant Improvements Costs anticipated to
be incurred as of that date, (ii) within ten (10) business days after
notification to Tenant by Landlord that it has determined, in a periodic review
of the Tenant Improvements Costs during construction of the Tenant Improvements,
pursuant to Subsection 2.10(e), above, that the Allowance will be insufficient
to cover all the Tenant Improvements Costs anticipated to be incurred, or (iii)
within ten (10) business days after Landlord has notified Tenant that it has
made a final determination, pursuant to subsection (g), below, that the
Allowance is insufficient to
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cover all the Tenant Improvements Costs which have been incurred, or (iv) as
otherwise required by Landlord's construction lender, but in no event prior to
commencement of construction of the Tenant Improvements.
(d) Landlord shall deposit the funds paid to it by Tenant under
subsections (b) or (c) of this Section 2.11 in its construction loan control
account with the construction Lender (as that term is defined in Section 3.4
hereof) and those funds shall be applied to the cost of construction of the
Shell Improvements and Tenant Improvements as provided under Landlord's
construction loan.
(e) Within ninety (90) days following Substantial Completion of
the Improvements, Landlord shall calculate, and report to Tenant, in writing,
(i) the final Shell Improvements Cost and the final Tenant Improvements Cost,
and (ii) the amount of any Excess Shell Costs or Excess Tenant Improvements
Costs (the "Final Cost Report"). In the event that there is an amount which has
not been paid by Tenant at the time of such final determination (i.e. Excess
Shell Improvements Costs or Excess Tenant Improvements Costs) then Tenant shall
pay such additional amount to Landlord within ten (10) business days following
such final determination.
(f) If the Final Cost Report, shows that the amounts previously
paid by Tenant under subsections (b) and (c) of this Section 2.11 exceeded the
final amount of Excess Shell Improvements Costs or Excess Tenant Improvements
Costs, as the case may be (i.e. Tenant has paid to Landlord more than was
ultimately needed), then such overpayment shall be refunded to Tenant within ten
(10) business days following delivery to Tenant of such Final Cost Report. In
any event, whether additional amounts are owed or a refund is due, within ten
(10) business days following the delivery to Tenant of the Final Cost Report,
Landlord shall pay to Tenant any amount equal to the product of (i) amount paid
to Landlord by Tenant under subsections (b)(i) and (c)(i) of this Section 2.11,
(ii) multiplied by five percent (.05), (iii) divided by two (2).
(g) All of the Periodic Cost Reports and the Final Cost Report
shall include reasonably detailed supporting explanations and documentation.
Landlord shall maintain accurate and complete books and records of all Shell
Improvement Costs and Tenant Improvement Costs. Tenant shall have the right to
inspect, audit and copy such books and records at Landlord's office in San
Diego, California.
2.12 Contractor. Reno Contracting, Inc., a California corporation
----------
("Reno") shall act as the general contractor ("Contractor"), for the
construction of the Shell Improvements and the Tenant Improvements.
Notwithstanding the foregoing, in the event that Reno's quality of construction
and professional reputation in the community has, in the reasonable opinion of
Landlord and Tenant, materially deteriorated between the date of this Lease and
the time the construction contract is to be entered into, a different general
contractor shall be selected for the construction of the Shell Improvements and
Tenant's Improvements which general contractor shall be subject to the
reasonable approval of both Landlord and Tenant. Contractor's contract shall be
on a "cost-plus" basis, with Contractor entitled to (i) reimbursement for direct
insurance expenses and direct "G&A" or "General Conditions" expenses, as
provided in the Estimated Budget and (ii) a profit of no more than five percent
(5%). Landlord shall cause the Contractor
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to bid each component of the Improvements to at least three (3) qualified
subcontractors and, unless Landlord and Tenant agree otherwise, shall select the
lowest qualified bidder. Tenant shall have the right to approve the list of
subcontractors to be solicited for bids and to designate subcontractors to
participate in the bidding process. Tenant shall also have the right to select
subcontractors to perform components of the Improvements if Tenant agrees to pay
any Excess Shell Costs or Excess Tenant Improvements Costs attributable to such
election, provided such subcontractor is reasonably acceptable to Landlord and
Contractor. In no event shall the profit and overhead percentages for the Tenant
Improvements exceed the percentages paid by Landlord to Contractor for the Shell
Improvements.
2.13 Tenant's Entry Into the Building Prior to Substantial Completion.
----------------------------------------------------------------
Provided that Tenant and its agents, employees and contractors do not materially
interfere with the Contractor's work on the Demised Premises (any such
interference constituting a basis for a Tenant-Caused Delay), Landlord shall
allow and shall require the Contractor to allow, Tenant and Tenant's agents,
employees and contractors access to the Building prior to Substantial Completion
of the Improvements so that Tenant may install its furniture, trade fixtures,
data and telecommunications wiring and equipment, photocopy equipment and other
business equipment in the Building. Prior to Tenant's entry into the Building as
permitted by the terms of this Section 2.13, Tenant shall arrange a schedule
with Landlord and the Contractor in order to coordinate the timing of Tenant's
entry with the actions of the Contractor. Prior to any such entry, Tenant or its
agents and contractors (as applicable) shall provide evidence of insurance
reasonably satisfactory to Landlord. Tenant acknowledges that Section 20.3 below
shall apply with respect to any and all claims which may arise as a result of
the entry by Tenant, its agents, employees and contractors on the Demised
Premises in accordance with this Section 2.13. Tenant's responsibilities under
Section 7.1 of this Lease shall commence upon such early occupancy as opposed to
the Commencement Date.
ARTICLE III
RENT
3.1 Base Rent. In consideration of the lease of the Demised Premises
---------
evidenced by this Lease, Tenant covenants to pay Landlord, without previous
demand therefor and without any right of set-off or deduction whatsoever except
as expressly provided in this Lease, at the office of Landlord at:
Kilroy Realty, L.P.
Kilroy Realty Corporation
2250 East Imperial Highway, Suite 1200
El Segundo, California 90245
Attention: Chief Financial Officer
or at such other place as Landlord may from time to time designate in writing, a
rental for the Initial Term of this Lease as hereinafter set forth, payable
monthly, in advance, in equal installments as hereinafter set forth, with the
first payment due on the Commencement Date, and
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continuing on the first day of each month thereafter for the succeeding months
during the balance of the Term ("Base Rent"):
<TABLE>
<CAPTION>
Period Annual Base Rent Monthly Base Rent
------ ---------------- -----------------
<S> <C> <C>
Months 1-24 $1,050,960 $ 87,580
Months 25-48 $1,114,020 $ 92,835
Months 49-72 $1,180,860 $ 98,405
Months 73-96 $1,251,708 $104,309
Months 97-120 $1,326,816 $110,568
</TABLE>
The Base Rent scheduled above is based on the assumption that the final rentable
square footage of the Building is 58,000. In the event the rentable square
footage of the Building upon Substantial Completion is more or less than 58,000,
then the initial Base Rent shall be increased or decreased, as appropriate, to
an amount equal to the product of(i) $1.51 per rentable square foot per month,
and (ii) the final rentable square footage of the Building. Such adjusted
initial Base Rent shall be increased every twenty-four (24) months by a factor
of six percent (6%).
In the event the Commencement Date occurs on other than the first (1st) day of a
month, the amount of the first and last monthly payment of Base Rent shall be
apportioned to account for the fact that the last month of the Initial Term
shall be less than a full calendar month.
In the event that the Commencement Date occurs before the Target Commencement
Date, the initial Base Rent shall be decreased by an amount equal to the produce
of(i) $.01, (ii) the number of rentable square feet in the Demised Premises, and
(iii) the number of thirty (30) day periods the Commencement Date occurs prior
to May 1,2001; provided, however, that in no event shall the initial Base Rent
for the Demised Premises be less than Seventy Five Thousand Four Hundred Dollars
($75,400.00) per month. Such adjusted initial Base Rent shall be increased every
twenty-four (24) months by a factor of six percent (6%)
3.2 Base Rent During Option Term. The Base Rent during the Option Term
----------------------------
("Option Term Base Rent") shall be an amount equal to the greater of (i) the
then fair market rental value of the Demised Premises ("Fair Market Rental
Value"), as stated on a monthly basis and determined pursuant to this Section
3.2, or (ii) the Base Rent during the last month of the Initial Term, multiplied
by 1.06. The initial Option Term Base Rent during each Option Term shall
thereafter be increased in accordance with market rate increases, if any. Upon
receipt by Landlord of Tenant's Extension Notice under Section 1.2, above,
Landlord and Tenant shall meet in an effort to negotiate, in good faith, the
Option Term Base Rent which shall become effective as of the first day of the
Option Term ("Option Term Commencement Date"). If Landlord and Tenant have not
agreed upon the Option Term Base Rent (which Option Term Base Rent shall, for
purposes of this Section 3.2 , include market rate increases) within thirty (30)
days after the delivery of Tenant's Extension Notice, the Option Term Base Rent
shall be determined as follows:
(a) Landlord and Tenant shall attempt to agree in good faith upon a
single appraiser not later than thirty-five (35) days after delivery of Tenant's
Extension Notice. If
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Landlord and Tenant are unable to agree upon a single appraiser within such time
period, then Landlord and Tenant shall each appoint one appraiser not later than
five (5) days after the deadline for selecting a single appraiser. Landlord and
Tenant shall each give written notice to the other as to the name of the
appraiser it has selected, as soon as the selection is made. Within ten (10)
days thereafter, the two appointed appraisers shall appoint a third appraiser.
All appraisers shall be independent from, and disinterested in, both Landlord
and Tenant.
(b) The only task which the appraiser(s) shall perform shall be
forming and reporting to Landlord and Tenant an opinion of the Fair Market
Rental Value of the Demised Premises for use in determining the Option Term Base
Rent.
(c) If either Landlord or Tenant fails to appoint its appraiser
within the prescribed time period, the single appraiser appointed shall
determine the Fair Market Rental Value of the Demised Premises. If both parties
fail to appoint appraisers within the prescribed time periods, then the first
appraiser thereafter selected by a party shall determine the Fair Market Rental
Value of the Demised Premises.
(d) Each party shall bear the cost of its own appraiser and the
parties shall share equally the cost of any single or third appraiser, if
applicable. All appraisers so designated herein shall have at least five (5)
years' experience in the appraisal of commercial properties similar to the
Demised Premises in San Diego County, California and shall be members of
professional organizations such as MAI or its equivalent.
(e) For the purpose of such appraisal and this subsection (d), the
term "Fair Market Rental Value" shall mean the price that a ready and willing
single tenant would pay, as of the Option Term Commencement Date, as annual rent
to a ready and willing landlord of a property comparable to the Demised Premises
on the terms of this Lease, if such property were exposed for lease on the open
market for a reasonable period of time. A "comparable property" shall mean a
research and development and office facility located in the Sorrento Mesa area
of the City of San Diego, California (the "Market Area"), with improvements
similar in age and character to the Demised Premises, which has been improved
with the tenant improvements comparable to those constructed in the Demised
Premises; provided, however, that the appraisal shall disregard the value of
Tenant's and any other improvements paid for by Tenant (including Tenant
Improvements but only to the extent such Tenant Improvements were paid for by
Tenant as Excess Tenant Improvement Costs). The appraiser shall give appropriate
consideration to all relevant factors, including, without limitation, (i) the
fact that this Lease is a "triple net" lease, (ii) rental concessions and tenant
improvement allowances generally being offered by landlords of comparable
properties, (iii) the age of the Improvements, (iv) the condition of the Demised
Premises on the assumption that Tenant has complied with its obligations to
maintain and repair the Demised Premises, (v) rental market conditions then in
existence, (vi) whether Landlord will or will not be required to pay a real
estate brokerage commission in connection with Tenant's exercise of the
Extension Option, and (vii) the fact that the Tenant will be accepting the
Demised Premises in an "As-Is" condition.
(f) If a single appraiser is chosen, then such appraiser shall
determine the Fair Market Rental Value of the
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<PAGE>
Demised Premises shall be the arithmetic average of the two (2) appraisals which
are closest in amount, and the third appraisal shall be disregarded.
(g) Landlord and Tenant shall instruct the appraiser(s), in writing,
to complete their written determination of the Fair Market Rental Value not
later than thirty (30) days after their selection. If the Fair Market Rental
Value has not been determined by such date, then the Fair Market Rental Value
shall be determined thereafter, and if it has not been determined by the Option
Term Commencement Date, then Tenant shall continue to pay Landlord monthly
installments of Annual Rent in the amount applicable to the Demised Premises
immediately prior to the Option Term Commencement Date until the Fair Market
Rental Value is determined. In no event shall the Rent be less than the Rent in
the last year of the Lease Term increased by six percent (6%), and adjusted
based on market rate increases thereafter. When the Fair Market Rental Value of
the Demised Premises is determined, Landlord shall deliver notice thereof to
Tenant, and Tenant shall pay to Landlord, within ten (10) days after receipt of
such notice, the difference between the monthly installments of Base Rent
actually paid by Tenant to Landlord subsequent to the Option Term Commencement
Date and the new monthly installments of Base Rent which are determined to have
been actually owing during such period in accordance with this Section 3.2.
(h) On or before the date which is fifteen (15) months prior to the
expiration of the Initial Term or the first Option Term, as the case may be,
Tenant may deliver to Landlord a notice that it intends to exercise an Extension
Option provided in Section 1.2 hereof (a "Pre-Exercise Notice"). If a Pre-
Exercise Notice is timely delivered by Tenant, the provisions of this Section
3.2 regarding the determination of the Option Term Base Rent shall be
implemented as if Tenant had delivered the Extension Notice pursuant to Section
1.2. If the Option Term Base Rent has not been determined in accordance with
this Section 3.2 on or before the date which is three hundred sixty (360) days
prior to the end of the Initial Term or the first Option Term, as the case may
be, then when it is thereafter determined, Tenant shall have the option, to be
exercised within two (2) business days after notice of such determination is
given to Tenant, of (i) delivering to Landlord a written notice rescinding
Tenant's Pre-Exercise Notice (i.e. electing not to extend the Lease), in which
case the Initial Term or the first Option Term, as the case may be, shall be
extended to the date which is three hundred sixty (360) days after the date such
rescission notice is delivered, or (ii) delivering its Extension Notice, in
which case such Extension Notice shall be deemed timely delivered in accordance
with Section 1.2. If the Option Term Base Rent has been determined in accordance
with this Section 3.2 prior to the date which is three hundred sixty (360) days
prior to the end of the Initial Term or the first Option Term, as the case may
be, then provisions of this subsection (h) shall not apply. If the provisions of
this subsection (h) apply, and Tenant fails to deliver either a rescission
notice or the Extension Notice, Tenant shall be deemed to have rescinded the
Pre-Exercise Notice and not to have timely delivered the Extension Notice.
3.3 Additional Obligations: Additional Rent. The Base Rent shall be
---------------------------------------
absolutely "net" to Landlord so that this Lease shall yield to Landlord the Base
Rent specified in Section 3.1 and that all Impositions, insurance premiums,
utility charges, maintenance, repair and replacement expenses, all expenses
relating to compliance with all present or future applicable governmental laws,
rules and regulations, and all other costs, fees, charges, expenses,
reimbursements and
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<PAGE>
obligations of every kind and nature whatsoever relating to the Demised Premises
which may arise or become due during the term or by reason of events occurring
during the term of this Lease (all such items being sometimes referred to as
"Additional Obligations") shall be paid or discharged by Tenant, except to the
extent they are expressly the responsibility of Landlord under this Lease. To
the extent the following are the obligations of Tenant under this Lease, Tenant
hereby agrees to indemnify, defend and save Landlord harmless from and against
such Impositions, insurance premiums, utility charges, maintenance, repair and
replacement expenses, all expenses relating to compliance with all present and
future governmental laws, rules and regulations becoming effective during the
Term, and all other costs, fees, charges, expenses, reimbursements and
obligations referred to above. Any amounts referred to in this Lease as
additional rent (including, without limitation, the Additional Obligations) are
referred to collectively as "Additional Rent."
3.4 Delinquent Rental Payments. All payments of Base Rent and Additional
--------------------------
Rent shall be payable without previous demand therefor and without any right of
set-off or deduction whatsoever (except as expressly provided in this Lease),
and in case of nonpayment of any item of Additional Rent by Tenant when the same
is due, Landlord shall have, in addition to all its other rights and remedies,
all of the rights and remedies available to Landlord under the provisions of
this Lease or by law in the case of nonpayment of Base Rent. The performance and
observance by Tenant of all the terms, covenants, conditions and agreements to
be performed or observed by Tenant hereunder shall be performed and observed by
Tenant at Tenant's sole cost and expense. Any installment of Base Rent or
Additional Rent or any other charges payable by Tenant under the provisions
hereof which shall not be paid within five (5) days after they are due shall,
(i) be subject to a late charge of five percent (5%) of the amount due and not
timely paid, and (ii) bear interest from the date when such payment was due at
the lesser of(A) the default rate of interest under Landlord's most senior debt
obligation encumbering the Demised Premises, or (B) an annual rate of eighteen
percent (18%) per annum, but in no event in excess of the maximum lawful rate
permitted to be charged by Landlord against Tenant. Said rate of interest is
sometimes hereinafter referred to as the "Maximum Rate of Interest."
Notwithstanding the foregoing provisions of this Section 3.4, if any mortgagee
under any mortgage, beneficiary under any deed of trust, or ground lessor under
any ground lease, which encumbers the Land (a "Lender"), imposes fees, charges,
penalties or interest on Landlord for late payments under such instrument which
fees, charges, penalties or interest are less in amount than those described in
this Section 3.4, Landlord will not impose any late payment charge or interest
which is greater than the amounts charged by such Lender.
ARTICLE IV
USE OF DEMISED PREMISES
4.1 Permitted Use. Tenant intends to use the Demised Premises primarily
-------------
as a research and development and office facility and related lawful purposes,
and they shall be used for no other purpose without first securing the prior
written consent of Landlord, which consent shall not be unreasonably withheld.
Tenant shall not use or occupy the same, or knowingly permit them to be used or
occupied, contrary to any statute, rule, order, ordinance, requirement or
regulation applicable thereto, or in any manner which would violate any
certificate of occupancy
20
<PAGE>
affecting the same, or which would make void or voidable any insurance then in
force with respect thereto (provided Tenant has received a copy of the policy)
or which would make it impossible to obtain fire or other insurance thereon
required to be furnished hereunder by Tenant, or which would cause structural
injury to the improvements, or which would constitute a public or private
nuisance or waste, and Tenant agrees that it will promptly, upon discovery of
any such use, take all necessary steps to compel the discontinuance of such use.
4.2 Preservation of Demised Premises. Tenant shall not use, or permit the
--------------------------------
Demised Premises, or any portion thereof, to be used by Tenant, any third party
or the public in such manner as might reasonably tend to impair Landlord's title
to the Demised Premises, or any portion thereof, or in such manner as might
reasonably make possible a claim or claims of adverse usage or adverse
possession by the public, as such, or third persons, or of implied dedication of
the Demised Premises, or any portion thereof. Nothing contained in this Lease,
and no action or inaction by Landlord, shall be deemed or construed to mean that
Landlord has granted to Tenant any right, power or permission to do any act or
make any agreement that may create, or give rise to or be the foundation for any
right, title, interest, lien, charge or other encumbrance upon the estate of
Landlord in the Demised Premises other than as expressly set forth in this
Lease.
4.3 Hazardous Substances.
--------------------
(a) Subject to Section 4.3(f), Tenant shall at all times and in all
respects comply with all federal, state and local laws, ordinances and
regulations ("Hazardous Materials Laws") relating to the industrial hygiene,
environmental protection or the use, analysis, generation, manufacture, storage,
presence, disposal or transportation of any oil, flammable explosives, asbestos,
urea formaldehyde, polychlorinated biphenyls, radioactive materials or waste, or
other hazardous, toxic, contaminated or polluting materials, substances or
wastes, including without limitation any "hazardous substances," "hazardous
wastes," "hazardous materials" or toxic substances" under any such laws,
ordinances or regulations (collectively, "Hazardous Materials") at the Demised
Premises.
(b) Subject to Section 4.3(f), Tenant shall at its own expense procure
(other than a certificate of occupancy), maintain in effect and comply with all
conditions of any and all permits, licenses and other governmental and
regulatory approvals required for Tenant's use of the Demised Premises,
including, without limitation, discharge of (appropriately treated) materials or
waste into or through any sanitary sewer system serving the Demised Premises.
Tenant shall in all respects handle, treat, deal with and manage any and all
Hazardous Materials in, on, under or about the Demised Premises in complete
conformity with all applicable Hazardous Materials Laws and prudent industry
practices regarding the management of such Hazardous Materials. Subject to
Section 4.3(f), all reporting obligations imposed by Hazardous Materials Laws
are solely the responsibility of Tenant. Upon expiration or earlier termination
of this Lease and subject to Section 4.3(f), Tenant shall cause all Hazardous
Waste Materials (as defined in 22 CCR 66261.3) to be removed from the Demised
Premises and transported for use, storage or disposal in accordance with and in
complete compliance with all applicable Hazardous Materials Laws. Tenant shall
not take any remedial action in response to the presence of any Hazardous
Materials in, on, about or under the Demised Premises or in any Improvements
21
<PAGE>
situated on the Land other than in the normal course of Tenant's business
operations as now contemplated in accordance with all Hazardous Materials Laws
or as necessitated by emergency considerations in accordance with all applicable
Hazardous Materials Laws, nor enter into any settlement agreement, consent
decree or other compromise in respect to any claims relating to any Hazardous
Materials in any way connected with the Demised Premises or the Improvements on
the Land without first notifying Landlord of Tenant's intention to do so and
affording Landlord ample opportunity to appear, intervene or otherwise
appropriately assert and protect Landlord's interest with respect thereto. In
addition, at Landlord's request, at the expiration of the term of this Lease,
Tenant shall remove all tanks or fixtures which were placed on the Demised
Premises during the term of this Lease and which contain, have contained or are
contaminated with Hazardous Waste Materials.
(c) Tenant shall immediately notify Landlord in writing of (i) any
enforcement, cleanup, removal or other governmental or regulatory action
instituted, completed or threatened pursuant to any Hazardous Materials Laws;
(ii) any claim made or threatened by any person against Landlord or the Demised
Premises relating to damage, contribution, cost recovery, compensation, loss or
injury resulting from or claimed to result from any Hazardous Materials; and
(iii) any non-routine reports made to any environmental agency arising out of or
in connection with any Hazardous Materials in, on or about the Demised Premises
or with respect to any Hazardous Materials removed from the Demised Premises,
including any complaints, notices, warnings, reports or asserted violations in
connection therewith. Tenant shall also provide to Landlord, as promptly as
possible, and in any event within five (5) business days after Tenant first
receives or sends the same, copies of all claims, reports, complaints, notices,
warnings or asserted violations from any governmental agency of any Hazardous
Materials Laws relating in any way to the Demised Premises or Tenant's use
thereof. Upon written request of Landlord (to enable Landlord to defend itself
from any claim or charge related to any Hazardous Materials Laws), Tenant shall
promptly deliver to Landlord notices of hazardous waste manifests reflecting the
legal and proper disposal of all such Hazardous Materials removed from the
Demised Premises. Subject to Section 4.3(f), all such manifests shall list the
Tenant or its agent as a responsible party and in no way shall attribute
responsibility for any such Hazardous Materials to Landlord.
(d) Subject to Section 4.3(f), Tenant shall indemnify, defend (with
counsel reasonably acceptable to Landlord), protect and hold Landlord and each
of Landlord's officers, directors, partners, shareholders, affiliates,
employees, agents, attorneys, successors and assigns free and harmless from and
against any and all claims, liabilities, damages, costs, penalties, forfeitures,
losses or expenses (including attorneys' fees) for death or injury to any person
or damage to any property whatsoever (including water tables and atmosphere) to
the extent arising or resulting in whole or in part, directly or indirectly,
from the presence or discharge of Hazardous Materials in, on, under, upon or
from the Demised Premises or the Improvements located thereon or from the
transportation or disposal of Hazardous Materials to or from the Demised
Premises to the extent brought onto the Demised Premises by Tenant whether
knowingly or unknowingly, the standard herein being one of strict liability. For
purposes of the indemnity provided herein, any act or omission of Tenant or its
agents, employees, contractors or subcontractors (whether or not they are
negligent, intentional, willful or unlawful) shall be strictly attributable to
Tenant. Subject to Section 4.3(f), Tenant's obligations hereunder shall
22
<PAGE>
include, without limitation, and whether foreseeable or unforeseeable, all costs
of any required or necessary repairs, clean-up or detoxification or
decontamination of the Demised Premises or the Improvements, and the presence
and implementation of any closure, remedial action or other required plans in
connection therewith, and shall survive the expiration of or early termination
of the term of this Lease. For purposes of the indemnity provided herein, any
acts or omissions of Tenant or its employees, agents, customers, sublessees,
assignees, contractors or subcontractors (whether or not they are negligent,
intentional, willful or unlawful) shall be strictly attributable to Tenant.
(e) Landlord may, at its expense, commission an environmental audit of
the Demised Premises at any time after prior written notice thereof to Tenant;
provided that such environmental audit does not unreasonably interfere with
Tenant's use of the Demised Premises, or any portion thereof, and provided
further that Landlord indemnifies, defends and holds harmless Tenant and its
officers, agents, employees and customers from and against any loss, liabilities
or damages to Tenant's machinery, equipment, fixtures and personal property, and
all liability, loss or damage arising from an injury to the property of Tenant,
or its officers, agents, employees or customers, and any death or personal
injury to any person or persons to the extent arising out of such environmental
audit except for liability, loss or damage caused by Tenant's gross negligence
or willful misconduct. However, should Tenant breach any of its obligations set
forth in this Section 4.3 in a manner that may expose Landlord to liability, and
Landlord provides written notice to Tenant of the reasonable basis upon which it
believes it has been exposed to liability, then Landlord shall have the right to
require Tenant to undertake and submit to Landlord an environmental audit from
an environmental company reasonably acceptable to Landlord, which audit shall
evidence Tenant's compliance with this Section 4.3.
(f) Landlord represents and warrants that as of the date of this Lease
there are, and as of the Commencement Date there will be, no Hazardous Materials
located on the Demised Premises, other than an as required for the normal
operation of the Demised Premises and in accordance with all Hazardous Materials
Laws. Landlord shall indemnify, defend (with counsel reasonably acceptable to
Tenant), protect and hold Tenant and each of Tenant's officers, directors,
partners, shareholders, affiliates, employees, agents, attorneys, successors and
assigns free and harmless from and against any and all claims, liabilities,
damages, costs, penalties, forfeitures, losses or expenses (including attorneys'
fees) for death or injury to any person or damage to any property whatsoever
(including water tables and atmosphere) arising or resulting in whole or in
part, directly or indirectly, from the presence of Hazardous Materials in, on,
under, upon or from the Demised Premises or the Improvements located thereon
prior to the Commencement Date, or from the transportation or disposal of
Hazardous Materials to or from the Demised Premises to the extent caused by
Landlord whether knowingly or unknowingly, the standard being one of strict
liability.
For purposes of the indemnity provided herein, any act or omission of
Landlord or its agents, employees, contractors or subcontractors (whether or not
they are negligent, intentional, willful or unlawful) shall be strictly
attributable to Landlord. Subject to Section 4.3(f), Landlord's obligations
hereunder shall include, without limitation, and whether foreseeable or
unforeseeable, all costs of any required or necessary repairs, clean-up or
detoxification or decontamination of the Demised Premises or the Improvements,
and the
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presence and implementation of any closure, remedial action or other required
plans in connection therewith, and shall survive the expiration of or early
termination of the term of this Lease.
(g) The obligations of Landlord and Tenant under this Section 4.3
shall survive the expiration or earlier termination of this Lease.
4.4 Access Easement.
---------------
Landlord as owner of the building adjacent to the north, and
identified in Exhibit "B" as the "Existing Comstream Building," shall grant
Tenant access for ingress and egress between the Building and the "Existing
Comstream Building." If Landlord sells either property, Landlord will grant or
reserve an easement evidencing Tenant's ingress and egress rights.
ARTICLE V
PAYMENT OF TAXES, ASSESSMENTS, ETC.
5.1 Payment of Impositions.
----------------------
(a) Except as provided to the contrary in this Section 5.1 below,
Tenant covenants and agrees to pay during the Term of this Lease, as Additional
Rent, and before any fine, penalty, interest or cost may be added thereto for
the nonpayment thereof, all real estate taxes, regular or special assessments,
water rates and charges, sewer rates and charges, including any sum or sums
payable for present or future sewer or water capacity, (except as set forth in
Section 2.6 above) charges for public utilities, street lighting, excise levies,
licenses, permits, inspection fees, other governmental charges and all other
charges or burdens of whatsoever kind and nature (including costs, fees and
expenses of complying with any restrictive covenants to which the Land is
subject as of the date of this Lease or similar agreements to which the Demised
Premises are subject, incurred in the use, occupancy, ownership, operation,
leasing or possession of the Demised Premises), without particularizing by any
known name or by whatever name hereafter called, and whether any of the
foregoing be general or special, ordinary or extraordinary, foreseen or
unforeseen (all of which are sometimes herein referred to as "Impositions"),
which at any time during the Term may have been or may be assessed or levied on
the Demised Premises or any portion thereof or any appurtenance thereto, rents
or income therefrom, and such easements or rights as may now or hereafter be
appurtenant or appertain to the use of the Demised Premises. Tenant shall pay
the current portions of all special (or similar) assessments which during the
Term of this Lease shall be laid, assessed, levied or imposed upon or become
payable or become a lien upon the Demised Premises or any portion thereof;
provided, however, that if by law any special assessment is payable (without
default) or, at the option of the owner, may be paid (without default) in
installments (whether or not interest shall accrue on the unpaid balance of such
special assessment), Tenant may (and shall only be obligated to) pay the same,
in installments as the same respectively become payable and before any fine,
penalty, interest or cost may be added thereto for the nonpayment of any such
installment and the interest thereon. Notwithstanding the generality of the
foregoing, Tenant
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shall not be responsible (and Landlord shall pay prior to delinquency) for
Impositions charged by any association which includes the Land to the extent the
amount of the Impositions therefrom exceeds the amount which Tenant would have
incurred had Tenant performed the work and provided the services performed or
provided by the association.
(b) Notwithstanding the foregoing provisions of Section 5.1(a), Tenant
shall not be responsible for (and Landlord shall pay prior to delinquency) any
increase in ad valorem property taxes or other taxes which might result from the
sale or other transfer (deemed a change of ownership for California tax
purposes) of the Demised Premises during the Term of the Lease to the extent
such increase results from the fact that the assessed value of the Demised
Premises exceeds the total cost (including the direct and indirect costs
(including the costs of permits, fees and professional services) of the Land,
Shell Improvements and Tenant Improvements) of the Demised Premises. Payment of
any taxes, assessments or similar charges which are directly related to the
acquisition of the Land or the construction of the Improvements or Demised
Premises will be Landlord's financial responsibility.
(c) Landlord shall pay all installments of special assessments
(including interest accrued on the unpaid balance) which are payable for periods
prior to the Commencement Date and after the termination date of the Term of
this Lease. Landlord will deliver to Tenant the tax bills at least thirty (30)
days prior to any delinquency date. Tenant shall pay all real estate taxes,
whether heretofore or hereafter levied or assessed upon the Demised Premises or
any portion thereof, which are due and payable for periods during the Term of
this Lease. Landlord shall pay all real estate taxes which are payable for
periods prior to the Commencement Date and after the termination date of the
Term of this Lease. Provisions herein to the contrary notwithstanding, Landlord
shall pay that portion of the real estate taxes and installments of special
assessments due and payable in respect to the Demised Premises during the year
in which the Initial Term commences and the year in which the Term ends which
the number of days in said year not within the Term of this Lease bears to 365,
and Tenant shall pay the balance of said current real estate taxes and current
installments of special assessments during said years.
5.2 Tenant's Right to Contest Impositions. Tenant shall have the right at
-------------------------------------
its own expense to contest the amount or validity, in whole or in part, of any
Imposition by appropriate proceedings diligently conducted in good faith;
provided, however, if the payment of such Imposition is necessary to properly
appeal such Imposition, Tenant shall pay such imposition before delinquency;
and, provided further, if there is then an uncured Event of Default hereunder,
Tenant shall have first deposited with Landlord cash or a certificate of deposit
payable to Landlord issued by a national bank or federal savings and loan
association in the amount of the Imposition so contested and unpaid, together
with all interest and penalties which may accrue in Landlord's reasonable
judgment in connection therewith, and all charges that may or might be assessed
against or become a charge on the Demised Premises or any portion thereof during
the pendency of such proceedings. If there is then in an uncured Event of
Default hereunder and if during the continuance of such proceedings, Landlord
shall, from time to time, reasonably deem the amount deposited, as aforesaid,
insufficient, Tenant shall, upon demand of Landlord, make additional deposits of
such additional sums of money or such additional certificates of deposit as
Landlord may reasonably request. If Tenant is required to make such additional
deposits
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hereunder and Tenant fails to make same, the amount theretofore deposited may be
applied by Landlord to the payment, removal and discharge of such Imposition,
and the interest, fines and penalties in connection therewith, and any costs,
fees (including attorneys' fees) and other liability (including costs incurred
by Landlord) accruing in any such proceedings. Upon the termination of any such
proceedings, Tenant shall pay the amount of such Imposition or part thereof, if
any, as finally determined in such proceedings, the payment of which may have
been deferred during the prosecution of such proceedings, together with any
costs, fees, including attorneys' fees, interest, penalties, fines and other
liability in connection therewith, and upon such payment, if Landlord had
previously received any amounts or certificates as a deposit, Landlord shall
return all amounts or certificates deposited with it with respect to the contest
of such Imposition, as aforesaid, or, at the written direction of Tenant,
Landlord shall make such payment out of the funds on deposit with Landlord and
the balance, if any, shall be returned to Tenant. Tenant shall be entitled to
the refund of any Imposition, penalty, fine and interest thereon received by
Landlord which has been paid by Tenant or which has been paid by Landlord but
for which Landlord has been previously reimbursed in full by Tenant. Landlord
shall not be required to join in any proceedings referred to in this Section 5.2
unless the provisions of any law, rule or regulation at the time in effect shall
require that such proceedings be brought by or in the name of Landlord, in which
event Landlord shall join in such proceedings or permit the same to be brought
in Landlord's name upon compliance with such conditions as Landlord may
reasonably require. Landlord shall not ultimately be subject to any liability
for the payment of any fees, including attorneys' fees, costs and expenses in
connection with such proceedings. Tenant agrees to pay all such fees (including
reasonable attorneys' fees), costs and expenses or, on demand, to make
reimbursement to Landlord for such payment for fees reasonably incurred by
Landlord in connection with such proceedings as provided above. During the time
when any such certificate of deposit is on deposit with Landlord, and prior to
the time when the same is returned to Tenant or applied against the payment,
removal or discharge of Impositions, as above provided, Tenant shall be entitled
to receive all interest paid thereon. Cash deposits shall not bear interest.
5.3 Levies and Other Taxes. If, at any time during the Term of this Lease,
----------------------
any method of taxation shall be such that there shall be levied, assessed or
imposed on Landlord, or on the Base Rent or Additional Rent, or on the Demised
Premises, or any portion thereof, a capital levy, gross receipts tax,
transaction privilege tax or other tax on the rents received therefrom or a
franchise tax, or an assessment, levy or charge measured by or based in whole or
in part upon such rents, Tenant covenants to pay and discharge the same, it
being the intention of the parties hereto that the rent to be paid hereunder,
shall be paid to Landlord absolutely net, without deduction or charge of any
nature whatsoever, foreseeable or unforeseeable, ordinary or extraordinary, or
of any nature, kind or description, except as in this Lease otherwise expressly
provided. Nothing in this Lease contained shall require Tenant to pay any
municipal, state or federal net income, franchise, or excess profits taxes
assessed against Landlord, or any municipal, state or federal capital levy,
estate, succession, inheritance or transfer taxes of Landlord, or corporation
franchise taxes imposed upon any corporate owner of the fee of the Demised
Premises nor shall anything in this Lease require Tenant to pay any income tax
of Landlord or any tax in the nature of income and/or franchise tax or in lieu
of income tax.
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5.4 Evidence of Payment. Tenant covenants to furnish Landlord, within
-------------------
thirty (30) days after Landlord requests the same, official receipts of the
appropriate taxing authority, or other appropriate proof reasonably satisfactory
to Landlord, evidencing the payment of the same. The certificate, advice or bill
of the appropriate official designated by law to make or issue the same or to
receive payment of any Imposition or other tax, assessment, levy or charge may
be relied upon by Landlord as sufficient evidence that such Imposition or other
tax, assessment, levy or charge is due and unpaid at the time of the making or
issuance of such certificate, advice or bill.
5.5 Escrow for Taxes and Assessments. At Landlord's written demand after
--------------------------------
any Event of Default (as hereinafter defined) and for as long as such Event of
Default is uncured, Tenant shall pay to Landlord the known or estimated yearly
real estate taxes and assessments payable with respect to the Demised Premises
in monthly payments equal to one-twelfth (1/12) of the known or estimated yearly
real estate taxes and assessments next payable with respect to the Demised
Premises. From time to time, Landlord may re-estimate the amount of real estate
taxes and assessments, and in such event Landlord shall notify Tenant, in
writing, of such re-estimate and fix future monthly installments for the
remaining period prior to the next tax and assessment due date in an amount
sufficient to pay the re-estimated amount over the balance of such period after
giving credit for payments made by Tenant on the previous estimate. If the total
monthly payments made by Tenant pursuant to this Section 5.5 shall exceed the
amount of payments necessary for said taxes and assessments, such excess shall
be credited on subsequent monthly payments of the same nature; but if the total
of such monthly payments so made under this paragraph shall be insufficient to
pay such taxes and assessments when due, then Tenant shall pay to Landlord such
amount as may be necessary to make up the deficiency. Payment by Tenant of real
estate taxes and assessments under this Section 5.5 shall be considered as
performance of such obligation under the provisions of Section 5.1 hereof.
5.6 Landlord's Right to Contest Impositions. In addition to the right of
---------------------------------------
Tenant under Section 5.2 to contest the amount or validity of Impositions,
Landlord shall also have the right, but not the obligation, to contest the
amount or validity, in whole or in part, of any Impositions not contested by
Tenant, by appropriate proceedings conducted in the name of Landlord or in the
name of Landlord and Tenant. If Landlord elects to contest the amount or
validity, in whole or in part, of any Impositions, such contests by Landlord
shall be at Landlord's expense; provided, however, that if the amounts payable
by Tenant for Impositions are reduced (or if a proposed increase in such amounts
is avoided or reduced) by reason of Landlord's contest of Impositions, Tenant
shall reimburse Landlord for the costs reasonably incurred by Landlord in
contesting such Impositions, but such reimbursements shall not be in excess of
the amount saved by Tenant.
ARTICLE VI
INSURANCE
6.1 Casualty Insurance. Tenant, at its sole cost and expense, shall obtain
------------------
and continuously maintain in full force and effect during the Term of this
Lease, commencing with the Commencement Date (subject to the provisions of
Section 2.12), policies of insurance covering the Building constructed,
installed or located on the Demised Premises naming the
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Landlord as an additional insured, against (a) loss or damage by fire; (b) loss
or damage from such other risks or hazards now or hereafter embraced by an
"Extended Coverage Endorsement," including, but not limited to, windstorm, hail,
explosion, vandalism, riot and civil commotion, damage from vehicles, smoke
damage, water damage and debris removal; (c) loss for flood if the Demised
Premises are in a designated flood or flood insurance area and if such coverage
is required by Landlord's lender, (d) loss or damage caused by earthquake (but
only if required by a Lender) subject to standard deductibles (provided,
however, that (i) Tenant shall not be required to maintain earthquake insurance
if it is not reasonably obtainable and (ii) Tenant's financial responsibility
for the premium associated with earthquake insurance shall not exceed $50,000.00
per year during the Initial Term or any Option Term); and (e) loss or damage
from such other risks or hazards of a similar or dissimilar nature which are now
or may hereafter be customarily insured against with respect to improvements
similar in construction, design, general location, use and occupancy to the
Improvements. If the premium associated with earthquake insurance exceeds
$50,000.00 per year, Landlord shall have the option to either pay the excess
premium over and above such $50,000.00 amount or delete the requirement that
Tenant obtain earthquake coverage. At all times, such insurance coverage shall
be in an amount equal to one hundred percent (100%) of the then "Full
Replacement Cost" of the Improvements. "Full Replacement Cost" shall be
interpreted to mean the cost of replacing the Improvements, without deduction
for depreciation or wear and tear, including costs attributable to improvements
or upgrades in the Improvements required by changes in laws and regulations
governing zoning, public access and accommodation, workplace conditions, public
health or safety or similar matter, and it shall include to the extent
reasonably obtainable a reasonable sum for architectural, engineering, legal,
administrative and supervisory fees connected with the restoration or
replacement of the Improvements in the event of damage thereto or destruction
thereof. If a sprinkler system shall be located in the Improvements, sprinkler
leakage insurance shall be procured and continuously maintained by Tenant at
Tenant's sole cost and expense. Any deductible, self-insured retention or
similar limitation on coverage shall be submitted to Landlord for its prior
written approval, which shall be granted or withheld in Landlord's reasonable
discretion.
6.2 Public Liability Insurance. From and after the Commencement Date,
--------------------------
Tenant, at its sole cost and expense, shall obtain and continuously maintain in
full force and effect comprehensive general liability insurance against any
loss, liability or damage on, about or relating to the Demised Premises, or any
portions thereof, with limits of not less than Ten Million Dollars
($10,000,000.00); provided, however, such coverage may be maintained by Tenant
pursuant to an "umbrella" policy covering the Demised Premises and Tenant's
other properties and operations. Any such insurance obtained and maintained by
Tenant shall name Landlord as an additional insured therein or shall include a
"loss payee" endorsement in favor of Landlord, and shall be obtained and
maintained from and with a reputable and financially sound insurance company
authorized to issue such insurance in the state in which the Demised Premises
are located. Such insurance shall to the extent reasonably obtainable
specifically insure (by contractual liability endorsement) Tenant's obligations
under Section 20.3 of this Lease.
6.3 Other Insurance.
---------------
(a) During the Term of this Lease, commencing with the Commencement
Date, Tenant, at its sole cost and expense, shall obtain and continuously
maintain in full force
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and effect boiler and pressure vessel (including, but not limited to, pressure
pipes, steam pipes and condensation return pipes) insurance, provided the
Building contains a boiler or other pressure vessel or pressure pipes. Landlord
shall be named as an additional insured or loss payee in such policy or policies
of insurance.
(b) During the Term of this Lease commencing with the Commencement
Date, Tenant, at its sole cost and expense, shall obtain and continuously
maintain, in full force and effect, loss of use and business interruption
coverage for the payment for no less than one (1) year of (i) the Base Rent and
(ii) those Impositions which will continue to be payable even during a period
when the Demised Premises are not operational.
(c) During the Term of this Lease, Tenant, at its sole cost and
expense, shall obtain and continuously maintain in full force and effect such
other insurance in such amounts against other insurable hazards which at the
time are commonly insured against in the case of premises and/or buildings or
improvements similar in construction, design, general location, use and
occupancy to the Demised Premises if required by Landlord's construction or
permanent lenders; provided, however, that this Section 6.3(c) is not intended
to, and shall not, supersede the cap on Tenant's financial responsibility for
earthquake insurance premiums specified in Section 6.1(d)(ii), above.
6.4 Certain Insurance Provisions. All policies of insurance required by
----------------------------
Section 6.1 shall contain deductibles which are no higher than those which are
customarily maintained for casualty and liability insurance in connection with
facilities similar to the Demised Premises and provide that the proceeds thereof
shall be payable to Landlord and if Landlord so requests shall also be payable
to any contract purchaser of the Demised Premises and the holder of any
mortgages now or hereafter becoming a lien on the fee of the Demised Premises,
or any portion thereof, as the interest of such purchase or holder appears
pursuant to a standard named insured or mortgagee clause or as an additional
insured. Tenant shall not, on Tenant's own initiative or pursuant to request or
requirement of any third party, take out separate insurance concurrent in form
or contributing in the event of loss with that required in Section 6.1 hereof,
unless Landlord is named therein as an additional insured with loss payable as
provided in Section 6.1. Tenant shall immediately notify Landlord whenever any
such separate insurance is taken out and shall deliver to Landlord original
certificates evidencing the same.
Each policy required under this Article VI shall have attached thereto (a)
an endorsement that such policy shall not be canceled and that the coverage
under such policy will not be materially changed without at least thirty (30)
days prior written notice to Landlord, and (b) to the extent reasonably
obtainable an endorsement to the effect that the insurance as to the interest of
Landlord shall not be invalidated by any act or neglect of Landlord or Tenant.
All policies of insurance shall be written with companies reasonably
satisfactory to Landlord and licensed in the state in which the Demised Premises
are located. Such certificates of insurance shall be in a form reasonably
acceptable to Landlord and shall be delivered to Landlord upon the Commencement
Date and, prior to expiration of such policy, new certificates of insurance
shall be delivered to Landlord not less than twenty (20) days prior to the
expiration of the then current policy term.
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Insurance required hereunder shall be obtained from companies duly licensed
to transact business in the state of California, and maintaining during the
policy term a "General Policyholders Rating" of at least "A" and financial
category rating of "Class VII" in "Best's Insurance Guide."
6.5 Waiver of Subrogation. Landlord and Tenant hereby mutually waive any
---------------------
and all rights of recovery against one another for real or personal property
loss or damage occurring to the Demised Premises, or any part thereof, or any
personal property therein from perils insured against under the insurance
maintained hereunder for the benefit of the respective parties, and to the
extent the proceeds of such insurance are actually recovered, and each shall use
commercially reasonable efforts to assure that such insurance permits waiver of
liability and contains a waiver of subrogation.
6.6 Tenant's Indemnification of Landlord. Tenant may maintain insurance
------------------------------------
coverage upon all personal property of Tenant or the personal property of others
kept, stored or maintained on the Demised Premises against loss or damage by
fire, windstorm or other casualties or causes for such amount as Tenant may
desire. To the extent Tenant maintains such insurance, Tenant agrees that such
policies shall, to the extent obtainable, name Landlord as an "additional
insured" and contain a waiver of subrogation clause as to Landlord.
6.7 Unearned Premiums. Upon expiration or other termination of the Term of
-----------------
this Lease, the unearned premiums upon any insurance policies or certificates
thereof lodged with Landlord by Tenant shall, subject to the provisions of
Article XIII hereof, be payable to Tenant, provided that an Event of Default
does not then exist (or if an Event of Default does then exist, any excess over
the amount required to cure such default shall be so payable to Tenant).
6.8 Blanket Insurance Coverage. Nothing in this Article VI shall prevent
--------------------------
Tenant from taking out insurance of the kind and in the amount provided for
under the preceding paragraphs of this Article VI under a blanket insurance
policy or policies (and certificates thereof reasonably satisfactory to Landlord
shall be delivered to Landlord) which may cover other properties owned, leased
or operated by Tenant as well as the Demised Premises; provided, however, that
any such policy of blanket insurance of the kind provided for shall not contain
any clause which would result in the insured thereunder being required to carry
any insurance with respect to the property covered thereby in an amount not less
than any specific percentage of the Full Replacement Cost of such property in
order to prevent the insured therein named from becoming a co-insurer of any
loss with the insurer under such policy; and further provided, however, that
such policies of blanket insurance shall, as respects the Demised Premises,
contain the various provisions required of such an insurance policy by the
foregoing provisions of this Article VI.
6.9 Landlord's Liability Insurance Coverage. Landlord, at its sole cost and
---------------------------------------
expense, shall obtain and continuously maintain in full force and effect during
the Term of this Lease, commencing with the Commencement Date, comprehensive
general liability insurance in such amounts as it shall deem reasonably
appropriate.
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ARTICLE VII
UTILITIES
7.1 Payment of Utilities. During the Term of this Lease, Tenant shall pay,
--------------------
when due, all charges of every nature, kind or description for utilities
furnished to the Demised Premises or chargeable against the Demised Premises,
including all charges for water, sewage, heat, gas, light, garbage, electricity,
telephone, steam, power, or other public or private utility services.
7.2 Additional Charges. In the event that any charge or fee is required
------------------
after the Commencement Date by the state in which the Demised Premises are
located, or by any agency, subdivision or instrumentality thereof, or by any
utility company furnishing services or utilities to the Demised Premises, as a
condition precedent to furnishing or continuing to furnish utilities or services
to the Demised Premises, such charge or fee shall be deemed to be a utility
charge payable by Tenant. The provisions of this Section 7.2 shall include, but
not be limited to, any charges or fees for future water or sewer capacity to
serve the Demised Premises, any charges for the underground installation of gas
or other utilities or services subsequent to the installation thereof, and other
charges relating to the extension of or change in the facilities necessary to
provide the Demised Premises with adequate utility services. In the event that
Landlord has paid any such charge or fee after the Commencement Date, Tenant
shall reimburse Landlord for such utility charge.
7.3 Landlord's Responsibility for Utility Hook-Up Charges and Fees.
--------------------------------------------------------------
Notwithstanding anything contained in this Article VII to the contrary, (a) as
of the Commencement Date, all utilities contemplated by the Improvements shall
be hooked-up and fully operational and functional to the Demised Premises and
all capacity, hookup and similar charges (except to the extent they constitute
Excess Shell Costs or Excess Tenant Improvement Costs) shall have been paid by
Landlord; and (b) if any utility or service charge or fee related to capital
improvements made during the Term of this Lease, whose tax depreciable life
extends beyond the termination date of this Lease, Tenant shall only pay the pro
rata portion of such charge or fee to the extent that such tax depreciable life
is within the Term of this Lease.
ARTICLE VIII
REPAIRS AND MAINTENANCE OF DEMISED PREMISES
8.1 Tenant's Responsibilities. Except to the extent specifically identified
-------------------------
as Landlord's responsibility in Section 8.2, below, Tenant shall, at its own
expense, keep the Demised Premises, and every part thereof, including, but not
by way of limitation, the grounds, landscaped areas, truck parking and loading
and dock areas, the roof surface and roof membrane (but only as to routine and
ongoing maintenance), drainage swales, gutters, downspouts, glass, interior and
exterior portions of the Building, and the plumbing, heating, air conditioning,
wiring, elevators and other mechanical systems therein, the facilities thereof
and all sidewalks, parking areas, driveways, passageways and alleys adjacent
thereto and other appurtenances thereunto belonging, in good order, appearance,
condition and repair (reasonable wear and tear excepted), free of obstructions,
dirt, and rubbish, and so as to comply fully and at all times with all present
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and future applicable governmental laws, rules and regulations, consistent with
other comparable business and industrial parks in the Market Area. Tenant agrees
to make all replacements and repairs to the Demised Premises necessary to
maintain the Demised Premises in the condition described in the preceding
sentence. Tenant, at its own expense, shall also seal (paint) the exterior of
the Building periodically during the Term (including any Option Term) of this
Lease in accordance with the recommendations of the manufacturer of the material
used for the exterior of said Building. Tenant shall maintain regular service
contracts for all of the Demised Premises' (i) HVAC system, and (ii)
elevator(s), and shall, upon Landlord's request, provide Landlord copies of such
contracts or any other maintenance or service contracts maintained by Tenant
with respect to the Demised Premises. Any such contract shall be terminable by
Tenant (or its successors, including Landlord or a Lender) on not less than
thirty (30) days notice to the contractor or shall provide that it does not bind
a Lender. All repairs, replacements and renewals shall be at least equal in
quality and class to the original work. Because Tenant is undertaking the
responsibility for most aspects of the ongoing maintenance of the Demised
Premises, Tenant waives the provisions of California Civil Code Sections 1941
and 1942 with respect to Landlord's obligations for tenantability of the Demised
Premises and Tenant's right to make repairs and deduct the expenses of such
repairs from Rent. When used in this Article VIII, "repairs" shall include all
necessary replacements, renewals, alterations, additions and betterments.
8.2 Landlord's Responsibilities. Landlord shall, at its own expense,
---------------------------
repair any failure in the structural elements of the roof, all exterior and
load-bearing walls (except for painting of the exterior walls, which shall be
Tenant's responsibility), the Building foundation and for keeping all
underground utilities in good order, condition and repair. In addition, Landlord
shall be responsible, at Landlord's sole cost and expense, for the prompt and
diligent repair of any latent defects in design and construction of the Demised
Premises which manifest themselves during the Term, including, but not limited
to, latent defects in the design and/or construction of the drainage system
constructed on the Demised Premises as part of the Improvements. Landlord shall
not charge Tenant for any property management fees during the Term of the Lease.
8.3 Sharing of Expenses of Capital Items. Certain items of repair and
------------------------------------
maintenance which are Tenant's responsibility under Section 8.1, may, under
generally acceptable accounting principles consistently applied, be considered
to have a reasonable useful life which would extend beyond the end of the Term
(a "Capital Item"). Landlord and Tenant shall share the expenses associated with
such Capital Items, as follows:
(a) Tenant shall pay all expenses related to Capital Items.
(b) At any time Tenant intends to incur an expense related to a
Capital Item, Tenant shall notify Landlord, in writing, and Landlord shall
approve or disapprove such expenditure, which approval shall not be unreasonably
withheld or delayed. Landlord shall not be required to approve any expenditure
which is not required for the maintenance and operation of the Demised Premises.
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(c) At that time, Landlord and Tenant shall also agree on the
"useful" life of the Capital Item and, shall determine a level per-year useful
life allocation (the "Useful Life Allocation") of financial responsibility for
that Capital Item. By way of example only, financial responsibility for a
Capital Item which requires the expenditure of $50,000.00 and which has a five-
year "useful" life would be assigned a $10,000.00 per year Useful Life
Allocation.
(d) The Useful Life Allocation shall be applied to the item of
expense related to the Capital Item, until the full amount of such expense has
been amortized, although Tenant shall have the responsibility for paying all
expenses related to Capital Items when incurred.
(e) If, at the end of the Term of Lease, including any Option Term,
there remains any unamortized Useful Life Allocation(s), Landlord shall, within
thirty (30) days after the end of the Term, refund to Tenant, such unamortized
Useful Life Allocations, in cash.
8.4 Tenant's Waiver of Claims Against Landlord. Except as provided in
------------------------------------------
Article II, Section 8.2 and Article XIII of this Lease, or as expressly provided
under any other provision hereof, Landlord shall not be required to furnish any
services or facilities or to make any repairs or alterations in, about or to the
Demised Premises or any improvements hereafter erected thereon. Subject to the
requirements of Article II, Section 8.2 and Article XIII of this Lease, or as
expressly provided under any other provision hereof, Tenant hereby assumes the
full and sole responsibility for the condition, operation, repair, replacement,
maintenance and management of the Demised Premises and all improvements
hereafter erected thereon, and Tenant hereby waives any rights created by any
law now or hereafter in force to make repairs to the Demised Premises or
improvements hereafter erected thereon at Landlord's expense.
8.5 Prohibition Against Waste. Tenant shall not do or suffer any waste,
-------------------------
damage, disfigurement or injury to the Demised Premises, or any improvements
hereafter erected thereon, or to the fixtures or equipment therein, or permit or
suffer any overloading of the floors or other use of the Improvements that would
place an undue stress on the same or any portion thereof beyond that for which
the same was designed.
ARTICLE IX
COMPLIANCE WITH APPLICABLE LAWS AND RESTRICTIONS
9.1 Compliance with Applicable Laws and Restrictions. Subject to
------------------------------------------------
Landlord's obligations under Article II, Section 8.2 and Article XIII of this
Lease, or as expressly provided under any other provision hereof, throughout the
Term of this Lease, and at Tenant's sole cost and expense (except as provided in
Sections 2.8 and 8.3 above), Tenant shall promptly comply or cause compliance
with or remove or cure any violation caused by Tenant of any and all present and
future laws, rules and regulations applicable to the Demised Premises
(including, without limitation, those reflected on the Preliminary Title Report
prepared by First American Title Company, dated October 28, 1998; provided,
however, Landlord hereby agrees that Tenant shall have no responsibility with
respect to the Memorandum of Contribution Agreement described in Exception No.
14 of said Preliminary Title Report), and the appropriate departments,
commissions, boards, associations and officers enforcing them, and the orders,
rules
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and regulations of the Board of Fire Underwriters where the Demised Premises are
situated, or any other governmental body now or hereafter constituted exercising
lawful or valid authority over the Demised Premises, or any portion thereof, or
exercising authority with respect to the use or manner of use of the Demised
Premises, whether or not the compliance, curing or removal of any such violation
and the costs and expenses necessitated thereby shall have been foreseen or
unforeseen, ordinary or extraordinary, and whether or not the same shall be
presently within the contemplation of Landlord or Tenant or shall involve any
change of governmental policy or require structural or extraordinary repairs,
alterations or additions by Tenant and irrespective of the costs thereof. Tenant
shall also comply with, observe and perform all provisions and requirements of
all policies of insurance at any time in force with respect to the Demised
Premises and required to be obtained and maintained under the terms of Article
VI hereof, and Tenant shall comply with all development permits issued by
governmental authorities issued in connection with development of the Demised
Premises, copies of which shall be supplied to Tenant by Landlord promptly after
issuance. In addition to the matters of record to which the Demised Premises are
subject as of the date of this Lease, Tenant acknowledges that, prior to the
Commencement Date, the Demised Premises will become subject to a Reciprocal
Easement Agreement the purpose of which will be to establish certain access and
maintenance rights and obligations with regard to driveway, fire suppression and
storm drain facilities shared by the Demised Premises and the property which is
located adjacent to the Demised Premises, provided that Landlord shall obtain
Tenant's approval of such Reciprocal Easement Agreement prior to the Demised
Premises becoming subject thereto, and to any other modifications to the matters
of record to which the Demised Premises are subject and which would have an
affect on Tenant's use and enjoyment of the Demised Premises, which approval
shall not be unreasonably withheld.
9.2 Tenant's Obligations. Notwithstanding that it may be usual and
--------------------
customary for Landlord to assume responsibility and performance of any or all of
the obligations set forth in this Article IX, and notwithstanding any order,
rule or regulation directed to Landlord to perform, subject to the provisions of
Article II, Section 8.2 and Article XIII of this Lease, Tenant hereby assumes
such obligations because, by nature of this Lease, or as expressly provided
under any other provision hereof, the rents and income derived from this Lease
by Landlord are "net" rentals not to be diminished by any expense incident to
the ownership, occupancy, use, leasing or possession of the Demised Premises or
any portion thereof (except as expressly provided in this Lease).
9.3 Tenant's Right to Contest Laws and Ordinances. After prior written
---------------------------------------------
notice to Landlord, Tenant, at its sole cost and expense and without cost or
expense to Landlord, shall have the right to contest the validity or application
of any Applicable Laws or Restrictions in the name of Tenant or Landlord, or
both, by appropriate legal proceedings diligently conducted but only if
compliance with the terms of any such law or ordinance pending the prosecution
of any such proceeding, may legally be delayed without incurring of any lien,
charge or liability of any kind against the Demised Premises, or any portion
thereof, and without subjecting Landlord or Tenant to any liability, civil or
criminal, for failure so to comply therewith until the final determination of
such proceeding; provided, however, if any lien, charge or civil liability would
be incurred by reason of any such delay, Tenant nevertheless, on the prior
written consent of Landlord, which consent shall not be unreasonably withheld,
may contest as aforesaid and delay as aforesaid, provided that such delay would
not subject Tenant or Landlord to criminal liability
34
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and Tenant (a) furnishes Landlord security, reasonably satisfactory to Landlord,
against any loss or injury by reason of any such contest or delay, (b)
prosecutes the contest with due diligence and in good faith, and (c) agrees to
indemnify, defend and hold harmless Landlord and the Demised Premises from any
charge, liability or expense whatsoever. The security furnished to Landlord by
Tenant shall be in the form of a cash deposit or a Certificate of Deposit issued
by a national bank or federal savings and loan association payable to Landlord.
Said deposit shall be held, administered and distributed in accordance with the
provisions of Section 5.2 hereof relating to the contest of the amount or
validity of any Imposition.
If necessary or proper to permit Tenant so to contest the validity or
application of any such law or ordinance, Landlord shall, at Tenant's sole cost
and expense, including reasonable attorneys' fees incurred by Landlord, execute
and deliver any appropriate papers or other documents; provided, however, that
Landlord shall not be required to execute any document or consent to any
proceeding which would result in the imposition of any cost, charge, expense or
penalty on Landlord or the Demised Premises.
ARTICLE X
MECHANIC'S LIENS AND OTHER LIENS
10.1 Mechanic's Liens.
----------------
(a) Tenant shall keep the Demised Premises free from any liens
arising out of work performed, materials furnished and obligations incurred by
Tenant. Tenant covenants and agrees that any mechanic's lien filed against the
Demised Premises for work claimed to have been done for, or materials claimed to
have been furnished to, Tenant shall be discharged by Tenant, by bond or
otherwise, within thirty (30) days after the filing thereof, at the sole cost
and expense of Tenant. This provision does not apply to any claim or lien
arising out of the original construction of the Demised Premises by Landlord
pursuant to this Lease.
(b) Tenant shall have the right to contest with due diligence the
validity or amount of any lien or claimed lien created by Tenant if Tenant shall
give to Landlord such security as Landlord may reasonably require to insure
payment thereof and prevent any sale, foreclosure or forfeiture of the Demised
Premises or any portion thereof by reason of such nonpayment. On final
determination of the lien or claim for lien, Tenant shall immediately pay any
judgment rendered with all proper costs and charges and shall have the lien
released or judgment satisfied at Tenant's own expense, and if Tenant shall fail
to do so, Landlord may at its option, pay any such final judgment and clear the
Demised Premises therefrom. If Tenant shall fail to contest with due diligence
the validity or amount of any such lien or claimed lien created by Tenant, or to
give Landlord security as hereinabove provided, Landlord may, but shall not be
required to, contest the validity or amount of any such lien or claimed lien or
settle or compromise the same without inquiring into the validity of the claim
or the reasonableness of the amount thereof. Should any lien be filed against
the Demised Premises or should any action of any character affecting the title
thereto be commenced, Tenant shall give to Landlord written notice thereof as
soon as notice of such lien or action comes to the knowledge of Tenant.
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(c) Should Tenant fail to discharge any such lien, Landlord may,
at Landlord's election, pay such claim or post a bond or otherwise provide
security to eliminate the lien as a claim against title, and the cost thereof
shall be immediately due from Tenant as Additional Rent. Tenant shall not suffer
or permit any mechanic's lien or other lien to be filed against the Demised
Premises, or any portion thereof, by reason of work, labor, skill, services,
equipment or materials supplied or claimed to have been supplied to the Demised
Premises at the request of Tenant, or anyone holding the Demised Premises, or
any portion thereof, through or under Tenant.
(d) All materialmen, contractors, artisans, mechanics, laborers
and any other person now or hereafter furnishing any labor, services, materials,
supplies or equipment to Tenant with respect to the Demised Premises, or any
portion thereof, are hereby charged with notice that they must look exclusively
to Tenant to obtain payment for the same. Notice is hereby given that Landlord
shall not be liable for any labor, services, materials, supplies, skill,
machinery, fixtures or equipment furnished or to be furnished to Tenant upon
credit, and that no mechanic's lien or other lien for any such labor, services,
materials, supplies, machinery, fixtures or equipment shall attach to or affect
the estate or interest of Landlord in and to the Demised Premises or any portion
thereof.
10.2 Landlord's Indemnification. The provisions of Section 10.1 above
--------------------------
shall not apply to any mechanic's lien or other lien for labor, services,
materials, supplies, machinery, fixtures or equipment furnished to the Demised
Premises in the performance of Landlord's obligations to construct the
Improvements required by the provisions of Article II hereof or in the
performance of Landlord's other obligations under this Lease, and Landlord does
hereby agree to indemnify and defend Tenant against and save Tenant and the
Demised Premises and any portion thereof harmless from all losses, costs,
damages, expenses, liabilities and obligations, including, without limitation,
reasonable attorneys' fees resulting from the assertion, filing, foreclosure or
other legal proceedings with respect to any such mechanic's lien or other lien.
10.3 Removal of Liens. Except as otherwise provided for in this Article
----------------
X, Tenant shall not create, permit or suffer, and shall promptly discharge and
satisfy of record, any other lien, encumbrance, charge, security interest or
other right or interest which shall be or become a lien, encumbrance, charge or
security interest upon the Demised Premises, or any portion thereof, or the
income therefrom, or on the interest of Landlord or Tenant in the Demised
Premises, or any portion thereof, if such lien, encumbrance, charge, security
interest or other right or interest shall result from the actions of Tenant or
others acting on the behalf of or for Tenant (other than Landlord).
10.4 Equipment and Trade Fixtures. Landlord expressly waives and
----------------------------
disclaims any lien which it may have by statute or otherwise on the equipment
and trade fixtures which Tenant brings to the Demised Premises. In addition,
Landlord acknowledges that Tenant may, from time to time, offer all or portions
of such equipment and trade fixtures as collateral for obligations to lenders.
Landlord will promptly execute such reasonable documentation as Tenant may
request in order to evidence to any such lender Landlord's lack of any claim to
such equipment and trade fixtures.
36
<PAGE>
ARTICLE XI
LANDLORD'S PERFORMANCE OF TENANT'S OBLIGATIONS
In the event Tenant fails to pay or discharge any Additional Obligation,
Landlord may, but shall not be obligated to, in addition to its remedies in an
Event of Default, provide a factually correct written notice of such failure,
and if Tenant still fails to cure such failure within ten (10) days after
Tenant's receipt of such notice, Landlord may pay or perform the same, and in
that event Tenant shall within ten (10) days after invoice reimburse Landlord
therefor (together with interest at the Maximum Rate of Interest from the date
Landlord made such payment), which amount shall be deemed Additional Rent;
provided, however, that Landlord shall be entitled to pay such amount without
prior notice to Tenant if Landlord reasonably believes that any further delay
would expose Landlord or the Demised Premises to (i) civil or criminal
penalties, (ii) a potential default under a mortgage, deed of trust or similar
obligation, or (iii) lack of insurance coverage as required hereunder, or is
otherwise an emergency. Nothing herein contained shall be deemed as a waiver or
release of Tenant from any obligation of Tenant contained in this Lease.
ARTICLE XII
DEFAULTS OF TENANT
12.1 Events of Default. Any one or more of the following events shall be
-----------------
an event of default by Tenant ("Event of Default") under this Lease:
(a) Tenant fails to pay any Base Rent or Additional Rent or any
other sum required by this Lease to be paid by Tenant, within five (5) business
days after the same is due and payable;
(b) Tenant fails to perform or comply with any other term hereof,
and such failure shall continue for more than thirty (30) days after notice
thereof from Landlord, and Tenant shall not within such period commence with due
diligence and thereafter dispatch the curing of such default, or, having so
commenced, shall thereafter fail or neglect to prosecute or complete with due
diligence and dispatch the curing of such default;
(c) Tenant makes a general assignment for the benefit of creditors
or admits in writing its inability to pay its debts as they become due or files
a petition in bankruptcy, or is adjudicated as bankrupt or insolvent, or files a
petition seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future statutes,
law or regulation, or files an answer admitting or fails to reasonably contest
the material allegations of a petition filed against it in any such proceeding,
or seeks or consents to or acquiesces in the appointment of any trustee,
receiver or liquidator of Tenant or any material part of its properties
(provided, however, that this Section 12.1(c) shall apply only to the extent it
is enforceable under applicable law); or
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(d) Within ninety (90) days after the commencement of any
proceeding against Tenant seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future statute, law or regulation, such proceeding has not been dismissed, or
if, within ninety (90) days after the appointment without the consent or
acquiescence of Tenant of any trustee, receiver or liquidator of Tenant or of
any material part of its properties, such appointment has not been vacated
(provided, however, that this Section 12.1(d) shall apply only to the extent it
is enforceable under applicable law); or
(e) Tenant permits the abandonment or nonoccupancy of the entire
Demised Premises (except for temporary vacancies or portions thereof, or to the
extent caused by damage, destruction or condemnation).
12.2 Landlord's Remedies. Upon the occurrence of an Event of Default,
-------------------
Landlord, at its option, without further notice or demand to Tenant, shall have,
in addition to all other rights and remedies provided in this Lease, at law or
in equity, the option to pursue any one or more of the following remedies, each
and all of which shall be cumulative and nonexclusive, without any notice or
demand whatsoever:
(a) Terminate this Lease, in which event Tenant shall immediately
surrender the Demised Premises to Landlord, and if Tenant fails to do so,
Landlord may, without prejudice to any other remedy which it may have for
possession or arrearages in Base Rent or Additional Rent, enter upon and take
possession of the Demised Premises and expel or remove Tenant and any other
person who may be occupying the Demised Premises or any part thereof, without
being liable for prosecution or any claim or damages therefor; and Landlord may
recover from Tenant the following:
(i) The worth at the time of award of any unpaid Base Rent
and Additional Rent which has been earned at the time of such termination; plus
(ii) The worth at the time of award of the amount by which the
unpaid Base Rent and Additional Rent which would have been earned after
termination until the time of award exceeds the amount of such rental loss that
Tenant proves could have been reasonably avoided; plus
(iii) The worth at the time of award of the amount by which the
unpaid Base Rent and Additional Rent for the balance of the Lease Term after the
time of award exceeds the amount of such rental loss that Tenant proves could
have been reasonably avoided; plus
(iv) Any other amount necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform its obligations
under this Lease or which in the ordinary course of things would be likely to
result therefrom; and
(v) Such other amounts in addition to or in lieu of the
foregoing as may be permitted from time to time by applicable law.
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The term "Rent" as used in this Section 12.2 shall be deemed to be and to
mean all sums of every nature required to be paid by Tenant pursuant to the
terms of this Lease, whether to Landlord or to others. As used in subsections
(i) and (ii), above, the "worth at the time of award" shall be computed at the
Maximum Rate of Interest. As used in subsection (iii), above, the "worth at the
time of award" shall be computed by discounting such amount at the discount rate
of the Federal Reserve Bank of San Francisco at the time of award plus one
percent (1%). Nothing herein shall be deemed to relieve Landlord of its
obligation to mitigate its damages following an Event of Default.
12.3 Right to Collect Rent as Due. Landlord shall have the remedy
----------------------------
described in California Civil Code Section 1951.4 (Landlord may continue lease
in effect after Tenant's breach and abandonment and recover rent as it becomes
due, if Tenant has the right to sublet or assign, subject only to reasonable
limitations). Accordingly, if Landlord does not elect to terminate this Lease on
account of any default by Tenant, Landlord may, from time to time, without
terminating this Lease, enforce all of its rights and remedies under this Lease,
including the right to recover all Base Rent and Additional Rent as they become
due.
12.4 New Lease Following Termination. In the event Landlord elects to
-------------------------------
terminate this Lease and relet the Premises, it may execute any new lease in its
own name. Tenant hereunder shall have no right or authority whatsoever to
collect any Base Rent, Additional Rent or other sums from such tenant. The
proceeds of any such reletting shall be applied as follows:
(a) First, to the payment of any indebtedness other than Base Rent
or Additional Rent due hereunder from Tenant to Landlord, including but not
limited to storage charges or brokerage commissions owing from Tenant to
Landlord as the result of such reletting;
(b) Second, to the payment of the costs and expenses of reletting
the Premises, including alterations and repairs which Landlord deems reasonably
necessary and advisable, and reasonable attorneys' fees incurred by Landlord in
connection with the retaking of the Demised Premises and such reletting;
(c) Third, to the payment of Base Rent, Additional Rent and other
charges due and unpaid hereunder, and
(d) Fourth, to the payment of future Base Rent, Additional Charges
and other damages payable by Tenant under this Lease.
12.5 Cumulative Rights; No Waiver. All rights, options and remedies of
----------------------------
Landlord contained in this Lease shall be construed and held to be non-exclusive
and cumulative. Landlord shall have the right to pursue any or all of such
remedies or any other remedy or relief which may be provided by law, whether or
not stated in this Lease. No waiver of any Event of Default of Tenant hereunder
shall be implied from the acceptance by Lender of any payments due hereunder
(except with respect to the amount so collected) or any omission by Landlord
party to take any action on account of such Event of Default if such Event of
Default persists or is repeated, and no express waiver shall affect defaults
other than as specified in said waiver.
39
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12.6 Surrender of Demised Premises. Upon any expiration or termination of
-----------------------------
this Lease, Tenant shall quit and peaceably surrender the Demised Premises and
all portions thereof to Landlord, and Landlord may, upon or at any time after
any such expiration or termination and without further notice, enter upon and
reenter the Demised Premises and all portions thereof and possess and repossess
itself thereof by force, summary proceeding, ejectment or otherwise, and may
dispossess Tenant and remove Tenant and all other persons and property from the
Demised Premises and all portions thereof and may have, hold and enjoy the
Demised Premises and the right to receive all rental and other income of and
from the same.
12.7 Interest on Unpaid Amounts. If Tenant shall commit an Event of
--------------------------
Default, Landlord may cure the same, but shall not be required to do so, as
provided in, and subject to, Section 11.1 above, and in exercising any such
right, may employ counsel and pay necessary and incidental costs and expenses,
including reasonable attorneys' fees. All reasonable sums so paid by Landlord,
and all reasonable and necessary costs and expenses, including reasonable
attorneys' fees, in connection with the performance of any such act by Landlord,
together with interest thereon at the Maximum Rate of Interest from the date of
making such expenditure by Landlord, shall be deemed Additional Rent hereunder
and, except as is otherwise expressly provided herein, shall be payable to
Landlord within ten (10) days after written demand, and Tenant covenants to pay
any such sum or sums, with interest as aforesaid, and Landlord shall have, in
addition to any other right or remedy of Landlord, the same rights and remedies
in the event of nonpayment thereof by Tenant as in the case of default by Tenant
in the payment of monthly Base Rent. Landlord shall not be limited in the proof
of any damages which Landlord may claim against Tenant arising out of or by
reason of Tenant's failure to provide and keep in force insurance as aforesaid,
to the amount of the insurance premium or premiums not paid or not incurred by
Tenant, and which would have been payable upon such insurance, but Landlord
shall also be entitled to recover as damages for such breach the uninsured
amount of any loss (to the extent of any deficiency between the dollar limits of
insurance required by the provisions of this Lease and the dollar limits of the
insurance actually carried by Tenant) and reasonable costs and expenses,
including reasonable attorneys' fees, suffered or incurred by reason thereof
occurring during any period when Tenant shall have failed or neglected to
provide insurance as aforesaid.
ARTICLE XIII
DESTRUCTION AND RESTORATION
13.1 Destruction and Restoration. Tenant covenants and agrees that, in
---------------------------
case of damage to or destruction of the Improvements during the Term, whether by
fire or otherwise, Tenant shall make funds available to Landlord and Landlord
shall promptly restore, repair, replace and rebuild the same as nearly as
possible to the condition that the same were in immediately prior to such damage
or destruction with such changes or alterations as may be reasonably acceptable
to Landlord and Tenant or required by Applicable Land Use Laws and Restrictions
then in effect. Tenant shall immediately give Landlord written notice of such
damage or destruction upon Tenant's or any assignee's or subtenant's knowledge
of the occurrence thereof and specify in such notice, in reasonable detail, the
extent thereof. Such restorations, repairs, replacements, rebuilding, changes
and alterations, including the cost of
40
<PAGE>
temporary repairs for the protection of the Demised Premises, or any portion
thereof, pending completion thereof are sometimes hereinafter referred to as the
"Restoration." Landlord shall be entitled to recover all "soft" costs incurred
in connection with Landlord's performance of the Restoration including a fee
competitive with others providing similar services. The Restoration shall be
carried on and completed in accordance with the provisions and conditions of
Section 13.2 hereof. If the amount of the insurance proceeds recovered from the
policy or policies maintained (or required to be maintained) by Tenant, as
described in Article VI of this Lease, is reasonably deemed insufficient by a
qualified contractor, reasonably acceptable to Tenant and Landlord (or
Landlord's lender, as the case may be) to complete the Restoration of such
Improvements (exclusive of Tenant's personal property and trade fixtures which
shall be restored, repaired or rebuilt, at Tenant's discretion, out of Tenant's
separate funds), except as provided in this Section 13.1 below, Tenant shall,
upon request of Landlord (or by Landlord's lender, as the case may be), deposit
with Landlord (or Landlord's lender, if required) a cash deposit equal to the
reasonable estimate of the amount necessary to complete the Restoration of such
Improvements less the amount of such insurance proceeds available.
Notwithstanding the foregoing, if Landlord is prohibited from effecting the
Restoration of the Demised Premises due to applicable governmental laws, rules
or regulations then in effect, Landlord shall not be required to effect such
Restoration. In such an event, any insurance proceeds shall be paid to, and may
be retained by, Landlord or Landlord's lender, as the case may be, and this
Lease, and all obligations of the parties hereunder (except those which
expressly survive the termination hereof) shall terminate.
13.2 Application of Insurance Proceeds. All moneys recovered from the
---------------------------------
insurance policy or policies maintained (or required to be maintained) by
Tenant, shall be paid directly to Landlord (or held by Landlord's lender, if
required) on account of such damage or destruction. Such amounts, less the
reasonable costs, if any, incurred by Landlord in recovering such funds, shall
be applied to the payment of the costs of the Restoration and shall be paid out
from time-to-time as the Restoration progresses upon the written request of
Tenant, accompanied by a certificate of the architect or a qualified
professional engineer in charge of the Restoration stating that as of the date
of such certificate (a) the sum requested is justly due to the contractors,
subcontractors, materialmen, laborers, engineers, architects, or persons, firms
or corporations furnishing or supplying work, labor, services or materials for
such Restoration, and when added to all sums previously paid out does not exceed
the value of the Restoration performed to the date of such certificate by all of
said parties; (b) except for the amount, if any, stated in such certificates to
be due for work, labor, services or materials, there is no outstanding
indebtedness known to the person signing such certificate, after due inquiry,
which is then due for work, labor, services or materials in connection with such
Restoration, which, if unpaid, might become the basis of a mechanic's lien or
similar lien with respect to the Restoration or a lien upon the Demised
Premises, or any portion thereof; and (c) the costs, as estimated by the person
signing such certificate, of the completion of the Restoration required to be
done subsequent to the date of such certificate in order to complete the
Restoration do not exceed the sum of the remaining insurance moneys, plus the
amount deposited by the parties (as applicable) after payment of the sum
requested in such certificate.
If the insurance moneys and such other sums, if any, deposited with
Landlord (or with Landlord's lender) pursuant to Section 13.1 hereof, shall be
insufficient to pay the entire costs of
<PAGE>
the Restoration, Tenant agrees to pay any deficiency promptly upon demand. Upon
completion of the Restoration and payment in full thereof by Tenant, Landlord
shall, within a reasonable period of time, turn over to Tenant all insurance
moneys or other moneys then remaining upon the parties' joint, good-faith
determination that the Restoration has been paid for in full and the damaged or
destroyed Building and other Improvements repaired, restored or rebuilt as
nearly as possible to the condition they were in immediately prior to such
damage or destruction, or with such changes or alterations as may be made in
conformity with Section 13.1 and Article XIX hereof.
13.3 Continuance of Tenant's Obligations. Except as provided for in this
-----------------------------------
Section 13.3 and in Section 13.6, no destruction of or damage to the Demised
Premises, or any portion thereof, by fire, casualty or otherwise shall permit
Tenant to surrender this Lease or shall relieve Tenant from its liability to pay
to Landlord the Base Rent and Additional Rent payable under this Lease or from
any of its other obligations under this Lease, and Tenant waives any rights now
or hereafter conferred upon Tenant by present or future law or otherwise to quit
or surrender this Lease or the Demised Premises, or any portion thereof, to
Landlord or to any suspension, diminution, abatement or reduction of rent on
account of any such damage or destruction, including, without limitation, the
provisions of California Civil Code Sections 1932(2) and 1933(4).
13.4 Availability of Insurance Proceeds. To the extent that any
----------------------------------
insurance moneys which would otherwise be payable and used in the Restoration of
the damaged or destroyed Improvements are paid to any mortgagee of Landlord and
applied in payment of or reduction of the sum or sums secured by any such
mortgage or mortgages made by Landlord on the Demised Premises, Landlord shall
make available, for the purpose of Restoration of such Improvements, an amount
equal to the amount payable to its mortgagee out of such proceeds, and such sum
shall be applied in the manner provided in Section 13.2 hereof.
13.5 Completion of Restoration. The foregoing provisions of this Article
-------------------------
XIII apply only to damage or destruction of the Improvements by fire, casualty
or other cause occurring after the Commencement Date. Any such damage or
destruction occurring prior to such time shall be restored, repaired, replaced
and rebuilt by Landlord.
13.6 Termination of Lease.
--------------------
(a) For purposes of this Lease, the term "Threshold Amount" shall
mean an amount equal to the product of (i) One Million Dollars ($1,000,000.00)
multiplied by (ii) a fraction, the numerator of which is the number of months
from the date of damage or destruction until the expiration of the Term of this
Lease, and the denominator of which is eighteen (18); and the term "Threshold
Period" shall mean the product of (a) one hundred eighty (180) days multiplied
by a fraction, the numerator of which is the number of months from the date of
such damage or destruction until the date of expiration of the Term of this
Lease, and the denominator of which is eighteen (18).
(b) If, within eighteen (18) months prior to the expiration of the
Term of this Lease, the Improvements shall be destroyed or damaged to such an
extent that the Restoration
42
<PAGE>
thereof is reasonably estimated to cost more than the Threshold Amount to
complete, Tenant and Landlord shall, as soon as reasonably possible following
such event of damage or destruction, compute the amount of the insurance
proceeds available from the insurance required to be maintained by Tenant under
this Lease and the amount, if any, over and above the net proceeds of such
insurance which will be necessary for such Restoration, as determined by a
qualified contractor, reasonably acceptable to Tenant and Landlord (or
Landlord's Lender, as the case may be), which latter amount is hereinafter
referred to as the "Excess Cost." Within five (5) business days following the
determination of the Excess Cost, Tenant shall notify Landlord, in writing,
whether Tenant is willing to pay to such Excess Cost to restore such damage or
destruction for occupancy by Tenant. If Tenant notifies Landlord that it is
willing to pay such Excess Cost, it shall do so in accordance with the
provisions of Sections 13.1, 13.2 and 13.3 hereof.
(c) If, within eighteen (18) months prior to the expiration of the
Term of this Lease, the Improvements shall be destroyed or damaged to such an
extent that, in the opinion of a reasonably qualified contractor selected by
Landlord and Tenant, the Restoration shall take longer than the Threshold Period
to complete, Tenant shall be entitled to notify Landlord, in writing, of such
fact, which notice shall be accompanied by a detailed statement of the nature
and extent of such damage or destruction and the estimated period of
Restoration.
(d) If (i) Tenant elects not to pay the Excess Cost, as described
under subsection (b), above, or (ii) if the period of Restoration as estimated
by the contractor selected by Landlord and Tenant exceeds the Threshold Period,
then Tenant shall have the option, within thirty (30) days after Tenant's notice
to Landlord, to surrender the Demised Premises to Landlord by a notice, in
writing, addressed to Landlord, specifying such election; provided, however, if
Landlord elects to pay such Excess Cost, which election shall be made within ten
(10) business days after Tenant notifies Landlord of its election not to pay the
Excess Cost, then Tenant shall not have the right to terminate this Lease
pursuant to subsection (i) of this subsection (d) and, provided Tenant has not
elected to terminate this Lease under subsection (ii) of this subsection (d),
Landlord shall pay such Excess Cost. If Tenant terminates this Lease in
accordance with this subsection (d), the applicable notice shall be accompanied
by (A) Tenant's payment of the balance of the Base Rent and Additional Rent due
for the remainder of the term of this Lease and other charges hereafter
specified in this Section 13.6, or, in the alternative, (B) reasonably
satisfactory evidence (e.g. a certificate from the insurer) that the loss of use
and business interruption insurance Tenant is required to maintain shall be paid
by the insurer directly to Landlord in an amount equal to the lesser of (x) if
more than one (1) year of the Term remains the Base Rent and Additional Rent
provided under this Lease for no less than one (1) year, or (y) the Base Rent
and Additional Rent provided under this Lease for the remainder of the Term.
(e) In such an event Landlord shall be entitled to the proceeds of all
insurance required to be maintained by Tenant under Section 6.1 above (other
than proceeds related to trade fixtures, furniture, equipment and other personal
property of Tenant) and Tenant shall execute all documents reasonably requested
by Landlord to allow such proceeds to be paid to Landlord or as Landlord may
otherwise direct (e.g., to Landlord's lender).
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ARTICLE XIV
CONDEMNATION
14.1 Condemnation of Entire Demised Premises. If, during the Initial
---------------------------------------
Term of this Lease or any extension or renewal thereof, the entire Demised
Premises or the entire Building shall be taken as the result of the exercise of
the power of eminent domain (hereinafter referred to as the "Proceedings"), this
Lease and all right, title and interest of Tenant hereunder shall cease and come
to an end on the date of vesting of title pursuant to such Proceedings.
In any taking of the Demised Premises, or any portion thereof, whether or
not this Lease is terminated as in this Article provided, Tenant shall not be
entitled to any portion of the award for the taking of the Demised Premises or
damage to the Improvements, except as otherwise provided in Section 14.3 with
respect to the restoration of the Improvements, and Tenant hereby waives any
right it now has or may have under present or future law to receive any separate
award of damages for its interest in the Demised Premises or any portion
thereof, except that Tenant shall have, nevertheless, the limited right to prove
in the Proceedings and to receive any award which may be made for damages to or
condemnation of Tenant's movable trade fixtures and equipment, for goodwill and
for Tenant's relocation costs in connection therewith.
14.2 Partial Condemnation/Termination of Lease. If, during the Term of
-----------------------------------------
this Lease an amount less than the entire Demised Premises shall be taken in
such Proceedings with the result that it will materially and adversely interfere
with Tenant's enjoyment and intended use (as described in Section 4.1, hereof),
as reasonably determined by Tenant, Tenant may, at its option, terminate this
Lease as to the remainder of the Demised Premises. Tenant shall not have the
right to terminate this Lease pursuant to the preceding sentence unless (a) the
business of Tenant conducted in the portion of the Demised Premises taken cannot
reasonably be carried on with substantially the same utility and efficiency in
the remainder of the Demised Premises, and (b) Tenant (or Landlord for Tenant)
cannot construct or secure on the Demised Premises substantially similar space
to the space so taken and as a substantially integrated whole with the remaining
portion of the Demised Premises. Such termination as to the remainder of the
Demised Premises shall be effected by notice in writing given not more than
sixty (60) days after the date of vesting of title in such Proceedings, and
shall specify a date no more than sixty (60) days after the giving of such
notice as the date for such termination. Upon the date specified in such notice,
the Term of this Lease, and all right, title and interest of Tenant hereunder,
shall cease and come to an end. If this Lease is terminated as provided in this
Section 14.2, Landlord shall be entitled to and shall receive the total award
made in such Proceedings, Tenant hereby assigning any interest in such award,
damages, and compensation to Landlord, and Tenant hereby waiving any right
Tenant now has or may have under present or future law to receive any separate
award of damages for its interest in the Demised Premises or any portion thereof
or its interest in this Lease, except as otherwise provided in Section 14.1. The
right of Tenant to terminate this Lease as provided in this Section 14.2, shall
not cure or otherwise release Tenant from any then existing breach of Tenant's
performance of any of the terms, covenants or conditions of this Lease on its
part to be performed. In the event that Tenant elects not to terminate this
Lease as to the remainder of the Demised Premises, the rights and obligations of
Landlord and Tenant shall be governed by the provisions of Section 14.3 hereof.
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14.3 Partial Condemnation/Continuation of Lease. If this Lease is not
------------------------------------------
terminated as provided in Section 14.2 hereof; then this Lease shall, upon
vesting of title in the Proceedings, terminate as to the parts so taken, and
Tenant shall have no claim or interest in the award, damages, consequential
damages and compensation, or any part thereof except as otherwise provided in
Section 14.1, Tenant hereby waiving any right Tenant now has or may have under
present or future law to receive any separate award of damages for its interest
in the Demised Premises or any portion thereof or its interest in this Lease,
except as otherwise provided in Section 14.1 and except that Tenant shall have
the right to apply to Landlord for reimbursement as hereinafter provided from
such funds as specified in this Section 14.3. The net amount of the award (after
deduction of all costs and expenses, including attorneys' fees) shall be held by
Landlord (or Landlord's lender) and applied as hereinafter provided. Landlord,
in such case, covenants and agrees, at Landlord's sole cost and expense promptly
to restore that portion of the Improvements on the Demised Premises not so taken
to a complete architectural and mechanical unit for the use and occupancy of
Tenant as provided in this Lease. In the event that the net amount of the award
(after deduction of all costs and expenses, including attorneys' fees) that may
be received by Landlord in any such Proceedings for physical damage to the
Improvements as a result of such taking, and held by Landlord (or Landlord's
lender) for restoration of the Demised Premises, is insufficient to pay all
costs of such restoration work, Landlord shall pay the difference. Tenant shall
not be liable for any additional sum.
14.4 Continuance of Obligations. In the event of any termination of this
--------------------------
Lease or any part thereof as a result of any such Proceedings, Tenant shall pay
to Landlord all Base Rent, all Additional Rent and other charges payable
hereunder with respect to that portion of the Demised Premises so taken in such
Proceedings with respect to which this Lease shall have terminated justly
apportioned to the date of such termination. From and after the date of vesting
of possession in such Proceedings, Tenant shall continue to pay the Base Rent,
Additional Rent and other charges payable hereunder as in this Lease provided to
be paid by Tenant, subject to an abatement of a just and proportionate part of
the Base Rent according to the extent and nature of such taking as provided for
in Sections 14.3 and 14.5 hereof in respect to the Demised Premises remaining
after such taking.
14.5 Adjustment of Rent. In the event of a partial taking of the Demised
------------------
Premises under Sections 14.2 or 14.3 hereof in which case this Lease is not
terminated, the Base Rent for the period from and after the date of vesting of
title in such Proceedings, until the termination of this Lease, shall be reduced
to a sum equal to the product of the Base Rent provided for herein multiplied by
a fraction, the numerator of which is the value of the Demised Premises after
such taking and after the same shall have been restored to a complete
architectural unit, and the denominator of which is the value of the Demised
Premises prior to such taking.
ARTICLE XV
ASSIGNMENT, SUBLETTING, ETC.
15.1 Restriction on Transfer. Tenant shall not sublet the Demised
-----------------------
Premises or any portion thereof, nor assign, mortgage, pledge, transfer or
otherwise encumber or dispose of this
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Lease or any interest therein, or in any manner assign, mortgage, pledge,
transfer or otherwise encumber or dispose of its interest or estate in the
Demised Premises or any portion thereof without obtaining Landlord's prior
written consent in each and every instance. For purposes of this Article XV, an
assignment shall not be deemed to include any sale or similar transfer of any
stock in Tenant so long as Tenant's stock is publicly traded.. Landlord's
consent to an assignment or subletting under this Section 15.1 shall not be
unreasonably withheld or delayed, provided the following conditions are complied
with:
(a) Any assignment of this Lease shall transfer to the assignee all of
Tenant's right, title and interest in this Lease and all of Tenant's estate or
interest in the Demised Premises.
(b) At the time of any assignment or subletting and at the time Tenant
requests Landlord's written consent thereto, this Lease must be in full force
and effect without any uncured Event of Default or Incipient Default thereunder
on the part of Tenant.
(c) Any such assignee shall assume, by written, recordable instrument,
in form and content satisfactory to Landlord, the due performance of all of
Tenant's obligations under this Lease from and after the time of the effective
date of the assignment, and such assumption agreement shall state that the same
is made by the assignee for the express benefit of Landlord as a third party
beneficiary thereof. A copy of the assignment and assumption agreement, both in
form and content satisfactory to Landlord, fully executed and acknowledged by
assignee, together with a certified copy of a properly executed corporate
resolution (if the assignee be a corporation) authorizing the execution and
delivery of such assumption agreement, shall be sent to Landlord ten (10) days
after the effective date of such assignment.
(d) In the case of a subletting, a copy of any sublease fully executed
and acknowledged by Tenant and the sublessee shall be mailed to Landlord ten
(10) days after to the effective date of such subletting, which sublease shall
be in form and content acceptable to Landlord.
(e) Each sublease permitted under this Section 15.1 shall contain
provisions to the effect that (i) such sublease is only for actual use and
occupancy by the sublessee; (ii) such sublease is subject and subordinate to all
of the terms, covenants and conditions of this Lease and to all of the rights of
Landlord thereunder, and (iii) in the event this Lease shall terminate before
the expiration of such sublease, the sublessee thereunder will, at Landlord's
option, attorn to Landlord and waive any rights the sublessee may have to
terminate the sublease or to surrender possession thereunder as a result of the
termination of this Lease.
(f) Any and all compensation paid to Tenant, in whatever form, in
consideration of such assignment or subletting, including any differential
between Base Rent and rent paid to Tenant by such assignee or subtenant, or any
assignment fee or any other amount which can be attributed to the assignment or
subletting, shall be paid directly by such assignee or subtenant to Landlord;
provided, however, that Tenant shall Tenant be entitled to deduct from such
compensation the amount of any (i) leasing commissions it has incurred in
connection with such assignment or subletting, (ii) the direct cost of
improvements constructed and paid for by Tenant in connection with such
assignment or subletting, provided such improvements have been
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made in accordance with the terms of this Lease (including, without limitation,
requirements for Landlord's approval and that they be completed on a lien-free
basis), and (iii) the actual cost of similar concessions actually made by Tenant
in connection with such assignment or subletting.
(g) Tenant agrees to pay on behalf of Landlord any and all
reasonable costs of Landlord, including reasonable attorneys' fees paid or
payable to outside counsel, occasioned by such assignment or subletting, but not
to exceed One Thousand Dollars ($1,000.00).
15.2 Transfer to Affiliates; Sale or Merger. Notwithstanding the
--------------------------------------
foregoing provisions of Section 15.1, Tenant shall be permitted to assign or
sublet the Demised Premises or Tenant's rights under this Lease, without
Landlord's prior consent, to (i) an entity in which Tenant, directly or
indirectly, owns or beneficially controls more than fifty percent (50%) of the
outstanding voting interests, (ii) an entity which directly or indirectly owns
or beneficially controls more than fifty percent (50%) of the outstanding voting
interests of Tenant, (iii) an entity, the outstanding voting interests of which
are directly or indirectly owned by the same persons or entities which own or
beneficially control the outstanding voting interests of Tenant (each, a "Sister
Entity"), (iv) an entity in which a Sister Entity owns or beneficially controls
more than fifty percent (50%) of the outstanding voting interests, or (v) an
entity deemed to have been assigned the Lease through a sale of Tenant's stock
or assets or through merger with Tenant, provided, that in any such case Tenant
shall be required to give Landlord written notice of that assignment or
subletting within thirty (30) days thereafter, including written evidence of the
identity of the assignee or sublessee (actual or deemed) and its affiliation
with Tenant. Tenant shall not be entitled to share in any profits Tenant might
obtain as a result of an authorized assignment or sublet of the Demised Premises
and Tenant shall arrange for any such profits which might otherwise be paid to
Tenant by such assignee or sublessee to be paid directly to Landlord.
15.3 Restriction Against Further Assignment. Notwithstanding anything
---------------------------------------
contained in this Lease to the contrary and notwithstanding any consent by
Landlord to any sublease of the Demised Premises or any portion thereof or to
any assignment of this Lease or of Tenant's interest or estate in the Demised
Premises, except as provided in Section 15.2 above, no sublessee shall assign
its sublease nor further sublease the Demised Premises or any portion thereof,
and no assignee shall further assign its interest in this Lease or its interest
or estate in the Demised Premises or any portion thereof; nor sublease the
Demised Premises or any portion thereof; without Landlord's prior written
consent in each and every instance, which consent shall not be unreasonably
withheld or unduly delayed. No such assignment or subleasing shall relieve
Tenant from any of Tenant's obligations contained in this Lease.
15.4 Tenant's Failure to Comply. Tenant's failure to comply with all of
--------------------------
the foregoing provisions and conditions of this Article XV shall, at Landlord's
option, render any purported assignment or subletting null and void and of no
force and effect.
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ARTICLE XVI
SUBORDINATION, NONDISTURBANCE,
NOTICE TO MORTGAGEE AND ATTORNMENT
16.1 Subordination by Tenant. This Lease and all rights of Tenant
-----------------------
therein and all interest or estate of Tenant in the Demised Premises or any
portion thereof shall be subject and subordinate to the lien of any mortgage,
deed of trust, security instrument or other document of like nature
(collectively, "Mortgage"), which at any time after the date of this Lease may
be placed upon the Demised Premises or any portion thereof, and to each and
every advance made under any such Mortgage. Tenant agrees at any time hereafter,
to execute and deliver to Landlord any instruments, releases or other documents
that may be reasonably required for the purpose of subjecting and subordinating
this Lease to the lien of any such Mortgage. It is agreed, nevertheless, that so
long as an Event of Default does not exist, that such subordination agreement or
other instrument, release or document shall not interfere with, hinder or molest
Tenant's right to quiet enjoyment under this Lease, shall not modify the terms
of this Lease, nor the right of Tenant to continue to occupy the Demised
Premises and all portions thereof, and to conduct its business thereon in
accordance with the covenants, conditions, provisions, terms and agreements of
this Lease. The lien of any such Mortgage shall not cover Tenant's trade
fixtures or other personal property located in or on the Demised Premises.
Landlord shall deliver to Tenant a commercially reasonably nondisturbance
agreement executed by all lenders having a lien on the Demised Premises on the
Commencement Date as a condition precedent in Tenant's favor, and from each
future lender as a condition to Tenant's subordination or attornment hereunder.
16.2 Landlord's Default. In the event of any act or omission of Landlord
------------------
constituting a default by Landlord, other than Landlord's failure to have the
Improvements substantially completed on a timely basis as provided in Article II
and to make the same fully available to Tenant as therein provided, Tenant shall
not exercise any remedy until Tenant has given Landlord and any mortgagee whose
name and address have been previously provided to Tenant prior written notice of
such act or omission and until a 30-day period of time to allow Landlord or the
mortgagee to remedy such act or omission shall have elapsed following the giving
of such notice; provided, however, if such act or omission cannot with due
diligence and in good faith be remedied within such 30-day period, Landlord
and/or mortgagee shall be allowed such further period of time as may be
reasonably necessary provided that it shall have commenced remedying the same
with due diligence and in good faith within said 30-day period. In the event any
act or omission of Landlord which constitutes a Landlord's default hereunder
results in an immediate threat of bodily harm to Tenant's employees, agents or
invitees or damage to Tenant's property, or exposes Tenant to criminal
liability, Tenant may proceed to cure the default without prior notice to
Landlord or its mortgagee; provided, however, in that event Tenant shall give
written notice to Landlord and its mortgagee as soon as possible after
commencement of such cure. Nothing herein contained shall be construed or
interpreted as requiring any mortgagee to remedy such act or omission.
16.3 Attornment. Subject to Section 16.1 above, if any mortgagee shall
----------
succeed to the rights of Landlord under this Lease or to ownership of the
Demised Premises, whether through
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possession or foreclosure or the delivery of a deed to the Demised Premises,
then, upon the written request of such mortgagee so succeeding to Landlord's
rights hereunder, Tenant shall attorn to and recognize such mortgagee as
Tenant's landlord under this Lease, and shall promptly execute and deliver any
instrument that such mortgagee may reasonably request to evidence such
attornment (whether before or after making of the mortgage). In the event of any
other transfer of Landlord's interest hereunder, upon the written request of the
transferee and Landlord, Tenant shall attorn to and recognize such transferee as
Tenant's landlord under this Lease and shall promptly execute and deliver any
instrument that such transferee and Landlord may reasonably request to evidence
such attornment.
ARTICLE XVII
SIGNS
Tenant shall be allowed prominent Building and monument signage during the
Term of this Lease, provided that such sign or signs (a) do not cause any
structural damage or other material damage to the Building; (b) comply with and
do not violate applicable governmental laws, ordinances, rules or regulations;
(c) comply with and do not violate any existing restrictions affecting the
Demised Premises and which are of a matter of record as of the date of this
Lease; (d) are compatible with the architecture of the Building and the
landscaped area adjacent thereto, and (e) the design, size and location of such
signs have been mutually approved by Landlord and Tenant, which approval shall
not be unreasonably withheld or delayed. The cost of such signs shall not be
funded from the Tenant Improvement Allowance and shall be entirely Tenant's
separate expense, except as provided in Section 2.10(c).
ARTICLE XVIII
FINANCIAL STATEMENTS OF TENANT
From time to time, at Landlord's request, Tenant shall provide Landlord
with Tenant's most recent financial statements in form and content reasonably
satisfactory to Landlord and Landlord's lenders (which, if Tenant is an entity
which files periodic financial disclosures to securities regulatory authorities,
shall be those which are periodically filed with those authorities). Landlord
may provide copies of those financial statements to current and prospective
lenders, investors and buyers, identified in writing to Tenant, for examination
and review. Landlord shall keep all such financial statements strictly
confidential and may provide copies of such financial statements to such other
parties only upon receiving in return a covenant from each recipient that such
recipient shall keep the financial statements confidential except with the prior
written consent of Tenant.
ARTICLE XIX
CHANGES AND ALTERATIONS
Tenant shall have the right at any time, and from time to time during the
Term of this Lease, to make such changes and alterations, structural or
otherwise, to the Building,
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improvements and fixtures hereafter erected on the Demised Premises as Tenant
shall deem necessary or desirable in connection with the requirements of its
business, which changes and alterations (other than changes or alterations of
Tenant's movable trade fixtures and equipment) shall be made in all cases
subject to the following conditions, which Tenant covenants to observe and
perform:
(a) Permits. No change or alteration shall be undertaken until Tenant shall
-------
have procured and paid for, so far as the same may be required from time to
time, all municipal, state and federal permits and authorizations of the various
governmental bodies and departments having jurisdiction thereof; and Landlord
agrees to join in the application for such permits or authorizations whenever
such action is necessary, all at Tenant's sole cost and expense, provided such
applications do not cause Landlord to become liable for any cost, fees or
expenses.
(b) Compliance with Plans and Specifications. Before commencement of any
----------------------------------------
change, alteration, restoration or construction (hereinafter sometimes referred
to as "Work") involving in the aggregate an estimated cost of more than Fifty
Thousand Dollars ($50,000.00) or which, in Landlord's reasonable judgment, would
materially alter the mechanical, structural or electrical components of the
Demised Premises, Tenant shall (i) furnish Landlord with detailed plans and
specifications of the proposed change or alteration; (ii) obtain Landlord's
prior written consent, which consent shall not be unreasonably withheld; (iii)
obtain Landlord's prior written approval of a licensed architect or licensed
professional engineer selected and paid for by Tenant who shall approve any such
work (hereinafter referred to as "Alterations Architect or Engineer"); (iv)
obtain Landlord's prior written approval (which shall not be unreasonably
withheld or delayed) of detailed plans and specifications prepared and approved
in writing by said Alterations Architect or Engineer and of each amendment and
change thereto, and (v) for any Work involving in the aggregate an estimated
cost of more than One Hundred Thousand Dollars ($100,000.00), furnish to
Landlord a surety company performance bond issued by a surety company licensed
to do business in the state in which the Demised Premises are located and
reasonably acceptable to Landlord in an amount equal to the estimated cost of
such work guaranteeing the completion thereof within a reasonable time
thereafter (1) free and clear of all mechanic's liens or other liens,
encumbrances, security interests and charges, and (2) in accordance with the
plans and specifications approved by Landlord. Tenant shall retain Contractor as
the general contractor for the build-out of any portion of the Demised Premises
which are left in "shell" condition as of the Commencement Date, provided
Contractor's contract is on substantially the same terms as described in Section
2.12 of this Lease.
(c) Value Maintained. Any change or alteration shall, when completed, be of
----------------
such character so as not to reduce the value of the Demised Premises or the
Building to which such change or alteration is made below its value or utility
to Landlord immediately before such change or alteration, nor shall such change
or alteration reduce the area or cubic content of the Building to use without
Landlord's express written consent.
(d) Compliance with Laws. All Work done in connection with any change or
--------------------
alteration shall be done promptly and in a good and workmanlike manner and in
compliance with all building and zoning laws of the place in which the Demised
Premises are situated, and in compliance with all laws, ordinances, orders,
rules, regulations and requirements of all federal,
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state and municipal governments and appropriate departments, commissions, boards
and officers thereof; and in accordance with the orders, rules and regulations
of the Board of Fire Underwriters where the Demised Premises are located or any
other body exercising similar functions. The cost of any such change or
alteration shall be paid in cash so that the Demised Premises and all portions
thereof shall at all times be free of liens for labor and materials supplied to
the Demised Premises or any portion thereof. The Work or any change or
alteration shall be prosecuted with reasonable dispatch, delays due to strikes,
lockouts, acts of God, inability to obtain labor or materials, governmental
restrictions or similar causes beyond the control of Tenant excepted. Tenant or
Tenant's contractor or subcontractor shall obtain and maintain at its sole cost
and expense during the performance of the Work workers' compensation insurance
covering all persons employed in connection with the Work and with respect to
which death or injury claims could be asserted against Landlord or Tenant or
against the Demised Premises or any interest therein, together with
comprehensive general liability insurance for the mutual benefit of Landlord and
Tenant with limits of not less than One Million Dollars ($1,000,000.00) in the
event of injury to one person, Three Million Dollars ($3,000,000.00) in respect
to any one accident or occurrence, and Five Hundred Thousand Dollars
($500,000.00) for property damage, and the fire insurance with "extended
coverage" endorsement required by Section 6.1 hereof shall be supplemented with
"builder's risk" insurance on a completed value form or other comparable
coverage on the Work if the cost of such work will be in excess of Fifty
Thousand Dollars ($50,000.00). All such insurance shall be in a company or
companies authorized to do business in the state in which the Demised Premises
are located and reasonably satisfactory to Landlord, and all such policies of
insurance or certificates of insurance shall be delivered to Landlord endorsed
"Premium Paid" by the company or agency issuing the same, or with other evidence
of payment of the premium satisfactory to Landlord.
(e) Property of Landlord. All improvements and alterations (other than
--------------------
Tenant's movable trade fixtures, furniture and equipment) made or installed by
Tenant shall, immediately upon completion or installation thereof, become the
property of Landlord without payment therefor by Landlord, and shall be
surrendered to Landlord on the expiration of the Term of this Lease unless and
to the extent Tenant is required or permitted to remove the same upon
termination or expiration of the Term as provided in subsection (g), below, in
which event they shall become the property of Tenant, provided that Tenant shall
be required to restore the Demised Premises in accordance with Section 19(g),
below.
(f) Location of Improvements. No change, alteration, restoration or new
------------------------
construction shall be in, or connect the Improvements with, any property,
building or other improvement located outside the boundaries of the parcel of
land described in Exhibit "A" attached hereto, nor shall the same obstruct or
-----------
interfere with any existing easement.
(g) Removal of Improvements. As a condition to granting approval for any
-----------------------
changes or alterations, Landlord may require Tenant, by written notice to Tenant
given at or prior to the time of granting such approval, to remove any
improvements, additions or installations installed by Tenant in the Demised
Premises at Tenant's sole cost and expense at the end of the term of this Lease
and repair and restore any damage caused by the installation and removal of such
improvements, additions, or installations; provided, however, the only
improvements, additions or installations which Tenant shall remove shall be
those specified in such notice. All
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improvements, additions or installations installed by Tenant which did not
require Landlord's prior approval shall be removed by Tenant as provided for in
this Section 19(g), unless such improvements, additions or installations do not
adversely affect Landlord's ability to re-lease the Demised Premises. Prior to
making any improvements, additions or alterations that do not require Landlord's
approval, Tenant may request Landlord to specify whether Landlord considers such
improvements, additions or installations to be of the type that would adversely
affect Landlord's ability to re-lease the Demised Premises if not removed by
Tenant Notwithstanding anything to the contrary contained herein, Tenant shall
have the right to remove any improvements, additions or alterations installed by
Tenant and at its expense (specifically not including any of the original Tenant
Improvements) upon expiration or earlier termination of the Term so long as
Tenant repairs any damage caused by such removal at its sole cost and expense
and returns the applicable portion of the Demised Premises to its original
condition prior to the installation of such improvement, addition or alteration.
(h) Reasonable Consent. All consents required of Landlord under this
------------------
Article XIX shall not be unreasonably withheld by Landlord.
(i) Notice to Landlord. Regardless of whether Landlord's consent is
------------------
required to any change or alteration to the Demised Premises made or to be made
by Tenant, such changes or alterations shall not be commenced until two (2)
business days notice after Landlord has received notice from Tenant stating the
date such changes or alterations are to commence so that Landlord can post and
record an appropriate notice of nonresponsibility.
ARTICLE XX
MISCELLANEOUS PROVISIONS
20.1 Entry by Landlord. Tenant agrees to permit Landlord and authorized
-----------------
representatives of Landlord to enter upon the Demised Premises at all reasonable
times during ordinary business hours upon at least two (2) business day's
advance notice to Tenant for the purpose of inspecting the same and making any
repairs required to be made thereto by Landlord under the terms of this Lease,
or as required to be made thereto by Tenant under the terms of this Lease
provided that Landlord shall have first given written notice to Tenant to make
such repairs and Tenant shall have failed to make such repairs within thirty
(30) days after notice; provided, however, Tenant shall be allowed such further
period of time as may be provided in Section 12.1(b); and, provided further,
that Landlord shall be allowed to enter upon the Demised Premises during an
emergency. Nothing herein contained shall imply any duty upon the part of
Landlord to do any such work which, under any provision of this Lease, Tenant
may be required to perform, and the performance thereof by Landlord shall not
constitute a waiver of Tenant's default in failing to perform the same. Landlord
may, during the progress of any work, keep and store upon the Demised Premises
all necessary materials, tools and equipment in areas designated by Tenant.
Landlord shall not in any event be liable for inconvenience, annoyance,
disturbance, loss of business or other damage to Tenant by reason of making such
repairs or the performance of any such work in or about the Demised Premises or
on account of bringing material, supplies and equipment into, upon or through
the Demised Premises during the course thereof, and the obligations of Tenant
under this Lease shall not be thereby affected in any
52
<PAGE>
manner whatsoever, except that Landlord shall use its best efforts to not
unreasonably interfere with Tenant's use of the Demised Premises, or any portion
thereof; by reason of Landlord's making such repairs or the performance of any
such work in or about the Demised Premises or on account of bringing materials,
supplies and equipment into, upon or through the Demised Premises during the
course thereof. Tenant may accompany Landlord on any inspection or entry by
Landlord.
20.2 Exhibition of Demised Premises. Landlord is hereby given the right
------------------------------
during usual business hours upon at least two (2) business days' advance notice
to Tenant at any time during the Term of this Lease to enter upon the Demised
Premises and to exhibit the same for the purpose of mortgaging or selling the
same. During the final year of the Term, Landlord shall be entitled (i) to
display on the Demised Premises in such manner as to not unreasonably interfere
with Tenant's business, signs reasonably approved as to design and location by
Tenant indicating that the Demised Premises are for rent and/or sale and
suitably identifying Landlord or its agent, and (ii) upon at least two (2)
business days' advance notice to Tenant, to exhibit the Demised Premises to
prospective tenants.
20.3 Indemnifications by Tenant. To the fullest extent allowed by law,
--------------------------
Tenant shall at all times indemnify, defend and hold Landlord harmless against
and from any and all claims by or on behalf of any person or persons, firm or
firms, corporation or corporations, arising from the conduct or management, or
from any work or things whatsoever done in or about the Demised Premises during
the Term of this Lease, other than as a result of the negligence or willful
misconduct of Landlord or its officers, agents, employees, contractors or
subcontractors, or as a result of Landlord's breach of its obligations under
this Lease, and Tenant shall further indemnify, defend and hold Landlord
harmless against and from any and all claims arising during the Term of this
Lease from any condition of the Improvements (other than defects in construction
of the initial Improvements or other items Landlord is required to repair or
maintain), or of any passageways or space therein, other than as a result of the
negligence or willful misconduct of Landlord or its officers, employees, agents,
contractors or subcontractors or as a result of Landlord's breach of its
obligations under this Lease, or arising from any act or gross negligence of
Tenant, its agents, servants, employees or licenses, or arising from any
accident, injury or damage whatsoever caused to any person, firm or corporation
occurring during the Term of this Lease in or about the Demised Premises, other
than as a result of the negligence or willful misconduct of Landlord or its
officers, employees, agents, contractors or subcontractors, or as a result of
Landlord's breach of its obligations under this Lease, and from and against all
costs, attorneys' fees, expenses and liabilities incurred in or about any such
claim or action or proceeding brought thereon; and in case any action or
proceeding be brought against Landlord by reason of any such claim, Tenant, upon
notice from Landlord, covenants to defend such action or proceeding by counsel
reasonably satisfactory to Landlord subject to the requirements of Tenant's
insurer. Tenant's obligations under this Section 20.3 shall be insured by
contractual liability endorsement on Tenant's policies of insurance required
under the provisions of Section 6.2 hereof to the extent reasonably obtainable.
20.4 Notices. All notices, demands and requests which may be or are
-------
required to be given, demanded or requested by either party to the other shall
be in writing, and shall be sent by United States registered or certified mail,
postage prepaid, by an independent overnight courier
53
<PAGE>
service marked for next business day delivery, or by telephonic facsimile
transmission with automatic written time and date confirmation of delivery
transmitted between the hours of 9:00 a.m. and 5:00 p.m. (time zone of
recipient, but only if confirmed within two (2) business days by receipt of a
mailed or personally delivered copy), and addressed as follows:
To Landlord:
Kilroy Realty, L.P.
2250 East Imperial Highway, Suite 1200
El Segundo, California 92045
Attention: Nadine Kirk
Facsimile: (310) 322-8790
with copy to:
Kilroy Realty, L.P.
2250 East Imperial Highway, Suite 1200
El Segundo, California 92045
Attention: Jeff Hawken
Facsimile: (310) 322-5981
with an additional copy to:
Kilroy Realty, L.P.
4365 Executive Drive, Suite 850
San Diego, California 92121
Attention: Steve Scott
Facsimile: (619) 550-1935
To Tenant:
Applied Micro Circuits Corporation
6920 Sequence Drive
San Diego, California 92121-2793
Attention: Mr. Joel 0. Holliday
Facsimile: (619) 535-6800
With a copy to:
David B. Marino
The Irving Hughes Group, Inc.
501 West Broadway, Suite 2020
San Diego, California 92101
Facsimile: (619) 238-1025
54
<PAGE>
or at such other place as a party hereto may from time to time designate by
written notice thereof to the other. Notices, demands and requests which shall
be served upon Landlord by Tenant, or upon Tenant by Landlord, in the manner
aforesaid, shall be deemed received three (3) days after delivery to United
States mail, one (1) business day after delivery to an overnight courier
service, or at the time such notice, demand or request shall be transmitted by
facsimile (if confirmed as written above).
20.5 Quiet Enjoyment. Landlord covenants and agrees that Tenant, upon
---------------
paying the Base Rent and Additional Rent and upon observing and keeping the
covenants, agreements and conditions of this Lease on its part to be kept,
observed and performed, shall lawfully and quietly hold, occupy and enjoy the
Demised Premises (subject to the provisions of this Lease) during the Term of
this Lease without hindrance or molestation by Landlord or by any person or
persons claiming under Landlord.
20.6 Landlord's Continuing Obligations. The term "Landlord," as used in
---------------------------------
this Lease, so far as covenants or obligations on the part of Landlord are
concerned, shall be limited to mean and include only the owner or owners at the
time in question of the fee of the Demised Premises, and in the event of any
transfer or transfers or conveyance, the then grantor shall be automatically
freed and relieved from and after the date of such transfer or conveyance of all
liability as respects the performance of any covenants or obligations on the
part of Landlord contained in this Lease thereafter to be performed, provided
that any funds in the hands of such landlord or the then grantor at the time of
such transfer, in which Tenant has an interest, shall be turned over to the
grantee, and any amount then due and payable to Tenant by Landlord or the then
grantor under any provision of this Lease, shall be paid to Tenant, and further
provided that the new Landlord expressly assumes in writing for the benefit of
Tenant all obligations of Landlord under this Lease. The covenants and
obligations contained in this Lease on the part of Landlord shall, subject to
the aforesaid, be binding on Landlord's successors and assigns during and in
respect of their respective successive periods of ownership. Nothing herein
contained shall be construed as relieving Landlord of its obligations under
Article II of this Lease or releasing Landlord from any obligation to complete
the cure of any breach by Landlord during the period of its ownership of the
Demised Premises. However, Tenant agrees to look solely to Landlord's interest
in the Land, the Building and the Improvements for the recovery of any judgment
from Landlord, it being agreed that, if Landlord is a partnership, Landlord's
partners, whether general or limited, or if Landlord is a corporation, its
directors, officers and shareholders, shall never be personally liable for any
such judgments or damages. Notwithstanding the foregoing, Landlord and its
general partner shall be fully and personally liable for claims by Tenant
relating to Landlord's obligations under Sections 2.1 (The Improvements), 2.6
(Liquidated Damages for Delay in Substantial Completion) and 2.9 (Condition of
Demised Premises; Limited Warranty).
20.7 Estoppel. Tenant shall, without charge at any time and from time to
--------
time, within ten (10) business days after written request by Landlord, certify
by written instrument, duly executed, acknowledged and delivered to any
mortgagee, assignee of a mortgagee, proposed mortgagee, purchaser or proposed
purchaser, or any other person dealing with Landlord or the Demised Premises:
55
<PAGE>
(a) That this Lease (and all guaranties, if any) is unmodified and in
full force and effect (or, if there have been modifications, that the same is in
full force and effect, as modified and stating the modifications);
(b) The dates to which the Base Rent or Additional Rent have been
paid in advance.
(c) Whether or not there are then existing any breaches or defaults
by such party or the other party known by such party under any of the covenants,
conditions, provisions, terms or agreements of this Lease, and specifying such
breach or default, if any, or any set-offs or defenses against the enforcement
of any covenant, condition, provision, term or agreement of this Lease (or of
any guaranties) upon the part of Landlord or Tenant (or any guarantor), as the
case may be, to be performed or complied with (and, if so, specifying the same
and the steps being taken to remedy the same); and
(d) Such other statements or certificates as Landlord or any
mortgagee may reasonably request.
It is the intention of the parties hereto that any statement delivered
pursuant to this Section 20.7 may be relied upon by any of such parties dealing
with Landlord or the Demised Premises. Failure by Tenant to timely respond to
such request shall be deemed Tenant's certification of the accuracy of such
matters.
20.8 Delivery of Corporate Documents. In the event that Tenant is a
-------------------------------
corporation or similar business entity (e.g., limited partnership, limited
liability company or limited liability partnership), Tenant shall, without
charge to Landlord, at any time and from time to time within ten (10) business
days after written request by Landlord, deliver to Landlord, in connection with
any proposed sale or mortgage of the Demised Premises, the following instruments
and documents:
(a) Certificate of Good Standing in the state of incorporation of
Tenant and in the state in which the Demised Premises are located issued by the
appropriate state authority and bearing a current date;
(b) A copy of Tenant's articles of incorporation and by-laws (or
partnership or operating agreement, as the case may be) and any amendments or
modifications thereof certified by the secretary or assistant secretary (or
managing partner or member, as the case may be) of Tenant;
(c) A written and certified confirmation from the secretary or
assistant secretary (or managing partner or member, as the case may be) that (i)
this Lease has been duly authorized by all necessary corporate action and is a
valid and binding agreement enforceable in accordance with its terms; and (ii)
Tenant is a duly organized and validly existing corporation under the laws of
its state of incorporation, is duly authorized to carry on its business, and is
in good standing under the laws of the state in which the Demised Premises are
located, if different from the state of incorporation.
56
<PAGE>
20.9 Memorandum of Lease. Concurrently with their execution and delivery
-------------------
of this Lease, the parties shall execute, acknowledge and deliver to each other,
a Memorandum of Lease in the form attached hereto as "Exhibit C" and made a part
---------
hereof. Such Memorandum of Lease may be recorded by either party' at their sole
cost and expense.
20.10 Severability. If any covenant, condition, provision, term or
------------
agreement of this Lease shall, to any extent, be held invalid or unenforceable,
the remaining covenants, conditions, provisions, terms and agreements of this
Lease shall not be affected thereby, but each covenant, condition, provisions,
term or agreement of this Lease shall be valid and in force to the fullest
extent permitted by law.
20.11 Successors and Assigns. The covenants and agreements herein contained
----------------------
shall bind and inure to the benefit of Landlord, its successors and assigns, and
Tenant and its permitted successors and assigns.
20.12 Captions. The caption of each article of this Lease is for
--------
convenience and reference only, and in no way defines, limits or describes the
scope or intent of such article or of this Lease.
20.13 Relationship of Parties. This Lease does not create the relationship
-----------------------
of principal and agent, partnership, joint venture, or any association or
relationship between Landlord and Tenant, the sole relationship between Landlord
and Tenant being that of landlord and tenant.
20.14 Entire Agreement. All preliminary and contemporaneous negotiations
----------------
are merged into and incorporated in this Lease. This Lease, together with the
exhibits attached hereto, contains the entire agreement between the parties and
shall not be modified or amended in any manner except by any instrument in
writing executed by the parties hereto.
20.15 No Merger. There shall be no merger of this Lease or of the leasehold
---------
estate created by this Lease with any other estate or interest in the Demised
Premises by reason of the fact that the same person, firm, corporation or other
entity may acquire, hold or own, directly or indirectly, (a) this Lease or the
leasehold interest created by this Lease or any interest therein, and (b) any
such other estate or interest in the Demised Premises, or any portion thereof.
No such merger shall occur unless and until all persons, firms, corporations or
other entities having an interest (including a security interest) in (1) this
Lease or the leasehold estate created thereby, and (2) any such other estate or
interest in the Demised Premises, or any portion thereof; shall join in a
written instrument expressly affecting such merger and shall duly record the
same.
20.16 Possession and Use. Tenant acknowledges that the Demised Premises are
------------------
the property of Landlord and that Tenant has only the right to possession and
use thereof upon the covenants, conditions, provisions, terms and agreements set
forth in this Lease.
20.17 Surrender of Demised Premises. Subject to the other provisions of
-----------------------------
this Lease, at the expiration of the Term of this Lease, Tenant shall surrender
the Demised Premises in the same condition as they were in upon delivery of
possession thereto at the Commencement Date,
57
<PAGE>
reasonable wear and tear, casualty and condemnation excepted, and shall
surrender all keys to the Demised Premises to Landlord at the place then fixed
for the payment of Base Rent, and shall inform Landlord of all combinations on
locks, safes and vaults, if any. Tenant shall at such time remove all of its
property therefrom and all alterations and improvements placed thereon by Tenant
if so requested by Landlord, or otherwise allowed, subject to Sections 19(e) and
(g). Tenant shall repair any damage to the Demised Premises caused by such
removal, and any and all such property not so removed shall, at Landlord's
option, become the exclusive property of Landlord or be disposed of by Landlord,
at Tenant's cost and expense, without further notice to or demand upon Tenant,
subject to applicable law and Sections 19(e) and (g).
All property of Tenant not removed on or before the last day of the Term of
this Lease shall be deemed abandoned in accordance with, and subject to,
applicable law.
20.18 Holding Over. In the event Tenant remains in possession of the
------------
Demised Premises after expiration of this Lease and without the execution of a
new lease, it shall be deemed to be occupying the Demised Premises as a tenant
from month-to-month, subject to all the provisions, conditions and obligations
of this Lease insofar as the same can be applicable to a month-to-month tenancy,
except that the Base Rent shall be escalated to one hundred and twenty-five
percent (125%) of the then current Base Rent for the Demised Premises for the
first three (3) months of such tenancy and one hundred fifty percent (150%) of
such amount thereafter, and from and after such three (3) month period, Tenant
shall indemnify, defend and hold Landlord harmless against loss or liability
resulting from the delay by Tenant in so surrendering the Demised Premises,
including without limitation any claim made by any succeeding occupant founded
on such delay. Tenant's obligation to observe or perform this covenant shall
survive the expiration or other termination of this Lease.
20.19 Survival. All obligations of either party (together with interest or
--------
money obligations at the Maximum Rate of Interest) accruing prior to expiration
of the Term of this Lease shall survive the expiration or other termination of
this Lease.
20.20 Broker's Commission. Tenant and Landlord represent that they have
-------------------
dealt only with The Irving Hughes Group, Inc., as broker in connection with this
Lease. Landlord shall be responsible for paying the commissions owing to such
brokers under a separate written agreement between Landlord and such broker.
Tenant and Landlord will indemnify, defend and hold the other harmless from and
against any loss, cost or expense, including, but not limited to, reasonable
attorneys' fees and court costs, resulting from any claim for a fee or
commission by any other broker or finder resulting from their own actions.
20.21 Applicable Law. This Lease shall be governed and interpreted in
--------------
accordance with the laws of the State of California.
20.22 Counterparts. This Lease may be executed in one or more
------------
counterparts, each of which shall be deemed an original and all of which, when
taken together, shall constitute a single instrument.
58
<PAGE>
20.23 Attorney's Fees. In the event of any litigation, arbitration,
---------------
mediation or any other action taken by either party to this Lease to enforce any
provision of this Lease, enforce any remedy available upon default under this
Lease, or seek a declaration of the rights of a party under this Lease, the
prevailing party shall be entitled to recover in such action such attorneys'
fees and costs as may be reasonably incurred, including, without limitation, the
costs of reasonable investigation, preparation and professional or expert
consultation, travel expenses, costs on appeal, court reporter fees and
expenses, incurred by reason of such litigation, arbitration or other action.
All other attorneys' fees and cost relating to this Agreement and the
transactions described herein shall be borne by the party incurring the same.
IN WITNESS WHEREOF, each of the parties hereto have caused this Lease to be
duly executed as of the day and year first above-written.
LANDLORD:
KILROY REALTY, L.P.,
a Delaware limited partnership
By: Kilroy Realty Corporation,
a Maryland corporation
Its General Partner
By: [SIGNATURE ILLEGIBLE] By:______________________
----------------------------
Name:__________________________ Name:____________________
Its:______________________ Its: _______________
TENANT:
APPLIED MICRO CIRCUITS CORPORATION,
a Delaware corporation
By: /s/ Joel O. Holiday
----------------------------
Joel O. Holliday
Its: Vice President, Finance and Administration
By: /s/ David M. Rickey
----------------------------
David M. Rickey
Its: President & CEO
59
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION OF LAND
LEGAL DESCRIPTION
BEING A PORTION OF PARCELS 3 AND 4 OF PARCEL MAP NO. 17755, ON FILE IN THE
OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, IN THE CITY, OF SAN DIEGO,
COUNTY OF SAN DIEGO, STATE OF CALIFORNIA. MORE PARTICULARLY DESCRIBED AS
FOLLOWS:
EGINNING AT THE SOUTHWEST CORNER OF SAID PARCEL 3; THENCE ALONG THE WESTERLY
LINE OF SAID PARCEL 3
1. NORTH 04 degrees 43'00" EAST 40.06 FEET; THENCE
2. NORTH 00 degrees 19'33" WEST 199.65 FEET; THENCE LEAVING SAID WESTERLY
LINE
3. NORTH 89 degrees 57'12" EAST 57.50 FEET; THENCE
4. NORTH 00 degrees 19'33" WEST 99.68 FEET: THENCE
5. NORTH 86 degrees 40'27" WEST 31.29 FEET; THENCE
6. NORTH 00 degrees 00'00" EAST 23.80 FEET; THENCE
7. SOUTH 85 degrees 37'38" EAST 274.92 FEET TO A POINT ON THE WESTERLY LINE
OF SEQUENCE DRIVE AS DEDICATED
PER MAP NO. 12685, ON FILE IN
THE OFFICE OF THE COUNTY
RECORDER OF SAN DIEGO COUNTY,
IN THE CITY OF SAN DIEGO,
COUNTY OF SAN DIEGO, STATE OF
CALIFORNIA. POINT ALSO LIES ON
THE ARC OF A 1573.00 FOOT
RADIUS CURVE, CONCAVE EASTERLY,
A RADIAL TO TO SAID POINT BEARS
NORTH 87 DEGREES 02' 12" WEST:
THENCE ALONG THE ARC OF SAID
CURVE AND SAID WESTERLY LINE
8. SOUTHERLY 318.25 FEET THROUGH A CENTRAL ANGLE OF 11
DEGREES 35'31"; THENCE LEAVING
SAID WESTERLY LINE IN A NON-
TANGENT DIRECTION
9. SOUTH 86 degrees 32'09" WEST 380.84 FEET TO THE POINT OF BEGINNING.
CONTAINS 2.69 AC. MORE OR LESS.
/s/ Mark J. Rowson Jan 25, 1999
----------------------------------------------
MARK J. ROWSON, R.C.E. 30836 DATE
[SEAL] (Registration expires 3-31-2000)
EXHIBIT A
---------
<PAGE>
EXHIBIT "B"
SITE PLAN
[TO BE ATTACHED]
EXHIBIT B
---------
<PAGE>
EXHIBIT "C"
MEMORANDUM OF LEASE
RECORDING REQUESTED BY: )
AND WHEN RECORDED RETURN TO: )
)
Applied Micro Circuits Corporation )
c/o Luce, Forward, Hamilton & Scripps, LLP)
600 West Broadway, Suite 2600 )
San Diego, California 92101 )
Attn: David Hymer, Esq. )
- -------------------------------------------
(Space Above For Recorder's Use Only)
MEMORANDUM OF LEASE
1. This Memorandum of Lease is made as of the ______ day of __________,
1999, by and between KILROY REALTY, L.P., a Delaware limited partnership
("Landlord"), and APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation
("Tenant"). By this Memorandum, for good and adequate consideration, Landlord
does hereby lease to Tenant and Tenant does hereby rent from Landlord that
certain real property depicted on Schedule "A" attached hereto as the Demised
-----------
Premises, which real property is situated in the City of San Diego, County of
San Diego, State of California.
2. The terms, conditions, covenants and agreements governing the leasing
of the Demised Premises from Landlord to Tenant are set forth at length in that
certain Lease (the "Lease") between Landlord and Tenant dated as of the same
date as this Memorandum. All of the terms, conditions, covenants and agreements
in the Lease are incorporated into this Memorandum with the same force and
effect as if they were fully recited in this document
3. The term of the Lease shall commence upon the substantial completion of
certain improvements to be constructed by Landlord at the Demised Premises, and
shall terminate ten (10) years thereafter, unless sooner terminated or extended
as provided in the Lease. Tenant has two (3) consecutive options to extend the
term of the Lease for a period of five (5) years each.
4. In the event of inconsistency between the terms of this Memorandum or
the Lease, the terms of the Lease shall control.
EXHIBIT C
---------
1
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Memorandum of Lease as
of the date first above written.
LANDLORD:
KILROY REALTY, L.P.,
a Delaware limited partnership
By: Kilroy Realty Corporation,
a Maryland corporation
Its General Partner
By:_____________________________
Name:___________________________
Its:_______________________
TENANT:
APPLIED MICRO CIRCUITS CORPORATION,
a Delaware corporation
By: ____________________________
Joel O. Holliday
Its: Vice President, Finance and Administration
STATE OF )
)ss.
COUNTY OF )
On _____________________,before me, ______________________, a Notary Public in
and for said state, personally appeared ___________________, personally known to
me (or proved to me on the basis of satisfactory evidence) to be the person
whose name is subscribed to the within instrument and acknowledged to me that
he/she executed the same in his/her authorized capacity, and that by his/her
signature on the instrument, the person, or the entity upon behalf of which the
person acted, executed the instrument.
WITNESS my hand and official seal.
Notary Public in and for said State
EXHIBIT C
---------
2
<PAGE>
STATE OF )
) ss.
COUNTY OF )
On ____________________, before me, ____________________, a Notary Public in
and for said state, personally appeared _________________, personally known to
me (or proved to me on the basis of satisfactory evidence) to be the person
whose name is subscribed to the within instrument and acknowledged to me that
he/she executed the same in his/her authorized capacity, and that by his/her
signature on the instrument, the person, or the entity upon behalf of which the
person acted, executed the instrument.
WITNESS my hand and official seal.
Notary Public in and for said State
EXHIBIT C
---------
3
<PAGE>
SCHEDULE "A"
DESCRIPTION OF DEMISED PREMISES
LEGAL DESCRIPTION
BEING A PORTION OF PARCELS 3 AND 4 OF PARCEL MAP NO. 17755, ON FILE IN THE
OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, IN THE CITY, OF SAN DIEGO,
COUNTY OF SAN DIEGO, STATE OF CALIFORNIA. MORE PARTICULARLY DESCRIBED AS
FOLLOWS:
BEGINNING AT THE SOUTHWEST CORNER OF SAID PARCEL 3; THENCE ALONG THE WESTERLY
LINE OF SAID PARCEL 3
1. NORTH 04 degrees 43'00" EAST 40.06 FEET; THENCE
2. NORTH 00 degrees 19'33" WEST 199.65 FEET; THENCE LEAVING SAID WESTERLY
LINE
3. NORTH 89 degrees 57'12" EAST 57.50 FEET; THENCE
4. NORTH 00 degrees 19'33" WEST 99.68 FEET: THENCE
5. NORTH 86 degrees 40'27" WEST 31.29 FEET; THENCE
6. NORTH 00 degrees 00'00" EAST 23.80 FEET; THENCE
7. SOUTH 85 degrees 37'35" EAST 274.92 FEET TO A POINT ON THE WESTERLY LINE
OF SEQUENCE DRIVE AS DEDICATED
PER MAP NO. 12685, ON FILE IN
THE OFFICE OF THE COUNTY
RECORDER OF SAN DIEGO COUNTY, IN
THE CITY OF SAN DIEGO, COUNTY OF
SAN DIEGO, STATE OF CALIFORNIA.
POINT ALSO LIES ON THE ARC OF A
1573.00 FOOT RADIUS CURVE,
CONCAVE EASTERLY, A RADIAL TO TO
SAID POINT BEARS NORTH 87
DEGREES 02'12" WEST: THENCE
ALONG THE ARC OF SAID CURVE AND
SAID WESTERLY LINE
8. SOUTHERLY 318.25 FEET THROUGH A CENTRAL ANGLE OF 11
DEGREES 35'31"; THENCE LEAVING
SAID WESTERLY LINE IN A NON-
TANGENT DIRECTION
9. SOUTH 86 degrees 32'09" WEST 380.84 FEET TO THE POINT OF BEGINNING.
CONTAINS 2.69 AC. MORE OR LESS.
/s/ Mark J. Rowson Jan 25, 1999
----------------------------------------------
MARK J. ROWSON, R.C.E. 30836 DATE
[SEAL] (Registration expires 3-31-2000)
SCHEDULE A
----------
<PAGE>
EXHIBIT 10.31
[*] CERTAIN INFORMATION IN EXHIBIT 10.31 HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
CUSTOM SALES AGREEMENT
BASE AGREEMENT
- --------------------------------------------------------------------------------
International Business Machines Corporation
AGREEMENT NO. 000144
CUSTOMER: APPLIED MICRO CIRCUITS CORPORATION
6290 SEQUENCE DRIVE
SAN DIEGO, CA 92121-4358
This Custom Sales Agreement, which consists of this Base Agreement and Statement
of Work Attachments, shall be referred to as the "Agreement". The term of this
Agreement commences on July 14, 1998 and expires on [*]. [*] to encompass the
Process which includes [*] will the customer have access to [*] Process(es).
The Customer shall have access to [*] Process(es) during the entire term of the
Agreement ("Production Term"). The parties agree that this Agreement may be
renewed annually upon mutual consent.
By signing below, the parties each agree to be bound by: (1) the terms and
conditions of this Agreement; and (2) the initial Statement of Work, Attachment
No. 1. No additional signature on the initial Statement of Work is required.
Subsequent Statement of Work Attachments under this Agreement must be signed by
the parties to become effective.
Upon signature by both parties, it is agreed this Agreement constitutes the
complete and exclusive agreement between them superseding any prior agreements,
written or oral, relating to the subject matter notwithstanding anything
contained in any document issued by either party. This Agreement may not be
amended or modified except by a written amendment signed by both parties.
The parties expressly acknowledge that they have received and are in possession
of a copy of any referenced item which is not physically attached to the
Agreement and any such item will be treated as if attached, and will be
considered an Attachment for the purposes of this Agreement.
ACCEPTED AND AGREED TO:
INTERNATIONAL BUSINESS MACHINES CORPORATION
By:_______________________________
BY:___________________________
NAME:
NAME:
TITLE:
TITLE:
DATE:_____________________________
DATE:_________________________
1.0 DEFINITIONS
-----------
Capitalized terms in this Agreement have the following meanings. An Attachment
may define additional terms; however, those terms apply only to that Attachment.
1.1 "Item" shall mean any part, specification, design, document, report, data
or the like which Customer delivers to IBM under this Agreement.
1.2 "Manufacturing Process" mean IBM's SiGe IC manufacturing process employed
at an IBM facility and as adapted for use by IBM in the fabrication of Products.
1.3 "NTAT" means Normal Turn Around Time, which denotes IBM's standard
timeframe for completion of work performed.
1.4 "Product" shall mean production units to be sold or purchased under this
Agreement. Products shall not include Prototypes.
Page 1 of 7
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CUSTOM SALES AGREEMENT
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1.5 "Prototype" shall mean a preliminary version of a Product or an
experimental device sold or purchased under this Agreement which may or may not
be functional, is intended for evaluation and testing, is not suitable for
production in commercial quantities, and [*].
1.6 "Purchase Order Lead Time" shall mean the required minimum amount of time
between IBM's receipt of the purchase order issued by Customer and the requested
shipment date necessary to accommodate manufacturing cycle time.
1.7 [*]
1.8 "Related Company" of a party hereunder shall mean a corporation, company or
other entity which controls or is controlled by such party or by another Related
Company of such party, where control means ownership or control, direct or
indirect, of more than fifty (50) percent of: (i) the outstanding voting shares
or securities (representing the right to vote for the election of directors or
managing authority), or (ii) the ownership interests representing the right to
make decisions for such a corporation, company or other entity (as the case may
be in partnership, joint venture or unincorporated association having no
outstanding shares or securities). However, any such corporation, company or
other entity shall be deemed to be a Related Company of such party only so long
as such ownership or control exists.
1.9 "RTAT" means Rapid Turn Around Time, which denotes a faster than standard
timeframe for completion of work, as opposed to NTAT.
1.10 "Service" shall mean any manufacturing activity or design, or engineering
work IBM performs.
1.11 "Shipment Date" shall mean IBM's estimated date of shipment.
1.12 [*]
1.13 "Wafer Acceptance Criteria" means the engineering specifications,
referenced in Exhibit A of this Statement of Work, which sets forth the
technology parameters and physical criteria to which the Product will conform at
the time of delivery.
2.0 AGREEMENT STRUCTURE
-------------------
2.1 This Agreement consists of: (i) the Base Agreement which defines the basic
terms and conditions of the relationship between the parties; and (ii)
Attachments which specify the details of a specific work task. An Attachment
may include additional or differing terms and conditions, however such terms and
conditions apply only to that Attachment. Attachments also include any
specification documents agreed to by the parties, in writing, applicable to the
specific work under that Attachment.
2.2 If there is a conflict among the terms and conditions of the various
documents, Attachment terms and conditions govern.
2.3 Purchase orders and acknowledgements will be used to convey information
only (including, as to purchase orders, method of shipment and carrier in
accordance with Section 3.0 of the Attachment) and any terms and conditions on
those are void and replaced by this Agreement.
2.4 Either party may include its Related Companies under this Agreement by
written agreement with the other party.
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3.0 ORDER AND DELIVERY
------------------
3.1 Customer shall order Products, Prototypes and Services by issuing written
purchase orders, which are subject to acceptance by IBM, in accordance with
Section 4.0 of the Attachment. Purchase orders for Products and/or Prototypes
must be received by IBM in advance, with at least the Purchase Order Lead Time
specified in the applicable Attachment.
3.2 Products and/or Prototypes will be shipped to Customer FOB plant of
manufacture, except for Products and/or Prototypes shipped outside the United
States which will be shipped EXWORKS (as defined in ICC INCOTERMS 1990).
3.3 Title to the Products and/or Prototypes and risk of loss shall pass to the
Customer upon delivery to the carrier for shipment to the Customer.
4.0 CANCELLATION AND RESCHEDULING
-----------------------------
4.1 If IBM's supply of the Product, Prototypes and/or Services ordered
hereunder becomes constrained, IBM will reduce the quantities of Products,
Prototypes and/or Services to be supplied to the Customer in proportion to the
reduction in quantities of products and/or services of the same technology or
utilizing the same manufacturing process to be supplied to satisfy others.
Receipt of such allocated supply and later delivery of all undelivered ordered
quantities shall constitute Customer's exclusive remedy in the event of such a
supply constraint.
4.2 Customer may cancel or reschedule an order for Products, Prototypes and/or
Services only upon prior written notice to IBM. In the event of a cancellation
or reschedule which exceeds the rescheduling rights set forth in an applicable
Attachment, Customer shall pay the quoted price for Products, Prototypes and/or
Services delivered or ready for shipment; otherwise, for Product, Prototype
and/or Services not delivered or ready for shipment, Customer shall pay the
cancellation charges set forth in the applicable Attachment.
4.3 Customer agrees that if Customer decreases the total quantity of an order
that has a unit price based on an agreed to quantity Customer will pay an
applicable higher unit price, if any, as specified in the applicable Attachment,
for previous shipments and for new shipments.
5.0 PAYMENT
-------
5.1 Prices for Products, Prototypes and Services shall be as set forth in an
applicable Attachment. With the exception of the activities referenced in
Section 5.2 of the Attachment, IBM shall invoice Customer after the Products
and/or Prototypes have been shipped or the Services provided. Payment by the
Customer will be due within thirty (30) days from the date of invoice. Late
payment of invoices will be assessed a charge equal to the lesser of one and
one-half percent (1.5%) per month or the statutorily maximum rate of interest in
accordance with the laws of the State of New York. In addition, if Customer's
account balance exceeds its credit limit with IBM, or becomes delinquent, IBM
may stop shipments to Customer or ship to Customer on a prepaid basis until the
account is current again.
5.2 Payment defined in Section 5.2 of the Attachment shall be made via bank
wire transfer to:
[*]
The following information is to be included in the wire detail:
Applied Micro Circuits Corporation
Reason for payment (Foundry Operations)
[*]
The pricing schedule in Section 5.2 of the Attachment shall act as the
Customers invoice.
6.0 TERMINATION
-----------
6.1 If either party materially breaches a term of this Base Agreement or an
Attachment, the other party may, at its option, terminate this Agreement or any
or all Attachments provided that the party in breach is given written notice of
such breach and fails to cure such breach within 30 days after delivery of such
notice (within such 30 day period, the breaching party may send the non-
breaching party written notice of the actions taken to cure the breach and the
non-breaching party shall send notice back to the breaching party as to whether
the actions taken were effective to cure the breach), or immediately in the
event of (i) insolvency, dissolution or liquidation by or against either party,
(ii) any assignment of either party's assets for the benefit of creditors, (iii)
any act or omission of an act by a party
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CUSTOM SALES AGREEMENT
BASE AGREEMENT
demonstrating its inability to pay debts generally as they become due, or (iv)
if IBM has a reasonable basis to believe any of the Items infringe intellectual
property rights.
6.2 If IBM terminates this Agreement or an Attachment pursuant to Section 6.1
of this Agreement, IBM shall be entitled to treat any or all applicable
outstanding purchase orders as if cancelled by Customer and Customer shall pay
(i) all applicable IBM NRE costs, (ii) the quoted price applicable for any
affected Products, Prototypes and/or Services delivered or ready for shipment,
and (iii) for Product, Prototype and/or Services not delivered or ready for
shipment, the cancellation charges set forth in the applicable Attachment or
Attachments. Monies owing IBM shall become immediately due and payable.
6.3 If Customer terminates this Agreement or an Attachment, IBM will fill all
applicable previously accepted purchase orders for Products and/or Prototypes,
but IBM shall not be obligated to accept further applicable purchase orders
after receiving notice.
6.4 This Base Agreement will continue after its termination or expiration with
respect to any Attachments already in place until they expire, are terminated or
completed. Provided that no monies are due IBM, applicable Items shall be
disposed of as directed by Customer in writing at Customer's expense after a
termination or expiration, subject to the provisions of Section 6.3.
6.5 [*]
6.6 [*]
7.0 CONFIDENTIAL INFORMATION
------------------------
7.1 With the exception of the terms and conditions of this Agreement, no
information exchanged between the parties shall be considered confidential
and/or proprietary to either party, or to any third party except as may be
specified pursuant to Section 7.2 below.
7.2 In the event IBM or Customer needs to disclose specific confidential
information to the other in order for IBM to furnish Products, Prototypes and/or
Services hereunder, such information shall be disclosed only pursuant to the
terms of the confidential information exchange agreement number V2518, dated
11/3/97, as executed by the parties.
8.0 LICENSE
-------
8.1 Subject to licenses expressly granted under this Agreement, no license,
immunity or other right is granted herein to either party whether directly or by
implication, estoppel or otherwise, with respect to any patent, trademark,
copyright, mask work, trade secret or other intellectual property right of
either party with the exception of: 1) Customer's right to use or resell any
Product patented and sold by IBM to Customer pursuant to this Agreement, and 2)
IBM's right to use Customer's design(s) to provide Products, Prototypes and/or
Services to Customer, pursuant to this Agreement. . .
9.0 TRADEMARK
---------
9.1 Nothing in this Agreement grants either party any rights to use the other
party's trademarks or trade names, directly or indirectly, in connection with
any product, service, promotion.
10.0 INTELLECTUAL PROPERTY AND INDEMNIFICATION
-----------------------------------------
10.1 IBM agrees to indemnify Customer against damages assessed against Customer
as a result of a final judgment of a court of competent jurisdiction holding
that any Product sold or Service provided by IBM in connection with a [*]
Process [*] to Customer hereunder infringes a patent, maskwork right or
copyright of a third party in any country in which IBM sells or provides similar
products or services, up to the amount paid by Customer for Products or Services
provided hereunder; PROVIDED THAT Customer (1) promptly notifies IBM, in
writing, of the charge of infringement; (2) allows IBM to control and cooperates
with IBM in the defense and any related settlement action; and (3) upon the
written request of IBM (a) allows IBM to modify or replace the Product with a
non-infringing Product, consistent with this Base Agreement and all applicable
Attachments, or (b) returns the Product to IBM for a credit equal to Customer's
purchase price for the Product, provided Customer has followed generally
accepted accounting principles. IBM has no obligation regarding any claim of
infringement to the extent such claim is based on any of the following: (1)
Customer's modification of a Product; (2) the combination, operation, or use of
a Product with any product, data, or apparatus that IBM did not provide; (3)
infringement by a non-IBM Product alone, as opposed to its combination as part
of a system of Products that IBM provides; or (4) IBM's manufacture or
modification of a Product in compliance with Customer's specifications.
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CUSTOM SALES AGREEMENT
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10.1.1 Customer agrees to indemnify IBM against damages assessed against IBM as
a result of a final judgment of a court of competent jurisdiction holding that
any Product or Prototype sold by Customer hereunder infringes a patent, maskwork
right or copyright of a third party, up to the amount paid by Customer for
Products or Prototypes provided hereunder; PROVIDED THAT IBM (1) promptly
notifies Customer, in writing, of the charge of infringement; and (2) allows
Customer to control and cooperates with Customer in the defense and any related
settlement action. The foregoing states the entire obligation and exclusive
remedy of IBM and Customer regarding any claim of patent or copyright
infringement relating to any Product and/or Prototypes sold or Service provided
hereunder.
10.2 Customer warrants that it is the originator, rightful owner or licensee
of all Items supplied to IBM hereunder and that to the best of Customer's
knowledge no part of such Items infringes any intellectual property rights.
11.0 LIMITATION OF LIABILITY
-----------------------
11.1 Neither party shall be entitled to indirect, incidental, consequential or
punitive damages, including lost profits based on any breach or default of the
other party, including those arising from infringement or alleged infringement
of any patent, trademark, copyright, mask work, or any other intellectual
property.
11.2 Except for nonpayment, no action, regardless of form, arising from this
Agreement may be brought by either party more than one (1) year after the cause
of action has arisen. IBM's liability for any and all causes of action shall be
limited in the aggregate to the greater of: (1) [*] or (2) the applicable IBM
price to Customer for the specific Products, Prototypes and/or Services that
caused the damages or that are the subject matter of, or directly related to,
the cause of action.
11.3 The limitation of Section 11.2 does not apply to: (1) payments referred to
in Section 10.1 and (2) damages for bodily injury (including death) and damage
to real property and tangible personal property caused by IBM's negligence.
11.4 Under no circumstances is IBM liable for any of the following: (A) third
party claims against Customer for losses or damages other than those in 11.3(1)
and (2) above; or (B) loss of, or damage to, Customer's or another parties'
records or data; or (C) when the Products and/or Services are used in
conjunction with medical devices or nuclear materials.
12.0 WARRANTIES
----------
12.1 IBM warrants all Products delivered hereunder to be free from defects in
material and workmanship for a period of one (1) year from the date of shipment
unless otherwise stated in an Attachment applicable to such Products. Customer
acknowledges that the functionality of Products is contingent on Customer's
designs and, therefore, such warranty does not apply to the functionality of
Products fabricated under this Agreement to the extent that functionality is
dependant on such designs. All Prototypes are provided "As Is" without warranty
of any kind.
12.2 THE FOREGOING WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING THE IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS OR USAGE
FOR A PARTICULAR PURPOSE.
12.3 No course of dealing, course of performance, usage of trade, or
description of Product, Prototype or Service shall be deemed to establish a
warranty, express or implied.
12.4 If Customer claims that any Products and any incidental Services are
nonconforming, Customer shall (1) promptly notify IBM, in writing, of the basis
for such nonconformity; (2) follow IBM's instructions for the return of the
Products; and (3) return such Products freight collect to IBM's designated
facility. If IBM determines the Products are nonconforming, IBM will, at its
option, repair or replace the defective Products, or issue a credit or rebate
for the purchase price.
12.5 IBM's sole liability and Customer's sole remedy for breach of warranty
shall be limited as stated in this Section 12.
13.0 TAXES
-----
13.1 IBM shall bill Customer for all applicable sales, use and gross receipts
taxes, unless Customer provides IBM with appropriate exemption certificates.
14.0 NOTICES
-------
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14.1 All communications and notices between the parties concerning this
Agreement shall be given to the appropriate individual listed in the applicable
Attachment and shall be deemed sufficiently made on the date if given by
personal service, sent via certified mail, facsimile or electronic data
interchange provided that any notice sent by certified mail shall be deemed to
be delivered five (5) business days after deposit with postal authorities.
Communication by facsimile or electronic data interchange is acceptable as a
"writing". The autographs of representatives of the parties, as received by
facsimile or electronic data interchange, shall constitute "original"
signatures.
15.0 INDEPENDENCE OF ACTION
----------------------
15.1 Each party agrees that this Agreement will not restrict the right of
either party to enter into agreements with other parties for same or similar
work, or to make, have made, use, sell, buy, develop, market or otherwise
transfer any products or services, now or in the future, so long as confidential
information is not disclosed. IBM shall not sell, market or otherwise transfer
to any third party any Products using the trademark or trade name of Customer
without prior written consent of Customer.
16.0 UTILIZATION OF PRODUCTS
-----------------------
16.1 Customer agrees that it will not act as an agent or as a "pass through
foundry" for purchasing Products and or Prototypes for others from IBM
hereunder. Customer also represents that all Prototypes from [*] purchased
under this Agreement shall only be used by Customer internally and shall not be
resold by Customer without IBM's prior written consent, except in situations
where Customer is selling a limited number of Prototypes to its customers,
provided that all such sales shall be at Customer's sole risk, and provided that
Customer clearly sets forth in a written agreement with its customers that the
Prototypes are intended for evaluation purposes only and are sold "as is"
without warranty of any kind. .
17.0 GENERAL
-------
17.1 Neither party shall be responsible for failure to fulfill its obligations
under this Agreement due to fire, flood, war or other such cause beyond its
reasonable control and without its fault or negligence (excluding labor disputes
or payment obligations) provided it promptly notifies the other party.
17.2 The substantive laws of the State of New York govern this Agreement
without regard to conflict of law principles. Both parties agree to waive their
right to a jury trial in any dispute arising out of this Agreement. The
prevailing party in any legal action hereunder shall be entitled to
reimbursement by the other party for its expenses, including without limitation
reasonable attorney's fees.
17.3 Customer agrees that IBM may assign its right to collect payments under
this Agreement. Customer may not assign any of its rights under this Agreement
relating to IBM's [*] Manufacturing Processes [*] without IBM's consent.
Otherwise, either party may assign its rights under this Agreement only in the
event of a sale of all or substantially all of the assets of that part of its
business relating to the Agreement, provided that if party to whom Customer
wants to assign is currently in the business of manufacturing semiconductor
products, the assignment will be subject to IBM's consent.
17.4 No delay or failure by either party to act in the event of a breach or
default hereunder shall be construed as a waiver of that or any subsequent
breach or default of any provision of this Agreement.
17.5 If any part, term or provision of this Agreement is declared unlawful or
unenforceable, by judicial determination or performance, the remainder of this
Agreement shall remain in full force and effect.
17.6 Any terms of this Agreement which by their nature extend beyond expiration
or termination of this Agreement shall remain in effect until fulfilled and
shall bind the parties and their legal representatives, successors, heirs and
assigns.
17.7 The headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement.
17.8 Each party will comply, at its own expense, with all applicable federal,
state and local laws, regulations and ordinances including, but not limited to,
the regulations of the U.S. Government relating to export and re-export.
Customer agrees that it is responsible for obtaining required government
documents and approvals prior to export and re-export of any commodity, machine,
software or technical data.
17.9 The UN Convention on Contracts for the International Sale of Goods shall
not apply to this Agreement.
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17.10 Press releases and other like publicity, advertising or promotional
material which mention the other party by name, this Agreement or any term
hereof shall be agreed upon by both parties in writing prior to any release.
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<PAGE>
SEMICONDUCTOR CUSTOM MANUFACTURING ATTACHMENT NO.
CUSTOM SALES AGREEMENT NO.
STATEMENT OF WORK
CUSTOM SEMICONDUCTOR MANUFACTURING TASK ORDER
1.0 SCOPE OF WORK
1.1 IBM will provide the following:
[*]
1.2 Subject to the terms and conditions of this Statement of Work, Customer will
provide IBM with the Customer's Items and cooperate with IBM to enable IBM to
perform foundry services in accordance with this Agreement.
1.3 IBM will provide a technical coordinator(s) for coordination of Customer
engineering activities, as identified in Section 9.0 of this Attachment. The
duties of the technical coordinator(s) will include arranging for training (as
may be agreed upon from time to time by the parties), providing development lot
tracking information, coordinating development lot requirements with Customer
and aiding Customer in the resolution of technical issues regarding the use of
pre-qualification models and processes.
1.4 [*]
1.5 IBM will provide access to an ECL library for Silicon Germanium which it
agrees to make available to Customer under this Agreement. Updates to this
library will be provided to Customer at least annually. IBM will consider
additions or modifications to this library as suggested by Customer. IBM will
provide the initial documentation for the ECL library to Customer within 30 days
of the effective date of this Agreement. The ECL library shall be licensed under
the terms of the IBM AMS Design Kit License Agreement, as modified, and as
attached as Exhibit B of this Agreement.
1.6 When available and if requested by Customer, IBM shall provide Customer with
preliminary versions of models and design kits [*], but only for the purpose of
developing Prototypes to be manufactured solely by IBM. Such models and design
kits shall be licensed under the terms of the IBM AMS Design Kit License
Agreement, dated and attached as Exhibit B of this Agreement. IBM may modify or
alter the models and design kits [*] at any time without notice. Such changes
may cause the Prototype designs to be unuseable for the manufacture of Products.
1.7 The charges associated with the activities in Sections 1.3, 1.4, 1.5 and 1.6
of this Attachment are included as part of the development pricing in Section
5.2 of this Attachment.
1.8 Customer may, at any time and from time to time, by written notice to IBM,
request changes to the part numbers, specifications, or work scope. IBM will
submit a written report to Customer setting forth the probable effect, if any,
of such requested change on prices, payment or delivery. IBM shall not proceed
<PAGE>
with any change until authorized in writing by Customer. The parties shall
promptly amend this Attachment to incorporate any agreed changes.
1.9 IBM may implement engineering changes required to satisfy governmental
standards, protect Product or system integrity, or for environmental, health or
safety reasons, and shall notify Customer if such changes are implemented.
Customer will use reasonable efforts to incorporate such changes in Products
already shipped by IBM. IBM may implement engineering changes that result in
cost reductions to Product with prior approval of Customer, which will not be
unreasonably withheld.
2.0 FORECASTING
Initial Forecast. Each Attachment shall contain an initial forecast of
Customer's anticipated unit production demand requirements for Product(s) and/or
Prototypes for at least the [*] period immediately following execution of the
Attachment. Customer shall submit a purchase order (pursuant to Section 4.0)
with the initial forecast for a minimum of the [*] period.
Subsequent Forecasts. Customer shall provide an updated forecast in writing to
IBM, on a monthly basis by no later than the fifteenth (15th) day of each month
during the term of the Attachment. Each such forecast will cover at least a
rolling [*] (not to exceed the term of this Attachment), and will be reviewed
for acceptance by IBM. Within ten (10) business days after receipt IBM shall
notify Customer with written notice of whether such forecast has been accepted
or rejected.
With each updated forecast Customer shall submit a purchase order (pursuant to
Section 4.0). This purchase order shall be for the quantity of Products and/or
Prototypes forecast for the [*] month of the rolling forecast (months [*] having
already been committed under purchase order(s) pursuant to previous
forecast(s)). Customer agrees that if it does not submit purchase orders for
accepted forecasts, as discussed in Section 7.0 of this Attachment, then
Customer shall be subject to the cancellation charges described therein. All
purchase orders submitted shall be subject to the terms of Section 4.0 of the
Base Agreement.
IBM will accept purchase orders for months [*] of any forecast, provided the
forecast has been accepted by IBM, the orders are placed in accordance with
Section 4.0 and the quantities requested are within ten percent (10%) of the
previously accepted forecast for said months.
Months [*] (or greater, if Customer submits forecasts beyond [*]) of each
forecast are non-binding on Customer and IBM, and provided for convenience
purposes only.
3.0 Orders
After the parties have executed a Attachment, Customer will request delivery of
Products or Prototypes by issuing written purchase orders to IBM by the fifth
(5th) day of each calendar month. As set forth in Section 2.0, Customer will
maintain a minimum of [*] on IBM and may place purchase order(s) for
<PAGE>
months [*] of each forecast. Purchase orders are subject to, and IBM will accept
and ship against purchase orders that comply with, the terms and conditions of
the Agreement and this Attachment, and are consistent with the most recently
accepted forecasts and the most recent Customer credit limit as granted by IBM.
Customer will request delivery of Products or Prototypes by issuing written
purchase orders to the IBM ordering location identified in Section 8.0 of this
Attachment. Purchase orders shall only specify:
a) Customer's purchase order number;
b) Customer's tax status - exempt or non-exempt;
c) ship to location - complete address;
d) bill to location - complete address;
e) order from location - complete address;
f) Product part numbers and quantities being ordered
(in increments of the Minimum Order Quantity ("MOQ");
g) the Product's applicable unit price;
h) shipping instructions, including preferred courier;
i) requested shipment dates;
j) the Agreement Number of this Agreement;
k) Name of Customer contact.
4.0 CUSTOMER REQUIREMENTS
4.1 Wafer:
- Levels of metal: [*]
4.2 Wafer test: Wafers will conform to the Wafer Acceptance Criteria
4.3 Package: N/A
5.0 Pricing
5.1 Production pricing:
Untested [*] process
Wafers Per Calendar Year [*]
Price Per Wafer (not to exceed) [*]
Optional Features (1998 pricing only):
[*] [*] per wafer
[*] [*] per wafer
[*] [*] per wafer
[*] [*] per wafer
[*] [*] per wafer
<PAGE>
RTAT's will be ordered using the normal forecast process at a price of [*]
for mask set and [*] for wafers [*]. (For [*] level metal, wirebond
configurations only).
5.2 Pricing for Section 1.1:
Pricing for the activities described in Section 1.1 of the Attachment, not
to include the pricing of Section 5.1, above, is a total of [*], due as
follows: 30 days from signing of this Agreement:[*];
Due on [*] : [*];
Due on [*] : [*];
The above [*] fee includes [*] runs, up to [*] which can be used for unqualified
processes and not to exceed [*] in any calendar year. RTAT runs include an IBM
Mask Set from Customer, clean GDSII tape and the process start of [*] Wafers per
run. RTAT runs under this Section cannot be used for [*] process.
Additional Mask plate for RTAT's: [*]
6.0 DELIVERY SCHEDULE AND MINIMUM ORDER QUANTITIES
Each Customer order shall be for a minimum of [*] Wafers. Delivery shall be made
in increments of not less than [*]Wafers, and shall be delivered no more than
six months apart.
Turn around time (TAT) targets in calendar days from receipt of clean GDSII tape
(For 3 level metal, wirebond configurations only):
4Q98 1999
RTAT [*] [*]
NTAT [*] [*]
7.0 CANCELLATION CHARGES
By giving written notice, Customer may cancel, in whole or in part, any order
for Product. IBM may impose a cancellation charge for such canceled order, or
portion thereof, subject to the provisions of Sections 4.2 and 6.2 of the
Agreement, in accordance with the following table:
<TABLE>
<CAPTION>
Number of Calendar Days Prior to Scheduled Shipment Date Cancellation Charge Expressed as a Percentage of the
that Notice of Cancellation is Received by IBM Applicable Product Production Price
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
0-30 [*]
- ----------------------------------------------------------------------------------------------------------------------
31-60 [*]
- ----------------------------------------------------------------------------------------------------------------------
61-105 [*]
- ----------------------------------------------------------------------------------------------------------------------
105+ [*]
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Notwithstanding the above, if the pattern generator tape has been released to
the mask shop for a specific Product and/or Prototype, including a shared mask
set, Customer agrees to pay the quoted purchase price of the mask.
Also, for a purchase order which is more than thirty (30) days from its
scheduled shipment date, Buyer may request in writing a onetime deferral of the
scheduled shipment date not to exceed thirty (30) days, with no cancellation
charge imposed. If Buyer subsequently cancels a deferred order, Buyer agrees to
pay the applicable Product cancellation charge above.
<PAGE>
8.0 ORDERING LOCATION: SHIP TO: BILL TO:
Same Same
9.0 COORDINATORS/ADMINISTRATORS
Technical Coordinators:
Customer: [*] IBM: [*]
Phone: [*] Phone: [*]
Fax: [*] Fax: [*]
Email: [*] Email: [*]
Contract Administrators:
Customer: TBD IBM: [*]
Phone: Phone: [*]
Fax: Fax: [*]
Email: Email: [*]
<PAGE>
Exhibit A
1.0 PRODUCT NAME AND DESCRIPTION:
Untested Wafers
2.0 PRODUCT SPECIFICATIONS, WAFER ACCEPTANCE CRITERIA:
See Exhibit C, attached, for Wafer Acceptance Criteria,
3.0 CUSTOMER'S ITEMS:
Year:
Month:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
<VAR5> <VAR5> <VAR5> <VAR5> <VAR5> <VAR5> <VAR5> <VAR5> <VAR5> <VAR5> <VAR5> <VAR5>
</TABLE>
<PAGE>
EXHIBIT B
License
-------
COPYRIGHT NOTICE
The enclosed IBM AMS Design Kit materials (documentation, diskette, and/or
tapes) are (C)Copyright 1993, 1994, 1995, 1996, 1997 IBM Corporation. All
rights reserved. The software describe in this document is furnished under a
license agreement. The software may be used or copied under the terms of the
agreement.
LICENSE AGREEMENT
IMPORTANT-READ BEFORE INSTALLING
Read this agreement carefully before installing the IBM AMS Design Kit
(hereafter Program). This letter agreement between International Business
Machines, A New York corporation, having a place of business at Essex Junction,
Vermont (here after IBM) and You, if accepted by you, represents a Program
License and Loan Agreement for the referenced Program, more specifically
describe in the Attachment to this agreement. By installing the Program, you
accept the terms of this agreement. If you do not accept the terms of this
agreement, do not install this Program, and please return to IBM this letter and
any software documentation received.
You and IBM agree that the following terms and conditions will apply to any IBM
Program licensed under this Agreement. This is a license agreement and not an
agreement for sale. IBM retains title to the copy of the Program provided to you
and any copy made from it.
When an individual Program becomes subject to this Agreement, IBM will grant you
a nontransferable and nonexclusive license in the United State and Puerto Rico
for the Program. You may not transfer the Program without IBM's written
consent.
DEFINITIONS
- -----------
The term "Program" means 1) machine readable instruction or statements, 2) any
machine readable data base, and/or 3) any machine readable or printed related
materials, including portions of such Program. Programs are copyrighted. The
term "use," relating to the machine-readable portion of the Program, means
copying any portion of the Program into a machine for processing, transmitting
it to a machine for processing, and performing such processing.
INTENDED USE
- ------------
IBM AMS Design Kits are provided for uses by customers of IBM Microelectronics
Division's Analog & Mixed Signal Technologies. They are intended solely to be
used as design aids with other software tools to produce a Customer design in of
IBM's Analog & Mixed Signal Technologies.
The AMS Design kit contains information (performance models, design rules,
guidelines, etc.) with which to estimate the possible future performance of a
product. Your use of such information DOES NOT guarantee performance or
correctness of the product design. You acknowledge these limitation and agree
that you will not rely solely upon the results derived from the use of
information provided in the AMS design kit in determining the final design,
composition, structure, safety, reliability, or performance of any product. IBM
will not be liable for any use of the AMS Design Kit including, but not limited
to, misuse, errors
<PAGE>
EXHIBIT B
in judgement or application of the AMS Design Kit in the development or use of
said products.
YOU MAY
- -------
1. Use the Program only for purposes of evaluation or as describe under the
preceding section "Intended Use", and
2. Copy or translate the Program's machine readable portion into any machine
readable or printed form to provide sufficient copies to support your
authorized use, storage and modifications of the Program.
YOU MAY NOT
- -----------
1. Reverse assemble or reverse compile the Program without IBM's prior written
consent;
2. Generally make the Program available to a network accessible by persons
outside of your organization;
3. Distribute any Program to any other person, including other licensees,
without IBM's written consent;
4. Use, copy, modify, or transfer the Program, except as expressly provide for
in this Agreement, and
5. Sublicense, rent or lease this Program.
SUBSEQUENT RELEASES
- -------------------
IBM may make a subsequent Program release available to you for your use. While
you may continue use of the previous release, no Program service will be
available for previous releases.
PROTECTION AND SECURITY
- -----------------------
You will take appropriate action, by instruction, agreement or otherwise, with
any persons permitted access to any Program, to satisfy your obligations under
this Agreement.
You will reproduce and include the copyright notices and any other legend on any
copies, modifications, or portions merged into any other Program.
You will maintain records of the number and location of all copies of the
Program.
You will insure, before disposing of any media, that any Program contained on it
has been erased or destroyed.
For purposes specifically related to your use of the Program, You may make the
Program available to 1) your employees or IBM's employees or 2) other persons a)
during the period they are on your premises or b) whom you authorize to have
remote access to the Program. You may not make the Program in any form
available to any persons not associated with your organization through IBM's'
written consent.
TERM
- ----
The license granted herein is effective for the period, as set forth in the
Attachment, after you receive the Program for a maximum period of 90 days should
the number of days not be indicated in the Attachment. This license may be
renewed upon your written request and IBM's approval.
You may terminate this agreement at any time by destroying the Program together
with all copies, modification and merged
<PAGE>
EXHIBIT B
portions in any form, It will also terminate upon conditions set forth elsewhere
in this Agreement or if you fail to comply with any term or condition of this
Agreement. You agree upon such termination to destroy the Program together with
all copies, modifications and merge portions in any form.
PATENTS AND COPYRIGHTS
- ----------------------
If the operations of a Program becomes, or IBM believes is likely to become the
subject of a claim that it infringes a patent or copyright in the United State
or Puerto Rico you will permit IBM, at its option and expense, either to secure
the right for you to continue using that Program or to replace or modify it so
that it becomes noninfringing. However, if either of the foregoing alternatives
is available on terms which are reasonable in IBM's judgment, you will return
the Program to IBM upon IBM's written request.
IBM will have no obligation with respect to any such claim based upon our
modification of IBM equipment, Programs or programming or their combination,
operation or use with any non-IBM apparatus or Programs.
IBM will not have any liability regarding patent or copyright infringement for
non-IBM items.
This action states IBM's entire obligation to you regarding claims of patent or
copyright infringement.
CONFIDENTIAL INFORMATION
- ------------------------
The parties agree that all information exchanged hereunder will be
nonconfidential. If the activity under which this license is given requires
the exchange or transfer of confidential information, a separate confidentiality
agreement will be executed as part of, or will be an amendment to, this
Agreement and the attachment to this Agreement will be so noted.
LIMITED WARRANTY AND DISCLAIMER OF WARRANTY
- -------------------------------------------
IBM warrants the media on which the Program is furnished to be free from defects
in materials and workmanship under normal use for 90 days from the date of
delivery to you by IBM.
ALL IBM PROGRAMS ARE PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER
EXPRESS OR IMPLIED. THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE OF THE
PROGRAM IS WITH YOU. SHOULD THE PROGRAM PROVE DEFECTIVE, YOU (AND NOT IBM OR AN
IBM AUTHORIZED REPRESENTATIVE) ASSUME THE ENTIRE COST OF ALL NECESSARY
SERVICING, REPAIR OR CORRECTION.
IBM does not warrant that the functions contained in any Program will meet your
requirements or that the operation of the Program will be corrected.
THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
SOME STATES DO NOT ALLOW THE EXCLUSION OF IMPLIED WARRANTIES, SO THE ABOVE
EXCLUSION MAY NOT APPLY TO YOU. THIS WARRANTY GIVES YOU
<PAGE>
EXHIBIT B
SPECIFIC LEGAL RIGHTS AND YOU MAY ALSO HAVE OTHER RIGHTS WHICH VARY FROM STATE
TO STATE.
LIMITATION OF REMEDIES
- ----------------------
IBM's entire liability and your exclusive remedy shall be as follows:
1. IBM will replace media not meeting IBM's Limited Warranty if returned to
IBM.
2. In the alternative, if IBM is unable to deliver replacement media free of
defects in materials and workmanship, you may terminate this Agreement by
returning the Program and charges imposed, if any, will be refunded.
IN NO EVENT WILL IBM BE LIABLE TO YOU FOR ANY LOST PROFITS, LOST SAVINGS OR
OTHER INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THE USE OF THE PROGRAM,
EVEN IF IBM OR AN AUTHORIZED REPRESENTATIVE HAS BEEN ADVISED OF THE POSSIBILITY
OF SUCH DAMAGES, OR FOR ANY CLAIM BY ANY OTHER PARTY.
SOME STATES DO NOT ALLOW THE LIMITATION OR EXCLUSION OF LIABILITY FOR INCIDENTAL
OR CONSEQUENTIAL DAMAGES SO THE ABOVE LIMITS OR INCLUSION MAY NOT APPLY TO YOU.
IBM's liability to you for actual damages for any cause whatsoever, and
regardless of the form of action, shall be limited to the grate of $5,000 or the
money paid for the Program that caused the damages or that is the subject matter
of or is directly related to, the cause of action.
SERVICE
- -------
Service from IBM, if any, will be described in Program specifications or in the
statement of service, supplied with the Program, if there are no Program
specifications.
GENERAL
- -------
AND ATTEMPT TO SUBLICENSE, RENT OR LEASE, OR, EXPECT AS EXPRESSLY PROVIDED FOR
IN THIS Agreement, to transfer any of the rights, duties or obligations
hereunder is void.
You may not use IBM's trademarks or trade names, or refer to this agreement or
your activity under this agreement, in connection with any product, promotion or
publication, without IBM's written approval.
You agree to comply will all United States and foreign laws and regulations
relating to the export of technical information or data.
In the event of the termination or expiration of this agreement, any provisions
of this agreement which by their nature extend beyond the expiration or
termination date shall remain in effect until fulfilled.
This Agreement will be constructed under the laws of the State of New York
without regard to its conflict of laws.
THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS AGREEMENT, UNDERSTAND IT, AND
AGREE TO BE BOUND BY ITS ITEMS AND CONDITION. YOU AND IBM AGREE THAT THE
COMPLETE AND EXCLUSIVE STATEMENT OF
<PAGE>
EXHIBIT B
AGREEMENT BETWEEN THE PARTIES RELATING TO THE LICENSING OF THE PROGRAMS SUBJECT
TO THIS AGREEMENT SHALL CONSIST OF 1) THIS AGREEMENT AND ITS ATTACHMENTS, 2)
LICENSE PROGRAM SPECIFICATION OR NOTICES OF AVAILABILITY, AS APPLICABLE 3) ITS
EXHIBITS AND 4) ANY OTHER, APPLICABLE IBM AGREEMENTS, AMENDMENTS, SUPPLEMENTS,
ADDENDA AND EXHIBITS, INCLUDING THOSE EFFECTIVE IN THE FUTURE. THIS STATEMENT OF
THE AGREEMENT SUPERSEDES ALL PROPOSALS OR OTHER PRIOR AGREEMENTS, ORAL OR
WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING THE PROGRAMS
LICENSE UNDER THIS AGREEMENT.
<PAGE>
EXHIBIT C - SiGe [*]
WAFER ACCEPTANCE CRITERIA
PROCEDURE FOR RELEASE OF WAFERS TO EXTERNAL CUSTOMERS
- -----------------------------------------------------
Prior to shipment of external customer wafers, [*] of all wafers built in RTAT
or NRE lots are screened. In production, a sample testing of the lot at final
metal level (minimum of [*] is performed. A summary of electrical test data
for the lot will be made available. This lot summary will contain medians and
distributions for the critical parameters and limits shown in the table below.
In addition, for production wafers, if any of the wafers in the tested sample
exceed the design manual specification [*], all wafers will be screened such
that the [*] percentile of via, contact and metal resistances are within the
design manual specifications. In this case, with [*] screening, any wafers
failing will be scrapped.
WAFER ACCEPTANCE CRITERIA:
- --------------------------
IBM maintains a document specifying the acceptance criteria of a wafer for
customer shipment. In brief, the list of critical parameters and specification
limits described below must individually be met by [*] of the chips sampled on
each wafer. Wafers not meeting the complete set of criteria will be either
scrapped or shipped as "offspec" with product engineering concurrence. An
accepted offspec is an indication that IBM in-line test, modeling, reliability
and quality all agree that the highlighted measurement should have little impact
on the customer. Typical reasoning could be that the measurement was believed
inaccurate, or in the case of defect measurements with large critical areas, it
is believed to be of minor impact to the integration level of a product. Where
a critical parameter distribution falls out of normal range defined by the
specification limits, the customer will be notified and the Technical
Coordinators will promptly determine disposition of "offspec" wafers.
Certain limits, indicated by a "P" in the tables below, have reliability
implications when the values fall below or above the limit indicated.
[*]
- ---
[*]
[*]
[*]
[*]
Page 1
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
AMCC (Barbados) Limited, a Barbados Corporation
Wiley Acquisition Corporation, a Delaware Corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-8 No. 333-40905 pertaining to the 1997 Employee Stock Purchase Plan,
No. 333-47185 pertaining to the 1982 Employee Incentive Stock Option Plan, the
1992 Employee Stock Option Plan and the 1997 Directors' Stock Option Plan, No.
333-76767 pertaining to the 1998 Employee Stock Purchase Plan, No. 333-74787
pertaining to the 1998 Cimaron Communications Corporation Stock Incentive Plan
and in the Registration Statement on Form S-3 No. 333-76185 pertaining to the
registration of shares issued upon the acquisition of Cimaron Communications
Corporation of Applied Micro Circuits Corporation of our report dated April
21, 1999, with respect to the consolidated financial statements and schedule
of Applied Micro Circuits Corporation included in the Annual Report on Form
10-K for the year ended March 31, 1999.
Ernst & Young LLP
San Diego, California
June 21, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10K FOR THE YEAR ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1999
<PERIOD-START> APR-01-1997 APR-01-1998
<PERIOD-END> MAR-31-1998 MAR-31-1999
<CASH> 6,460 13,530
<SECURITIES> 61,436 73,010
<RECEIVABLES> 12,529 19,452
<ALLOWANCES> 350 177
<INVENTORY> 8,185 9,813
<CURRENT-ASSETS> 94,526 125,020
<PP&E> 46,678 58,708
<DEPRECIATION> 29,460 35,580
<TOTAL-ASSETS> 112,834 150,655
<CURRENT-LIABILITIES> 17,109 21,403
<BONDS> 4,091 7,558
0 0
0 0
<COMMON> 225 266
<OTHER-SE> 91,409 121,428
<TOTAL-LIABILITY-AND-EQUITY> 112,834 150,655
<SALES> 76,618 105,000
<TOTAL-REVENUES> 76,618 105,000
<CGS> 34,321 37,937
<TOTAL-COSTS> 34,321 37,937
<OTHER-EXPENSES> 27,546 43,147
<LOSS-PROVISION> 157 50
<INTEREST-EXPENSE> 381 542
<INCOME-PRETAX> 15,622 27,366
<INCOME-TAX> 406 10,233
<INCOME-CONTINUING> 15,216 17,133
<DISCONTINUED> 0 0
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<NET-INCOME> 15,216 17,133
<EPS-BASIC> 1.44 .70
<EPS-DILUTED> .75 .62
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