Broadcom Corporation Form 10-K December 31, 2001

Securities registered pursuant to Section 12(g) of the Act: Class A common stock

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by a 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. o

Based on the closing sale price on the Nasdaq National Market® on March 11, 2002, the aggregate market value of the voting stock held by nonaffiliates of the registrant was approximately $8,883,944,000. For the purposes of this calculation, shares owned by officers, directors and 10% shareholders known to the registrant have been deemed to be owned by affiliates. This determination of affiliate status is not a determination for other purposes.

The registrant has two classes of common stock authorized, Class A common stock and Class B common stock. The rights, preferences and privileges of each class of common stock are substantially identical except for voting rights. Each share of Class A common stock entitles its holder to one vote and each share of Class B common stock entitles its holder to ten votes. In addition, holders of Class B common stock are entitled to vote separately on the proposed issuance of additional shares of Class B common stock in certain circumstances. As of March 11, 2002 there were 194,123,300 shares of Class A common stock outstanding and 73,740,871 shares of Class B common stock outstanding.

Part III incorporates by reference certain information from the registrant’s definitive proxy statement (the “Proxy Statement”) for the Annual Meeting of Shareholders to be held April 25, 2002.

Broadcom,® the pulse logo,® Connecting everything,^TM CALISTO,^TM CryptoNetX,^TM Digi-PHY,^TM Grand Champion,^TM iLine32,^TM MetroSwitch,^TM OpenVoIP,^TM QAMLink,® ROBOswitch,^TM ServerWorks,^TM SiByte,^TM StrataSwitch^TM and SystemI/O^TM are trademarks of Broadcom Corporation and/or its affiliates in the United States and certain other countries. All other trademarks mentioned are the property of their respective owners.

All statements included or incorporated by reference in this Report, other than statements or characterizations of historical fact, are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements concerning projected revenue, expenses, gross profit and income, our accounting estimates, assumptions and judgments, the market acceptance and performance of our products, the competitive nature of and anticipated growth in our markets, our ability to achieve further product integration, the status of evolving technologies and their growth potential, the cost and success of our development projects, the timing of new product introductions, the adoption of future industry standards, our production capacity, our ability to migrate to smaller process geometries, our ability to consummate acquisitions and integrate their operations successfully, the need for additional capital, the impact of tax audits and the success of pending litigation. These forward-looking statements are based on our current expectations, estimates and projections about our industry, management’s beliefs, and certain assumptions made by us. Forward-looking statements can often be identified by words such as “anticipates,” “expects,” “intends,” “plans,” “predicts,” “believes,” “seeks,” “estimates,” “may,” “will,” “should,” “would,” “potential,” “continue,” similar expressions and variations or negatives of these words. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. These forward-looking statements speak only as of the date of this Report and are based upon the information available to us at this time. Such information is subject to change, and we will not necessarily inform you of such changes. These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of which are listed under the section “Risk Factors” at the end of Item 7 of this Report. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

All share numbers and per share amounts in this Report have been retroactively adjusted to reflect our 2-for-1 stock splits, each in the form of a 100% stock dividend, effective February 17, 1999 and February 11, 2000.

Broadcom Corporation is the leading provider of highly integrated silicon solutions that enable broadband communications and networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, Broadcom designs, develops and supplies complete system-on-a-chip solutions and related hardware and software applications for every major broadband communications market. Broadcom’s diverse product portfolio includes solutions for digital cable set-top boxes and cable modems; high-speed local, metropolitan and wide area and optical networks; home networking; Voice over Internet Protocol, or VoIP; carrier access; residential broadband gateways; direct broadcast satellite and terrestrial digital broadcast; digital subscriber lines, or DSL; wireless communications; SystemI/O^TM server solutions; and broadband network processors.

The desire of equipment manufacturers and service providers to develop and expand existing broadband communications markets has created the need for new generations of integrated circuits. Broadband transmission of digital information over existing infrastructures requires highly integrated mixed-signal semiconductor solutions to perform critical systems functions such as complex signal processing and converting digital data to and from analog signals. Broadband communications equipment requires substantially higher levels of system performance, in terms of both speed and precision, which typically cannot be adequately addressed by traditional semiconductor solutions developed for low speed transmission applications. Moreover, solutions that are based on multiple discrete analog and digital chips generally cannot achieve the cost-effectiveness, performance and reliability required by today’s broadband marketplace. These requirements are best addressed by new generations of highly integrated mixed-signal devices that combine complex analog and digital functions with high performance circuitry and can be manufactured in high volumes using cost-effective process technologies.

We design, develop and supply silicon solutions for every significant broadband communications market. Our core markets include the markets for cable modems, digital cable and direct broadcast satellite set-top boxes, enterprise local area networking equipment, servers and home networking. In addition, we have invested significant time and resources developing products for emerging broadband communications markets such as DSL, optical and metropolitan and wide area networking, wireless communications, carrier access, broadband processors and security processors and adapters. Following is a brief description of each of our target markets.

Cable television operators have been upgrading their systems to hybrid fiber coaxial cable, commonly known as HFC in the telecommunications industry. These upgraded HFC networks are able to support two-way communications, high-speed Internet access and telecommuting through the use of a cable modem. The cable industry’s adoption of an open standard, the Data Over Cable Service Interface Specification, commonly known as DOCSIS,^TM has made possible interoperability between different manufacturers’ cable modems and head-end equipment across different cable networks. The first specification, DOCSIS 1.0, was adopted in 1997 and enabled the cost-effective deployment of cable modems via retail channels. High-speed Internet access services use cable modems to connect PCs to the cable network. These modems were designed to achieve downstream transmission speeds of up to 43 megabits per second, or Mbps (North American standard), or 56 Mbps (international standard), and upstream transmission to the network at speeds of up to 10 Mbps, nearly 1,000 times faster than the fastest analog telephone modems, which transmit downstream at up to 56 kilobits per second, or Kbps, and upstream at up to 28.8 Kbps. In 1998 the DOCSIS 1.1 specification was announced. The new specification enhanced DOCSIS 1.0 to include support for cable telephony using VoIP technology, streaming video and managed data services. In December 2001 DOCSIS 2.0, which adds support for higher upstream transmission speeds of up to 30 Mbps, supports more symmetric Internet Protocol, or IP, services and provides extra capacity for cable telephony, was released. The high speeds of today’s cable modems can enable an entirely new generation of multimedia-rich content over the Internet and allow cable operators to expand their traditional video product offerings to include data and telephone services.

The adoption of cable modem services and the continued proliferation of homes with multiple PCs have also generated the need for residential networking. Cable television operators have recognized the opportunity to include this feature in the equipment they utilize for cable modem services through either home phoneline or wireless solutions.

The last decade has seen rapid growth in the quantity and diversity of television programming. Despite ongoing efforts to upgrade the existing cable infrastructure, an inadequate number of channels exists to provide the content demanded by consumers. In an effort to increase the number of channels and provide higher picture quality, cable service providers began offering digital programming in 1996 through the use of new digital cable set-top boxes. These digital cable set-top boxes facilitate high-speed digital communications between a subscriber’s television and the cable network. Digital cable set-top boxes are currently able to support downstream transmission speeds to the subscriber of up to 43 Mbps (North American standard) or 56 Mbps (international standard), and several hundred MPEG-2 compressed digital television channels. Additional applications for digital cable set-top boxes include Internet access, personal video recording, or PVR, video on demand interactive television, high definition television, 3-D gaming, audio players, various forms of home networking and cable telephony. A new generation of digital cable set-top boxes is being introduced to facilitate television Internet access, support high definition television and provide a gateway for the distribution of voice, video and data services throughout the home and business.

Direct broadcast satellite, or DBS, is the primary alternative to cable for providing digital television programming. DBS broadcasts video and audio data from satellites directly to digital set-top boxes in the home via dish antennas. Due to the ability of DBS to provide television programming where no cable infrastructure is in place, we believe that the United States market for DBS may eventually be surpassed by the international market where the cable infrastructure is generally less extensive.

The Federal Communications Commission has mandated digital television broadcast by traditional terrestrial broadcast stations. We believe this conversion to digital broadcasting will also require new digital set-top boxes and television receivers.

Local area networks, commonly known as LANs, are comprised of different types of equipment interconnected by copper, fiber or coax cables over a computer networking protocol called Ethernet. Ethernet scales in speed from 10 Mbps to 10 gigabits per second, or Gbps, providing both the bandwidth and scalability required in today’s dynamic networking environment. As communications bottlenecks have appeared in corporate LANs, new technologies such as Fast Ethernet, a networking standard that supports data transfer rates of up to 100 Mbps, and Gigabit Ethernet, which supports data transfer rates of up to one Gbps, are being employed to replace older technologies such as 10Base-T Ethernet, which supports data transfer rates of 10 Mbps, and Token Ring, which supports data transfer rates of 16 Mbps. As most desktop connections have migrated to Fast Ethernet, Gigabit Ethernet is emerging as the predominant technology for servers and backbone infrastructures that support LANs. We anticipate that it will eventually migrate to the desktop itself.

As Gigabit Ethernet is deployed to the desktop, we expect server and backbone connections to migrate to the new 10 Gigabit Ethernet standard, which supports data transfer rates of up to 10 Gbps. We anticipate that a significant portion of the installed base of 10Base-T and 10/100Base-T Ethernet repeater and hub ports, switches and network interface cards, or NICs, will be upgraded to faster technologies. In addition, the need for dedicated and predictable bandwidth to the desktop is driving a transition from legacy repeater to switch connections. Switches not only have the ability to provide dedicated bandwidth to each connection, but also provide routing functionality and possess the intelligence to deal with differentiated traffic such as voice, video and data.

With the proliferation of data being accessed and sorted by the Internet and corporate intranets, the demand for servers has increased substantially. As integral pieces of the overall communications infrastructure, servers are multiprocessor-based computers that are used to support users’ PCs and to perform basic PC functions such as accessing, maintaining and updating databases. The Internet has created a new market for servers as users access data and entertainment stored on servers from their PCs, handheld computers and wireless handsets.

SystemI/O silicon solutions act as the essential conduits for delivering high-bandwidth data in and out of servers, and coordinating all input/output, or I/O, transactions within the server platform, including between external I/O devices, the main system memory and the central processing units, or CPUs.

The proliferation of multi-PC households and Internet appliances increases the need for home networking solutions and lays the foundation for extending the reach of shared broadband Internet access, video transfer and voice at high speeds throughout the home and small office. The industry’s adoption of the Home Phoneline Networking Alliance’s HomePNA^TM 2.0 standard for 32 Mbps home networking technology has met this need by enabling the development of affordable, easy-to-use networking solutions for the consumer. We believe HomePNA 2.0 will enable the delivery of voice, video and data services concurrently to any network-enabled appliance, PC or consumer electronic device over ordinary phone lines at speeds of up to 32 Mbps. Home networking devices may take the form of separate, stand alone equipment or they may be bundled into other products such as PCs or high-speed modems.

Digital subscriber line technologies, commonly known as DSL, represent a family of broadband technologies that use the copper twisted pair wiring in existing local telephone networks to deliver high-speed data transmission. DSL speeds range from 128 Kbps to 52 Mbps depending on the distance between the central office and the subscriber. These data rates are enabling a wide range of new services, including high-speed Internet access and multi-line voice and digital television delivery.

To address the increasing volume of data traffic emanating from the growing number of broadband connections in homes and businesses, metropolitan area networks, commonly known as MANs, and wide area networks, commonly known as WANs, will have to evolve at both the transport and switching layers. One significant obstacle preventing this evolution has been the high cost of optical modules and next generation network elements.

We believe that the complementary metal oxide semiconductor, or CMOS, fabrication process is the key technology that will significantly reduce the cost of deploying higher transport speeds in MANs and WANs. High-speed CMOS components that support transmission speeds ranging from one Gbps to 10 Gbps will enable the development of smaller optical modules and system components that cost less and consume less power. Furthermore, we anticipate that the ability to achieve high degrees of semiconductor integration using CMOS will permit MANs and WANs to evolve from time-division multiplex to IP packet switching, by enabling hybrid network elements that cost-effectively combine time-division multiplex functionality with IP and Ethernet.

Wireless technologies based upon the IEEE 802.11 and Bluetooth^TM standards allow enterprises and consumers to have mobile flexibility around their homes and offices. Bluetooth provides a low cost wire replacement technology enabling invisible connectivity among consumers’ cell phones, personal digital assistants, PCs, MP3 players and other devices. This

industry standard is supported by over 1,000 companies to date. We anticipate that acceptance of this standard will increase in the next 12 to 18 months to the point where it becomes the defacto cable replacement standard in consumer products. The 802.11b, or Wi-Fi^TM, specification is the wireless equivalent of 10 Mbps Ethernet, and has already penetrated the corporate campus as the wireless LAN technology of choice. Additionally, we are beginning to see adoption of the 802.11b standard in the education, consumer, home and small to medium business segments. Next generation wireless LAN products based on the IEEE 802.11a, 802.11g and other standards will be forthcoming.


	•	terrestrial digital broadcast television — the upgrade of analog broadcast television to digital, which enables the delivery of high definition television;

	•	multichannel multipoint distribution system, or MMDS, which uses microwave frequencies below 10 GigaHertz, or GHz, to transmit voice, video and data over two-way terrestrial digital microwave channels to digital set-top boxes and wireless modems; and

	•	local multipoint distribution system, or LMDS, which uses higher microwave frequencies above 10 GHz to transmit voice, video and data to digital set-top boxes and wireless modems over a shorter distance via a cellular-like network.

MMDS and LMDS are wireless systems that are currently being tested in limited deployments. In the United States, the MMDS and LMDS markets have experienced significant license holder consolidation, which may lead to greater investment in equipment and service for these markets. These new systems, which are able to provide programming in areas that do not have cable infrastructure, will also require digital set-top boxes or wireless modems.

Voice over IP is stimulating dramatic changes in the traditional public switched and enterprise telephone networks. With the significant growth in data traffic for Internet and other data services, long distance deregulation and local deregulation, packet-based bandwidth-on-demand networks provide significant economic advantages over traditional circuit-switched circuit-on-demand voice networks.

The PBX and systems markets are being radically affected by the convergence of circuit switched and IP packet-based technologies. LAN-based solutions that use the network infrastructure as the backbone for routing and switching of packet-voice within a business enable IP phones in the enterprise.

The continued growth of IP traffic coupled with the increased demand for new services and applications, such as VoIP, VPNs and high-speed Internet access, are placing great processing demands on next-generation LAN, MAN and WAN equipment. We believe that today’s networking and telecommunications platforms, especially at the access and service provider edge, must scale in performance from the current OC-12 standard, which transmits data at 625 Mbps, and OC-48, which transmits data at 2.5 Gbps, to OC-192, which transmits data at 10 Gbps. We anticipate that networking and telecommunications platforms will eventually migrate to the proposed OC-768 standard, which should provide transmission speeds of 40 Gbps.

We believe that a new generation of broadband processors that balance aggressive performance requirements with power and die-size constraints is required to meet the needs of current and next generation networks. These processors must be easily programmable to allow new services and features to be upgraded with minimal hassle. We believe that leveraging a standard instruction set architecture such as MIPS® that is well established in the networking market and supported by a large host of third-party tools and software developers is key to enabling customers to quickly and easily develop new products and applications.

Most corporations today use the Internet for the transmission of data between corporate offices and remote sites, and for a variety of e-commerce and business-to-business applications. To secure corporate networks from intrusive attacks and provide for secure communications between corporate sites, an increasing amount of networking equipment will include technology to establish virtual private networks, or VPNs. In addition to VPNs, which use the Internet protocol security, or IPSec protocol, secure socket layer, commonly referred to as SSL, is used to secure sensitive information between users and service providers for e-commerce applications.

While we focus entirely on broadband solutions, we provide a diverse portfolio of products targeted to a number of different broadband communications markets. Using proprietary technologies and advanced design methodologies, we design, develop and supply complete system-on-a-chip solutions and related hardware and software applications for our target markets. Our proven “system-on-a-chip” design methodology has enabled us to be first to market with advanced chips that are highly integrated and cost-effective, and that facilitate the easy integration of our customers’ intellectual property. Our design methodology leverages industry-standard, state-of-the-art electronic design automation tools, and generally migrates easily to new silicon processes and technology platforms. It also allows for the easy integration of acquired or licensed technology, providing customers with a broad range of silicon options with differentiated networking and performance features.

Our cable product line consists of integrated silicon solutions for cable modems, cable modem termination systems and digital cable-TV set-top boxes. We currently have a leading market position in all three equipment areas, with an extensive product offering for the high-speed, two-way transmission and display of digital information for the delivery of voice, video and data services to residential customers over existing HFC. We offer our customers a complete system level solution that not only includes integrated circuits, but also reference design hardware and a full software suite to support our customers’ needs and accelerate time to market.

Cable Modems. All of our cable modem chips are built around our QAMLink® DOCSIS-compliant transceiver and media access controller, or MAC, technologies, which enable downstream data rates up to 56 Mbps and upstream data rates up to 30 Mbps and are compliant with DOCSIS versions 1.0 and 1.1 These devices provide real-time DOCSIS component capabilities in silicon, enabling quality of service to support constant bit rate services like VoIP and video streaming.

The level of integration and performance that we continue to accomplish in these devices is reducing the cost and size of cable modems while providing consumers with easy to use features and seamless integration to other transmission mediums. As a result, cable modem functionality is evolving into a small silicon core that can be incorporated into other consumer devices for broader distribution of IP-based services throughout the home. Our cable modem technology is being incorporated into personal computers for high-speed Internet access, digital cable-TV set-top boxes for high-speed Internet access through the television, and residential broadband gateways for receiving and distributing IP-based voice and data services in the home over existing phone lines and wireless connections.

Cable Modem Termination Systems. We have a complete end-to-end DOCSIS 1.0 and 1.1 compliant cable modem silicon solution for both head-end and subscriber locations. Our cable modem termination system chipset consists of downstream and upstream physical layer devices and a DOCSIS MAC. This cable modem termination system enables the exchange of information to and from the subscriber location, making it a key element in the delivery of broadband access over cable.

Cable-TV Set-Top Boxes. We have a complete silicon platform for the digital cable-TV set-top box market. These highly integrated chips give manufacturers a complete range of features and capabilities for building standard digital cable-TV boxes for digital video broadcasting, as well as high-end interactive set-top boxes that merge high-speed cable modem functionality with studio-quality graphics, text and video for both standard definition, or SDTV, and high definition, or HDTV, formats.

Our cable-TV set-top box silicon consists of front-end transceivers with downstream, upstream and MAC functions, single-chip cable modems, advanced 2D/3D video-graphics encoders and decoders, and CMOS-based radio frequency television tuners. These cable-TV chips support most industry transmission and television standards, enabling universal interoperability and easy retail channel distribution. Peripheral modules incorporated into front-end devices also provide support for common set-top box peripheral devices, such as infrared remotes and keyboards, LED displays and keypads.

Our chips provide a comprehensive silicon platform for high-end interactive set-top boxes, supporting the simultaneous viewing of television programming with Internet content capability in either HDTV or SDTV format. This capability provides consumers with a true interactive environment, allowing them to access Internet content while watching television. With the addition of our home networking and VoIP technologies, these set-top boxes can also support the functions of a residential broadband gateway for receiving and distributing digital voice and data services throughout the home over the phone line.

Satellite and HDTV. We have front-end receiver chips for digital broadcast satellite and HDTV set-top boxes. We believe that we are the only company with a complete end-to-end chipset for receiving and displaying HDTV. This chipset provides television and set-top box manufacturers with a high performance vestigial side band receiver and a 2D/3D video-graphics subsystem for SDTV and HDTV displays.

Our PVR products for the cable and satellite markets allow consumers to record two programs simultaneously while watching a pre-recorded program or watch a live program while recording another. In addition, these products allow consumers to pause TV, perform instant replays, and use VCR-like functions such as fast forward, reverse and pause on cable and satellite entertainment networks.

Our 10/100/1000 Mbps Ethernet transceivers, controllers and switches are integrated, low-power silicon solutions that enable the high-speed transmission of voice, video and data services over the widely deployed Category 5 unshielded twisted-pair copper wiring in enterprise and small office networks. We also offer 10 Gigabit Ethernet transceivers for network infrastructure products. These high-speed connections are enabling users to share Internet access, exchange graphics and video presentations, receive VoIP services and share peripheral equipment, such as printers and scanners. We also incorporate intelligent networking functionality into our devices, enabling system vendors to deploy enhanced classes of services and applications, typically found only in the core of the network, to every corporate desktop.

Digital Signal Processing Communication Architecture. Our complex Ethernet transceivers are built upon a proprietary digital signal processing, or DSP, communication architecture optimized for high-speed enterprise network connections. Our Digi-F^TM DSP silicon core enables interoperability and robust performance over a wide range of cable lengths and operating conditions, and delivers performance of greater than 250 billion operations per second. This proprietary DSP architecture facilitates the migration path to smaller process geometries and minimizes the development schedule and cost of our transceivers. It has been successfully implemented in .5, .35, .25, .18 and .13 micron CMOS processes, and implemented in chips with one, four, six and eight ports.

Ethernet Transceivers. Our 10/100 Ethernet transceiver product line ranges from single-chip 10/100 Ethernet transceivers to single-chip octal 10/100 Ethernet transceivers. These devices allow information to travel over standard Category 5 cable at rates of 10 Mbps and 100 Mbps. Our Gigabit transceivers are enabling manufacturers to make equipment that delivers data at Gigabit speeds (1000 Mbps) over Category 5 cabling. We believe this equipment can significantly upgrade the performance of existing networks without the necessity to rewire the network infrastructure with fiber or enhanced copper cabling.

Our transceivers are driving the market toward lower power, smaller footprint solutions, making it easier and less expensive to build 10/100/1000 Ethernet NICs, switches, hubs and routers, and to put networking chips directly on computer motherboards in LAN on motherboard, or LOM, configurations. We plan to continue to incorporate additional functionality into all of our transceivers, providing customers with advanced networking features and higher performance capabilities that we believe will make it even easier to bring Gigabit Ethernet to the desktop.

10 Gigabit Ethernet Transceivers. We have developed a family of 10 Gigabit Ethernet CMOS transceivers. When combined with serial 10 Gigabit optics, these devices can simultaneously transmit and receive at 10 Gbps data rates over 50 kilometers of existing single mode optical fiber. A 10 Gigabit Ethernet link over such distances extends the reach of Ethernet into local, regional and metropolitan fiber optic networks. We believe that significant cost, performance and latency advantages can be realized when the Ethernet protocol and other associated quality of service capabilities are available in these network domains. We anticipate that convergence around 10 Gigabit Ethernet will allow massive data flow from remote storage sites across the country over the MAN and into the corporate LAN, without unnecessary delays, costly buffering for speed mismatches or latency, or breaks in the quality of service protocol.

Ethernet Switches. We offer a broad switch-on-a-chip product line ranging from low-cost, unmanaged and managed, Layer 2 eight-port switches to high-end managed, Layer 3 through Layer 7 enterprise class 24-port switches.

The ROBOswitch^TM-plus product family consists of five- and eight-port Layer 2 switch chips supporting five-, eight-, 16- and 24-port 10/100 Ethernet switches. We believe our switch chips are making it economical for the remote office/business office and small office/home office network markets to have the same high-speed local connectivity as the large corporate office market. Our highly integrated family of switch products combines the switching fabric, MACs, 10/100 Ethernet transceivers, media independent interface and packet buffer memory onto single-chip solutions. These chips give

Our family of high-end StrataSwitch^TM II products consists of wire-speed, multi-layer chips that combine multi-service provisioning capabilities with switching, routing and traffic classification functionality onto single-chip solutions. Replacing as many as 10 chips, our StrataSwitch II family of chips incorporates 24 Fast Ethernet and two Gigabit Ethernet ports with advanced Layer 3 switching and multi-layer packet classification. These multi-layer switches are capable of receiving, prioritizing and forwarding packets of voice, video and data at high speeds over existing corporate networks. In addition the StrataSwitch II family enables advanced network management capabilities in the switching infrastructure to track different data flows and monitor or control bandwidth on any one of these flows. This results in a more intelligent use of network resources and enables a whole new set of network service applications requiring high bandwidth, reliable data transmission, low latency and advanced quality service features such as streaming video and VoIP.

We recently commenced volume production of the first member of our MetroSwitch^TM product family, which is targeted at the MAN market. This product integrates 12 Gigabit Ethernet ports and one 10 Gigabit Ethernet port into a single-chip solution.

Ethernet Controllers. We offer Gigabit Ethernet controllers that support PCI and PCI-X local bus interfaces for use in NICs and in LOM implementations. These devices include an advanced software suite and complement our broad family of Gigabit Ethernet transceiver products.

ServerWorks Corporation, our wholly-owned subsidiary, offers products that are used to design low-end servers with one or two CPUs and mid-range servers with two to four CPUs as well as storage, workstation and networking platforms. The bandwidth of our SystemI/ O solutions, both from CPU to memory and memory to I/O subsystems such as disk drives or networks, leads the industry. ServerWorks^TM products also provide reliability, availability and serviceability features. The current generation of our SystemI/ O products, the HE, LE and the HE-SL, supports Intel Pentium® III processors that run at speeds beyond 1 GHz and provides memory bandwidth of up to 4 gigabytes per second and I/O bandwidth of up to 1 gigabyte per second. In February 2001 we announced our Grand Champion^TM SystemI/O product line that supports Intel’s next generation server CPU and offers memory bandwidth of up to 6.4 gigabytes per second and I/O bandwidth of up to 5 gigabytes per second.

To date, ServerWorks’ chips are found in servers sold by the major PC server OEMs, such as Compaq, Dell, Hewlett-Packard and IBM and motherboard manufacturers such as Intel, ASUSTeK and Acer. The server market is growing rapidly, and ServerWorks has successfully leveraged its technology over the past year into faster growing markets such as storage and networking through design wins with OEMs such as Network Appliance and Cisco Systems. ServerWorks is also integrating our communications technologies into its product line.

HomePNA Silicon Solutions. Our home networking technologies are enabling the distribution of digital voice, video and data content over the home phone line. Our home networking technologies are the conduits for sharing IP-based broadband services, such as Internet access and VoIP connections, throughout the home using PCs, entertainment equipment and other intelligent devices. These technologies also enable consumers to stream digital audio and video locally or off the Internet, as well as share printers and other PC-based peripheral equipment.

Based on the HomePNA 2.0 standard, our initial home networking silicon technology, called iLine32,^TM supports data rates up to 32 Mbps, expanding the bandwidth capacity of the phone line by as much as 32 times over the HomePNA 1.0 standard. We accomplish this by using a patented variation of quadrature amplitude modulation called Frequency-Diverse QAM, which enables the high-speed transmission of digital data reliably across degraded home phone lines, overcoming the random topologies and varying noise conditions commonly found in these types of networking environments.

Our HomePNA 2.0 chipset is targeted at OEMs producing equipment for residential and small office/home office use and is being incorporated into cable, DSL and V.90 modems, personal computers, digital set-top boxes, residential broadband gateways and consumer electronic equipment. This chipset features a highly integrated MAC/PHY communications engine that delivers transmission speeds up to 32 Mbps.

Residential Broadband Gateways. Leveraging our core technologies in cable modems, DSL, home networking, VoIP and high-speed Internet security, we have developed residential broadband gateway chips. These silicon solutions enable OEMs to build gateway equipment for operators to economically deliver multiple lines of residential broadband services, such as digital IP voice, video and data for telephone, fax and Internet connections, to and throughout the home using a cable or DSL connection and one telephone line.

We offer a family of DSL chips and chipsets for both central office and customer premises equipment, or CPE, applications. Our DSL technology is enabling local exchange carriers and enterprise networking vendors to deliver bundled broadband services, such as digital video, high-speed Internet access, video teleconferencing and IP data business services, over existing copper telephone lines.

For CPE applications, we provide products that address the wide variety of LAN connectivity options, including Ethernet, USB, HomePNA, 802.11 and other standards. These solutions also provide a fully scalable architecture to address emerging value-added services such as in-home voice and video distribution. Wide area network connectivity is provided by integrated DSL physical layer technology using standards-compliant ADSL or VDSL.

Central office applications are addressed with highly integrated silicon solutions. We believe these solutions will enable equipment vendors of DSL access multiplexers and digital loop carriers to offer a significant increase in the number of DSL-enabled copper twisted pairs that can be supported within their tight heat, power and space constraints. Our central office products address both the ADSL and VDSL markets.

Electronic components for optical communications are a natural extension of our large portfolio of high-speed LAN chips, one that will allow us to provide end-to-end silicon solutions across the WAN, MAN and LAN that increase the performance, intelligence and cost-effectiveness of broadband communications networks. These chips are enabling a new class of high-speed optical communications equipment that can support more network traffic in a much smaller form factor, decreasing the cost and space restraints facing companies as bandwidth demands increase in corporate network backbones, MANs and WANs.

We offer a portfolio of CMOS OC-48 and OC-192 transceiver and framer chips for Synchronous Optical Networks, or SONET, and dense wave division multiplexing, or DWDM, applications, as well as a serial CMOS transceiver for 10 Gigabit Ethernet applications. Our CMOS-based solutions provide substantially higher levels of integration and lower power than competitive Gallium Arsenide, Bipolar or Silicon Germanium solutions. The unique implementation of these high-speed transceivers in standard CMOS processes results in low power and low cost-per-port, allowing higher port count DWDM systems, lower power and smaller-sized optical modules, as well as the integration of a 10 Gigabit transceiver, 10 Gigabit data framer and packet processing functions into a single chip. Our DWDM Transport Processor exemplifies the benefits of integration by combining an OC-192 transceiver, forward error correction, performance monitoring logic and G.709 digital wrapper into a single CMOS chip solution. This device occupies less than one half the space and consumes one-third the power of non-integrated solutions.

Through internal engineering efforts and acquisitions, we continue to develop silicon solutions for wireless networking, fixed and short-range wireless and terrestrial digital broadcast markets.

Wireless Networking. We currently offer products that allow PCs and other devices to connect to wireless enterprise or home networks utilizing 802.11b technology. This technology allows for wireless connections at speeds of up to 11 Mbps that can span distances of up to 100 meters. We also offer Bluetooth products that allow for personal area networking at speeds of up to 721 Kbps to cover distances of 30 feet. Our solutions in these areas offer the industry’s highest levels of performance and integration with designs in standard CMOS, allowing them to be the highly reliable while dramatically lowering manufacturing costs.

Fixed-Wireless Communications. We currently have a strategic relationship with Cisco Systems to develop fixed-wireless chips for high-speed Internet services for voice, video and data. The development objective is a fully custom CMOS single-chip wireless modem application specific integrated circuit containing both a MAC layer and an advanced wireless physical layer based on vector orthogonal frequency division multiplexing, a new radio frequency technology supported by Broadcom,

Cisco and nine other industry leaders. We plan to make this chip available on the open market, and anticipate the chip will provide multiple equipment vendors a robust, cost-effective broadband fixed wireless solution that minimizes the line-of-sight limitations and installation problems faced by other proposed broadband fixed wireless technologies.

Communications Processors. We have the semiconductor technology, software and development tools to develop core-processing engines for gateway and access devices that connect the traditional public-switched-telephone network to packet-based networks such as the Internet. This innovative communications processor technology will enable Internet service providers, Internet telephony service providers, competitive and incumbent local exchange carriers and inter-exchange carriers to deliver voice and data services simultaneously over a unified data network with the highest density voice channel in the industry.

The cornerstone of our carrier access technology is CALISTO^TM, a single-chip communications processor for carrier-class voice gateways and access concentrators. This advanced architecture provides increased signal processing throughput in a more efficient silicon implementation. CALISTO provides over 3.3 GMACs of signal processing horsepower and 1.4 megabytes of high-speed memory, which supports up to 240 packet telephony channels on a single chip. This chip replaces up to 10 traditional DSP discrete components with a power consumption of less than 10 milliwatts per channel.

VoIP Software. We are developing advanced embedded DSP technology for VoIP applications in both the residential and business markets. VoIP refers to the transmission of telephony – voice, data, analog modems and signaling – over a packet-based network. The delivery of voice, fax and analog data over LANs and WANs with inherently unpredictable routings requires complex DSP technology to preserve voice fidelity, fax reliability and telephone quality of service. Our VoIP DSP software provides voice, fax relay, data relay and telephony signaling for VoIP in gateways, cable modems, DSL modems, remote access servers, LAN PBXs and Internet appliances. Our VoIP software operates on programmable DSPs in conjunction with our cable, home networking, LAN, DSL and carrier access chips, and we anticipate will eventually be embedded into our advanced silicon devices.

IP Phone Solutions. Our IP phone silicon solutions integrate the essential packet processing, voice processing and switching technologies to provide the quality of service, high fidelity and reliability necessary for enterprise telephony applications.

Leveraging our expertise in high-performance, low-power very large scale integration design, we have developed a family of high performance, low power processor solutions designed specifically to meet the needs of next-generation networks. Our SiByte^TM family of processors delivers four key ingredients essential for today’s embedded broadband network processors: very high performance, low power, high integration of network-centric functions, and programmability based on an industry standard instruction set architecture. At the heart of the SiByte family of processors is the SB-1 core, a MIPS 64-bit superscalar CPU capable of operating at frequencies up to one GHz. All SiByte processors are based on the industry-standard MIPS64^TM architecture, and we anticipate these processors will enable equipment vendors to immediately leverage the large installed base of tools and software available for the MIPS architecture, thereby shortening development time.

These processors provide customers with a solution for high-speed network processing, including packet classification, queuing, forwarding and exception processing. They also enable complex decisions such as routing and load balancing to be performed at wire speed, at line rates between OC-3, which transmits data at 100 Mbps, and OC-48, which transmits data at 2.5 Gbps.

Our family of CryptoNetX^TM high-speed security processors and adapters for enterprise networks is enabling companies to guard against Internet attacks without compromising the speed and performance of their networks. Our PCI 2.2-compliant adapters provide a range of performance from 800 to 4000 SSL transactions per second. Our security processors are built upon a proprietary, scalable silicon architecture that performs standards-compliant cryptographic functions at data rates ranging from a few Mbps to multi-Gbps. This architecture is being deployed across all our product lines, addressing the entire broadband security network spectrum from residential applications to enterprise networking equipment. This scalable architecture allows us to develop standalone security products for very high-speed networking applications and to integrate the IP security processor core into lower speed solutions for consumer products, such as cable and DSL modem applications.

We also develop and license reference platforms designed around our integrated circuit products that represent application examples for incorporation into our customers’ equipment. By providing these reference platforms, we can assist our customers in achieving easier and faster transitions from initial prototype designs through final production releases. These reference platforms enhance the customer’s confidence that our products will meet their market requirements and product introduction schedules.

We sell our products to leading manufacturers of broadband communications equipment in each of our target markets. Because we leverage our technologies across different markets, certain of our integrated circuits may be incorporated into equipment used in several different markets.

Customers currently shipping broadband communications equipment incorporating our products include Ambit, Askey, Cisco Systems, Compaq, Dell, Echostar, Ericsson, Fujitsu, Gateway, Hewlett-Packard, IBM, Motorola, Nortel Networks, Pace, Pioneer, Samsung, Scientific-Atlanta, Thomson CE and 3Com, among others. To meet the current and future technical needs in our target markets, we have established strategic relationships with multi-service operators that provide broadband communications services to consumers and businesses.

As part of our business strategy, we periodically establish strategic relationships with certain key customers. In September 1997 we entered into a development, supply and license agreement with General Instrument, now a wholly-owned subsidiary of Motorola, which provided that we would develop and supply chips for General Instrument’s digital cable set-top boxes. In November 2000 we modified that agreement to amend General Instrument’s minimum purchase requirements and also entered into a new supply agreement with General Instrument covering our sale of cable modem chips. In January 2002 we modified the new supply agreement to add minimum purchase requirements of chips for digital set-top boxes.

From time to time, we have entered into development agreements with Cisco Systems, Nortel Networks, Sony, 3Com and others. We have worked closely with these customers to co-develop products.

A small number of customers have historically accounted for a substantial portion of our net revenue. Sales to Motorola, including sales to its manufacturing subcontractors, represented approximately 18.2% of our net revenue in 2001 and approximately 23.2% of our net revenue in 2000. Sales to 3Com, including sales to its manufacturing subcontractors, represented approximately 15.1% of our net revenue in 2000. Sales to Cisco, including sales to its manufacturing subcontractors, represented approximately 14.1% of our net revenue in 2000. Sales to our five largest customers decreased to approximately 49.3% of our net revenue in 2001 from approximately 61.8% of our net revenue in 2000. We expect that our key customers will continue to account for a substantial portion of our net revenue in 2002 and in the foreseeable future. We typically sell products pursuant to purchase orders that customers can generally cancel or defer on short notice without incurring a significant penalty, and currently do not have agreements with any of our key customers that contain long-term commitments to purchase specified volumes of our products. The loss of any key customer could materially and adversely affect our business, financial condition and results of operations.

We believe that one of our key competitive advantages is our broad base of core technologies encompassing the complete design space from systems to silicon. We have developed and continue to build on five primary technology foundations:


	•	proprietary communications systems algorithms and protocols;

	•	advanced DSP hardware architectures;

	•	silicon compiler design methodologies and advanced cell library development for both standard cell and full-custom integrated circuit design;

	•	high-performance radio frequency, analog and mixed-signal circuit design using industry-standard CMOS processes; and

	•	high-performance custom microprocessor architecture and circuit design.

We have assembled a large team of experienced engineers and technologists, many of whom are leaders in their particular field or discipline. As of February 28, 2002 a majority of our 1,973 research and development employees had advanced degrees. Our work force includes approximately 226 employees with Ph.Ds. These key employees are involved in advancing our core technologies, as well as applying them to our product development activities. The transmission solutions for many of our target markets benefit from the same underlying core technologies, which enables us to leverage our ability to address various broadband communications markets with a relatively focused investment in research and development.

We believe that the achievement of higher levels of integration and the introduction of new products in our target markets is essential to our growth. As a result, we plan to continue to increase research and development staffing levels in 2002. In addition to our design facilities in Irvine, California, we have established additional design centers in Tempe, Arizona; Los Angeles County, Pleasanton, San Diego and Santa Clara County, California; Duluth, Georgia; Dallas, Texas; Seattle, Washington; Bunnik, the Netherlands; and Singapore. As a result of acquisitions, we also undertake software design and development in Canada and design and development activities in Belgium, India, Israel, Taiwan and the United Kingdom. We anticipate establishing additional design centers in the United States and other countries in the future.

We manufacture our products using standard CMOS process techniques. The standard nature of these processes permits us to engage independent silicon foundries to fabricate our integrated circuits. By subcontracting our manufacturing requirements, we are able to focus our resources on design and test applications where we believe we have greater competitive advantages. This strategy also eliminates the high cost of owning and operating a semiconductor wafer fabrication facility.

Our operations and quality engineering team closely manages the interface between manufacturing and design engineering. While our design methodology typically creates smaller than average die for a given function, it also generates full-custom integrated circuit designs. As a result, we are responsible for the complete functional and parametric performance testing of our devices, including quality. We employ a fully staffed operations and quality organization similar to that of a vertically integrated semiconductor manufacturer. We also arrange with our foundries to have online work-in-progress control, making the manufacturing subcontracting process transparent to our customers.

We depend on five independent foundry subcontractors to manufacture substantially all of our products. Our key silicon foundries are Taiwan Semiconductor Manufacturing Corporation in Taiwan, Chartered Semiconductor Manufacturing in Singapore and NEC Corporation in Japan. Any inability of one of our five independent foundry subcontractors to provide the necessary capacity or output for our products could result in significant production delays and could materially and adversely affect our business, financial condition and results of operations. While we currently believe we have adequate capacity to support our current sales levels, we continue to work with our existing foundries to obtain more production capacity, and we intend to qualify new foundries to provide additional production capacity. It is possible that adequate foundry capacity may not be available on acceptable terms, if at all. In the event a foundry experiences financial difficulties, or if a foundry suffers any damage or destruction to its facilities, or in the event of any other disruption of foundry capacity, we may not be able to qualify alternative manufacturing sources for existing or new products in a timely manner.

Our products are currently fabricated with .5 micron, triple layer metal; .35 micron, quad layer metal; .22 micron, five layer metal; .18 micron, five and six layer metal; and .13 micron, five and six layer metal, feature sizes. We continuously evaluate the benefits, on a product by product basis, of migrating to smaller geometry process technologies. Our experience to date with the migration of products to smaller processes geometries has been favorable, but we could experience difficulties in future process migration. Other companies in our industry have experienced difficulty transitioning to new manufacturing processes and, consequently, have suffered reduced yields or delays in product deliveries. We believe that the transition of our products to smaller geometries will be important for us to remain competitive. Our business, financial condition and results of operations could be materially and adversely affected if any such transition is substantially delayed or inefficiently implemented.

Our wafer probe testing is conducted by either our independent foundries or independent wafer probe test subcontractors. Following completion of the wafer probe tests, the die are assembled into packages and the finished products are tested by one of our four key subcontractors: ASAT Ltd. in Hong Kong, ST Assembly Test Services in Singapore, Amkor

Technology in the Philippines and South Korea, and Siliconware Precision in Taiwan. While we have not experienced any material disruption in supply from assembly subcontractors to date, we could experience assembly problems in the future. The availability of assembly and testing services from these subcontractors could be materially and adversely affected in the event a subcontractor experiences financial difficulties, or if a subcontractor suffers any damage or destruction to its facilities, or in the event of any other disruption of assembly and testing capacity.

Manufacturers of broadband communications equipment demand high quality and reliable semiconductors for incorporation into their products. We focus on product reliability from the initial stage of the design cycle through each specific design process, including layout and production test design. In addition, we subject our designs to in-depth circuit simulation at temperature, voltage and processing extremes before initiating the manufacturing process.

We prequalify each assembly and foundry subcontractor. This prequalification process consists of a series of industry standard environmental product stress tests, as well as an audit and analysis of the subcontractor’s quality system and manufacturing capability. We also participate in quality and reliability monitoring through each stage of the production cycle by reviewing electrical and parametric data from our wafer foundry and assembly subcontractors. We closely monitor wafer foundry production to ensure consistent overall quality, reliability and yield levels. In cases where we purchase wafers on a fixed cost basis, any improvement in yields can reduce our cost per chip.

As part of our total quality program, we received ISO 9002 certification, a comprehensive International Standards Organization specified quality system, for our Singapore facility. All of our principal independent foundries and package assembly facilities are currently ISO 9001 certified.

Historically we distributed products to our customers through an operations and distribution center located in Irvine, California. In 1999 we established an international distribution center in Singapore. This facility puts us closer to our suppliers and many key customers and improves our ability to meet customers’ needs. Our Irvine facility continues to ship products to U.S. destinations, while our Singapore facility distributes products to international customers as well as the manufacturing subcontractors for many of our U.S. customers. As a result of our acquisition of ServerWorks, we also ship products from a Los Angeles distribution facility.

Our sales and marketing strategy is to achieve design wins with technology leaders in each of our targeted broadband communications markets by providing superior sales, field application and engineering support. We market and sell our products in the United States through a direct sales force, distributors and manufacturer’s representatives. The majority of our sales occur through our direct sales force, which is based out of offices located in California, Florida, Georgia, Illinois, Maine, Massachusetts, New York, North Carolina and Texas. We have engaged independent distributors, Arrow Electronics and Insight Electronics, to service the North American and South American markets.

We dedicate sales managers to principal customers to promote close cooperation and communication. We also provide our customers with reference platform designs for most products. We believe this enables our customers to achieve easier and faster transitions from the initial prototype designs through final production releases. We believe these reference platform designs also significantly enhance our customers’ confidence that our products will meet their market requirements and product introduction schedules.

We market and sell our products internationally through regional offices located in Canada, France, Germany, Japan, the Netherlands, Singapore, Sweden and the United Kingdom, as well as through a network of independent distributors and representatives in Australia, Canada, Germany, Hong Kong, India, Israel, Japan, Korea, Singapore and Taiwan. We select these independent entities based on their ability to provide effective field sales, marketing communications and technical support to our customers. All international sales to date have been denominated in U.S. dollars.

Our sales are made primarily pursuant to standard purchase orders for delivery of products. Due to industry practice that allows customers to cancel or change orders with limited advance notice prior to shipment, we believe that backlog is not a reliable indicator of future revenue levels.

Broadband communications markets and the semiconductor industry are intensely competitive and are characterized by rapid technological change, evolving standards, short product life cycles and price erosion. We believe that the principal factors of competition for integrated circuit providers to our target markets include:


	•	product quality;

	•	product capabilities;

	•	level of integration;

	•	reliability;

	•	price;

	•	time-to-market;

	•	standards compliance;

	•	system cost;

	•	intellectual property;

	•	customer support; and

	•	reputation.

We compete with a number of major domestic and international suppliers of integrated circuits and related applications in our target broadband communications markets. We also compete with suppliers of system-level and motherboard-level solutions incorporating integrated circuits that are proprietary or sourced from manufacturers other than Broadcom. This competition has resulted and may continue to result in declining average selling prices for our products. In all of our target markets, we also may face competition from newly established competitors and suppliers of products based on new or emerging technologies, and customers who choose to develop their own silicon solutions. We also expect to encounter further consolidation in the markets in which we compete.

Many of our competitors operate their own fabrication facilities and have longer operating histories and presence in key markets, greater name recognition, larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. As a result, these competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the promotion and sale of their products. Current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. In addition, competitors may develop technologies in the future that more effectively address our markets with products that offer enhanced features, lower power requirements or lower cost. Increased competition could result in pricing pressures, decreased gross margins and loss of market share and may materially and adversely affect our business, financial condition and results of operations.

Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies and processes. These measures may not provide meaningful protection for our intellectual property. We have received 79 United States patents and have filed over 800 additional United States patent applications. We may not receive any additional patents as a result of these applications or future applications. Even if additional patents are issued, any claims allowed may not be sufficiently broad to protect our technology. In addition, any existing or future patents could be challenged, invalidated or circumvented, and any rights granted under such patents may not provide us with meaningful protection. The failure of any patents to adequately protect our technology would make it easier for our competitors to offer similar products. In connection with our participation in the development of various industry standards, we may be required to license certain of our patents to other parties, including competitors, that develop products based upon the adopted industry standards. We also generally enter into confidentiality agreements with our employees and strategic

partners, and typically control access to and distribution of our documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our products, services or technology without authorization, to develop similar technology independently or to design around our patents. In addition, effective copyright, trademark and trade secret protection may not be available or may be limited in certain foreign countries. We have also entered into agreements with certain of our customers and granted these customers the right to use our proprietary technology in the event we default in our contractual obligations, including product supply obligations, and fail to cure the default within a specified period of time. In addition, we often incorporate the intellectual property of our strategic customers into our designs, and we have certain obligations with respect to the non-use and non-disclosure of their intellectual property. It is possible that the steps taken by us to prevent misappropriation or infringement of our intellectual property or our customers’ intellectual property may not be successful. Moreover, we are currently engaged in litigation and may need to engage in additional litigation in the future to enforce our intellectual property rights or the rights of our customers, to protect our trade secrets or to determine the validity and scope of proprietary rights of others, including our customers. Such litigation could result in substantial costs and diversion of our resources and could materially and adversely affect our business, financial condition and results of operations.

Companies in the semiconductor industry often aggressively protect and pursue their intellectual property rights. From time to time, we have received, and may continue to receive in the future, notices that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights. Moreover, in the past we have been engaged and currently we are engaged in litigation with parties who claim that we have infringed their patents or misappropriated or misused their trade secrets. (The current litigation is discussed in Note 11 of Notes to Consolidated Financial Statements, included in Part IV, Item 14 of this Report.) Although we are defending the pending litigation vigorously, it is possible that we will not prevail in pending or future lawsuits. In addition, we may be sued in the future by other parties who claim that we have infringed their patents or misappropriated or misused their trade secrets, or who may seek to invalidate one of our patents. Any of these claims may materially and adversely affect our business, financial condition and results of operations. For example, in a patent or trade secret action, a court could issue a preliminary or permanent injunction that would require us to withdraw or recall certain products from the market or redesign certain products offered for sale or under development. In addition, we may be liable for damages for past infringement and royalties for future use of the technology. We may also have to indemnify certain customers and strategic partners under our agreements with such parties if a third party alleges or if a court finds that we have infringed upon, misappropriated or misused another party’s proprietary rights. Even if claims against us are not valid or successfully asserted, the defense of these claims could result in significant costs and a diversion of management and personnel resources. In that event, our business, financial condition and results of operations would likely be materially and adversely affected. If any claims or actions are asserted against us, we may seek to obtain a license under a third party’s intellectual property rights. However, we may not be able to obtain a license on commercially reasonable terms, if at all.

As of February 28, 2002 we had 2,728 full-time employees and 96 contract and temporary employees, including 1,973 employees engaged in research and development, 344 engaged in sales and marketing, 190 engaged in manufacturing operations and 317 engaged in finance, legal and general administration activities. Our employees are not represented by any collective bargaining agreement, and we have never experienced a work stoppage. We believe our employee relations are good.

We lease buildings in Irvine, California that comprise our corporate headquarters and include administration, sales and marketing, research and development, and operations functions. We also lease engineering design centers in Tempe, Arizona; Los Angeles County, Pleasanton, San Diego and Santa Clara County, California; Duluth, Georgia; Dallas, Texas; and Seattle, Washington.

Internationally, we lease a distribution center that includes engineering design facilities in Singapore. We also lease engineering design centers in Belgium, Canada, India, Israel, the Netherlands, Taiwan and the United Kingdom.

In addition, we lease various sales and marketing facilities in the United States and several other countries.

The foregoing leases comprise an aggregate of 1.4 million square feet. Our principal facilities have lease terms expiring between 2005 and 2012. We believe that our current facilities, together with planned expansions, will be adequate for at least the next 12 months.

For additional information regarding our obligations under property leases, see Note 7 of Notes to Consolidated Financial Statements, included in Part IV, Item 14 of this Report.

The information set forth under Note 11 of Notes to Consolidated Financial Statements, included in Part IV, Item 14 of this Report, is incorporated herein by reference.

No matters were submitted to a vote of security holders during the quarter ended December 31, 2001.

Our Class A common stock is traded on the Nasdaq National Market under the symbol BRCM. The following table sets forth, for the periods indicated, the high and low sale prices for the Class A common stock on the Nasdaq National Market, adjusted to reflect our 2-for-1 stock split effective February 11, 2000:

As of March 11, 2002 there were approximately 2,861 record holders of our Class A common stock and approximately 669 record holders of our Class B common stock. On March 11, 2002 the last reported sale price of the Class A common stock on the Nasdaq National Market was $43.95 per share.

Our Class B common stock is not publicly traded. Each share of Class B common stock is convertible at any time at the option of the holder into one share of Class A common stock and is automatically converted upon sale and most other transfers.

We have never declared or paid cash dividends on shares of our capital stock. We currently intend to retain all of our earnings, if any, for use in our business and in acquisitions of other businesses, products or technologies, and we do not anticipate paying any cash dividends in the foreseeable future.


(1)	See Notes 1 and 2 of Notes to Consolidated Financial Statements, included in Part IV, Item 14 of this Report, for an explanation of the calculation of earnings (loss) per share. Adjusted to reflect our 2-for-1 stock splits, each in the form of a 100% stock dividend, effective February 17, 1999 and February 11, 2000.

The table above sets forth our selected consolidated financial data. We prepared this information using the consolidated financial statements of Broadcom for the five years ended December 31, 2001, which have been restated to include the operations of acquisitions accounted for using the pooling-of-interests method of accounting as if they had been combined with Broadcom prior to the beginning of each period presented. In addition, the consolidated financial statements include the results of operations of acquisitions accounted for using the purchase method of accounting commencing as of their respective acquisition dates. See Note 3 of Notes to Consolidated Financial Statements.

You should read this selected consolidated financial data together with the Consolidated Financial Statements and related Notes contained in this Report and in our subsequent reports filed with the Securities and Exchange Commission (“SEC”), as well as the section of this Report and our other reports entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our Consolidated Financial Statements and related Notes thereto, included in Part IV, Item 14 of this Report, and the “Risk Factors” section at the end of this Item 7, before deciding to invest in our company or to maintain or increase your investment. In this Report, all share numbers and per share amounts have been retroactively adjusted to reflect our 2-for-1 stock splits, each in the form of a 100% stock dividend, effective February 17, 1999 and February 11, 2000.

We are the leading provider of highly integrated silicon solutions that enable broadband communications and networking of voice, video and data services. Using proprietary technologies and advanced design methodologies, we design, develop and supply complete system-on-a-chip solutions and related hardware and software applications for every major broadband communications market. Our diverse product portfolio includes solutions for digital cable set-top boxes and cable modems; high-speed local, metropolitan and wide area and optical networks; home networking; VoIP; carrier access; residential broadband gateways; direct broadcast satellite and terrestrial digital broadcast; DSL; wireless communications; SystemI/O server solutions; and broadband network processors. From Broadcom’s inception in 1991 through 1994, we were primarily engaged in product development and the establishment of strategic customer and foundry relationships. During that period, we generated the majority of our revenue from development work performed for key customers. We began shipping our products in 1994, and subsequently our revenue has increased predominantly through sales of our semiconductor products. We intend to continue to enter into development contracts with key customers, but expect that future development revenue will constitute a small percentage of our total revenue. We also generate a small percentage of our product revenue from the licensing of software and the provision of software support services and from licenses of system-level reference designs.

The percentage of our net revenue derived from independent customers located outside of the United States was approximately 23.3% in 2001, 20.3% in 2000 and 17.2% in 1999. All of our revenue to date has been denominated in U.S. dollars. See Note 12 of Notes to Consolidated Financial Statements.

From time to time, our key customers have placed large orders causing our quarterly net revenue to fluctuate significantly. We expect these fluctuations will continue. Sales to Motorola, including sales to its manufacturing subcontractors, represented approximately 18.2% of our net revenue in 2001, 23.2% of our net revenue in 2000 and 30.3% of our net revenue in 1999. Sales to 3Com, including sales to its manufacturing subcontractors, represented approximately 15.1% of our net revenue in 2000 and 18.0% of our net revenue in 1999. Sales to Cisco, including sales to its manufacturing subcontractors, represented approximately 14.1% of our net revenue in 2000 and 10.6% of our net revenue in 1999. Sales to our five largest customers (which customers have varied from year to year), including sales to their respective manufacturing subcontractors, represented approximately 49.3% of our net revenue in 2001, 61.8% of our net revenue in 2000 and 66.6% of our net revenue in 1999. We expect that our key customers will continue to account for a substantial portion of our net revenue in 2002 and for the foreseeable future.

Our gross margin has been affected in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:


	•	our product mix;

	•	the position of our products in their respective life cycles;

	•	competitive pricing strategies;

	•	manufacturing cost efficiencies and inefficiencies;

	•	amortization of purchased intangible assets;

	•	stock-based compensation expense;

	•	the fair value of performance-based warrants earned by certain customers; and

	•	the mix of product revenue and development revenue.

For example, newly-introduced products generally have higher average selling prices and gross margins, both of which typically decline over product life cycles due to competitive pressures and volume pricing agreements. Our gross margin and results of operations may continue to fluctuate as a result of these and other factors.

The cycle for test, evaluation and adoption of our products by customers can range from three to six months or more, with an additional three to nine months or more before a customer commences volume production of equipment incorporating our products. Moreover, in light of the recent significant economic slowdown in the technology sector, it may take significantly longer than three to nine months before customers commence volume production of equipment incorporating some of our products. Due to this lengthy sales cycle, we may experience significant delays between incurring expenses for research and development and selling, general and administrative efforts, and investments in inventory, and the generation of corresponding revenue, if any. Furthermore, during 2002 and thereafter, we may continue to increase our investment in research and development, selling, general and administrative functions and inventory. We anticipate that the rate of new orders may vary significantly from month to month. If anticipated sales and shipments in any quarter do not occur when expected, expenses and inventory levels could be disproportionately high, and our results of operations for that quarter, and potentially for future quarters, would be materially and adversely affected.

A key element of our business strategy involves the acquisition of businesses, products or technologies that allow us to reduce the time required to develop new technologies and products and bring them to market, complement our existing product offerings, expand our market coverage, increase our engineering workforce or enhance our technological capabilities. We plan to continue to evaluate opportunities for strategic acquisitions from time to time, and may make additional acquisitions in the future.

During 2001 and 2000 we completed 12 acquisitions that were accounted for using the purchase method of accounting, for aggregate equity consideration of $6.175 billion. In 2001 these acquisitions included Visiontech Ltd., a supplier of digital video/ audio MPEG-2 compression and decompression chips; ServerWorks Corporation, a supplier of high-performance system input/ output integrated circuits for servers, workstations and storage platforms; KimaLink, a developer of integrated circuits for wireless data communications; and PortaTec Corporation, a developer of integrated solutions for smart mobile devices. In 2000 these acquisitions included Innovent Systems, Inc., a developer of radio frequency integrated circuits for wireless data communications; Puyallup Integrated Circuit Company, Inc., a provider of integrated circuit design services; Altima Communications, Inc., a supplier of networking integrated circuits for the small-to-medium sized business networking market; NewPort Communications, Inc., a supplier of mixed-signal integrated circuits for the high-speed communications infrastructure market; Silicon Spice Inc., a developer of communications processors and other technology for high-density voice, fax and data packet transmission over wide area networks; Element 14, Inc., a developer of high-port density, low-power digital subscriber line chipsets, software and communications processor technology; Allayer Communications, a developer of high-performance enterprise and optical networking communications chips; and SiByte, Inc., a developer of high-performance microprocessor solutions for broadband networking. Because each of these acquisitions was accounted for as a purchase transaction, the accompanying consolidated financial statements include the results of operations of the acquired companies commencing as of their respective acquisition dates. See Note 3 of Notes to Consolidated Financial Statements.

In addition, during 2000 and 1999 we completed nine acquisitions that were accounted for using the pooling-of-interests method of accounting. In 2000 these acquisitions included Digital Furnace Corporation, a developer of communications algorithms and software that increase the capacity of existing broadband networks for interactive services; BlueSteel Networks, Inc., a developer of high-performance Internet security processors for e-commerce and VPN applications; Stellar Semiconductor, Inc., a developer of 3D graphics technology; and Pivotal Technologies Corporation, a developer of high-performance communications links for both wired and wireless environments. In 1999 these acquisitions included Maverick Networks, a developer of highly integrated silicon solutions for multi-layer switching equipment in enterprise networks; Epigram, Inc., a developer of advanced semiconductor products for high-speed home networking; Armedia, Inc., a developer of high performance digital video decoders; HotHaus Technologies Inc., a provider of OpenVoIP™ embedded communications software that enables transmission of digital voice, fax and data packets over data networks, including the Internet; and AltoCom, Inc., a provider of complete software data/ fax modem implementations for general purpose embedded processors, PC CPUs and digital signal processors. Because each of these acquisitions was accounted for as a pooling-of-interests transaction, our historical consolidated financial statements and the discussion and analysis of financial condition and results of operations for prior periods have been restated to include the operations of these nine companies as if they had been combined with our company at the beginning of the first period presented. Included in restated net revenue and net loss for 2000 were revenue and net losses, aggregating $0.3 million and $8.8 million, respectively, from the four pooling-of-interests transactions completed in that year and incurred prior to the respective closings of those transactions. Included in restated net revenue and net income for 1999 were revenue and net losses, aggregating $11.3 million and $19.6 million, respectively, incurred prior to the respective closings of the nine pooling-of-interests transactions.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during the reporting period. We regularly evaluate our estimates and assumptions related to allowances for doubtful accounts, sales returns and allowances, inventory reserves, strategic investments, goodwill and purchased intangible asset valuations, deferred income tax asset valuation allowances, warranty reserves, restructuring costs, litigation and other contingencies. We base our estimates and assumptions on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. To the extent there are material differences between our estimates and the actual results, our future results of operations will be affected.

We believe the following critical accounting policies, among others, affect the significant judgments and estimates we use in the preparation of our consolidated financial statements:


	•	Revenue, Receivables and Inventory. We recognize product revenue upon concluding that all of the fundamental criteria for revenue recognition have been met. The criteria are usually met at the time of product shipment, except for shipments to stocking distributors where revenue is recognized upon sale to the end customer. In addition, we record reductions to revenue for estimated product returns and allowances such as competitive pricing programs. Should actual product returns or pricing adjustments exceed our estimates, additional reductions to revenue would result. Our products typically carry a one to three year warranty. We provide reserves for estimated product warranty costs at the time revenue is recognized. Although we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates, use of materials and service delivery costs incurred in correcting a product failure. Should actual product failure rates, use of materials or service delivery costs differ from our estimates, additional warranty reserves could be required, which could reduce gross margins. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs could be required.

	•	Goodwill and Purchased Intangible Assets. The purchase method of accounting for acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired, including in-process research and development (“IPR&D”). The amounts and useful lives assigned to intangible assets impact future amortization; the amount assigned to IPR&D is expensed immediately. If the assumptions and estimates used to allocate the purchase price are not correct, purchase price adjustments or future asset impairment charges could be required.

	•	Impairment of Long-Lived Assets. We evaluate long-lived assets used in operations, including goodwill and purchased intangible assets, when indicators of impairment, such as reductions in demand or significant economic slowdowns in the semiconductor industry, are present. Reviews are performed to determine whether the carrying value of assets is impaired based on comparison to the undiscounted expected future cash flows. If the comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using a weighted average of the market approach and discounted expected future cash flows using a discount rate based upon our weighted average cost of capital. Impairment is based on the excess of the carrying amount over the fair value of those assets. Significant management judgment is required in the forecast of future operating results that is used in the preparation of expected discounted cash flows. It is reasonably possible that the estimates of anticipated future net revenue, the remaining estimated economic life of the products and technologies, or both, could differ from those used to assess the recoverability of these assets. In that event, additional impairment charges or shortened useful lives of certain long-lived assets could be required.

	•	Strategic Investments. We have made strategic investments in publicly traded and privately held companies for the promotion of business and strategic objectives. The share prices of the publicly traded securities have been volatile, and the value of the non-publicly traded securities is difficult to determine. We periodically review these investments for other-than-temporary declines in fair value and write down investments to their fair value when an other-than- temporary decline has occurred based on the specific identification method. We generally believe an other-than-


		temporary decline has occurred when the fair value of the investment is below the carrying value for two consecutive quarters, absent evidence to the contrary. Fair values for investments in public companies are determined using the quoted market prices. Fair values for investments in privately held companies are estimated based upon one or more of the following: pricing models using historical and forecasted financial information, the values of recent rounds of financing, or quoted market prices of comparable public companies. Although we believe our estimates reasonably reflect the fair value of our non-publicly traded securities, had there been an active market for the equity securities, the carrying values might have been materially different than the amounts reported. Future adverse changes in market conditions or poor operating results of companies in which we have such investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value and which could require an impairment charge.

	•	Deferred Taxes. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. We consider future taxable income and prudent and feasible tax planning strategies in assessing the need for a valuation allowance. If we determine that we will not realize all or part of our net deferred tax assets in the future, we will make an adjustment to the deferred tax assets, which adjustment will be charged to income tax expense in the period of such determination.

The following table sets forth certain statement of operations data expressed as a percentage of net revenue for the periods indicated:

Net Revenue. Our revenue consists principally of product revenue generated by sales of our semiconductor products, and to a much lesser extent, from licenses of software and the provision of software support services and development revenue generated under development contracts with our customers. Net revenue is revenue less provisions for returns and allowances and the fair value of performance-based warrants earned by certain customers. Net revenue for 2001 was $961.8 million, a decrease of $134.3 million or 12.3% as compared with net revenue of $1.096 billion in 2000. Net revenue was reduced by $25.5 million and $38.6 million in 2001 and 2000, respectively, to account for the fair value of the performance-based warrants to purchase shares of Class A common stock earned by certain customers in connection with purchase and development agreements that we assumed in prior acquisitions.

The decline in net revenue for 2001 as compared to 2000 resulted primarily from a decrease in volume shipments of our semiconductor products for the high-speed networking market, digital cable set-top boxes and cable modems, as our customers faced slower demand for their products and continued to work through their inventory issues, offset in part by shipments of SystemI/ O server products. Due to the significant economic slowdown in the technology sector and semiconductor industry in 2001, we experienced a significant slowdown in customer orders, as well as an increase in the number of order cancellations and reschedulings of backlog. We experienced modest revenue growth in the third and fourth quarters of 2001 and expect that modest growth to continue in the first quarter of 2002.

Gross Profit. Gross profit represents net revenue less the cost of revenue. Cost of revenue includes the cost of purchasing the finished silicon wafers manufactured by independent foundries, costs associated with assembly, packaging, test and quality assurance for semiconductor products, amortization of purchased technology, and costs of personnel and equipment associated with manufacturing support and contracted development work. Gross profit for 2001 was $404.1 million or 42.0% of net revenue, a decrease of $207.9 million or 34.0% from gross profit of $611.9 million or 55.8% of net revenue in 2000.

The decrease in gross profit was mainly attributable to the decrease in the volume of semiconductor product shipments as well as non-cash acquisition-related charges, including amortization of purchased intangible assets and stock-based compensation expense. This decrease was offset in part by cost reductions in 2001. The decrease in gross profit as a percentage of net revenue for 2001 compared with 2000 was primarily a result of the non-cash acquisition-related charges and, to a lesser extent, decreased absorption of manufacturing overhead due to lower production volumes and shifts in our product mix. Approximately $15.9 million and $4.6 million of stock-based compensation expense were included in cost of revenue in 2001 and 2000, respectively. Approximately $51.7 million and $2.3 million of amortization of purchased intangible assets were included in cost of revenue in 2001 and 2000, respectively. At December 31, 2001 the unamortized balance of purchased intangible assets that will be amortized to cost of revenue in the future was $62.9 million, of which $52.6 million is expected to be amortized in 2002 and $10.3 million is expected to be amortized in 2003. See Notes 1, 2 and 3 of Notes to Consolidated Financial Statements.

We anticipate that gross profit will continue to be impacted by the non-cash amortization of acquisition-related charges. In addition, gross profit is likely to be impacted in the future by competitive pricing strategies, fluctuations in the volume of our product sales, fluctuations in silicon wafer costs, and the possible future introduction of certain lower margin products.

Research and Development Expense. Research and development expense consists primarily of salaries and related costs of employees engaged in research, design and development activities, costs related to engineering design tools, subcontracting costs, and facilities expenses. Research and development expense for 2001 was $446.6 million or 46.4% of net revenue, an increase of $196.0 million or 78.2% as compared with research and development expense of $250.7 million or 22.9% of net revenue in 2000. This increase was primarily due to the addition of personnel through acquisitions and internal hiring, investment in design tools for the development of new products and the enhancement of existing products, and the cost of additional facilities required to support the increase in headcount. Research and development expense in the near term is expected to be slightly higher in absolute dollars than the 2001 levels. Due to the significant economic slowdown in the technology sector and current market conditions, we are not currently able to assess the trend of research and development expense thereafter. However, based upon past experience, we anticipate that research and development expense in absolute dollars will continue to increase over the long term as a result of the growth and diversification of the markets we serve, new product opportunities and our expansion into new markets and technologies. We will continue to periodically assess our cost structure and product programs to improve operational efficiencies.

Selling, General and Administrative Expense. Selling, general and administrative expense consists primarily of personnel-related expenses, professional and legal fees, trade show expenses and facilities expenses. Selling, general and administrative expense for 2001 was $155.4 million or 16.2% of net revenue, an increase of $52.1 million or 50.5% as compared with selling, general and administrative expense of $103.3 million or 9.4% of net revenue in 2000. This increase reflected higher personnel-related costs resulting from the addition of sales and marketing, senior management and administrative personnel through acquisitions and internal hiring as well as increased facilities expenses and legal fees. Selling, general and administrative expense in the near term is expected to be slightly higher in absolute dollars than the 2001 levels. Due to the significant economic slowdown in the technology sector and current market conditions, we are not currently able to assess the trend of selling, general and administrative expense thereafter. However, based upon past experience, we anticipate that over the long term selling, general and administrative expense in absolute dollars will continue to increase to support expansion of our operations through indigenous growth and acquisitions, as a result of periodic changes in our infrastructure to support increased headcount, acquisition and integration activities, and international operations, and in view of the volume of current litigation. We will continue to periodically assess our cost structure and product programs to improve operational efficiencies.

Stock-Based Compensation Expense. Stock-based compensation expense generally represents the amortization of deferred compensation as well as expense related to options subject to variable accounting. We recorded approximately $377.9 million of deferred compensation in 2001 and $1.242 billion of deferred compensation in 2000, primarily in connection with stock options assumed in our acquisitions. Deferred compensation primarily represents the difference between the fair value of our common stock at the measurement date of each acquisition and the exercise price of the unvested stock options assumed in the acquisition. Additional deferred compensation related to earned contingent consideration is measured and recorded at the date the contingency is met. Deferred compensation is presented as a reduction of shareholders’ equity and is amortized ratably over the respective vesting periods of the applicable options, generally three to five years. Approximately $84.6 million and $6.2 million of deferred compensation was eliminated due to employee terminations during 2001 and 2000, respectively.

Stock-based compensation expense for 2001 was $484.0 million or 50.3% of net revenue, an increase of $368.7 million or 319.8% as compared with stock-based compensation expense of $115.3 million or 10.5% of net revenue in 2000. Approximately $15.9 million and $4.6 million of additional stock-based compensation expense was classified as cost of revenue in 2001 and 2000, respectively. Approximately $11.1 million of additional stock-based compensation expense resulting from an extension of the exercise period for vested stock options of certain terminated employees was classified as restructuring costs for 2001. Approximately $0.3 million of additional stock-based compensation expense was classified as merger-related costs for 2000.

The significant increase in stock-based compensation expense for 2001 relates primarily to stock options assumed in the four purchase transactions completed during 2001 as well as the full year impact of the eight purchase transactions completed during 2000, all of which were accounted for in accordance with Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 44, Accounting for Certain Transactions Involving Stock Compensation – An Interpretation of APB Opinion No. 25 (“FIN 44”). We expect to record additional stock-based compensation expense in future periods as a result of the continued amortization of deferred compensation related to these purchase transactions.

In connection with our acquisition of ServerWorks in 2001 and our acquisitions of Allayer and SiByte in 2000, we agreed to increase the aggregate equity consideration for each acquisition if certain future internal performance goals were later achieved. Such additional consideration, if earned, will be paid in the form of additional shares of our Class A common stock. Any additional consideration paid that is allocated to deferred compensation will be amortized over the remaining vesting periods of the underlying options and restricted stock assumed in the acquisitions. In addition, outstanding options assumed in these transactions are subject to variable accounting and are revalued quarterly over their applicable vesting periods until all performance goals are satisfied or until the options are exercised, forfeited, cancelled or expire. We recorded an additional $24.8 million of deferred compensation during 2001 when certain Allayer, SiByte and ServerWorks performance goals were met. Approximately $5.0 million of this amount was expensed immediately.

At December 31, 2001, 6,466,831 shares of Class A common stock were reserved for future issuance if the remaining internal performance goals established in connection with our acquisitions of SiByte and ServerWorks are met. If the remaining internal performance goals had been met at December 31, 2001, additional consideration of approximately $264.3 million, based on the closing price of our Class A common stock on December 31, 2001, would have been recorded and allocated between goodwill and deferred compensation. The amount of actual additional consideration to be recorded will vary depending on which, if any, of the remaining internal performance goals are met and the actual market values of our Class A common stock on the dates such internal performance goals are satisfied.

We recorded approximately $35.0 million in stock-based compensation expense in 2001 related to stock options subject to variable accounting, using the fair market value of $40.87 per share based on the closing price of our Class A common stock on December 31, 2001, in accordance with FIN 44 and FIN No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. These charges have been and in the future will be based on the amount by which our Class A common stock closing price at the end of the reporting period, or at the date of exercise, if earlier, exceeds the exercise price. Depending upon movements in the market value of our Class A common stock, the variable accounting treatment of certain stock options may result in significant additional stock-based compensation expense in future periods. At December 31, 2001 there were 3,379,974 shares subject to variable accounting, of which 751,400 were vested and 2,628,574 were unvested. These shares have a weighted average per share exercise price of $8.68 and an average life of approximately three years. See Notes 1, 3 and 9 of Notes to Consolidated Financial Statements.

Amortization of Goodwill and Purchased Intangible Assets. In connection with the four purchase transactions completed during 2001 and contingent consideration earned from previous acquisitions, we recorded approximately $962.6 million of additional goodwill and $129.3 million of purchased intangible assets in 2001. For the eight purchase transactions completed during 2000, we recorded approximately $3.351 billion of goodwill and $50.3 million of purchased intangible assets in 2000.

Goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. Intangible assets acquired include completed technology, customer relationships and assembled workforce. We obtained independent appraisals or performed internal appraisals of the fair value of the tangible and intangible assets acquired to allocate the purchase prices. Goodwill and purchased intangible assets are amortized on a straight-line basis over the economic lives of the respective assets, generally two to five years. The amortization of goodwill and purchased intangible assets for 2001 was $780.2 million or 81.1% of net revenue, an increase of $642.0 million or 464.4% as compared with $138.2 million or 12.6% of net revenue in 2000. In addition, approximately $51.7 million and $2.3 million of amortization of purchased intangible assets has been classified as cost of revenue for 2001 and 2000, respectively. At December 31, 2001 the unamortized balance of purchased intangible assets that will be amortized in the future was $22.1 million, of which the majority is expected to be amortized to expense in 2002. See Notes 1, 2 and 3 of Notes to Consolidated Financial Statements.

In connection with our acquisitions of Allayer, SiByte and ServerWorks, we recorded $180.3 million of additional goodwill during 2001 when certain internal performance goals were met. We expect to record additional consideration in the future when and if any of the remaining internal performance goals are met. Any additional consideration paid will be allocated between goodwill and deferred compensation.

In June 2001 the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations (“SFAS 141”), and SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), effective for fiscal years beginning after December 15, 2001. Under these new rules, goodwill and other intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their useful lives. SFAS 142 is immediately applicable to any acquisitions made after June 30, 2001.

We will apply the new rules on accounting for goodwill and other intangible assets from prior acquisitions beginning in the first quarter of 2002. As of December 31, 2001 the unamortized balance of goodwill and other intangible assets was $2.254 billion. This balance includes assembled workforce, which will be reclassified to goodwill on January 1, 2002 in accordance with SFAS 142. Application of the non-amortization provisions of SFAS 142 is estimated to result in a decrease in amortization of goodwill of approximately $581.1 million per year (or $2.29 per share based on weighted average shares outstanding for the year ended December 31, 2001). We will perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets under the new rules as of January 1, 2002. We have not yet determined the effect that these tests will have on our results of operations and financial position.

Impairment of Goodwill. During 2001 we performed an assessment of the carrying values of intangible assets recorded in connection with our various acquisitions. The assessment was performed in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of (“SFAS 121”), due to the recent significant economic slowdown and the reduction in near-term demand in the technology sector and the semiconductor industry. As a result of the assessment, we concluded that the decline in market conditions within the industry was significant and other than temporary. Based on this assessment and an independent valuation, we recorded a charge of $1.182 billion to write down the value of goodwill associated with certain of our purchase transactions. See Notes 1 and 10 of Notes to Consolidated Financial Statements.

In-Process Research and Development. IPR&D totaled $109.7 million for the four purchase transactions completed in 2001, as compared to $713.1 million for the eight purchase transactions completed in 2000. The amounts allocated to IPR&D were determined through established valuation techniques used in the high technology industry and were expensed upon acquisition as it was determined that the underlying projects had not reached technological feasibility and no alternative future uses existed.

The fair value of IPR&D for each of the acquisitions was determined using the income approach. Under the income approach, the expected future cash flows from each project under development are estimated and discounted to their net present value at an appropriate risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return are the weighted-average cost of capital and return on assets, as well as the risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Each project was analyzed to determine the unique technological innovations, the existence and reliance upon core technology, the existence of any alternative future use or current technological feasibility, and the complexity, cost and time to complete the remaining development. Future cash flows for each project were estimated based upon forecasted revenue and costs, taking into account product life cycles, market penetration and growth rates.

The IPR&D charge includes only the fair value of IPR&D performed to date. The fair value of completed technology is included in identifiable purchased intangible assets, and the fair values of IPR&D to be completed and future research and development are included in goodwill. We believe the amounts recorded as IPR&D, as well as developed technology, represent fair values and approximate the amounts an independent party would pay for these projects.

As of the closing date of each purchase transaction, development projects were in process. Although the costs to bring the products from the acquired companies to technological feasibility are not expected to have a material impact on our future results of operations or financial condition, the development of these technologies remains a significant risk due to the remaining effort required to achieve technical viability, rapidly changing customer markets, uncertain standards for new products, and significant competitive threats from numerous companies. The nature of the efforts to develop the acquired technologies into commercially viable products consists principally of planning, designing and testing activities necessary to determine that the products can meet market expectations, including functionality and technical requirements. Failure to bring these products to market in a timely manner could result in a loss of market share or a lost opportunity to capitalize on emerging markets and could have a material and adverse impact on our business and operating results.

The following table summarizes the significant assumptions at the acquisition dates underlying the valuations for our significant purchase transactions completed in 2001 and 2000:

ServerWorks is expected to complete two development projects during the first six months of 2002. One additional project is expected to be completed during 2003. The current weighted average percent complete for these projects is approximately 72%, and we estimate the cost to complete these projects will be approximately $7.8 million.

We completed all five of the Innovent development projects by the end of 2001. An additional $16.9 million over the previous estimate was required to complete these projects.

We completed three development projects of Altima as expected during 2001. We reallocated the resources on the remaining project to focus on next-generation semiconductor products that we believe are better aligned with future demand.

We completed all eight of the NewPort development projects as expected during 2001. An additional $4.7 million over the previous estimate was required to complete these projects.

We completed one of the Element 14 development projects during 2001. One additional project is expected to be completed during 2003. We estimate the cost to complete this project will be approximately $6.0 million.

We completed one of the Allayer projects as expected during 2001. We reallocated the resources on the two remaining projects to focus on next-generation semiconductor products that we believe are better aligned with future demand.

We currently expect to complete one of the SiByte development projects during 2002 and another project in 2003. The current weighted average percent complete for both projects is approximately 61%, and we estimate the cost to complete these projects will be approximately $14.7 million.

Except as noted above, actual results to date have been consistent, in all material respects, with our assumptions at the time of the acquisitions. The assumptions consist primarily of expected completion dates for the in-process projects, estimated costs to complete the projects, and revenue and expense projections once the products have entered the market. Shipment volumes of products from the acquired technologies are not material to our overall financial results at the present time. It is difficult to determine the accuracy of overall revenue projections early in the technology life cycle. Failure to achieve the expected levels of revenue and net income from these products will negatively impact the return on investment expected at the time that the acquisitions were completed and may potentially result in impairment of goodwill and other long-lived assets.

Restructuring Costs. In the second quarter of 2001 we announced and began implementing a plan to restructure our operations in response to the then current challenging economic climate. This restructuring plan has resulted and will result in certain business unit realignments, workforce reductions and consolidation of excess facilities. For 2001 we recorded restructuring costs totaling $34.3 million, which were classified as operating expense in the consolidated statements of operations. We anticipate recording further restructuring costs in 2002 as we continue to implement this plan.

Through December 31, 2001 the restructuring plan had resulted in termination of the employment of approximately 160 employees across all business functions and geographic regions. We recorded workforce reduction charges of approximately $16.1 million related to severance and fringe benefits. Included in this amount is approximately $11.1 million of stock-based compensation expense resulting from an extension of the exercise period for vested stock options of the terminated employees. In addition, headcount was reduced through attrition and reductions in the number of temporary and contract workers employed by us.

Through December 31, 2001 we recorded charges of approximately $18.2 million for the consolidation of excess facilities. The charges related primarily to lease terminations and non-cancelable lease costs.

We cannot assure that our restructuring program will achieve all of the expense reductions and other benefits we anticipate. In addition, anticipated savings from reduced headcount or facility consolidations have been and may in the future be mitigated by subsequent increases to headcount and subsequent facilities additions related to our operating requirements.

Litigation Settlement Costs. Litigation settlement costs of approximately $3.0 million were incurred in 2001. No comparable litigation settlement costs were incurred in 2000.

Merger-Related Costs. In connection with the pooling-of-interests transactions in 2000, merger-related costs of approximately $4.7 million were incurred. No merger-related costs were incurred in 2001 as there were no business combinations accounted for as poolings of interests. Merger-related costs consist primarily of transaction costs, such as fees for investment bankers, attorneys, accountants and other related fees and expenses, incurred in acquisitions as well as certain restructuring costs related to the disposition of duplicative facilities and assets and the write down of unutilized assets.

Interest Income, Net. Interest income, net, reflects interest earned on average cash and cash equivalents and investment balances, less interest accrued on our debt and capital lease obligations. Interest income, net, for 2001 was $23.0 million as compared with $24.3 million in 2000. The decrease for 2001 was the result of interest expense incurred on debt assumed from our ServerWorks acquisition and an overall decline in interest rates on our investments, partially offset by increased cash balances available to invest resulting from the cash generated by operations, cash balances assumed in acquisitions, and cash received from the exercise of employee stock options.

Other Income (Expense), Net. Other income (expense), net, primarily includes recorded gains and losses on strategic investments as well as gains and losses on foreign currency transactions and dispositions of property and equipment. For 2001, other expense, net, was $30.9 million as compared with $2.7 million in 2000. During 2001 we recorded a loss of approximately $32.7 million representing an other-than-temporary decline in the value of our strategic investments.

Provision for Income Taxes. We recorded income tax benefits of approximately $56.7 million in 2001 and $4.0 million in 2000, which resulted in effective tax rates of approximately 2.0% for 2001 and 0.6% for 2000. The federal statutory rate was 35% for both periods. The differences between our effective tax rates for 2001 and 2000 and the federal statutory rate resulted primarily from the effects of nondeductible IPR&D, impairment of goodwill and other acquisition-related expenses from the 12 purchase transactions completed during 2001 and 2000, as well as the effects of certain 2001 losses recorded

At December 31, 2001 and 2000 we provided valuation allowances against deferred tax assets in the amounts of approximately $375.1 million and $6.9 million, respectively, resulting in an increase in the valuation allowance in 2001 of approximately $368.2 million. Approximately $215.2 million of the 2001 change in the valuation allowance was recorded as income tax expense. The remainder of the 2001 change was recorded primarily against shareholders’ equity as it relates primarily to the deferral of certain 2001 tax benefits from employee stock option exercises, which benefits, if and when recognized, will be recorded directly to shareholders’ equity. There is no valuation allowance provided against the remainder of our deferred tax assets, as we believe it is more likely than not that these assets will be realized. The primary bases for this conclusion are the expectation of future income from our ordinary and recurring operations and tax planning strategies, which rely on our continuing ability to realize value from our intellectual property portfolio.

The Internal Revenue Service is examining our federal income tax returns for the years ended December 31, 1998 and 1999. Management believes that the results of these examinations will not have a material impact on our financial condition and results of operations.

Net Revenue. Net revenue for 2000 was $1.096 billion, an increase of $574.9 million or 110.3% as compared with net revenue of $521.2 million in 1999. Net revenue for 2000 was reduced by $38.6 million, which represents the fair value of the performance-based warrants to purchase shares of Class A common stock earned by certain customers in connection with purchase and development agreements that we assumed in prior acquisitions. The growth in net revenue resulted mainly from increases in volume shipments of our semiconductor products for the high-speed networking market, digital cable set-top boxes and cable modems.

Gross Profit. Gross profit for 2000 was $611.9 million or 55.8% of net revenue, an increase of $302.7 million or 97.9% from gross profit of $309.2 million or 59.3% of net revenue in 1999. The increase in gross profit was mainly attributable to the significant increase in the volume of semiconductor product shipments. The decrease in gross profit as a percentage of net revenue was largely driven by volume-pricing agreements and competitive pricing strategies on certain high volume products. Included in cost of revenue were approximately $4.6 million and $0.1 million of stock-based compensation expense in 2000 and 1999, respectively, and approximately $2.3 million of amortization of purchased intangible assets in 2000.

Research and Development Expense. Research and development expense for 2000 was $250.7 million or 22.9% of net revenue, an increase of $131.4 million or 110.1% as compared with research and development expense of $119.3 million or 22.9% of net revenue in 1999. The increase in absolute dollars was primarily due to the addition of personnel and the investment in design tools for the development of new products and the enhancement of existing products.

Selling, General and Administrative Expense. Selling, general and administrative expense for 2000 was $103.3 million or 9.4% of net revenue, an increase of $41.8 million or 68.0% as compared with selling, general and administrative expense of $61.5 million or 11.8% of net revenue in 1999. The increase in absolute dollars reflected higher personnel-related costs resulting from the hiring of sales and marketing personnel, senior management and administrative personnel, increased facilities expenses and legal and other professional fees. The decrease in selling, general and administrative expense as a percentage of net revenue reflected the significant increase in net revenue during 2000 as compared with 1999.

Stock-Based Compensation Expense. We recorded approximately $1.242 billion and $9.3 million of deferred compensation in 2000 and 1999, respectively, primarily in connection with stock options assumed in our acquisitions. Stock-based compensation expense for 2000 was $115.3 million or 10.5% of net revenue, an increase of $111.7 million as compared with stock-based compensation expense of $3.6 million or 0.6% of net revenue in 1999. Approximately $0.3 million and $1.0 million of additional stock-based compensation expense in 2000 and 1999 were classified as merger-related costs. In addition, approximately $4.6 million and $0.1 million of stock-based compensation expense were classified as cost of revenue in 2000 and 1999, respectively. The significant increase in stock-based compensation expense in 2000 relates primarily to stock options assumed in the eight purchase transactions completed during the year that were accounted for in accordance with FIN 44. See Notes 1, 3 and 9 of Notes to Consolidated Financial Statements.

Amortization of Goodwill and Purchased Intangible Assets. In connection with the eight purchase transactions completed during 2000, we recorded approximately $3.351 billion of goodwill and $50.3 million of purchased intangible assets. The amortization of goodwill and purchased intangible assets for 2000 was $138.2 million or 12.6% of net revenue. No

In-Process Research and Development. IPR&D aggregated $713.1 million for the purchase transactions completed in 2000. No amounts of IPR&D were incurred in 1999. The amounts allocated to IPR&D were determined through established valuation techniques used in the high-technology industry and were expensed upon acquisition as it was determined that the underlying projects had not reached technological feasibility and no alternative future uses existed.

Litigation Settlement Costs. Litigation settlement costs of approximately $17.0 million were incurred in 1999. No comparable litigation settlement costs were incurred in 2000.

Merger-Related Costs. Merger-related costs of approximately $4.7 million and $15.2 million were incurred in 2000 and 1999, respectively, in connection with the pooling-of-interests transactions.

Interest Income, Net. Interest income, net, for 2000 was $24.3 million as compared with $8.4 million in 1999. This increase was principally due to increased cash balances available to invest resulting from the cash generated by operations, cash balances assumed in acquisitions, and cash received from the exercise of employee stock options.

Other Income (Expense), Net. Other income (expense), net, primarily includes gains and losses on foreign currency transactions and the disposals of property and equipment. For 2000, other expense, net, was $2.7 million as compared with $260,000 in 1999.

Provision for Income Taxes. We recorded an income tax benefit of approximately $4.0 million in 2000 and income tax expense of approximately $28.8 million in 1999, which resulted in effective tax rates of approximately 0.6% for 2000 and 28.5% for 1999. The federal statutory rate was 35% for both periods. The primary differences between our effective tax rates for 2000 and 1999 and the federal statutory rate resulted from the effects of nondeductible IPR&D and acquisition-related expenses from the eight purchase transactions completed during 2000. Our effective tax rate on income before the effects of these items, and before the effects of payroll tax expenses relating to certain stock option exercises, was 20% for 2000 and 29.9% for 1999. The primary reasons for our decreased effective tax rate on income before such items for 2000 compared to 1999 were benefits from increased research and development credits and beneficial tax rate differentials on foreign earnings.

At December 31, 2000 and 1999 we provided a valuation allowance of $6.9 million against a portion of certain acquired net operating losses, due to uncertainty regarding their future realization. There was no valuation allowance provided against the remainder of our deferred tax assets, as we believed it was more likely than not that these assets would be realized. The primary basis for this conclusion was the expectation of future income from our ordinary and recurring operations.

In June 2001 the FASB issued SFAS 141 and SFAS 142 effective for fiscal years beginning after December 15, 2001. Under these new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their estimated useful lives. SFAS 142 is immediately applicable to any acquisitions made after June 30, 2001.

We will apply the new rules on accounting for goodwill and other intangible assets from prior acquisitions beginning in the first quarter of 2002. Application of the non-amortization provisions of SFAS 142 is estimated to result in a decrease in amortization of goodwill of approximately $581.1 million per year (or $2.29 per share based on weighted average shares outstanding for the year ended December 31, 2001). We will perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets under the new rules during 2002. We have not yet determined the effect these tests will have on our results of operations and financial condition.

In October 2001 the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), which supercedes prior accounting standards concerning the financial accounting and reporting for the impairment or the disposition of long-lived assets for the disposition of a segment of a business. SFAS 144 is effective for fiscal years beginning after December 15, 2001. We expect to adopt SFAS 144 as of January 1, 2002 and have not yet determined the effect, if any, the adoption of SFAS 144 will have on our results of operations and financial condition.

Since our inception we have financed our operations through a combination of sales of equity securities, cash generated by operations and cash assumed in acquisitions. At December 31, 2001 we had $261.8 million in working capital, $539.8 million in cash, cash equivalents and short-term marketable securities and $109.8 million in long-term marketable securities. Marketable securities are defined as income yielding securities that can be readily converted into cash. At December 31, 2000 we had $673.1 million in working capital, $601.6 million in cash, cash equivalents and short-term marketable securities, and $2.0 million in long-term marketable securities.

Our working capital declined in 2001 due primarily to our assumption of approximately $200.0 million in net current liabilities in the acquisitions made during the year. In addition, we had $109.8 million in long-term marketable securities at the end of 2001 that were included in current assets at the end of 2000 and we expended approximately $91.7 million on additions to property and equipment and strategic investments.

Cash and cash equivalents decreased from $523.9 million at December 31, 2000 to $403.8 million at December 31, 2001 as investing activities more than offset the cash provided by operating and financing activities.

During 2001 operating activities provided $49.1 million in cash. Although we had a net loss of $2.742 billion in 2001, such amount included non-cash items aggregating $2.660 billion resulting from depreciation and amortization, stock-based compensation expense, amortization of goodwill and purchased intangible assets, impairment of goodwill, IPR&D, restructuring charges, deferred taxes and loss on strategic investments. In addition to the impact of non-cash items, our 2001 operating activities also reflected decreases in accounts receivable and inventory, offset in part by decreases in other accrued liabilities. Operating activities provided cash in the amount of $162.0 million in 2000. This was primarily the result of the net loss of $687.8 million being more than offset by the impact of net non-cash charges aggregating $965.8 million.

Accounts receivable decreased $115.1 million to $57.2 million during 2001. The decrease in accounts receivable was primarily due to lower billings at the end of 2001 as compared to 2000.

Inventories decreased $29.9 million to $22.3 million during 2001. The reduction in inventory generally reflects the close management of our inventory levels during the recent economic slowdown, and the increased use of drop shipments from our manufacturing subcontractors directly to our customers.

In the future, we may be required to maintain higher levels of accounts receivable and inventory to support increased sales. This may result in our operating activities using cash, in contrast to historically providing cash.

Investing activities used cash in the amount of $216.8 million in 2001, primarily as a result of $166.1 million of net purchases of marketable securities, the purchase of $71.4 million of capital equipment to support our operations and the purchase of $20.3 million of strategic investments, offset in part by $41.0 million of net cash acquired in purchase transactions. In 2000 our investing activities provided $3.0 million in cash, as a result of $40.2 million in proceeds from the net sales of marketable securities and $69.4 million in net cash acquired in purchase transactions, offset in part by $80.7 million in purchases of capital equipment and the purchase of $25.9 million in strategic investments.

Cash provided by financing activities was $47.6 million in 2001, which was primarily the result of a $90.0 million bank credit facility secured to replace the ServerWorks credit facility that was paid off in 2001, $59.8 million in net proceeds received from issuances of common stock upon exercises of stock options and $25.5 million in net proceeds from the exercise of performance-based warrants earned by customers, partially offset by $128.6 million in payments on debt obligations primarily of acquired companies. Cash provided by financing activities was $178.1 million in 2000, primarily from $144.6 million in net proceeds from issuances of common stock upon exercises of stock options and net proceeds of $38.6 million from the exercise of performance-based warrants earned by customers, partially offset by $6.0 million in net payments on debt obligations of acquired companies.

Due to the significant decline in our stock price, we received fewer proceeds from the exercise of stock options in 2001 than we did in 2000, as significantly fewer options, with lower exercise prices, were exercised. In the future we may not generate as much cash from the exercise of stock options as we have in the past.

The following table summarizes our contractual payment obligations and commitments:

In addition, we have guaranteed an aggregate of $1.2 million in loans provided by a financial institution to certain of our employees.

At the time of its acquisition by us, ServerWorks had an existing bank credit facility of up to $125.0 million, of which $90.0 million was outstanding on the date of acquisition. To receive more favorable terms and conditions, on December 19, 2001 that credit facility was paid in full and terminated. On December 21, 2001 we entered into a replacement financing arrangement for a bank credit facility of up to $90.0 million. We may choose the rate at which the credit facility bears interest at the rate of either (a) the higher of (i) 0.5% plus the Federal Reserve rate and (ii) the Bank of America prime rate or (b) LIBOR plus 1% (selected in one, two or three month periods). Interest is payable at either the selected interest period or quarterly. At December 31, 2001 the interest rate for the credit facility was 2.9%. We must pay a commitment fee of 0.35% on any unused balance of the credit facility. At December 31, 2001, $90.0 million was outstanding under the credit facility. The credit facility is due and payable December 20, 2002.

At the time of its acquisition by us, ServerWorks had a $35.0 million non-interest bearing obligation to a third party. That obligation was paid in April 2001.

Our debt also includes a note payable to a significant customer in the amount of $21.1 million that bears interest at a rate of LIBOR plus 1% per year, adjusted quarterly, and is due in December 2002. At December 31, 2001 the interest rate for the note was 3.59%. The note becomes immediately due and payable upon the occurrence of certain events. The customer has asserted that the entire principal amount of the note and all interest accrued thereon are currently due and payable and has filed a lawsuit to collect the obligation; we dispute that assertion and are vigorously defending the lawsuit. See Notes 11 and 12 of Notes to Consolidated Financial Statements.

Capitalized lease obligations for equipment are payable in varying monthly installments at rates from 7.8% to 14.7%.

We lease our facilities and certain engineering design tools and information systems equipment under operating lease agreements that expire at various dates through 2012.

We had outstanding capital commitments totaling approximately $2.5 million as of December 31, 2001, primarily for the purchase of engineering design tools, computer hardware and information systems infrastructure. During 2001 we spent approximately $79.3 million on capital equipment to support our operations. We expect that we will continue to spend substantial amounts during 2002 to purchase additional engineering design tools, computer hardware, test equipment, information systems and leasehold improvements, to support our operations and as we integrate and upgrade the capital equipment and facilities of acquired companies. We may finance these purchases from our cash and cash equivalents and marketable securities, on hand, borrowings, debt and equity offerings, or a combination of any of these means.

We believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet our working capital needs, capital expenditures, investment requirements and commitments for at least the next 12 months. However, it is possible that we may need to raise additional funds to finance our activities beyond the next 12 months or to consummate acquisitions of other businesses, products or technologies. We could raise such funds by selling equity or debt securities to the public or to selected investors, or by borrowing money from financial institutions. In addition, even though we may not need additional funds, we may still elect to sell additional equity or debt securities or obtain credit facilities for other reasons. We may not be able to obtain additional funds on terms that would be favorable to our shareholders and us, or at all. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing shareholders

Although we believe that we have sufficient capital to fund our activities for at least the next 12 months, our future capital requirements may vary materially from those now planned. We anticipate that the amount of capital that we will need in the future will depend on many factors, including:


	•	the overall levels of sales of our products and gross profit margins;

	•	the market acceptance of our products;

	•	the levels of promotion and advertising that will be required to launch our new products and achieve and maintain a competitive position in the marketplace;

	•	volume price discounts;

	•	our business, product, capital expenditure and research and development plans and product and technology roadmaps;

	•	the levels of inventory and accounts receivable that we maintain;

	•	capital improvements to new and existing facilities;

	•	technological advances;

	•	our competitors’ response to our products;

	•	our relationships with suppliers and customers; and

	•	general economic conditions and specific conditions in the semiconductor industry and the broadband communications markets, including the effects of the current economic slowdown and related uncertainties.

In addition, we may require additional capital to accommodate planned future growth, hiring, infrastructure and facility needs or to consummate acquisitions of other businesses, products or technologies.

Before deciding to invest in our company or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this Report and in our other filings with the SEC, including our subsequent reports on Forms 10-Q and 8-K. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occur with material adverse effects on Broadcom, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our Class A common stock could decline and you may lose all or part of your investment.

We are exposed to the risks associated with the recent worldwide economic slowdown and related uncertainties.

Slower economic activity, concerns about inflation, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns in the telecommunications and related industries, and recent international conflicts and terrorist and military activity have resulted in a downturn in worldwide economic conditions, and particularly in the United States. As a result of these unfavorable economic conditions, in the first half of 2001 we experienced a significant slowdown in customer orders, an increase in the number of cancellations and reschedulings of backlog and higher overhead costs as a percentage of our reduced net revenue. Although the volume of orders placed by customers increased, and our backlog and overhead costs, as a percentage of net revenue, improved during the second half of 2001, concerns remain regarding the timing, strength and duration of economic recovery in the semiconductor industry and broadband communications and Internet infrastructure markets. In addition, recent political and social turmoil related to international conflicts and terrorist acts can be expected to place further pressure on economic conditions in the U.S. and worldwide. These political, social and economic conditions make it extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities. If such conditions continue or worsen, our business, financial condition and results of operations will likely be materially and adversely affected.

Our operating results may fluctuate significantly due to the cyclicality of the semiconductor industry. Any such variations could adversely affect the market price of our Class A common stock.

We operate in the semiconductor industry, which is cyclical and subject to rapid technological change. From time to time, the semiconductor industry has experienced significant downturns such as the current one. These downturns are characterized by diminished product demand, excess customer inventories, accelerated erosion of prices and excess production capacity. The current downturn and future downturns in the semiconductor industry may be severe and prolonged. Future downturns in the semiconductor industry, or any failure of this industry or the broadband communications markets to fully recover from the recent downturn, could seriously impact our revenue and harm our business, financial condition and results of operations. This industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to ship products in future periods. Accordingly, our quarterly results may vary significantly as a result of the general conditions in the semiconductor industry, which could cause our stock price to decline.

Our quarterly operating results may fluctuate significantly. As a result, we may fail to meet or exceed the expectations of securities analysts and investors, which could cause our stock price to decline.

Our quarterly net revenue and operating results have fluctuated significantly in the past and may continue to vary from quarter to quarter due to a number of factors, many of which are not within our control. If our operating results do not meet the expectations of securities analysts or investors, our stock price may decline. Fluctuations in our operating results may be due to a number of factors, including the following:


	•	economic and market conditions in the semiconductor industry and the broadband communications markets, including the effects of the current significant economic slowdown;

	•	international conflicts and acts of terrorism and the impact of adverse economic, market and political conditions worldwide;

	•	the timing, rescheduling or cancellation of significant customer orders;

	•	the gain or loss of a key customer;

	•	changes in our product or customer mix;

	•	the volume of our product sales and pricing concessions on volume sales;

	•	the qualification, availability and pricing of competing products and technologies and the resulting effects on sales and pricing of our products;

	•	the effectiveness of our expense and product cost control and reduction efforts;

	•	the rate of adoption and acceptance of new industry standards in our target markets;

	•	our ability to specify, develop or acquire, complete, introduce, market and transition to volume production new products and technologies in a timely manner;

	•	the rate at which our present and future customers and end users adopt Broadcom technologies and products in our target markets;

	•	the timing of customer-industry qualification and certification of our products and the risks of non-qualification or non-certification;

	•	the effects of new and emerging technologies;

	•	the various risks inherent in our acquisitions of technologies and businesses;

	•	our ability to retain and hire key executives, technical personnel and other employees in the numbers, with the capabilities and at the compensation levels that we need to implement our business and product plans;

	•	patent and other intellectual property disputes, customer indemnification claims and other types of litigation risks;

	•	fluctuations in the manufacturing yields of our third party semiconductor foundries and other problems or delays in the fabrication, assembly, testing or delivery of our products;

	•	problems or delays that we may face in shifting our products to smaller geometry process technologies and in achieving higher levels of design integration;


	•	the availability and pricing of third party semiconductor foundry and assembly and test capacity and raw materials;

	•	the risks and challenges of producing products with new suppliers and at new fabrication and assembly facilities;

	•	the risks and uncertainties associated with our international operations;

	•	the quality of our products and any remediation costs;

	•	the effects of natural disasters and other events beyond our control; and

	•	the level of orders received that we can ship in a fiscal quarter.

We expect to continue to increase our operating expenses in the future. A large portion of our operating expenses, including rent, salaries and capital lease expenditures, is fixed and difficult to reduce or change. Accordingly, if our revenue does not meet our expectations, we probably would not be able to adjust our expenses quickly enough to compensate for the shortfall in revenue. In that event, our business, financial condition and results of operations would be materially and adversely affected.

Due to all of the foregoing factors, and the other risks discussed in this Report, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of future performance.

Because we depend on a few significant customers for a substantial portion of our revenue, the loss of a key customer could seriously impact our revenue and harm our business. In addition, if we are unable to continue to sell existing and new products to our key customers in significant quantities or to attract new significant customers, our future operating results could be adversely affected.

We have derived a substantial portion of our revenue in the past from sales to a relatively small number of customers. As a result, the loss of any significant customer could materially and adversely affect our financial condition and results of operations. Sales to Motorola, including sales to its manufacturing subcontractors, accounted for approximately 18.2% of our net revenue in 2001. Sales to our five largest customers, including sales to their respective manufacturing subcontractors, decreased to 49.3% of our net revenue in 2001 compared to 61.8% of our net revenue in 2000. We expect that our key customers will continue to account for a substantial portion of our revenue in 2002 and in the foreseeable future. Accordingly, our future operating results will continue to depend on the success of our largest customers and on our ability to sell existing and new products to these customers in significant quantities.

We may not be able to maintain or increase sales to certain of our key customers for a variety of reasons, including the following:


	•	Most of our customers can stop incorporating our products into their own products with limited notice to us and suffer little or no penalty.

	•	Our agreements with our customers typically do not require them to purchase a minimum amount of our products.

	•	Many of our customers have pre-existing relationships with our current or potential competitors that may affect their decisions to purchase our products.

	•	Our customers face intense competition from other manufacturers that do not use our products.

	•	Some of our customers offer or may offer products that compete with our products.

	•	Our longstanding relationships with some of our larger customers may also deter other potential customers who compete with these customers from buying our products.

In addition, to attract new customers or retain existing customers, we may offer certain customers favorable prices on our products. If these prices are lower than the prices paid by our existing customers, we would have to offer the same lower prices to certain of our customers who have contractual “most favored nation” pricing arrangements. In that event, our average selling prices and gross margins would decline. The loss of a key customer, a reduction in our sales to any key customer or our inability to attract new significant customers could materially and adversely affect our business, financial condition and results of operations.

Because we are subject to order and shipment uncertainties, any significant order cancellations or deferrals could adversely affect our operating results.

We typically sell products pursuant to purchase orders that customers can generally cancel or defer on short notice without incurring a significant penalty. Any significant cancellations or deferrals in the future could materially and adversely affect our business, financial condition and results of operations. In addition, cancellations or deferrals could cause us to hold excess inventory, which could reduce our profit margins, increase product obsolescence and restrict our ability to fund our operations. We generally recognize revenue upon shipment of products to a customer. If a customer refuses to accept shipped products or does not timely pay for these products, we could incur significant charges against our income, which could materially and adversely affect our operating results.

We face intense competition in the broadband communications markets and semiconductor industry, which could reduce our market share in existing markets and affect our entry into new markets.

The broadband communications markets and semiconductor industry are intensely competitive. We expect competition to continue to increase as industry standards become well known and as other competitors enter our target markets. We currently compete with a number of major domestic and international suppliers of integrated circuits and related applications in the markets for digital cable set-top boxes, cable modems, high-speed local, metropolitan and wide area and optical networks, home networking, VoIP, carrier access, residential broadband gateways, direct broadcast satellite and terrestrial digital broadcast, digital subscriber lines, wireless communications, I/O server solutions and network processing. We also compete with suppliers of system-level and motherboard-level solutions incorporating integrated circuits that are proprietary or sourced from manufacturers other than Broadcom. This competition has resulted and may continue to result in declining average selling prices for some of our products. In all of our target markets, we also may face competition from newly established competitors, suppliers of products based on new or emerging technologies, and customers who choose to develop their own silicon solutions. We also expect to encounter further consolidation in the markets in which we compete.

Many of our competitors operate their own fabrication facilities and have longer operating histories and presence in key markets, greater name recognition, larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. They may also be able to devote greater resources to the promotion and sale of their products. In addition, current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. Existing or new competitors may also develop technologies in the future that more effectively address our markets with products that offer enhanced features, lower power requirements or lower cost. Increased competition has in the past and is likely to continue to result in price reductions, reduced gross margins and loss of market share. We cannot assure you that we will be able to continue to compete successfully or that competitive pressures will not materially and adversely affect our business, financial condition and results of operations.

We must keep pace with rapid technological changes in the semiconductor industry and broadband communications markets to remain competitive.

Our future success will depend on our ability to anticipate and adapt to changes in technology and industry standards. We will also need to continue to develop and introduce new and enhanced products to meet our customers’ changing demands. Substantially all of our product revenue in recent quarters has been derived from sales of products for the cable modem, digital cable set-top box, high-speed office network and network server markets. These markets are characterized by rapidly changing technology, evolving industry standards, frequent new product introductions, short product life cycles and increasing demand for higher levels of integration and smaller process geometries. In addition, these markets continue to undergo rapid growth and consolidation. A significant slowdown in any of these or other broadband communications markets could materially and adversely affect our business, financial condition and results of operations. Our success will also depend on the ability of our customers to develop new products and enhance existing products for the broadband communications markets and to introduce and promote those products successfully. The broadband communications markets may not continue to develop to the extent or in the time periods that we anticipate. If new markets do not develop as we anticipate, or if our products do not gain widespread acceptance in these markets, our business, financial condition and results of operations could be materially and adversely affected.

If we do not anticipate and adapt to evolving industry standards in the semiconductor industry and broadband communications markets, our products could become obsolete and we could lose market share.

Products for broadband communications applications generally are based on industry standards that are continually evolving. If new industry standards emerge, our products or our customers’ products could become unmarketable or obsolete. We may also have to incur substantial unanticipated costs to comply with these new standards. Our past sales and profitability have resulted, to a large extent, from our ability to anticipate changes in technology and industry standards and to develop and introduce new and enhanced products incorporating the new standards. Our ability to adapt to these changes and to anticipate future standards, and the rate of adoption and acceptance of those standards, will be a significant factor in maintaining or improving our competitive position and prospects for growth. We have in the past invested substantial resources in emerging technologies that did not achieve the market acceptance that we had expected. Our inability to anticipate the evolving standards in the semiconductor industry and, in particular the broadband communications markets, or to develop and introduce new products successfully into these markets could materially and adversely affect our business, financial condition and results of operations.

If we are unable to develop and introduce new products successfully and in a cost-effective and timely manner or to achieve market acceptance of our new products, our operating results would be adversely affected.

Our future success will depend on our ability to develop new silicon solutions for existing and new markets, introduce these products in a cost-effective and timely manner and convince leading equipment manufacturers to select these products for design into their own new products. Our quarterly results in the past have been, and are expected in the future to continue to be, dependent on the introduction of a relatively small number of new products and the timely completion and delivery of those products to customers. The development of new silicon devices is highly complex, and from time to time we have experienced delays in completing the development and introduction of new products and lower than anticipated manufacturing yields in the early production of such products. Our ability to develop and deliver new products successfully will depend on various factors, including our ability to:


	•	accurately predict market requirements and evolving industry standards;

	•	accurately define new products;

	•	timely complete and introduce new product designs;

	•	timely qualify and obtain industry interoperability certification of our products and the products of our customers into which our products will be incorporated;

	•	obtain sufficient foundry capacity;

	•	achieve high manufacturing yields;

	•	shift our products to smaller geometry process technologies to achieve lower cost and higher levels of design integration; and

	•	gain market acceptance of our products and our customers’ products.

If we are not able to develop and introduce new products successfully and in a cost-effective and timely manner, our business, financial condition and results of operations would be materially and adversely affected.

Our new products generally are incorporated into our customers’ products at the design stage. We often incur significant expenditures on the development of a new product without any assurance that an equipment manufacturer will select our product for design into its own product. The value of our products largely depends on the commercial success of our customers’ products and on the extent to which those products accommodate components manufactured by our competitors. We cannot assure you that we will continue to achieve design wins or that equipment that incorporates our products will ever be commercially successful.

After we have developed and delivered a product to a customer, the customer will usually test and evaluate our product prior to designing its own equipment to incorporate our product. Our customer may need three to six months or longer to test, evaluate and adopt our product and an additional three to nine months or more to begin volume production of equipment that incorporates our product. Moreover, in light of the recent significant economic slowdown in the technology sector, it may take significantly longer than three to nine months before customers commence volume production of

equipment incorporating some of our products. Due to this lengthy sales cycle, we may experience significant delays from the time we increase our operating expenses and make investments in inventory until the time that we generate revenue from these products. It is possible that we may never generate any revenue from these products after incurring such expenditures. Even if a customer selects our product to incorporate into its equipment, we have no assurances that the customer will ultimately market and sell its equipment or that such efforts by our customer will be successful. The delays inherent in our lengthy sales cycle increase the risk that a customer will decide to cancel or change its product plans. Such a cancellation or change in plans by a customer could cause us to lose sales that we had anticipated. In addition, our business, financial condition and results of operations could be materially and adversely affected if a significant customer curtails, reduces or delays orders during our sales cycle or chooses not to release equipment that contains our products.

While our sales cycles are typically long, our average product life cycles tend to be short as a result of the rapidly changing technology environment in which we operate. As a result, the resources devoted to product sales and marketing may not generate material revenue for us, and from time to time, we may need to write off excess and obsolete inventory. If we incur significant marketing and inventory expenses in the future that we are not able to recover, and we are not able to compensate for those expenses, our operating results could be adversely affected. In addition, if we sell our products at reduced prices in anticipation of cost reductions and we still have higher cost products in inventory, our operating results would be harmed.

A key element of our business strategy involves expansion through the acquisition of businesses, products or technologies that allow us to complement our existing product offerings, expand our market coverage, increase our engineering workforce or enhance our technological capabilities. Between January 1, 1999 and December 31, 2001, we acquired 21 companies, including four acquisitions that were completed in 2001. We plan to continue to pursue acquisition opportunities in the future.

Acquisitions may require significant capital infusions, typically entail many risks and could result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies. We have in the past and may in the future experience delays in the timing and successful completion of the acquired company’s technologies and product development through volume production, unanticipated costs and expenditures, changing relationships with customers, suppliers and strategic partners, or contractual, intellectual property or employment issues. In addition, the key personnel of the acquired company may decide not to work for us. The acquisition of another company or its products and technologies may also require us to enter into a geographic or business market in which we have little or no prior experience. These challenges could disrupt our ongoing business, distract our management and employees, harm our reputation and increase our expenses. In addition, acquisitions may materially and adversely affect our results of operations because they may require large one-time charges or could result in increased debt or contingent liabilities, adverse tax consequences, substantial depreciation or deferred compensation charges, or the amortization of amounts related to deferred compensation and purchased intangible assets. In connection with our 12 purchase acquisitions to date, we recorded goodwill in the aggregate amount of approximately $4.313 billion. The portion of such goodwill attributable to each acquisition generally has been amortized over a 60 month period from the date that such acquisition closed. In accordance with SFAS 121 we recorded a goodwill impairment charge of $1.182 billion in the three months ended September 30, 2001 to write down the value of goodwill associated with certain of our purchase transactions. Beginning in the first quarter of 2002, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with SFAS 141 and SFAS 142. In addition, in connection with these acquisitions we incurred deferred compensation charges in the aggregate amount of approximately $1.595 billion, which will be amortized over the period of time for which the relevant options or restricted stock may continue to vest. We expect to record additional goodwill and deferred compensation charges in connection with future acquisitions and may record additional goodwill and deferred compensation charges with respect to prior acquisitions that involve as yet unearned contingent consideration. See Note 3 of Notes to Consolidated Financial Statements. Any of these events could cause the price of our Class A common stock to decline.

Acquisitions made entirely or partially for cash may reduce our cash reserves. Furthermore, if we issue equity or convertible debt securities in connection with an acquisition, as in the case of our recent acquisitions, the issuance may be dilutive to our existing shareholders. In addition, the equity or debt securities that we may issue could have rights, preferences or privileges senior to those of our Class A or Class B common stock. For example, as a consequence of the pooling-of-

We cannot assure you that we will be able to consummate any pending or future acquisitions or that we will realize the benefits anticipated from these acquisitions. In the future, we may not be able to find other suitable acquisition opportunities that are available at attractive valuations, if at all. Even if we do find suitable acquisition opportunities, we may not be able to consummate the acquisitions on commercially acceptable terms, as the recent decline in the price of our Class A common stock may make it significantly more difficult and expensive to initiate or consummate additional acquisitions. Moreover, it may be difficult for us to successfully integrate any acquired businesses, products, technologies or personnel, which could materially and adversely affect our business, financial condition and results of operations.

Our future success depends to a significant extent upon the continued service of our key technical and senior management personnel, in particular, our co-founders, President and Chief Executive Officer, Dr. Henry T. Nicholas III, and Vice President of Research & Development and Chief Technical Officer, Dr. Henry Samueli. We do not have employment agreements with these executives or any other key employees that govern the length of their service. The loss of the services of Dr. Nicholas or Dr. Samueli, or certain other key employees, would likely materially and adversely affect our business, financial condition and results of operations. Our future success also depends on our ability to continue to attract, retain and motivate qualified personnel, particularly senior managers, digital circuit designers, mixed-signal circuit designers and systems applications engineers. Competition for these employees is intense and the recent decline in the price of our Class A common stock may make it more difficult to attract and retain such key employees, all of whom have been granted stock options. In June 2001 we completed a stock option exchange offering for the purpose of reincentivizing and improving our ability to retain key employees. However, we cannot be certain that the stock option exchange program will result in increased retention of such employees. Our inability to attract and retain additional key employees could have an adverse effect on our business, financial condition and results of operations.

In the past, we have relied in significant part on our strategic relationships with certain customers who are technology leaders in our target markets. We intend to pursue and continue to form these strategic relationships in the future but we cannot assure you that we will be able to do so. These relationships often require us to develop new products that may involve significant technological challenges. Our partners frequently place considerable pressure on us to meet their tight development schedules. Accordingly, we may have to devote a substantial amount of our limited resources to our strategic relationships, which could detract from or delay our completion of other important development projects. Delays in development could impair our relationships with our strategic partners and negatively impact sales of the products under development. Moreover, it is possible that our customers may develop their own solutions or adopt a competitor’s solution for products that they currently buy from us. If that happens, our business, financial condition and results of operations could be materially and adversely affected.

Our success and future revenue growth will depend, in part, on our ability to protect our intellectual property. We primarily rely on patent, copyright, trademark and trade secret laws, as well as nondisclosure agreements and other methods, to protect our proprietary technologies and processes. Despite our efforts to protect our proprietary technologies and processes, it is possible that certain of our competitors or other parties may obtain, use or disclose our technologies and processes. We currently hold 79 issued United States patents and have filed over 800 additional United States patent applications. We cannot assure that any additional patents will be issued. Even if a new patent is issued, the claims allowed may not be sufficiently broad to protect our technology. In addition, any of our existing or future patents may be challenged, invalidated or circumvented. Moreover, any rights granted under these patents may not provide us with meaningful protection. If our patents do not adequately protect our technology, our competitors may be able to offer products similar to ours. Our competitors may also be able to develop similar technology independently or design around our patents. Moreover,

We generally enter into confidentiality agreements with our employees, consultants and strategic partners. We also try to control access to and distribution of our technologies, documentation and other proprietary information. Despite these efforts, parties may attempt to copy, disclose, obtain or use our products, services or technology without our authorization. As a result, our technologies and processes may be misappropriated, particularly in foreign countries where laws may not protect our proprietary rights as fully as in the United States.

In addition, some of our customers have entered into agreements with us that grant them the right to use our proprietary technology if we ever fail to fulfill our obligations, including product supply obligations, under those agreements, and if we do not correct this failure within a specified time period. Moreover, we often incorporate the intellectual property of our strategic customers into our own designs, and have certain obligations not to use or disclose their intellectual property without their authorization. We cannot assure you that our efforts to prevent the misappropriation or infringement of our intellectual property or the intellectual property of our customers will succeed. We are currently engaged in litigation, and in the future we may have to engage in additional litigation to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others, including our customers. This litigation may be very expensive and time consuming, divert management’s attention and materially and adversely affect our business, financial condition and results of operations.

Companies in the semiconductor industry often aggressively protect and pursue their intellectual property rights. From time to time, we have received, and may continue to receive in the future, notices that claim we have infringed upon, misappropriated or misused other parties’ proprietary rights. Moreover, in the past we have been engaged and currently we are engaged in litigation with parties who claim that we have infringed their patents or misappropriated or misused their trade secrets. Although we are defending the pending litigation vigorously, it is possible that we will not prevail in pending or future lawsuits. In addition, we may be sued in the future by other parties who claim that we have infringed their patents or misappropriated or misused their trade secrets, or who may seek to invalidate one of our patents. Any of these claims may materially and adversely affect our business, financial condition and results of operations. For example, in a patent or trade secret action, a court could issue a preliminary or permanent injunction that would require us to withdraw or recall certain products from the market or redesign certain products offered for sale or under development. In addition, we may be liable for damages for past infringement and royalties for future use of the technology. We may also have to indemnify certain customers and strategic partners under our agreements with such parties if a third party alleges or if a court finds that we have infringed upon, misappropriated or misused another party’s proprietary rights. Even if claims against us are not valid or successfully asserted, these claims could result in significant costs and a diversion of management and personnel resources to defend. In that event, our business, financial condition and results of operations would likely be materially and adversely affected. If any claims or actions are asserted against us, we may seek to obtain a license under a third party’s intellectual property rights. However, we may not be able to obtain a license on commercially reasonable terms, if at all.

We do not own or operate a fabrication facility. Five outside foundry subcontractors located in Asia manufacture substantially all of our semiconductor devices in current production. In September 1999 two of the foundries’ principal facilities were affected by a significant earthquake in Taiwan. As a consequence of this earthquake, they suffered power outages and equipment damage that impaired their wafer deliveries which, together with strong demand, resulted in wafer shortages and higher wafer pricing industrywide. If any of our foundries suffers any damage to its facilities, experiences power outages, encounters financial difficulties or in the event of any other disruption of foundry capacity, we may not be able to qualify an alternative foundry in a timely manner. Even our current foundries would need to have new manufacturing processes qualified if there is a disruption in an existing process. If we choose to use a new foundry or process, it would typically take us several months to qualify the new foundry or process before we can begin shipping products from it. If we cannot accomplish this qualification in a timely manner, we may still experience a significant interruption in supply of the affected products.

Because we rely on outside foundries with limited capacity, we face several significant risks, including:


	•	a lack of ensured wafer supply and potential wafer shortages and higher wafer prices;

	•	limited control over delivery schedules, quality assurance and control, manufacturing yields and production costs; and

	•	the unavailability of or potential delays in obtaining access to key process technologies.

In addition, the manufacture of integrated circuits is a highly complex and technologically demanding process. Although we work closely with our foundries to minimize the likelihood of reduced manufacturing yields, our foundries have from time to time experienced lower than anticipated manufacturing yields. This often occurs during the production of new products or the installation and start-up of new process technologies.

The ability of each foundry to provide us with semiconductor devices is limited by its available capacity and existing obligations. Although we have entered into contractual commitments to supply specified levels of products to certain of our customers, we do not have a long-term volume purchase agreement or a guaranteed level of production capacity with any of our foundries. Foundry capacity may not be available when we need it or at reasonable prices. Availability of foundry capacity has in the recent past been reduced due to strong demand. We place our orders on the basis of our customers’ purchase orders, and the foundries can allocate capacity to the production of other companies’ products and reduce deliveries to us on short notice. It is possible that foundry customers that are larger and better financed than we are, or that have long-term agreements with our four main foundries, may induce our foundries to reallocate capacity to them. Such a reallocation could impair our ability to secure the supply of components that we need. Although we primarily use four independent foundries, most of our components are not manufactured at more than one foundry at any given time, and our products typically are designed to be manufactured on a specific process at only one of these foundries. Accordingly, if one of our foundries is unable to provide us with components as needed, we could experience significant delays in securing sufficient supplies of those components. Any of these delays would likely materially and adversely affect our business, financial condition and results of operations. We cannot assure that any of our existing or new foundries would be able to produce integrated circuits with acceptable manufacturing yields. Furthermore, our foundries may not be able to deliver enough semiconductor devices to us on a timely basis, or at reasonable prices.

Certain of our acquired companies have established relationships with foundries other than our five main foundries, and we are using these other foundries to produce the initial products of these acquired companies. We may utilize such foundries for other products in the future. In using new foundries, we will be subject to all of the same risks described in the foregoing paragraphs with respect to our current foundries.

We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration and that may result in reduced manufacturing yields, delays in product deliveries and increased expenses.

In order to remain competitive, we expect to continue to transition our products to increasingly smaller line width geometries. This transition will require us to modify the manufacturing processes for our products and redesign certain products. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce our costs, and we have designed certain products to be manufactured in .35 micron, .22 micron, .18 micron and .13 micron geometry processes. In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes. These difficulties resulted in reduced manufacturing yields, delays in product deliveries and increased expenses. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes. We are dependent on our relationships with our foundries to transition to smaller geometry processes successfully. We cannot assure you that our foundries will be able to effectively manage the transition or that we will be able to maintain our relationships with our foundries. If our foundries or we experience significant delays in this transition or fail to efficiently implement this transition, our business, financial condition and results of operations could be materially and adversely affected. As smaller geometry processes become more prevalent, we expect to continue to integrate greater levels of functionality, as well as customer and third party intellectual property, into our products. However, we may not be able to achieve higher levels of design integration or deliver new integrated products on a timely basis, or at all.

The loss of any of the third-party subcontractors that assemble and test substantially all of our current products could disrupt our shipments, harm our customer relationships and adversely affect our net sales.

We do not own or operate an assembly or test facility. Five third-party subcontractors located in Asia assemble and test substantially all of our current products. Because we rely on third-party subcontractors to assemble and test our products, we cannot directly control our product delivery schedules and quality assurance and control. This lack of control has in the past resulted, and could in the future result, in product shortages or quality assurance problems that could increase our manufacturing, assembly or testing costs. We do not have long-term agreements with any of these subcontractors and typically procure services from these suppliers on a per order basis. If any of these subcontractors experiences capacity constraints or financial difficulties, suffers any damage to its facilities, experiences power outages or in the event of any other disruption of assembly and testing capacity, we may not be able to obtain alternative assembly and testing services in a timely manner. Due to the amount of time that it usually takes us to qualify assemblers and testers, we could experience significant delays in product shipments if we are required to find alternative assemblers or testers for our components. Any problems that we may encounter with the delivery, quality or cost of our products could materially and adversely affect our business, financial condition or results of operations.

We are continuing to develop relationships with additional third-party subcontractors to assemble and test our products. In using these new subcontractors, we will be subject to all of the same risks described in the foregoing paragraph.

The complexity of our products could result in unforeseen delays or expenses and in undetected defects or bugs, which could adversely affect the market acceptance of new products and damage our reputation with current or prospective customers.

Highly complex products such as the products that we offer frequently contain defects and bugs when they are first introduced or as new versions are released. We have in the past experienced, and may in the future experience, these defects and bugs. If any of our products contain defects or bugs, or have reliability, quality or compatibility problems, our reputation may be damaged and customers may be reluctant to buy our products, which could materially and adversely affect our ability to retain existing customers or attract new customers. In addition, these defects or bugs could interrupt or delay sales to our customers. To alleviate these problems, we may have to invest significant capital and other resources. Although our products are tested by our suppliers, our customers and ourselves, it is possible that our new products will contain defects or bugs. If any of these problems are not found until after we have commenced commercial production of a new product, we may be required to incur additional development costs and product recall, repair or replacement costs. These problems may also result in claims against us by our customers or others. In addition, these problems may divert our technical and other resources from other development efforts. Moreover, we would likely lose, or experience a delay in, market acceptance of the affected product or products, and we could lose credibility with our current and prospective customers.

We may be unable to manage future growth, which could strain our managerial, operational and financial resources, and materially and adversely affect our business.

During the past few years, we significantly increased the scope of our operations and expanded our workforce, expanding from 1,069 employees as of December 31, 1999 to 2,807 employees as of December 31, 2001, including contract and temporary employees and employees who joined us as the result of acquisitions. This growth has placed, and any future growth is expected to continue to place, a significant strain on our management personnel, systems and resources. We anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, and other internal management systems. We also will need to continue to expand, train, manage and motivate our workforce. All of these endeavors will require substantial management effort. We will likely need to expand our facilities or relocate some or all of our employees or operations from time to time to support our growth. These relocations could result in temporary disruptions of our operations or a diversion of management’s attention and resources. If we are unable to effectively manage expanding operations, our business, financial condition and results of operations could be materially and adversely affected.

As our international business expands, our business, financial condition and operating results could be adversely affected as a result of legal, business, political and economic risks specific to our international operations.

We currently obtain substantially all of our manufacturing, assembly and testing services from suppliers located outside of the United States. In addition, approximately 23.3% of our net revenue for the year ended December 31, 2001 was derived from sales to independent customers outside the United States. We also frequently ship products to our domestic

customers’ international manufacturing divisions and subcontractors. In 1999 we established an international distribution center in Singapore and a design center in the Netherlands. Furthermore, as a result of various acquisitions, we also currently undertake design and development activities in India, Canada, Taiwan, the United Kingdom, Belgium and Israel. We intend to continue to expand our international business activities and to open other design and operational centers abroad. The recent terrorist attacks in the United States and abroad and resultant heightened security may adversely impact our international sales and could make our international operations more expensive. International operations are subject to many inherent risks, including:


	•	political, social and economic instability;

	•	nationalization of business and blocking of cash flows;

	•	acts of terrorism and international conflicts;

	•	trade restrictions;

	•	the imposition of governmental controls and restrictions;

	•	exposure to different legal standards, particularly with respect to intellectual property;

	•	burdens of complying with a variety of foreign laws;

	•	import and export license requirements and restrictions of the United States and each other country in which we operate;

	•	unexpected changes in regulatory requirements;

	•	foreign technical standards;

	•	changes in tariffs;

	•	difficulties in staffing and managing international operations;

	•	fluctuations in currency exchange rates;

	•	difficulties in collecting receivables from foreign entities; and

	•	potentially adverse tax consequences.

Moreover, the seasonality of international sales and economic conditions in our primary overseas markets may negatively impact the demand for our products abroad. All of our international sales to date have been denominated in U.S. dollars. Accordingly, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets or require us to assume the risk of denominating certain sales in foreign currencies. Any one or more of the foregoing factors could materially and adversely affect our business, financial condition or results of operations or require us to modify our current business practices significantly. We anticipate that these factors will impact our business to a greater degree as we further expand our international business activities.

We may seek to raise additional capital in the future through the issuance of additional equity or debt securities or by borrowing money, and additional funds may not be available on terms acceptable to us, or at all.

We believe that our existing cash, cash equivalents and investments will be sufficient to meet our working capital needs, capital expenditures, investment requirements and commitments for at least the next 12 months. However, it is possible that we may need to raise additional funds to finance our activities beyond the next year or to consummate acquisitions of other businesses, products or technologies. We could raise these funds by selling more equity or debt securities to the public or to selected investors, or by borrowing money. In addition, even though we may not need additional funds, we may still elect to sell additional equity or debt securities or obtain credit facilities for other reasons. We may not be able to obtain additional funds on favorable terms, or at all. If adequate funds are not available, we may be required to curtail our operations significantly or to obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain technologies or potential markets. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing shareholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to those of our Class A or Class B common stock.

Our California facilities and the facilities of two of the four independent foundries upon which we rely to manufacture substantially all of our current products are located in regions that are subject to earthquakes and other natural disasters.

Our California facilities, including our principal executive offices, are located near major earthquake fault lines. If there is a major earthquake or any other natural disaster in a region where one of our facilities is located, our business could be materially and adversely affected. In addition, two of the five outside foundries upon which we rely to manufacture substantially all of our semiconductor devices, are located in Taiwan, a country that recently experienced a significant earthquake and could be subject to additional earthquakes. Any earthquake or other natural disaster in Taiwan could materially disrupt our foundries’ production capabilities and could result in our experiencing a significant delay in delivery, or substantial shortage, of wafers and possibly in higher wafer prices.

Disruptions in energy supplies could negatively affect our results of operations.

Early in 2001 California experienced prolonged energy alerts and blackouts caused by disruption in energy supplies. As a consequence, California continues to experience substantially increased costs of electricity and natural gas. We are unsure whether these alerts and blackouts will reoccur or how severe they may become in the future. Several of our facilities, including our principal executive offices, are located, and we conduct research, development and engineering activities, in California. Many of our customers are also headquartered or have substantial operations in California. If we, or any of our major customers located in California, experience a sustained disruption in energy supplies, our results of operations could be materially and adversely affected.

Changes in current or future laws or regulations or the imposition of new laws or regulations by the FCC, other federal or state agencies or foreign governments could impede the sale of our products or otherwise harm our business.

The Federal Communications Commission has broad jurisdiction over each of our target markets. Although current FCC regulations and the laws and regulations of other federal or state agencies are not directly applicable to our products, they do apply to much of the equipment into which our products are incorporated. As a result, the effects of regulation on our customers or the industries in which they operate may, in turn, materially and adversely impact our business, financial condition and results of operations. FCC regulatory policies that affect the ability of cable operators or telephone companies to offer certain services or other aspects of their business may impede the sale of our products. For example, in the past we have experienced delays when products incorporating our chips failed to comply with FCC emissions specifications. We and our customers may also be subject to regulation by countries other than the United States. Foreign governments may impose tariffs, duties and other import restrictions on components that we obtain from non-domestic suppliers and may impose export restrictions on products that we sell internationally. These tariffs, duties or restrictions could materially and adversely affect our business, financial condition and results of operations. Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere could also materially and adversely affect our business.

Various export licensing requirements could materially and adversely affect our business or require us to significantly modify our current business practices.

Various government export regulations apply to the encryption or other features contained in some of our products. We have applied for and received several export licenses under these regulations, but we cannot assure you that we will obtain any licenses for which we have currently applied or any licenses that we may apply for in the future. If we do not receive the required licenses, we may be unable to manufacture the affected products at our foreign foundries or to ship these products to certain customers located outside of the United States.

Certain of our directors, executive officers and their affiliates can control the outcome of matters that require the approval of our shareholders, and accordingly we will not be able to engage in certain transactions without their approval.

As of March 11, 2002 our directors and executive officers beneficially owned approximately 25.0% of our outstanding common stock and 70.7% of the total voting control held by our shareholders. In particular, as of March 11, 2002 our two founders, Dr. Henry T. Nicholas III and Dr. Henry Samueli, beneficially owned a total of approximately 23.9% of our outstanding common stock and 68.8% of the total voting control held by our shareholders. Accordingly, these shareholders currently have enough voting power to control the outcome of matters that require the approval of our shareholders. These matters include the election of a majority of our Board of Directors, the issuance of additional shares of Class B common

stock, and the approval of most significant corporate transactions, including a merger, consolidation or sale of substantially all of our assets. In addition, these persons currently control the management of our business. Because of their significant voting stock ownership, we will not be able to engage in certain transactions without the approval of these shareholders. These transactions include proxy contests, mergers, tender offers, open market purchase programs or other purchases of our Class A common stock that could give our shareholders the opportunity to receive a higher price for their shares than the prevailing market price at the time of such purchases.

Our stock price is highly volatile. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid for them.

The market price of our Class A common stock has fluctuated substantially in the past and is likely to continue to be highly volatile and subject to wide fluctuations. Since August 1, 2000 our Class A common stock has traded at prices as low as $18.40 and as high as $274.75 per share. These fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control, including:


	•	quarter-to-quarter variations in our operating results;

	•	announcements of technological innovations or new products by our competitors, customers or us;

	•	general economic and political conditions and specific conditions in the semiconductor industry and the broadband communications markets;

	•	international conflicts and acts of terrorism;

	•	changes in earnings estimates or investment recommendations by analysts;

	•	changes in investor perceptions; or

	•	changes in expectations relating to our products, plans and strategic position or those of our competitors or customers.

In addition, the market prices of securities of Internet-related, semiconductor and other high technology companies have been especially volatile. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to the operating performance of the specific companies. Accordingly, you may not be able to resell your shares of common stock at or above the price you paid. In the past, companies that have experienced volatility in the market price of their securities have been the subject of securities class action litigation, and as noted in Note 11 of Notes to Consolidated Financial Statements we have recently been sued in several purported securities class action lawsuits, which have been consolidated into a single action. We and our directors and officers have also been sued in purported shareholder derivative actions and other securities litigation. Although we believe that those lawsuits are without merit, an adverse determination could have a very significant effect on our business and results of operations, and could materially affect the price of our stock. Moreover, regardless of the ultimate result, it is likely that the lawsuits will divert management’s attention and resources from other matters, which could also adversely affect the price of our stock.

Our articles of incorporation and bylaws contain anti-takeover provisions that could adversely affect the price of our common stock.

Our articles of incorporation and bylaws contain provisions that may prevent or discourage a third party from acquiring us, even if the acquisition would be beneficial to our shareholders. In addition, we have in the past issued and may in the future issue shares of Class B common stock in connection with certain acquisitions, upon exercise of certain stock options, and for other purposes. Class B shares have superior voting rights entitling the holder to ten votes for each share held on matters that we submit to a shareholder vote (as compared with one vote per share in the case of our Class A common stock). Our Board of Directors also has the authority to fix the rights and preferences of shares of our preferred stock and to issue such shares without a shareholder vote. It is possible that the provisions in our charter documents, the exercise of supervoting rights by holders of our Class B common stock, our officers’ ownership of a majority of the Class B common stock and the ability of our Board of Directors to issue preferred stock or additional shares of Class B common stock may prevent parties from acquiring us. In addition, these factors may discourage third parties from bidding for our Class A common stock at a premium over the market price for this stock. Finally, these factors may also materially and adversely affect the market price of our Class A common stock, and the voting and other rights of the holders of our common stock.

We maintain an investment portfolio of various holdings, types and maturities. We do not use derivative financial instruments in our non-trading investment portfolio. We place our cash investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines; the guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument.

Debt securities are generally classified as held-to-maturity and are stated at cost, adjusted for amortization of premiums and discounts to maturity. Our investment policy for held-to-maturity investments requires that all investments mature in three years or less, with a weighted average maturity of no longer than one year. Primarily, these investments are sensitive to changes in interest rates.

Equity securities are generally classified as available-for-sale and are recorded on the balance sheet at fair value with unrealized gains or losses reported as a separate component of accumulated other comprehensive loss. Included in our portfolio are equity investments in three publicly traded companies. As a result of recent market price volatility, we recorded a $22.0 million loss in 2001 related to these investments. As of December 31, 2001 the fair value of these publicly traded equity investments was $15.9 million. We have also invested in several privately held companies, many of which can still be considered to be in the start-up or development stage, or in funds that invest in such companies. We make investments in key business partners and other industry participants to establish important strategic relationships, expand existing relationships and achieve a return on our investment. These investments are inherently risky, as the markets for the technologies or products these companies have under development are typically in the early stages and may never materialize. As such, we could lose our entire investment in these companies. We recorded a $10.7 million loss in 2001 related to these privately held investments. As of December 31, 2001 the fair value of these investments was $35.6 million.

Our debt currently consists of a financing arrangement for a bank credit facility of up to $90.0 million, a note payable in the amount of $21.1 million and capital leases in the amount of $7.0 million. With respect to the credit facility, we may choose the rate at which the credit facility bears interest at the rate of either (a) the higher of (i) 0.5% plus the Federal Reserve rate and (ii) the Bank of America prime rate or (b) LIBOR plus 1% (selected in one, two or three month periods). Interest is payable at either the selected interest period or quarterly. At December 31, 2001, the interest rate for the credit facility was 2.9%. We must pay a commitment fee of 0.35% on any unused balance of the credit facility. At December 31, 2001 $90.0 million was outstanding under the credit facility. The credit facility is due and payable December 20, 2002.

The note payable to a significant customer bears interest at a rate of LIBOR plus 1% per year, adjusted quarterly, and is due in December 2002. At December 31, 2001 the interest rate for the note was 3.59%. The note becomes immediately due and payable upon the occurrence of certain events. The customer has asserted that the entire principal amount of the note and all interest accrued thereon are currently due and payable and has filed a lawsuit to collect the obligation; we dispute that assertion and are vigorously defending the lawsuit. See Notes 11 and 12 of Notes to Consolidated Financial Statements.

The following table presents principal cash flows and related weighted average fixed interest rates by expected maturity dates.

The financial statements and supplementary data required by this item are included in Part IV, Item 14 of this Report.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

(a) Identification of Directors. The information under the caption “Election of Directors,” appearing in the Proxy Statement, is incorporated herein by reference.

(b) Identification of Executive Officers. The information under the caption “Executive Officers and Key Employees,” appearing in the Proxy Statement, is incorporated herein by reference.

(c) Compliance with Section 16(a) of the Exchange Act. The information under the caption “Section 16(a) Beneficial Ownership Reporting Compliance,” appearing in the Proxy Statement, is incorporated herein by reference.

The information under the caption “Executive Compensation and Other Information,” appearing in the Proxy Statement, is incorporated herein by reference.

The information under the caption “Ownership of Securities,” appearing in the Proxy Statement, is incorporated herein by reference.

The information under the heading “Certain Transactions,” appearing in the Proxy Statement, is incorporated herein by reference.

The following consolidated financial statements, and related notes thereto, of Broadcom and the Report of Independent Auditors are filed as part of this Form 10-K:

The following financial statement schedule of Broadcom and the related Report of Independent Auditors are filed as part of this Form 10-K:

All other schedules have been omitted because they are not applicable, not required, or the information is included in the Consolidated Financial Statements or Notes thereto.

The exhibits listed on the accompanying index to exhibits immediately following the financial statements are filed as part of, or hereby incorporated by reference into, this Form 10-K.

We filed the following current reports on Form 8-K during the quarter ended December 31, 2001:


	Form 8-K filed on October 19, 2001 reporting our third quarter earnings press release (Item 9).

We have audited the accompanying consolidated balance sheets of Broadcom Corporation as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Broadcom Corporation at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

Broadcom Corporation (the “Company”) designs, develops and supplies complete system-on-a-chip solutions and related hardware and software applications for every major broadband communications market. The Company’s diverse product portfolio includes solutions for digital cable set-top boxes and cable modems; high-speed local, metropolitan and wide area and optical networks; home networking; Voice over Internet Protocol (“VoIP”); carrier access; residential broadband gateways; direct broadcast satellite and terrestrial digital broadcast; digital subscriber lines (“DSL”); wireless communications; SystemI/O^TM server solutions; and broadband network processors.

The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

All historical financial information has been restated to include the operations of nine acquisitions accounted for on a pooling-of-interests basis as if each acquired company had been combined with the Company prior to the beginning of each period presented.

In 1999 the Company established an international distribution center in Singapore and a design center in the Netherlands. Additionally, as a result of acquisitions, the Company has software design, development and marketing activities in Canada and design and development activities in Belgium, India, Israel, Taiwan and the United Kingdom. At December 31, 2001 approximately $279.6 million of the Company’s net tangible assets were located outside of the United States, primarily in Singapore.

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates made in preparing the financial statements include the allowances for doubtful accounts, sales returns and allowances, inventory reserves, strategic investments, goodwill and purchased intangible asset valuations, deferred income tax asset valuation allowances, warranty reserves, restructuring costs, litigation and other contingencies. To the extent there are material differences between estimates and the actual results, future results of operations will be affected.

Revenue from product sales is recognized at the time of shipment, except for shipments to stocking distributors whereby revenue is recognized upon sale to the end customer. Provision is concurrently made for estimated product returns and allowances. Development revenue is generally recognized under the percentage-of-completion method. Revenue from licensed software is recognized when persuasive evidence of an arrangement exists and delivery has occurred, provided that the fee is fixed and determinable and collectibility is probable. Revenue from post-contract customer support and any other future deliverables is deferred and earned over the support period or as contract elements are delivered. The fair value of performance-based warrants earned by customers is recognized as a reduction of revenue. See Note 3.

The Company adopted Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin No. 101 (“SAB 101”), Revenue Recognition in Financial Statements, in January 2001. The adoption of SAB 101 did not have a material effect on the financial position or results of operations of the Company.

Performance-based warrants assumed in acquisitions are accounted for in accordance with Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services (“EITF 96-18”). Under EITF 96-18, a performance-based warrant is accounted for using its value at its date of issuance if a significant disincentive to the customer for non-performance exists that makes the customer’s performance probable. If there is not a significant disincentive for non-performance, the warrant is accounted for using its fair value on the date it is earned.

In addition, the warrants are accounted for in the Company’s financial statements pursuant to EITF Topic D-90, Grantor Balance Sheet Presentation of Unvested, Forfeitable Equity Instruments Granted to a Nonemployee (“EITF D-90”). Under EITF D-90, performance-based warrants are treated as unissued for accounting purposes until the issuer has received benefit and the warrant vests. Accordingly, performance-based warrants assumed in acquisitions have been given recognition in the consolidated financial statements as revenue reductions, based on the per share warrant fair values determined under EITF 96-18, only as and to the extent the warrants are earned and vest.

The Company sells the majority of its products throughout North America, Europe and Asia. Sales to the Company’s recurring customers are generally made on open account while sales to occasional customers are typically made on a prepaid or letter of credit basis. The Company performs periodic credit evaluations of its ongoing customers and generally does not require collateral. Reserves are maintained for potential credit losses, and such losses historically have not been significant and have been within management’s expectations.

The Company invests its excess cash in deposits with major banks, in U.S. Treasury and U.S. agency obligations and in debt securities of corporations with strong credit ratings and in a variety of industries. It is the Company’s policy to invest in instruments that have a final maturity of no longer than three years, with a portfolio weighted average maturity of not more than one year.

The Company’s financial instruments consist principally of cash and cash equivalents, short-term and long-term investments, accounts receivable, accounts payable and borrowings. The Company believes all of the financial instruments’ recorded values approximate current values because of the short maturities of these instruments. See Notes 4 and 6.

Cash and cash equivalents consist of cash and short-term investments with original maturities of ninety days or less.

The Company defines marketable securities as income yielding securities that can be readily converted into cash. Examples of marketable securities include commercial paper, corporate bonds, corporate notes and federal, state, county and municipal government bonds.

The Company accounts for its investments in debt and equity securities under Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Management determines the appropriate classification of such securities at the time of purchase and reevaluates such classification as of each balance sheet date. The investments are adjusted for amortization of premiums and discounts to maturity and such amortization is included in interest income. Realized gains and losses and declines in value judged to be other than temporary are determined based on the specific identification method and are reported in the statement of operations.

The Company also has made strategic investments in publicly traded and privately held companies for the promotion of business and strategic objectives. The Company’s investments in publicly traded equity securities are classified as available-for-sale. Available-for-sale investments are initially recorded at cost and periodically adjusted to fair value through comprehensive income. The Company’s investments in equity securities of non-publicly traded companies are accounted for under the cost method. Both types of investments are included in other assets on the Company’s balance sheet and are carried at fair value or cost, as appropriate. The Company periodically reviews these investments for other-than-temporary declines in fair value and writes down investments to their fair value when an other-than-temporary decline has occurred based on the specific identification method. The Company generally believes an other-than-temporary decline has occurred when the fair value of the investment is below the carrying value for two consecutive quarters, absent evidence to the contrary. Fair values for investments in public companies are determined using the quoted market prices. Fair values for investments in privately held companies are estimated based upon one or more of the following: pricing models using historical and forecasted financial information, the values of recent rounds of financing or quoted market prices of comparable public companies.

Inventory is stated at the lower of cost (first-in, first-out) or market. The Company provides inventory allowances based on estimates of excess and obsolete inventories. Shipping and handling costs are classified as a component of cost of revenue in the consolidated statement of operations.

Property and equipment are carried at cost. Depreciation and amortization are provided using the straight-line method over the assets’ estimated remaining useful lives, ranging from one to seven years. Depreciation and amortization of leasehold improvements are computed using the shorter of the remaining lease term or seven years.

In acquisitions accounted for using the purchase method of accounting, goodwill is recorded as the difference, if any, between the aggregate consideration paid for an acquisition and the fair value of the net tangible and intangible assets acquired. Goodwill and purchased intangible assets are amortized on a straight-line basis over the estimated remaining useful lives of the respective assets, ranging from one to five years. Other purchased intangible assets include items such as assembled workforce, completed technology, customer base and software.

The Company accounts for long-lived assets, including goodwill and purchased intangible assets, in accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (“SFAS 121”), which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment, such as reductions in demand or significant economic slowdowns in the semiconductor industry, are present. Reviews are performed to determine whether the carrying value of assets is impaired, based on comparison to undiscounted expected future cash flows. If this comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using a weighted average of the market approach and discounted expected future cash flows using a discount rate based upon the Company’s weighted average cost of capital. Impairment is based on the excess of the carrying amount over the fair value of those assets.

The Company utilizes the liability method of accounting for income taxes as set forth in SFAS No. 109, Accounting for Income Taxes. Under the liability method, deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. A valuation allowance is recorded when it is more likely than not that some of the deferred tax assets will not be realized.

The Company accounts for stock-based awards to employees in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and has adopted the disclosure-only alternative of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). Options granted to non-employees, as defined, have been accounted for at fair market value in accordance with SFAS 123.

In March 2000 the FASB issued Interpretation No. (“FIN”) 44, Accounting for Certain Transactions Involving Stock Compensation – An Interpretation of APB Opinion No. 25 (“FIN 44”). FIN 44 clarifies the definition of an employee for purposes of applying APB 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option or award, and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 was effective July 1, 2000 but certain conclusions therein cover specific events that occurred after either December 15, 1998 or January 12, 2000. The provisions of FIN 44 change the accounting for an exchange of unvested employee stock options and restricted stock awards in a purchase business combination. The new rules require that the intrinsic value of the unvested awards be allocated to deferred compensation and recognized as stock-based compensation expense over the remaining future vesting period. The Company adopted these new rules in its third quarter 2000 (beginning July 1, 2000) for acquisitions accounted for as purchase transactions.

The Company also complies with the provisions of EITF 96-18 with respect to stock option grants to non-employees who are consultants to the Company. EITF 96-18 requires variable plan accounting with respect to such non-employee stock options, whereby compensation associated with such options is measured on the date such options vest, and incorporates the then-current fair market value of the Company’s common stock into the option valuation model.

In addition, the Company complies with the provisions of FIN No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans (“FIN 28”), with respect to certain stock options assumed in connection with purchase transactions in which contingent consideration may be paid in the future. Stock-based compensation expense with respect to such options has been and in the future will be based on the amount by which the Class A common stock closing price at the end of the reporting period, or at the date of exercise, if earlier, exceeds the exercise price. Depending upon the movements in the market value of the Company’s common stock, the variable accounting treatment of certain stock options may result in significant additional stock-based compensation expense in future periods.

In connection with the Company’s acquisitions of Allayer, SiByte and ServerWorks, if certain future internal performance goals are satisfied, the aggregate consideration for these acquisitions will be increased. Such additional consideration, if earned, will be paid in the form of additional shares of the Company’s Class A common stock, which have been reserved for that purpose, and will be accounted for in accordance with APB 16, Business Combinations, FIN 28, FIN 44 and EITF No. 95-8, Accounting for Contingent Consideration Paid to the Shareholders of an Acquired Enterprise in a Purchase Business Combination. Any additional consideration paid will be allocated between goodwill and deferred compensation. The amount allocated to goodwill will be periodically reviewed for impairment. Deferred compensation is measured and recorded at the date the contingency is met and will be amortized over the remaining vesting periods of the applicable equity instruments.

Basic earnings (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the year. Diluted earnings (loss) per share is calculated by adjusting outstanding shares, assuming any dilutive effects of options, warrants and convertible securities.

The Company provides a one to three year warranty on most products and records a related provision for estimated warranty costs at the date of sale. The estimated warranty reserve accrual at December 31, 2001 and 2000 was $5.7 million and $3.4 million, respectively.

Interest expense for the years ended December 31, 2001, 2000 and 1999 was $5.0 million, $332,000 and $751,000, respectively.

SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and displaying comprehensive income and its components in the consolidated financial statements. Accumulated other comprehensive income (loss) includes foreign currency translation adjustments and unrealized gains or losses on investments.

SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), establishes standards for the way that public business enterprises report information about operating segments in annual consolidated financial statements and requires that those enterprises report selected information about operating segments in interim financial

Certain amounts in the 2000 and 1999 consolidated financial statements have been reclassified to conform to the current year presentation.

In June 2001 the FASB issued SFAS No. 141, Business Combinations (“SFAS 141”), and SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS 142”), effective for fiscal years beginning after December 15, 2001. Under these new rules, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests. Other intangible assets will continue to be amortized over their estimated useful lives. SFAS 142 is immediately applicable to any acquisitions made after June 30, 2001.

The Company will apply the new rules on accounting for goodwill and other intangible assets from prior acquisitions beginning in the first quarter of 2002. Application of the non-amortization provisions of SFAS 142 is estimated to result in a decrease of goodwill amortization of approximately $581.1 million per year (or $2.29 per share based on weighted average shares outstanding for the year ended December 31, 2001). The Company will perform the first of the required impairment tests of goodwill and indefinite-lived intangible assets under the new rules during 2002. The Company has not yet determined the effect these tests will have on its results of operations and financial condition.

In October 2001 the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”), which supercedes prior accounting standards concerning the financial accounting and reporting for the impairment or the disposition of long-lived assets and for the disposition of a segment of a business. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company expects to adopt SFAS 144 as of January 1, 2002 and has not yet determined the effect, if any, the adoption of SFAS 144 will have on its results of operations and financial condition.

At December 31, 2001 and 2000, approximately $7.0 million and $2.6 million, respectively, of the net property and equipment was originally acquired through capital leases.

Goodwill is presented net of impairment charges of approximately $1.182 billion in 2001 to write down the value of goodwill associated with certain of our purchase transactions. In accordance with SFAS 142, assembled workforce will be reclassified to goodwill on January 1, 2002. See Notes 1 and 10.

There were 27,749,377 and 41,257,512 common share equivalents excluded from the diluted loss per share calculation for the years ended December 31, 2001 and 2000, respectively, as they would have been antidilutive. The effect of performance-based warrants assumed by the Company and other contingent equity consideration paid by the Company in connection with certain acquisitions will be included in the calculation of basic and diluted earnings (loss) per share as of the beginning of the period in which they are earned. See Note 3.

The following table sets forth certain non-cash transactions excluded from the statements of cash flows:

During 2001 and 2000 the Company completed 12 acquisitions that were accounted for using the purchase method of accounting. The consolidated financial statements include the results of operations of these acquired companies commencing as of their respective acquisition dates.

In addition, during 2000 and 1999 the Company completed nine acquisitions that were accounted for using the pooling-of-interests method. The consolidated financial statements give effect to these transactions as if they had occurred prior to the beginning of each period presented and reflect adjustments made to (i) conform the accounting policies of the combined companies and (ii) eliminate intercompany accounts and transactions.

A summary of transactions accounted for using the purchase method of accounting is outlined below:

Portions of the shares issued are held in escrow pursuant to the terms of the acquisition agreements as well as various employee share repurchase agreements.

The Company obtained independent appraisals or performed internal appraisals of the fair value of the tangible and intangible assets acquired in order to allocate the purchase prices in accordance with APB 16. Based upon those appraisals, the purchase price for each of the acquisitions was allocated as follows:

The consideration for each of the purchase transactions was calculated as follows: (a) common shares issued were valued based upon the Company’s stock price for a period of two days before and through two days after the companies reached agreement and the proposed transaction was announced and (b) restricted common stock and employee stock options were valued in accordance with FIN 44. Acquisition costs incurred by the Company have been included as part of the net assets (liabilities) assumed in connection with the purchase transactions.

In each of the acquisitions of Altima, Silicon Spice, Allayer, SiByte and Visiontech, the Company reserved additional shares of its Class A common stock for future issuance to customers upon exercise of outstanding performance-based warrants of the acquired company that were assumed by the Company and become exercisable upon the satisfaction by customers of their obligations under certain purchase and/or development agreements. In allocating the purchase price for these purchase transactions, no value has been assigned to the purchase and development agreements under which performance-based warrants were issued because they were executory contracts and their terms were at fair value.

Because of significant penalties for non-performance, the performance-based warrants assumed during 2000 in the Altima, Silicon Spice, Allayer and SiByte acquisitions have been assigned fixed values based on their per share fair values using the Black-Scholes pricing model at the date they were assumed by the Company. The fair value of the warrants was estimated assuming no expected dividends, a weighted average expected life of approximately three years, a weighted average risk-free interest rate of 6.2% and an expected volatility of .90.

The performance-based warrants issued by Visiontech were immediately exercisable (and all but one customer exercised the warrants prior to the Company’s acquisition of Visiontech) but were subject to Visiontech’s right to repurchase unvested shares for the original exercise price paid per share. These shares vest and the repurchase right lapses as the purchase or development performance commitments in the warrant agreements are met. The fair value of the performance-based warrants and related unvested shares issued upon exercise of those (unvested) warrants assumed in the Visiontech acquisition is not determined until the warrants are earned or the shares vest; therefore no fair value has been assigned to those warrants or unvested shares. If the performance commitments had been met at December 31, 2001, the fair value would have been $40.87 per warrant or unvested share based on the closing price of the Company’s Class A common stock on December 31, 2001.

The warrants and unvested shares generally vest quarterly over the period from October 2000 through December 2004, subject to satisfaction by customers of the applicable purchase and development requirements. The warrants are generally exercisable for one year after the vesting date.

The fair value, weighted average remaining contractual life and per share exercise price of the assumed performance-based warrants outstanding as of December 31, 2001 were as follows:


(1)	As the fair value for the warrants assumed in the Visiontech acquisition is not determined until earned, the per share fair value shown is illustrative only and assumes the warrants were earned as of December 31, 2001.

Customers earned performance-based warrants to purchase 703,002 shares and 162,280 shares of the Company’s Class A common stock during 2001 and 2000, respectively. Revenue was reduced by $24.5 million and $38.6 million in 2001 and 2000, respectively, for the fair value of the warrants earned by customers. In 2001, in connection with the termination of certain of the purchase and development agreements and related warrant agreements, the Company repurchased and cancelled warrants covering 19,047 shares that were previously earned by customers and incurred approximately $718,000 in expenses related to the cancellations.

The activity for the unvested common stock issued in connection with the Visiontech acquisition is set forth below:


(1)	As the fair value for these restricted shares is not determined until earned, amounts shown represent the estimated weighted average per share fair values as of the date earned or as of December 31, 2001.

During 2001 customers vested in 33,996 shares of unvested common stock issued upon exercise of performance-based warrants. Revenue was reduced by $982,000 in 2001 for the fair value of the shares earned by customers.

In February 2002 the Company terminated purchase and development agreements and related warrant agreements with two customers and cancelled 860,628 unearned warrants and repurchased 257,654 unvested common shares. The Company is currently in negotiations with the final customer to cancel all remaining purchase and development agreements and related warrant agreements. Assuming these agreements are cancelled, no additional warrants will be earned.

In connection with its acquisition of Allayer in 2000, the Company reserved shares of its Class A common stock for future issuance upon the attainment of certain future internal performance goals. These performance goals were met during 2001. As a result, the Company issued or reserved for future issuance 234,042 shares of its Class A common stock and recorded an additional $6.5 million of goodwill, $0.4 million of stock-based compensation expense and $3.2 million of deferred compensation related to the satisfaction of the Allayer performance goals met during 2001.

In connection with its acquisition of SiByte in 2000, the Company reserved shares of its Class A common stock for future issuance upon the attainment of certain future internal performance goals. Three of these performance goals were met during 2001. As a result, the Company issued or reserved for future issuance 2,332,353 shares of its Class A common stock and recorded an additional $51.4 million of goodwill, $3.9 million of stock-based compensation expense and $16.7 million of deferred compensation related to the satisfaction of the SiByte performance goals met during 2001.

In connection with its acquisition of ServerWorks in 2001, the Company reserved shares of its Class A common stock for future issuance upon the attainment of certain future internal performance goals. One of these performance goals was met during 2001. As a result, the Company issued or reserved for future issuance 3,924,051 shares of its Class A common stock and recorded an additional $122.4 million of goodwill and $0.6 million of stock-based compensation expense related to the satisfaction of the ServerWorks performance goals met during 2001.

As of December 31, 2001, 6,466,831 shares of Class A common stock were reserved for future issuance if the remaining internal performance goals established in connection with the Company’s acquisitions of SiByte and ServerWorks are met. If the remaining internal performance goals had been met at December 31, 2001, additional consideration of approximately $264.3 million, based on the Class A common stock closing price on December 31, 2001, would have been recorded and allocated between goodwill and deferred compensation.

Outstanding stock options assumed in the Allayer, SiByte and ServerWorks acquisitions are subject to variable accounting and will be revalued quarterly over their vesting periods until all performance goals are satisfied or until the options are exercised, forfeited, cancelled or expire. In 2001 the Company recorded approximately $35.0 million in stock-based compensation expense related to stock options subject to variable accounting in accordance with the FIN 44 and FIN 28. These charges have been and in the future will be based on the amount by which the Class A common stock closing price at the end of the reporting period, or at the date of exercise, if earlier, exceeds the exercise price. See Note 1.

In-process research and development (“IPR&D”) totaled $109.7 million and $713.1 million for purchase transactions completed during 2001 and 2000, respectively. The amounts allocated to IPR&D were determined through established valuation techniques used in the high-technology industry and were expensed upon acquisition as it was determined that the projects had not reached technological feasibility and no alternative future uses existed.

The fair value of the IPR&D for each of the acquisitions was determined using the income approach. Under the income approach, the expected future cash flows from each project under development are estimated and discounted to their net present value at an appropriate risk-adjusted rate of return. Significant factors considered in the calculation of the rate of return are the weighted-average cost of capital and return on assets, as well as the risks inherent in the development process, including the likelihood of achieving technological success and market acceptance. Each project was analyzed to determine the unique technological innovations, the existence and reliance on core technology, the existence of any alternative future use or current technological feasibility, and the complexity, cost and time to complete the remaining development. Future cash flows for each project were estimated based on forecasted revenue and costs, taking into account product life cycles, and market penetration and growth rates.

The IPR&D charge includes only the fair value of IPR&D performed to date. The fair value of developed technology is included in identifiable intangible assets, and the fair values of IPR&D to be completed and future research and development are included in goodwill. The Company believes the amounts recorded as IPR&D, as well as developed technology, represent the fair value of, and approximate the amounts an independent party would pay for, these projects.

As of the acquisition dates of each purchase transaction, development projects were in process. Research and development costs to bring the products from the acquired companies to technological feasibility are not expected to have a material impact on the Company’s future results of operations or financial condition.

The pro forma statements of operations data of the Company set forth below gives effect to the 12 purchase transactions as if they had occurred at the beginning of 2000. The following unaudited pro forma statements of operations data includes amortization of goodwill, purchased intangible assets and stock-based compensation but excludes the charge for acquired IPR&D. This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations of the Company or of the results that would have actually occurred had the acquisitions taken place at the beginning of 2000.

In 2000 the Company acquired Digital Furnace Corporation, BlueSteel Networks, Inc., Stellar Semiconductor, Inc. and Pivotal Technologies Corporation. In connection with these acquisitions, the Company issued an aggregate of 3,911,130 shares of its Class B common stock in exchange for all shares of the acquired companies’ preferred stock and common stock and reserved an additional 373,713 shares of its Class B common stock for issuance upon exercise of outstanding employee stock options and other rights assumed by the Company.

In 1999 the Company acquired Maverick Networks, Epigram, Inc., Armedia, Inc., HotHaus Technologies Inc. and AltoCom, Inc. In connection with these acquisitions, the Company issued an aggregate of 19,450,786 shares of its Class B common stock in exchange for all shares of the acquired companies’ preferred stock and common stock and reserved an additional 1,849,450 shares of its Class B common stock for issuance upon exercise of outstanding employee stock options, warrants and other rights assumed by the Company.

Each of the foregoing acquisitions was accounted for as a pooling of interests. Accordingly, the Company’s consolidated financial statements have been restated to include the pooled operations of Maverick, Epigram, Armedia, HotHaus, AltoCom, Digital Furnace, BlueSteel, Stellar and Pivotal. A reconciliation of net revenue, net income (loss) and diluted earnings (loss) per share originally reported for the year ended December 31, 1999 to the restated amounts presented in the consolidated statements of operations is set forth below:

The historical numbers of shares of the acquired companies’ respective common stock and common stock equivalents have been converted to equivalent shares of the Company’s common stock based on the applicable exchange ratios used to convert the outstanding shares of each of these companies on their acquisition dates.

Included in net revenue for the year ended December 31, 2000 were aggregate revenues of $0.3 million earned by acquired companies prior to the respective closings of the four pooling-of-interests acquisitions that were consummated in 2000. Included in net loss for the year ended December 31, 2000 were aggregate net losses of $8.8 million from these companies incurred prior to the respective closings of the acquisitions.

AltoCom recorded approximately $6.4 million in 1999 representing accretion to the redemption value of its preferred stock. Such amount has been presented as a reduction of retained earnings (accumulated deficit) in the consolidated statements of shareholders’ equity.

In connection with the pooling-of-interests transactions that occurred in 2000 and 1999, the Company recorded approximately $4.7 million and $15.2 million in charges during the respective years for direct and other merger-related costs and certain restructuring programs. Merger transaction costs aggregated approximately $4.7 million and $11.9 million for 2000 and 1999, respectively, and consisted primarily of fees for investment bankers, attorneys, accountants and other related charges. Restructuring costs of approximately $3.3 million were incurred in 1999 and included provisions for the disposition of duplicative facilities and assets, write downs of unutilized assets, and adjustments to conform accounting policies to those of the Company. No restructuring costs were incurred in 2000.

At December 31, 2001 all of the Company’s held-to-maturity investments consisted of commercial paper and corporate bonds and federal, state, county and municipal government bonds. Debt securities are classified as held-to-maturity when the Company has the intent and ability to hold the securities to maturity. Held-to-maturity investments are stated at cost, adjusted for amortization of premiums and discounts to maturity. A summary of the Company’s held-to-maturity investments by balance sheet caption is as follows:

At December 31, 2001 and 2000 the carrying value of the Company’s available-for-sale securities was approximately $15.9 million and $17.3 million, respectively. The carrying values at December 31, 2001 and 2000 include unrealized gains of approximately $7.0 million and an unrealized loss of approximately $3.8 million, respectively, net of tax. The available-for-sale securities consist of shares of public companies and a warrant to purchase shares of a public company that has been valued using the Black-Scholes option-pricing model. During 2001 the Company recorded an impairment charge for these investments in the amount of $22.0 million representing other-than-temporary declines in the value of these security investments. This charge was included in other income (expense), net, in the consolidated statements of operations.

At December 31, 2001 and 2000 the carrying value of the Company’s investment in equity securities of non-publicly traded companies accounted for on the cost basis was approximately $35.6 million and $29.4 million, respectively. During 2001 the Company recorded an impairment charge for these investments in the amount of $10.7 million representing other-than-temporary declines in the value of these non-marketable equity securities. This charge was included in other income (expense), net, in the consolidated statements of operations.

In October 2001 the Company purchased an approximate 8% ownership interest in a privately held company for $20.0 million. Also in October 2001 the Company entered into a separate agreement to perform certain development services for the privately held company in exchange for additional equity consideration with an estimated aggregate value of up to approximately $10.0 million if all the development milestones are met. Consistent with the Company’s existing policy, revenue under the development agreement will be recorded under the percentage-of-completion method. No revenue was recognized under this agreement in 2001.

For financial reporting purposes, income (loss) before income taxes included the following components:

A reconciliation of the provision (benefit) for income taxes at the federal statutory rate compared to the Company’s effective tax rate was as follows:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred taxes were as follows:

The Company operates under a tax holiday in Singapore, which is effective until April 2004 and may be extended if certain additional requirements are met. The Company recognized a net tax benefit of approximately $7.3 million from this holiday in 2000. No net U.S. tax benefit resulted from the tax holiday or the Company’s foreign operations in 2001 or 1999.

At December 31, 2001 the Company had federal and state net operating loss carryforwards of $1.694 billion and $364.1 million, respectively, which begin to expire in 2006 and 2003, respectively. These net operating losses are primarily the result of tax deductions related to employee stock option exercises. At December 31, 2001 the Company had federal and state research and development credit carryforwards of $94.0 million and $136.3 million, respectively. These research and development credit carryforwards begin to expire in 2009. Certain state research and development credit carryforwards have no expiration date. Additionally, at December 31, 2001, the Company had California manufacturer’s investment credit carryforwards of $1.1 million, which begin to expire in 2005.

The Company maintains a valuation allowance against a portion of its deferred tax assets, due to uncertainty regarding their future realization. In assessing the realizability of its deferred tax assets, management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies. Based on the projections for future taxable income over the periods in which the deferred tax assets are realizable, and the ability to realize taxable income from the Company’s intellectual property portfolio, management believes it is more likely than not that the Company will realize its deferred tax assets, net of the valuation allowance.

If or when recognized, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets at December 31, 2001 will be accounted for as follows: approximately $222.1 million will be recognized as a reduction of income tax expense, $17.6 million will be recognized as a reduction of goodwill, and $135.4 million will be recognized as an increase in shareholders’ equity for certain tax deductions from employee stock options.

The following is a summary of the Company’s debt, including debt and loans assumed in connection with acquisitions:

At the time of its acquisition by the Company, ServerWorks had an existing bank credit facility of up to $125.0 million, of which $90.0 million was outstanding on the date of acquisition. On December 19, 2001 that credit facility was paid in full and terminated. On December 21, 2001 the Company entered into a replacement financing arrangement for a bank credit facility of up to $90.0 million. The Company may choose the rate at which the credit facility bears interest at the rate of either (a) the higher of (i) 0.5% plus the Federal Reserve rate and (ii) the Bank of America prime rate or (b) LIBOR plus 1% (selected in one, two or three month periods). Interest is payable at either the selected interest period or quarterly. At December 31, 2001 the interest rate for the credit facility was 2.9%. The Company must pay a commitment fee of 0.35% on any unused balance of the credit facility. At December 31, 2001 $90.0 million was outstanding under the credit facility. The credit facility is due and payable on December 20, 2002.

At the time of its acquisition by the Company, ServerWorks had a $35.0 million non-interest bearing obligation to a third party. That obligation was paid in April 2001.

At December 31, 2001 the Company had a note payable to a significant customer in the amount of $21.1 million that bears interest at a rate of LIBOR plus 1%, adjusted quarterly, and is due in December 2002. At December 31, 2001 the interest rate for the note was 3.59%. The note becomes immediately due and payable upon the occurrence of certain events. The customer has asserted that the entire principal amount of the note and all interest accrued thereon are currently due and payable and has filed a lawsuit to collect the obligation; the Company disputes that assertion and is vigorously defending the lawsuit. See Notes 11 and 12.

The Company leases buildings in Irvine, California that comprise its corporate headquarters and include administration, sales and marketing, research and development and operations functions. The Company also leases engineering design centers in Tempe, Arizona; Los Angeles County, Pleasanton, San Diego and Santa Clara County, California; Duluth, Georgia; Dallas, Texas; and Seattle, Washington. Internationally, the Company leases a distribution center which includes engineering design facilities in Singapore as well as engineering design facilities in Belgium, Canada, India, Israel, the Netherlands, Taiwan and the United Kingdom. In addition, the Company leases various sales and marketing facilities in the United States and several other countries.

The Company leases its facilities and certain engineering design tools and information systems equipment under operating lease agreements that expire at various dates through 2012. Capitalized lease obligations for equipment are payable

Facilities rent expense for the years ended December 31, 2001, 2000 and 1999 aggregated $31.0 million, $16.6 million and $6.6 million, respectively.

The Company had outstanding commitments totaling approximately $2.5 million as of December 31, 2001, primarily for the purchase of engineering design tools and computer hardware and for information systems infrastructure. The Company has guaranteed an aggregate of $1.2 million in loans provided by a financial institution to certain of its employees.

In January 2000 the Board of Directors approved an increase in the number of authorized shares of Class A common stock from 400,000,000 to 800,000,000 and in the number of authorized shares of Class B common stock from 200,000,000 to 400,000,000. In September 1999 the Board of Directors approved an increase in the number of authorized shares of Class A common stock from 200,000,000 to 400,000,000 and in the number of authorized shares of Class B common stock from 100,000,000 to 200,000,000. The shares of Class A common stock and Class B common stock are substantially identical, except that holders of Class A common stock are entitled to one vote for each share held, and holders of Class B common stock are entitled to ten votes for each share held, on all matters submitted to a vote of the shareholders. In addition, holders of Class B common stock are entitled to vote separately on the proposed issuance of additional shares of Class B common stock in certain circumstances. The Class A common stock and Class B common stock are sometimes collectively referred to herein as “common stock.”

The Company effected 2-for-1 stock splits of its Class A common stock and Class B common stock, in the form of 100% stock dividends, on February 11, 2000 and February 17, 1999. All share numbers and per share amounts contained in these notes and in the consolidated financial statements have been retroactively restated to reflect these changes in the Company’s capital structure.

The components of accumulated other comprehensive income (loss), net of tax, were as follows:

The Company has an employee stock purchase plan for all eligible employees. Under the plan, employees may purchase shares of the Company’s Class A common stock at six-month intervals at 85% of fair market value (calculated in the manner provided under the plan). Employees purchase such stock using payroll deductions, which may not exceed 15% of their total cash compensation. In 2001, 2000 and 1999, 584,484, 479,715 and 737,088 shares, respectively, were issued under this plan at average per share prices of $32.37, $24.54 and $6.81, respectively. At December 31, 2001, 860,114 shares were available for future issuance under this plan.

The Company has in effect several stock-based plans under which non-qualified and incentive stock options have been granted to employees, non-employee board members and other non-employees. The Company’s 1998 Stock Incentive Plan (the “1998 Plan”) is the successor equity incentive program to the Company’s 1994 Stock Option Plan (the “1994 Plan”) and the Company’s 1998 Special Stock Option Plan (together, the “Predecessor Plans”).

In April 2001 and February 2000, the Board of Directors approved amendments to the 1998 Plan, as previously amended, to increase the number of shares of Class A common stock reserved for issuance under this plan by an additional 25,000,000 and 15,000,000 shares, respectively. These amendments were approved by the shareholders at the Annual Meetings of Shareholders held in May 2001 and April 2000, respectively.

The Board of Directors or the Plan Administrator determines eligibility, vesting schedules and exercise prices for options granted under the plans. Options granted generally have a term of 10 years, and in the case of new hires generally vest and become exercisable at the rate of 25% after one year and ratably on a monthly basis over a period of 36 months thereafter; subsequent option grants to existing employees generally vest and become exercisable ratably on a monthly basis over a period of 48 months.

Options granted under the 1994 Plan were exercisable immediately upon issuance. The Company has reserved the right to repurchase all unvested shares held by a participant upon the participant’s termination of service, at the original purchase price. At December 31, 2001 there were unvested options outstanding to purchase 3,716,644 shares of common stock under the 1994 Plan that were exercisable subject to repurchase agreements.

At the discretion of the Board of Directors or the Plan Administrator, the Company may make full-recourse interest bearing secured loans to option holders in amounts up to the exercise price of their options plus related taxes or permit the option holder to pay the exercise price in installments over a determined period.

As of December 31, 2001, 120,317,807 shares of common stock were reserved for issuance under the 1998 Plan, including outstanding options granted under Predecessor Plans. The number of shares of Class A common stock reserved for issuance under the 1998 Plan automatically increases in January each year. Beginning in 2000, the increase is equal to 4.5% of the total number of shares of common stock outstanding on the last trading day of the preceding year, subject to an annual share limit.

In October 1999 the Board of Directors approved the 1999 Special Stock Option Plan (the “1999 Plan”) and reserved an aggregate of 1,000,000 shares of Class A common stock for issuance under that plan. Employees, independent consultants and advisors in the service of the Company or any of its subsidiaries who are neither officers of the Company nor members of the Board at the time of the option grant are eligible to participate in the plan. The exercise price of options granted under the 1999 Plan can be less than the fair market value of the underlying common stock on the grant date. In 1999, 40,542 options were granted under the 1999 Plan, to certain employees of acquired companies in connection with assumed

As a result of the Company’s acquisitions, the Company assumed stock options granted under stock option plans established by each acquired company. As of December 31, 2001, 9,594,848 and 731,737 shares of Class A and Class B common stock, respectively, were reserved for issuance upon exercise of outstanding options assumed under these stock option plans. In addition, the number of options assumed under the SiByte and ServerWorks plans may be increased if certain future internal performance goals are achieved (see Note 3). In 2001, 2000 and 1999 the Company assumed loans to option holders of acquired companies of approximately $756,000, $13.7 million and $394,000, respectively, related to stock options that were exercised prior to the acquisitions.

Activity under the stock option plans during 2001, 2000 and 1999 is set forth below:

The weighted average remaining contractual life and weighted average per share exercise price of options outstanding and of options exercisable as of December 31, 2001 were as follows:

The Company recorded deferred compensation for restricted common stock and employee stock options assumed in acquisitions in accordance with FIN 44. Net deferred compensation is presented as a reduction to shareholders’ equity and is amortized ratably over the respective vesting periods of the applicable options. Activity recorded in the components of net deferred compensation was as follows:

The components of stock-based compensation expense were derived from the following categories:

Included in this amount is approximately $11.1 million of stock-based compensation expense resulting from an extension of the exercise period for vested stock options of certain terminated employees, which was classified as a restructuring cost in 2001. In addition, approximately $0.3 million and $1.0 million of stock-based compensation expense was classified as merger-related costs in 2000 and 1999, respectively.

Outstanding stock options assumed in the Allayer, SiByte and ServerWorks acquisitions are subject to variable accounting and will be revalued quarterly over their vesting periods until all performance goals are satisfied or until the options are exercised, forfeited, cancelled or expired. Included in the components of stock-based compensation expense amounts above, the Company recorded approximately $35.0 million of stock-based compensation expense in 2001 related to stock options subject to variable accounting, using the fair market value of $40.87 per share (the closing price of the Company’s Class A common stock on December 31, 2001). At December 31, 2001 there were 3,379,974 options subject to variable accounting, of which 751,400 are vested and 2,628,574 are unvested. These options have a weighted average per share exercise price of $8.68 and an average life of approximately three years. See Notes 1 and 3.

On June 23, 2001 the Company completed an offering to Company employees of the opportunity to voluntarily exchange certain stock options or receive supplemental option grants. Under this program, employees holding options to purchase the Company’s Class A or Class B common stock were given the opportunity to exchange certain of their existing options, with exercise prices at or above $45.00 per share, for new options to purchase an equal number of shares of the Company’s Class A common stock that were not to be issued until at least six months and one day after the options to be exchanged were cancelled by the Company. The grant price for the new options would be the last reported trading price of the Company’s Class A common stock on the grant date. Options to purchase 18,716,811 shares with a weighted-average exercise price of $128.35 were tendered for exchange pursuant to this program. On June 23, 2001 those options were accepted and cancelled by the Company.

As an alternative, the eligible employees were given the opportunity to retain their existing eligible options and receive a supplemental grant of options to acquire the Company’s Class A common stock. The supplemental option grant size depended on the number of shares underlying and the exercise price of the holder’s existing eligible options, with larger grants going to those holding higher-priced options. Under this alternative, new options to purchase 3,878,073 shares of common stock were granted June 24, 2001 at an exercise price of $33.68 per share.

On December 24, 2001 the Company granted replacement options to purchase 18,616,372 shares of its Class A common stock to employees who tendered options under the stock option exchange offer, at an exercise price of $39.75 per share.

Certain of the Company’s employees hold options that were assumed by the Company in connection with its acquisitions of the businesses that previously employed those individuals; in the business combinations that were accounted for using the purchase method of accounting, the Company has recorded deferred compensation with respect to those options. To the extent those employees tendered, and the Company accepted for exchange and cancellation, such assumed eligible options in exchange for new options, the Company was required to immediately accelerate the amortization of the related deferred compensation previously recorded. The Company recorded approximately $8.9 million of accelerated deferred compensation expense related to exchanged assumed options in 2001.

The pro forma statement of operations data of the Company set forth below gives effect to valuing stock-based awards to employees using the Black-Scholes option-pricing model instead of the guidelines provided by APB 25. Among other things, the Black-Scholes model considers the expected volatility of the Company’s stock price, determined in accordance with SFAS 123, in arriving at an option valuation.

The per share fair value of options granted has been estimated with the following weighted average assumptions:

For pro forma purposes, the estimated value of the Company’s stock-based awards to employees is amortized over the vesting period of the underlying instruments. The results of applying SFAS 123 to the Company’s stock-based awards to employees would approximate the following:

The Company sponsors a defined contribution 401(k) savings and investment plan, which was established in 1996, covering substantially all of the Company’s employees, subject to certain eligibility requirements. At its discretion, the Company may make contributions to this plan. The Company made no contributions to this plan in 2001, 2000 or 1999.

Due to the recent significant economic slowdown and reduction in near-term demand in the technology sector and the semiconductor industry, the Company performed an assessment in accordance with SFAS 121 of the carrying values of purchased intangible assets recorded in connection with its various acquisitions. As a result of the assessment, the Company concluded the decline in market conditions within the industry was significant and other than temporary. Based on this assessment and an independent valuation, the Company recorded a charge of $1.182 billion during 2001 to write down the value of goodwill associated with certain of its purchase transactions. Impairment was based on the excess of the carrying amount of the goodwill over its fair value. Fair value was determined using a weighted average of the market approach and the discounted future cash flows for the businesses that had separately distinguishable asset balances and cash flows. The cash flow period used was five years, with a discount rate ranging from 33% to 40%, and estimated terminal values based on a terminal growth rate of 5%. The discount rate was based on the Company’s weighted average cost of capital adjusted for the risks associated with the operations. The assumptions supporting the estimated future cash flows, including the discount rate and estimated terminal values, reflect management’s best estimates.

In the second quarter of 2001 the Company announced and began implementing a plan to restructure its operations in response to the then current challenging economic climate. This restructuring plan has resulted and will result in certain business unit realignments, workforce reductions and consolidation of excess facilities. During 2001 the Company recorded restructuring costs totaling $34.3 million, which were classified as operating expense in the consolidated statements of operations. The Company anticipates recording further restructuring costs in 2002 as it continues to implement this plan.

Through December 31, 2001 the restructuring plan resulted in the termination of employment of approximately 160 employees across all business functions and geographic regions. The Company recorded workforce reduction charges of approximately $16.1 million related to severance and fringe benefits. Included in this amount is approximately $11.1 million of stock-based compensation expense resulting from an extension of the exercise period for vested stock options of the terminated employees. In addition, the number of temporary and contract workers employed by the Company was also reduced.

During 2001 the Company recorded charges of approximately $18.2 million for the consolidation of excess facilities, relating primarily to lease terminations and non-cancelable lease costs.

The consolidation of excess facilities costs will be paid over the respective lease terms through 2006.

In August 2000 Intel Corporation filed a complaint in the United States District Court for the District of Delaware against the Company asserting that the Company (i) infringes five Intel patents relating to video compression, high-speed networking and semiconductor packaging, (ii) induces the infringement of such patents, and (iii) contributorily infringes such patents. The complaint sought a preliminary and permanent injunction against the Company as well as the recovery of monetary damages, including treble damages for willful infringement. The Company denied Intel’s allegations of infringement and asserted related defenses and counterclaims in its October 2001 answer to the complaint. A patent claims construction hearing was held in September 2001 and the court issued a claims construction order November 6, 2001. In the first phase of the trial, which concluded in December 2001 and involved two of the five patents in the suit, a Delaware jury unanimously determined that Intel’s networking patent and digital video patent at issue were not infringed by the Company. Additionally, the jury unanimously determined that Intel’s networking patent was invalid. The court has not yet set a date to try claims relating to Intel’s remaining three patents or the Company’s counterclaims against Intel.

In November 2001 the Company filed a complaint in the United States District Court for the Eastern District of Texas against Intel asserting that Intel (i) infringes two Company patents relating to graphics and memory access, (ii) induces the infringement of such patents, and (iii) contributorily infringes such patents. The complaint seeks a preliminary and permanent injunction against Intel as well as the recovery of monetary damages, including treble damages for willful infringement. In December 2001 the Company amended its complaint against Intel in Texas asserting that Intel also infringes a third Company patent relating to high-speed networking. Intel denied the Company’s allegations of infringement and asserted related defenses and counterclaims in its January 2002 answer to the complaint. Intel also filed a motion to transfer the case to the Northern District of California. The court has not yet ruled on Intel’s motion to transfer. A patent claims construction hearing in this case is scheduled for August 2002, and trial is scheduled for February 2003.

In January 2002 Intel moved to amend its patent complaint against the Company in the United States District Court for the District of Delaware asserting that the Company infringes four additional Intel patents relating to video compression and direct memory access. The Company opposed Intel’s motion, and filed a complaint for declaratory judgment in the United States District Court for the Northern District of California against Intel asserting that the four additional patents are not infringed. The Delaware court has not yet ruled on Intel’s motion to amend its complaint, and discovery has not yet commenced in either forum.

In January 2001 Microtune, L.P., an affiliate of Microtune, Inc., filed a complaint in the United States District Court for the Eastern District of Texas against the Company asserting that (i) the Company’s BCM3415 silicon tuner chip infringes a single Microtune patent relating to tuner technology, (ii) the Company induces the infringement of such patent, and (iii) the Company contributorily infringes such patent. The complaint sought a preliminary and permanent injunction against the Company as well as the recovery of monetary damages, including treble damages for willful infringement. In March 2001 the Company answered the complaint and filed counterclaims seeking a declaratory judgment that Microtune’s patent is invalid, unenforceable and not infringed. Later Microtune amended its Complaint to accuse additional products of infringement, and the Company added the defenses that the patent in suit was procured by inequitable conduct and that Microtune’s bringing and maintaining the suit is a patent misuse. The parties are currently conducting discovery in the action. A hearing on patent claims construction was held March 14-15, 2002, and trial is scheduled to begin in October 2002.

Although the Company believes that it has strong defenses to Intel’s claims in the Delaware action and to Microtune’s claims in the Texas action and is defending both actions vigorously, a finding of infringement by the Company as to one or more patents in either of these actions could lead to liability for monetary damages (which could be trebled in the event that

the infringement were found to have been willful), the issuance of an injunction requiring that the Company withdraw various products from the market, and indemnification claims by the Company’s customers or strategic partners, each of which events could have a material and adverse effect on the Company’s business, results of operations and financial condition.

In the period from March through May 2001, the Company, its Chief Executive Officer, Chief Technical Officer and Chief Financial Officer were served with a number of complaints, brought as purported shareholder class actions and filed primarily in the United States District Court for the Central District of California,(1) alleging violations of the Securities Exchange Act of 1934, as amended (the “1934 Act”). In June 2001 the court consolidated all thirty-one lawsuits into a single action entitled In re: Broadcom Corp. Securities Litigation. The Court also appointed the Minnesota State Board of Investment as the lead plaintiff for the consolidated action. A consolidated amended complaint was filed October 1, 2001. The complaint named the same parties as defendants, and purported to state claims against them on behalf of all persons who purchased Broadcom public securities, or bought or sold options on Broadcom stock, between July 31, 2000 and February 26, 2001. The alleged claims were brought under Sections 10(b) and 20(a) of the 1934 Act and Rule 10b-5 promulgated thereunder. The essence of the allegations was that the defendants intentionally failed to properly account for the financial impact of performance-based warrants assumed in connection with Broadcom’s acquisitions of Altima Communications, Inc., Silicon Spice, Inc., Allayer Communications, SiByte, Inc., and Visiontech Ltd., which plaintiffs alleged had the effect of materially overstating the Company’s reported financial results. Plaintiffs alleged that the defendants intentionally engaged in this alleged improper accounting practice to inflate the value of the Company’s stock and thereby obtain alleged illegal insider trading proceeds, as well as to facilitate the use of the Company’s stock as consideration in other acquisitions. Plaintiffs also alleged generally that there was inadequate disclosure regarding the warrants and the terms of the particular agreements at issue. The Company filed a motion to dismiss the complaint under the Private Securities Litigation Reform Act of 1995 and Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure, and that motion was granted by the District Court on March 11, 2002. The court granted plaintiffs leave to file a second amended complaint within twenty days of the court’s order, and the Company anticipates that plaintiffs will do so. The Company believes the purported shareholder class action is without merit and intends to defend any amended complaint vigorously.

In the period from March through June 2001, the Company, along with its directors and Chief Financial Officer, and other officers of the Company, was also sued in five purported shareholder derivative actions. Four of these actions were filed in the Superior Court of the State of California for the County of Orange, and by order of the Superior Court dated June 21, 2001, these four actions were consolidated into a single action entitled David v. Wolfen, et al. One purported derivative action was filed in the United States District Court for the Central District of California, entitled Aiken v. Nicholas, et al. The parties have stipulated that the federal Aiken case will be stayed while the consolidated David derivative lawsuit proceeds in the California Superior Court. These purported derivative lawsuits are based upon the same general set of alleged facts and circumstances outlined above in connection with the purported shareholder class action. These lawsuits were filed as purported shareholder derivative actions under California law and allege that certain of the individual defendants sold shares while in possession of material inside information (and that other individual defendants aided and abetted this activity) in purported breach of their fiduciary duties to the Company. The complaints also allege breaches of fiduciary duties and “gross mismanagement, waste of corporate assets and abuse of control” based upon the same general set of alleged facts and circumstances alleged in the federal class action, and upon an additional allegation (made only in the state derivative action) that the defendants intentionally failed to properly account for the financial impact of warrants assumed in connection with the Company’s acquisition of NewPort Communications, Inc. The complaints also purport to allege violations of the California Corporations Code against certain of the individual defendants for alleged insider trading. Pursuant to court order, on March 8, 2002 the plaintiffs filed their consolidated amended complaint in the state action. The Company has not yet answered the consolidated amended complaint in the state action or the complaint in the federal Aiken action. The Company believes the allegations in these purported derivative actions are also without merit and intends to defend the actions vigorously.

In February 2002 an additional securities fraud complaint brought by several persons and entities suing individually (i.e., not a class action) was filed in the Superior Court of the State of California for the County of Orange, against the Company, its Chief Executive Officer, Chief Technical Officer and Chief Financial Officer, entitled Arenson, et al. v. Broadcom Corp., et al. This lawsuit purports to assert claims for violations of the California Corporations Code, and intentional and negligent misrepresentation, and seeks rescission of plaintiffs’ alleged purchases of Company stock, based upon the same general set of

In August 2001 3Com Corporation filed a complaint against the Company in California Superior Court asserting that the Company breached the terms of a promissory note in the original principal amount of $21.1 million issued by the Company in connection with its acquisition of warrants to purchase common stock of 3Com (see Notes 6 and 12). The complaint seeks the recovery of alleged monetary damages, including principal and interest, together with attorneys’ fees and other costs. In January 2002 the Company answered the complaint, generally denying the allegations and asserting affirmative defenses. The parties are currently in the initial stages of discovery in the action, and the court has scheduled a case management conference for May 2002. Although the Company believes that it has strong defenses and potential counterclaims to 3Com’s claims and is defending the action vigorously, a finding of breach by the Company could lead to liability for monetary damages, attorneys’ fees and other costs.

In December 1999 Level One Communications, Inc., a subsidiary of Intel, filed a complaint in the United States District Court for the Eastern District of California against Altima Communications, Inc., asserting that Altima’s AC108R repeater products infringe a U.S. patent owned by Level One. The complaint sought an injunction against Altima as well as the recovery of monetary damages, including treble damages for willful infringement. Altima filed an answer and affirmative defenses to the complaint. In March 2000 Level One filed a related complaint with the U.S. International Trade Commission (ITC) seeking an exclusion order and a cease and desist order based on alleged infringement of the same patent. (Monetary damages are not available in the ITC.) In July 2000 Intel and Level One filed a second complaint with the ITC asserting that certain of Altima’s repeater, switch and transceiver products infringe three additional U.S. patents owned by Level One or Intel. In September 2000, Altima filed declaratory judgment actions against Intel and Level One, respectively, in the United States District Court for the Northern District of California asserting that Altima has not infringed the three additional Intel and Level One patents and that such patents are invalid or unenforceable. Each of the district court actions was stayed pending completion of the ITC proceeding.

On October 24, 2001, the ITC issued a Limited Exclusion Order (“Order”) that excludes from importation into the United States integrated repeaters, such as Altima’s AC105R and AC108R devices, and circuit boards and carriers containing such devices, that are manufactured abroad and/or imported by or on behalf of Altima or any of its affiliates, parents, subsidiaries or other related entities and that are covered by Level One’s U.S. Patent No. 5,742,603. The Order also excludes from importation integrated repeaters, switches, and other products in plastic ball grid array packages, such as Altima’s AC105R and AC108 devices, and circuit boards and carriers containing such devices, that are manufactured abroad and/or imported by or on behalf of Altima or any of its affiliates, parents, subsidiaries or other related entities and that are covered by Intel’s U.S. Patent No. 5,894,410. The Order does not prohibit importation of any downstream products, such as finished hubs, that contain those devices. The Company believes that exclusion of the AC105R and AC108 devices will not have a material impact on the businesses of Altima or the Company. Altima and the Company have each filed motions at the ITC to explicitly limit the Order to the AC105R and AC108 products. Altima and the Company have also each filed notices of appeal with the United States Court of Appeals for the Federal Circuit challenging the Order on both substantive and procedural grounds.

In February 2002 Altima’s declaratory judgment actions against Intel and Level One in the Northern District of California were resumed and Level One’s action against Altima in the Eastern District Court of California was resumed. On February 20, 2002 Intel and Level One moved to dismiss Altima’s claims concerning two of the four Intel and Level One patents that were the basis of the infringement charges filed by Intel and Level One at the ITC. Intel has indicated that Intel and Level One will not sue Altima for infringement of any claims of these two patents with respect to products previously or currently manufactured or sold by Altima. Although these district court proceedings are in their initial phases, Altima intends to vigorously contest any allegation of patent infringement. However, an adverse determination that Altima products infringe any of the patents at issue could lead to liability for monetary damages (which could be trebled in the event that the infringement were found to have been willful) and the issuance of an injunction requiring that Altima withdraw various products from the market. An adverse determination could also result in indemnification claims by Altima’s customers or strategic partners. Any of the foregoing events could have a material and adverse effect on Altima’s, and possibly the Company’s, business, results of operations and financial condition.

The Company and its subsidiaries are also involved in other legal proceedings, claims and litigation arising in the ordinary course of business.

The pending lawsuits involve complex questions of fact and law and likely will require the expenditure of significant funds and the diversion of other resources to defend. Although management currently believes the outcome of outstanding legal proceedings, claims and litigation involving the Company or its subsidiaries will not have a material adverse effect on the Company’s business, results of operations and financial condition taken as a whole, the results of litigation are inherently uncertain, and an adverse outcome is at least reasonably possible. The Company is unable to estimate the range of possible loss from outstanding litigation, and no amounts have been provided for such matters in the consolidated financial statements.

During 2001, 2000 and 1999, the Company had a total of three customers whose purchases represented a significant portion of the Company’s net revenue in certain or all years. Net revenue from one customer represented approximately 18.2% in 2001, 23.2% in 2000 and 30.3% in 1999 of the Company’s net revenue for the respective year. Net revenue from a second customer was approximately 15.1% in 2000 and 18.0% in 1999 of the Company’s net revenue for the respective year. Net revenue from a third customer accounted for approximately 14.1% in 2000 and 10.6% in 1999 of the Company’s net revenue for the respective year. No other customer represented more than 10% of the Company’s annual net revenue in these years.

In December 2000 the Company entered into a strategic alliance agreement with a significant customer. (The agreement was terminated by the Company in November 2001.) In connection with the agreement, the Company acquired vested warrants to purchase up to 7.1 million shares of the customer’s common stock at a price of $9.31 per share, which warrants expire December 4, 2002. In exchange for the warrants, the Company executed a $21.1 million note, which bears interest at the rate of LIBOR plus 1% per year, adjusted quarterly, and is due December 4, 2002. The note becomes immediately due and payable on a pro rata basis should the Company exercise and sell shares under the warrant agreement. The warrants are classified as long-term available-for-sale securities included in other assets (see Notes 2 and 4) and the related note payable is classified as a current liability (see Note 6). The customer has asserted that the entire principal amount of the note and all interest accrued thereon are currently due and payable and has filed a lawsuit to collect the obligation; the Company disputes that assertion and is vigorously defending the lawsuit. See Note 11.

Export revenue to all foreign customers as a percent of total net revenue was as follows:

The Company does not own or operate a fabrication facility. Five independent third-party foundries in Asia currently supply substantially all of the Company’s semiconductor devices in current production. Any sudden demand for an increased amount of semiconductor devices or sudden reduction or elimination of any existing source or sources of semiconductor devices could result in a material delay in the shipment of the Company’s products. In addition, substantially all of the Company’s products are assembled and tested by one of four independent third-party subcontractors in Asia. The Company does not have long-term agreements with any of these suppliers. Any problems associated with the fabrication facilities or the delivery, quality or cost of the Company’s products could have a material adverse effect on the Company’s business, results of operations and financial condition.

The following summarized unaudited quarterly financial data has been prepared using the consolidated financial statements of Broadcom, which have been restated to include the operations of each of the companies acquired in pooling-of-interests transactions as if they had combined with the Company prior to the beginning of each period presented:


(1)	Includes in-process research and development expense of $109.7 million

(2)	Includes restructuring costs of $18.2 million

(3)	Includes restructuring costs of $16.1 million, impairment of goodwill of $1.182 billion and loss on strategic investments of $32.7 million

(4)	Includes in-process research and development expense of $45.7 million

(5)	Includes in-process research and development expense of $667.4 million

In March 2002 the Board of Directors adopted an amendment to the 1998 Stock Incentive Plan, as amended and restated, to, among other things, increase the number of shares of Class A common stock reserved for issuance under that plan by an additional 13,000,000 shares. In addition, the Board of Directors adopted an amendment to the Company’s 1998 Employee Stock Purchase Plan, as amended, to (i) increase the number of shares of Class A common stock reserved for issuance under that plan by an additional 3,000,000 shares and (ii) add an automatic share increase provision to the plan pursuant to which the shares of Class A common stock reserved for issuance under the plan would automatically increase on the first trading day of January in each year, beginning with the year 2003, by an amount equal to twenty-five hundredths of one percent (.25%) of the total number of shares of Class A common stock and Class B common stock outstanding on the last trading day of December in the immediately preceding calendar year, subject to an annual share limit. These matters will be submitted for approval by the shareholders at the 2002 Annual Meeting of Shareholders.

The following Exhibits are attached hereto and incorporated herein by reference.


	(1)	Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the registrant August 2, 2000.

	(2)	Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the registrant September 22, 2000.

	(3)	Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the registrant October 18, 2000.

	(4)	Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the registrant October 23, 2000.

	(5)	Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the registrant December 29, 2000.

	(6)	Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the registrant January 18, 2001.

	(7)	Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the registrant January 31, 2001.

	(8)	Incorporated by reference to the similarly numbered exhibit to the Registration Statement on Form S-1 filed by the registrant (Reg. No. 333-45619).

	(9)	Incorporated by reference to the similarly numbered exhibit to the Annual Report on Form 10-K for the year ended December 31, 2000.


(10)	Incorporated by reference to the similarly numbered exhibit to the Annual Report on Form 10-K for the year ended December 31, 1999.

(11)	Incorporated by reference to Appendix B to the Definitive Proxy Statement on Schedule 14A, filed by the registrant April 27, 2001.

(12)	Incorporated by reference to Exhibit 99.3 to the Registration Statement on Form S-8 filed by the registrant (Reg. No. 333-71338).

(13)	Incorporated by reference to Exhibits 99.2 and 99.4 through 99.11 to the Registration Statement on Form S-8 filed by the registrant (Reg. No. 333-60763).

(14)	Incorporated by reference to Exhibits 99.12 through 99.14 to the Registration Statement on Form S-8 filed by the registrant (Reg. No. 333-60763).

(15)	Incorporated by reference to the similarly numbered exhibit to the Registration Statement on Form S-1 filed by the registrant (Reg. No. 333-65117).


	†	Confidential treatment has previously been granted by the SEC for certain portions of the referenced exhibit pursuant to Rule 406.

Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the Consolidated Financial Statements or Notes thereto.

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, in the City of Irvine, State of California, on March 18, 2002.


	By:	/s/ HENRY T. NICHOLAS


	Henry T. Nicholas III, Ph.D.
	President, Chief Executive Officer and
	Co-Chairman

We, the undersigned officers and directors of Broadcom Corporation, do hereby constitute and appoint Henry T. Nicholas III, Ph.D., and William J. Ruehle, and each of them, our true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute or substitutes, may lawfully 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 in the capacities and on the dates indicated:

We have audited the consolidated financial statements of Broadcom Corporation as of December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, and have issued our report thereon dated January 23, 2002 (except for Notes 3, 11 and 14 as to which the date is March 15, 2002). Our audits also included the financial statement schedule listed in Item 14(a). This schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion based on our audits.

In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects the information set forth therein.


	(1)	Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the registrant August 2, 2000.

	(2)	Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the registrant September 22, 2000.

	(3)	Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the registrant October 18, 2000.

	(4)	Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the registrant October 23, 2000.

	(5)	Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the registrant December 29, 2000.

	(6)	Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the registrant January 18, 2001.

	(7)	Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the registrant January 31, 2001.

	(8)	Incorporated by reference to the similarly numbered exhibit to the Registration Statement on Form S-1 filed by the registrant (Reg. No. 333-45619).

	(9)	Incorporated by reference to the similarly numbered exhibit to the Annual Report on Form 10-K for the year ended December 31, 2000.


(10)	Incorporated by reference to the similarly numbered exhibit to the Annual Report on Form 10-K for the year ended December 31, 1999.

(11)	Incorporated by reference to Appendix B to the Definitive Proxy Statement on Schedule 14A, filed by the registrant April 27, 2001.

(12)	Incorporated by reference to Exhibit 99.3 to the Registration Statement on Form S-8 filed by the registrant (Reg. No. 333-71338).

(13)	Incorporated by reference to Exhibits 99.2 and 99.4 through 99.11 to the Registration Statement on Form S-8 filed by the registrant (Reg. No. 333-60763).

(14)	Incorporated by reference to Exhibits 99.12 through 99.14 to the Registration Statement on Form S-8 filed by the registrant (Reg. No. 333-60763).

(15)	Incorporated by reference to the similarly numbered exhibit to the Registration Statement on Form S-1 filed by the registrant (Reg. No. 333-65117).


	†	Confidential treatment has previously been granted by the SEC for certain portions of the referenced exhibit pursuant to Rule 406.

Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the Consolidated Financial Statements or Notes thereto. EX-10.17 3 a78920ex10-17.txt EXHIBIT 10.17 Exhibit 10.17 LEASE AGREEMENT BY AND BETWEEN Conejo Valley Development Corporation, a California corporation AS LANDLORD and Broadcom Corporation, a California corporation AS TENANT February 1, 2000 TABLE OF CONTENTS 1. DEMISE............................................................................10 2. PREMISES..........................................................................10 3. TERM..............................................................................11 4. RENT..............................................................................15 5. UTILITIES AND SERVICES............................................................23 6. LATE CHARGE.......................................................................25 7. SECURITY DEPOSIT..................................................................26 8. POSSESSION........................................................................26 9. USE OF PREMISES...................................................................27 10. ACCEPTANCE OF PREMISES............................................................28 11. SURRENDER.........................................................................28 12. ALTERATIONS AND ADDITIONS.........................................................29 13. MAINTENANCE AND REPAIRS OF PREMISES...............................................32 14. LANDLORD'S INSURANCE..............................................................34 15. TENANT'S INSURANCE................................................................35 16. INDEMNIFICATION...................................................................36 17. SUBROGATION.......................................................................37 18. SIGNS.............................................................................37 19. FREE FROM LIENS...................................................................37 20. ENTRY BY LANDLORD.................................................................37 21. DESTRUCTION AND DAMAGE............................................................38 22. CONDEMNATION......................................................................41 23. ASSIGNMENT AND SUBLETTING.........................................................42

2 24. TENANT'S DEFAULT.................................................................46 25. LANDLORD'S REMEDIES..............................................................47 26. LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS.................................50 27. ATTORNEY'S FEES..................................................................51 28. TAXES............................................................................51 29. EFFECT OF CONVEYANCE.............................................................51 30. TENANT'S ESTOPPEL CERTIFICATE....................................................51 31. SUBORDINATION....................................................................52 32. ENVIRONMENTAL COVENANTS..........................................................53 33. NOTICES..........................................................................55 34. WAIVER...........................................................................55 35. HOLDING OVER.....................................................................55 36. SUCCESSORS AND ASSIGNS...........................................................56 37. TIME.............................................................................56 38. BROKERS..........................................................................56 39. LIMITATION OF LIABILITY..........................................................56 40. FINANCIAL STATEMENTS.............................................................57 41. RULES AND REGULATIONS............................................................57 42. MORTGAGEE PROTECTION.............................................................57 43. INTENTIONALLY OMITTED............................................................58 44. PARKING..........................................................................58 45. ENTIRE AGREEMENT.................................................................58 46. INTEREST.........................................................................59 47. GOVERNING LAW; CONSTRUCTION......................................................59 48. REPRESENTATIONS AND WARRANTIES OF TENANT.........................................59

3 49. INTENTIONALLY OMITTED............................................................60 50. SECURITY.........................................................................60 51. JURY TRIAL WAIVER................................................................60 52. RECORDATION......................................................................60 53. INTENTIONALLY OMITTED............................................................60 54. FORCE MAJEURE....................................................................60 55. ACCEPTANCE.......................................................................61 56. RENEWAL OPTION (WITH FMV RENT)...................................................61 57. RIGHT OF FIRST OFFER.............................................................62 58. ARBITRATION......................................................................63

4 INDEX OF EXHIBITS A Land B Site Plan C Commencement and Expiration Date Memorandum D Form of Estoppel Certificate E Form of Subordination, Non-Disturbance and Attornment Agreement F Hazardous Materials Disclosure G Permitted Hazardous Materials 5 INDEX OF DEFINED TERMS
Paragraph # ----------- ADA 9 Additional Rent 4 Agents 2 Alterations 12 Bank 7 Base Rent 4 Building 2 Building Amenities 12 Casualty Discovery Date 21 Commencement Date 3 Common Areas 2 Communications Systems 12 Computation Year 4 Condemnation 22 Conduit 12 CPA 4 Default 24 Due Diligence Period 58 Early Occupancy 3 Electric Service Provider 5 Emergency Generator 5 Environmental Laws 32 Expiration Date 3 Extension Notice 57 First Offer Price 58 Force Majeure 54 Guarantor 24 Hazardous Materials 32 Holder 42 Insurance Expenses 4 Landlord Parties 39 Landlord's Agents 8 Landlord's Investment Advisors 15 Laws 9 Negotiation Period 58 Non-Structural Alterations 12 Normal Business Hours 5 Operating Expenses 4 Option 57 Option Period 57
6 Parking Areas 2 Premises 1 Private Restrictions 9 Project 2 Proportionate Share 4 Related Entity 23 Rent 4 Right of First Offer 58 Right of First Offer Notice 58 Rules and Regulations 41 Space Planning Expense 4 Structural Components 2 Successor Landlord 31 Superior Lease(s) 31 Superior Lessor 31 Superior Mortgage(s) 31 Superior Mortgagee 31 Systems 4 Taxes 4 Tenant Allowance 4 Tenant's Agents 9 Tenant's Property 15 Term 3 Third Party Price 58 Third Party Terms 58 Utilities 4 Utility Expenses 4 Year 2000 Compliant 4

7 LEASE AGREEMENT BASIC LEASE INFORMATION Lease Date: February 1, 2000 Landlord: Conejo Valley Development Corporation, a California corporation Landlord's Address: c/o Zeeco Trading 4523 North Houston School Road Lancaster, TX 75134 All notices sent to Landlord under this Lease shall be sent to the above address, with copies to: [Insert name and address of property manager]: --------------------------------- --------------------------------- --------------------------------- Attn: --------------------------- Phone: ( ) --- --------------------- Tenant: Broadcom Corporation, a California corporation Tenant's Contact Person: Director of Corporate Services Tenant's Address and Telephone Number: 16215 Alton Parkway Irvine, CA 92618 (949) 450-8700 Building Square Footage: Approximately Two Hundred Thousand (200,000) rentable square feet in one, partial two-story building (the "Building" or "Project") Premises Address: 3151 Zanker Road San Jose, CA Attn: Group Controller Premises: The Building and all Common Areas, including all associated parking, landscaping and other exterior areas located on the Land (as herein defined). Tenant's Proportionate Share of Project: 100 % Tenant's Proportionate Share of Building: 100 % Length of Term: One Hundred Twenty (120) months 8 Estimated Commencement Date: The later of (i) June 1, 2000, or (ii) sixty (60) days after The Current Tenant vacates the Premises Estimated Expiration Date: May 31, 2010 Rent Schedule for 3151 Zanker Road, San Jose (200,000 square feet):
Annual Rent Monthly Rent Price/SF Escalation % ----------- ------------ -------- ------------ Yr 1 $5,280,000.00 $440,000.00 $2.20 NNN Base Yr 2 $5,464,800.00 $455,400.00 $2.28 NNN 3.5% Yr 3 $5,656,068.00 $471,339.00 $2.36 NNN 3.5% Yr 4 $5,854,030.38 $487,835.87 $2.44 NNN 3.5% Yr 5 $6,058,921.44 $504,910.12 $2.52 NNN 3.5% Yr 6 $6,270,983.69 $522,581.97 $2.61 NNN 3.5% Yr 7 $6,490,468.12 $540,872.34 $2.70 NNN 3.5% Yr 8 $6,717,634.51 $559,802.88 $2.80 NNN 3.5% Yr 9 $6,952,751.72 $579,395.98 $2.90 NNN 3.5% Yr 10 $7,196,098.03 $599,674.84 $3.00 NNN 3.5%
Prepaid Base Rent: Eight Hundred Eighty Thousand Dollars ($880,000.00) Month(s) to which Prepaid Base Rent will be Applied: First two (2) full calendar months of Lease Term Security Deposit: Two Million Six Hundred Forty Thousand Dollars ($2,640,000) Permitted Use: General office, data and telecommunications research and development and related uses, including, but not limited to, customer service and sales, data and telecommunications and computer labs and repair facilities, employee cafeteria, recreational and similar support facilities, and other uses compatible with zoning, restrictions of record and any other legal restrictions affecting the Project as long as they do not involve (i) any manufacturing operations other than light assembly or (ii) any use of Hazardous Materials whatsoever other than the types and quantities of Hazardous Materials referred to in this Lease as the "Permitted Hazardous Materials." Broker(s): BT Commercial (Landlord's Broker) Real Estate & Logistics Technology (Tenant's Broker) 9 LEASE AGREEMENT THIS LEASE AGREEMENT is made and entered into by and between Landlord and Tenant on the Lease Date. The defined terms used in this Lease which are defined in the Basic Lease Information attached to this Lease Agreement ("Basic Lease Information") shall have the meaning and definition given them in the Basic Lease Information. The Basic Lease Information, the exhibits, the addendum or addenda described in the Basic Lease Information, and this Lease Agreement are and shall be construed as a single instrument and are referred to herein as the "Lease". 1. DEMISE In consideration for the rents and all other charges and payments payable by Tenant, and for the agreements, terms and conditions to be performed by Tenant in this Lease, LANDLORD DOES HEREBY LEASE TO TENANT, AND TENANT DOES HEREBY HIRE AND TAKE FROM LANDLORD, the Premises described below (the "Premises"), upon the agreements, terms and conditions of this Lease for the Term hereinafter stated. 2. PREMISES The Premises demised by this Lease is located on that certain parcel of land ("Land") more particularly described on Exhibit "A" attached hereto, and includes the improvements (the "Building Improvements") located on the Land, consisting of: (1) that certain building ( the "Building") specified in the Basic Lease Information and located on the Land as shown on the site plan attached hereto as Exhibit "B" ("Site Plan"); and (2) exterior parking areas (the "Parking Areas"), sidewalks, access driveways, landscaping and other site improvements indicated on the Site Plan (the "Site Improvements") within the Common Areas (as hereinafter defined). The Building has the address and contains the square footage specified in the Basic Lease Information; provided, however, that any statement of square footage set forth in this Lease, or that may have been used in calculating any of the economic terms hereof is an approximation which Landlord and Tenant agree is reasonable and no economic terms based thereon shall be subject to revision whether or not the actual square footage is more or less. The Common Areas and the Site Improvements shall be for the exclusive use of Tenant and its agents, employees, customers, invitees, tenants and licensees (the Tenant's "Agents") during the Lease Term (as hereinafter defined). For purposes of this Lease, the term "Common Areas" shall mean all areas and facilities outside the Building and within the exterior boundary line of the Land, and the "Project" shall consist of the Building and the Common Areas. Landlord shall deliver in good order, condition and repair, and shall repair and replace, as necessary to Tenant's quiet enjoyment of the Premises, over the entire Term (as such Term may be extended), at Landlord's cost and expense (except as otherwise expressly provided herein), all structural components of the Building, including footings, walls, floor structure and roof structure (collectively, the "Structural Components"). Tenant shall maintain, repair and replace, as necessary for the safe and commercially reasonable operation of the Premises, over the entire Term (as such Term may be extended), at Tenant's cost and expense, all systems servicing the Premises, including the mechanical, HVAC, electrical, plumbing, and fire/life/safety systems (the "Systems"). 10 Landlord will make no change to the size, layout or location of the parking areas, the number or size of parking spaces, or the locations of access to or driveways within the Common Areas, without the prior written consent of Tenant unless required by applicable governmental authority, quasi-governmental authority or law. No charge or fee (other than the rent payable hereunder, and except as required by applicable governmental authority or law) shall be imposed in exchange for the right of Tenant and its Agents to have access to or from, or to park in, the Parking Areas (except for Tenant's liability for Common Area Operating Expenses, as set forth in Section 4(b) below) for the Term specified herein, as such Term may be extended. This Lease and the obligations of Landlord hereunder are conditioned upon faithful performance by Tenant of all of the agreements and covenants herein set out and agreed to by Tenant. The Project consists of the Premises, which is the entire Building, including, without limitation, all rights with respect to the rooftop of such Building, and the Site Improvements located on the Land. Notwithstanding the foregoing, Tenant agrees and acknowledges that Landlord shall have non-exclusive access to and use of any and all mechanical, electrical, telephone and similar rooms, janitor closets, elevators, pipe and other vertical shafts and ducts, flues and stairwells of the Building, to the extent that such access and use is required (A) to comply with Landlord's obligations under this Lease, (B) to enforce Landlord's rights under this Lease and (C) to otherwise protect Landlord's interest in the Building. In connection with any of the foregoing activities of Landlord, Landlord shall use reasonable efforts while conducting such activities to minimize any interference with Tenant's use of the Premises. No rights to any view or to light or air over any property, whether belonging to Landlord or any other person, are granted to Tenant by this Lease. If at any time any windows of the Premises are temporarily darkened or the light or view therefrom is temporarily obstructed by reason of any repairs, improvements, maintenance or cleaning in or about the Building, the same shall be without liability to Landlord and without any reduction or diminution of Tenant's obligations under this Lease. 3. TERM (a) Term. The term of this Lease (the "Term") shall be for the period of months and days specified in the Basic Lease Information, commencing on the later to occur of the following dates (the "Commencement Date"): (1) The date that is sixty (60) days after Lockheed Martin Corporation and any subtenant thereof ("Current Tenant") vacates the Premises; or (2) June 1, 2000; subject to Landlord's obligations under Section 8(b) below. In the event the actual Commencement Date, as determined pursuant to the foregoing, is a date other than the estimated Commencement Date, then Landlord and Tenant shall promptly execute a Commencement and Expiration Date Memorandum in the form attached hereto as Exhibit "C", wherein the parties shall specify the Commencement Date, the date on which the Term expires (the "Expiration Date") and the date on which Tenant is to commence paying Rent (as defined below). 11 (b) Early Occupancy. Tenant shall have the right, but not the obligation, upon the Current Tenant vacating the Building, to take early occupancy before the Commencement Date, of the Premises for the Permitted Use and to enable Tenant and its contractors to install equipment, trade fixtures, furnishings and decorations in the Premises and to commence construction which may include, but is not limited to, installing equipment, furniture, fixtures and all related network and telecommunications cabling ("Early Occupancy"). Such Early Occupancy shall not change the Term Commencement Date or Term Expiration Date. Tenant's occupancy of the Premises under this Section 3(b) shall be upon all the terms, covenants and conditions contained in the Lease, including, without limitation, Tenant's Proportionate Share of Operating Expenses pursuant to Section 4(c)(2)(A) below, except that Tenant shall not be obligated to pay Base Rent or its Proportionate Share of Taxes during the Early Occupancy. (c) Tenant Allowance. (1) Landlord shall provide Tenant with a tenant allowance in the amount of Ten and 45/100 Dollars ($10.45) per rentable square foot of the Premises (the "Tenant Allowance"), to be expended at Tenant's discretion subject to Landlord's approval, which shall not be unreasonably withheld, conditioned or delayed and to be funded as provided in paragraph 3(c)(3) below. Landlord shall not charge Tenant any fee of any kind for managing the design and construction of the initial improvements to the Premises (the "Tenant Improvements"); however, any third party charges or expenses incurred by Landlord in connection with the Tenant Improvements shall be deducted from the Tenant Allowance. With the exception of Tenant's personal property and trade fixtures which can be removed by tenant without permanent damage to the Building Systems or Structural Components, all such alterations, additions and improvements shall immediately become Landlord's property and, at the end of the Term hereof, shall remain on the Premises or in the Building without compensation to Tenant; provided, however, that if Landlord at the time of consenting to the making of any alterations, additions and improvements (other than the Tenant Improvements, which shall remain in the Premises) requires that Tenant remove any such installations, alterations additions or improvements, Tenant shall, no later than the end of the Term, at its sole cost and expense, remove the same and repair and restore the Premises and the Building to their original condition at the commencement of the Term. (2) Tenant shall perform its own space planning and design, including the production of construction documents and mechanical, electrical and plumbing plans by engineers selected by Tenant and Tenant shall engage an architect and perform project management services ("Space Planning Expenses"). Space Planning Expenses shall be paid by Landlord, which amount shall be deducted from the Tenant Allowance, but under no circumstances shall Landlord be obligated to pay any amounts towards the Space Planning Expenses in excess of the Tenant Allowance remaining after deduction of the aforementioned third party charges and expenses incurred by Landlord. Subject to the foregoing, Space Planning Expenses incurred by Tenant prior to the Lease Effective Date shall be reimbursed by the Landlord upon the Effective Date. (3) Landlord shall make disbursements from the Tenant Allowance for the payment of the costs of construction of the Tenant Improvements. As the Tenant's general contractor constructs the Tenant Improvements and is entitled to payment (each such payment, a 12 "Contractor Payment") under Tenant's general contract, Tenant shall notify Landlord as to the date on which Tenant's general contractor and Tenant's architect have scheduled the periodic draw walk (which shall be no more often than twice monthly) and Landlord and Landlord's lender, if any, shall be entitled to participate in the periodic draw walk. Within thirty (30) days after the date on which Tenant's general contractor and Landlord have agreed upon the amount of any periodic draw requests as certified by Tenant's architect, Landlord shall be obligated to reimburse Tenant for Landlord's share of each such Contractor Payment (to the extent certified by Tenant's architect) paid by Tenant to Tenant's general contractor until the balance of the Tenant Allowance has been fully utilized. For purposes hereof, Landlord's share shall be equal to the amount of the Contractor Payment multiplied by the lesser of (x) one (1), or (y) a fraction determined immediately prior to the first payment under the Construction Contract, the numerator of which is the amount of the Tenant Allowance, and the denominator of which is the total estimated cost of constructing the Tenant Improvements under the general contract (a "Landlord Payment"), which Landlord Payment shall be made by Landlord from the Tenant Allowance and shall not exceed in the aggregate the then unadvanced portion of the Tenant Allowance. All payments of the Tenant Allowance shall be made to Tenant within thirty (30) days after Landlord's receipt of an invoice from Tenant requesting reimbursement of such costs and expenses, which invoice shall include the architects' certification and documentation reasonably acceptable to Landlord and Landlord's lender to confirm payment of such costs and expenses, together with a copy of the draw request and all supporting information and partial lien wavers and releases from Tenant, Tenant's general contractor and subcontractors with contracts in excess of $25,000. Tenant's general contract shall be subject to a 10% retainage by Tenant. Landlord shall not be required to reimburse Tenant for Landlord's share of the required retainage until thirty (30) days after Landlord's receipt of: (a) written notice from Tenant certifying that Tenant has inspected, approved and accepted the Tenant Improvements, that all work described in the Final Construction Documents has been completed, including punch list items thereunder, and that all costs in excess of the Tenant Allowance have been paid; and (b) Landlord has been provided with final as-built construction drawings and other close out documentation, along with final lien waivers and releases from Tenant, Tenant's general contractor and all subcontractors with contracts in excess of $25,000. Upon the occurrence and during the continuation of any Event of Default by Tenant under the Lease that continues beyond any applicable notice and cure periods, Landlord shall have no obligation to fund or make any further disbursements of the Tenant Allowance. Any portion of the Tenant Allowance not used for the Tenant Improvements, may be used by Tenant to pay for the cost of repairing or restoring the Premises to the condition required for Tenant's surrender thereof. Tenant's general contractor shall be subject to the approval of Landlord, which approval shall not be unreasonably withheld, conditioned or delayed. (4) Landlord hereby approves either IA or AI as Tenant's architect. Tenant shall deliver to Landlord the construction drawings and specifications including complete sets of detailed architectural, structural, mechanical, electrical and plumbing working drawings (the "Preliminary Construction Documents") for all Tenant Improvements desired by Tenant in the Premises, including, without limitation, communications and data cabling, roof-mounted antennae and/or satellite dishes, millwork, cabinetry, woodwork, interior and exterior signage, and customized fixtures, as such documentation is prepared by Tenant's architect, through the schematic, design development and final construction drawings phases of the Preliminary 13 Construction Documents. Landlord acknowledges that Preliminary Construction Documents may be delivered to Landlord in partial packages relating to certain components of the Tenant Improvements to be installed in the Premises (a "Subphase"); provided, however that Landlord shall not be required to approve any partial package of Preliminary Construction Documents if such package does not contain sufficient information to allow Landlord to approve the portion of the Tenant Improvements identified in such partial package. The Preliminary Construction Documents shall (i) include architectural drawings and specifications for Tenant's partition layout, reflected ceiling, data, voice and electrical outlets, and finish schedule; and (ii) mechanical plans and specifications where necessary for installation of the air-conditioning system and ductwork and heating and electrical facilities. (5) The Preliminary Construction Documents shall be subject to Landlord's approval, which shall not be unreasonably withheld, provided, however, that Landlord's approval rights as to the Preliminary Construction Documents shall be limited to a review of the Preliminary Construction Documents to confirm that: (i) the Tenant Improvements are reasonably compatible with (and not damaging to) the Structural Components and Building Systems, (ii) the Tenant improvements do not materially adversely impact (in Landlord's reasonable judgment) either the exterior appearance or operations of the Building or the appearance or operations of the public areas of the Building and (iii) the Tenant Improvements comply with all any law, statute, ordinance, order, rule, regulation or requirement of any governmental or quasi-governmental authority (collectively, "Legal Requirements"). Within five (5) business days after delivery of a complete set of the Preliminary Construction Documents for any Subphase to Landlord, Landlord shall either approve such Preliminary Construction Documents or notify Tenant of the specific item(s) of such Preliminary Construction Documents of which Landlord disapproves and a detailed description of the reason(s) for such disapproval. If Landlord disapproves any of the Preliminary Construction Documents for any Subphase, within five (5) business days after receipt of Landlord's disapproval notice, Tenant shall revise and resubmit same to Landlord for approval, which approval shall not be unreasonably withheld (the "Revised Construction Documents"). If Landlord does not respond to the Preliminary Construction Documents or the Revised Construction Documents within five (5) business days after receipt of same, such drawings shall be deemed approved as most recently submitted. The above process shall be repeated until such time as Landlord has approved or is deemed to have approved the revised Revised Construction Documents. Both parties agree to use their best efforts to conclude final preparation and approval of the Revised Construction Documents for each Subphase within thirty (30) days after the date on which the Preliminary Construction Documents for such Subphase are initially submitted by Tenant to Landlord. If Landlord disapproves the Revised Construction Documents and Landlord and Tenant are unable to agree upon mutually-acceptable modifications thereto within such thirty (30) day period, Tenant shall have five (5) business days from the expiration of such thirty (30) day period to elect to either accept Landlord's required modifications to the Revised Construction Documents or submit the matter to arbitration before the American Arbitration Association (or its successor) and the decision of the arbitrator will be binding on both parties with the cost of such arbitration being split evenly by the parties and each party bearing its own attorneys' fees and costs. 14 The Preliminary Construction Documents or the Revised Construction Documents, as approved (or deemed approved) by Landlord, are hereinafter referred to as the "Final Construction Documents." Tenant may request changes to the Final Construction Documents. Any changes shall be subject to Landlord's approval, to the extent Landlord's approval was originally required with respect thereto pursuant to this Section 3(c). Upon approval (or deemed approval) of the Preliminary Construction Documents or the Revised Construction Documents for any Subphase, Landlord shall not be entitled to subsequently disapprove any changes therein unless such changes results in a material change to, material deviation or material addition to the Tenant Improvements identified in the Preliminary Construction Documents and/or the Revised Construction Documents previously approved or deemed approved by Landlord. Within thirty (30) days after completion of the Tenant Improvements, Tenant shall provide Landlord with a complete set of as-built plans and specifications for the Tenant Improvements. 4. RENT (a) Base Rent. Tenant shall pay to Landlord, in advance on the first day of each month, without further notice or demand and without abatement (except as expressly provided herein), offset, rebate, credit or deduction for any reason whatsoever, the monthly installments of rent specified in the Basic Lease Information (the "Base Rent"). Upon execution of this Lease, Tenant shall pay to Landlord the Security Deposit and Prepaid Rent specified in the Basic Lease Information to be applied toward Base Rent for the months of the Term specified in the Basic Lease Information. As used in this Lease, the term "Additional Rent" shall mean all sums of money, other than Base Rent, that shall become due from and payable by Tenant pursuant to this Lease. (b) Additional Rent. (1) Except for the costs and expenses of those obligations of Landlord to be performed at Landlord's expense, as expressly provided herein, this Lease is intended to be a triple-net lease with respect to Landlord and subject to the provisions of Section 13(b) of this Lease, the Base Rent owing hereunder is (x) to be paid by Tenant absolutely net of all costs and expenses relating to Landlord's ownership and operation of the Project and the Building, and (y) not to be reduced, offset or diminished, directly or indirectly, by any cost, charge or expense payable hereunder by Tenant or by others in connection with the Premises and/or the Building, or any part thereof. The provisions of this Paragraph 4(b) for the payment of Tenant's Proportionate Share(s) of Expenses (as hereinafter defined) are intended to pass on to Tenant, Tenant's share of all costs and expenses relating to Landlord's ownership and operation of the Premises and/or the Building for which Landlord is not expressly obligated to perform at its expense under this Lease. During the Term, in addition to the Base Rent, Tenant shall pay to Landlord as Additional Rent, in accordance with this Paragraph 4, (i) Tenant's Proportionate Share(s) of Operating Expenses (as defined below), (ii) Tenant's Proportionate Share(s) of Insurance Expenses (as defined below) attributable to each Computation Year, (iii) Tenant's Proportionate Share(s) of Utility Expenses (as defined below) attributable to each Computation 15 Year, and (iv) Tenant's Proportionate Share(s) of Taxes (as defined below) attributable to each Computation Year. (2) As used in this Lease, the following terms shall have the meanings specified: (A) "Operating Expenses" means the total costs and expenses paid or incurred by Landlord in connection with the ownership, operation, maintenance, management and repair of the Premises, the Building and/or the Project or any part thereof, for which Landlord is entitled to reimbursement by Tenant, including, without limitation, all the following items: (i) Common Area Operating Expenses. All costs to operate, maintain, repair, replace, supervise, insure and administer the Common Areas, including, without limitation, any Parking Areas owned by Landlord for the use of tenants, and further including, without limitation, supplies, materials, labor and equipment used in or related to the operation and maintenance of the Common Areas, including Parking Areas (including, without limitation, all costs of resurfacing and restriping Parking Areas at such intervals as is reasonable), signs and directories on the Building and/or the Project, landscaping (including, without limitation, maintenance contracts and fees payable to landscaping consultants), amenities, sprinkler systems, sidewalks, walkways, driveways, curbs, lighting systems and security services, if any, provided by Landlord for the Common Areas, and any charges, assessments, costs or fees levied by any association or entity of which the Project or any part thereof is a member or to which the Project or any part thereof is subject; provided, however, that Landlord shall obtain Tenant's prior written consent to any and all Landlord's actions relating to any additional charges, assessments, costs or fees levied by any entity over which Landlord exerts control, directly or indirectly, and before entering into any agreement making the Project subject to or a member of an association, which consent shall not be unreasonably withheld by Tenant. Notwithstanding the foregoing, Landlord and Tenant intend that Tenant shall operate, maintain, repair and replace all non-structural components of the Site Improvements, including, without limitation, the Parking Areas, landscaping, lighting and security systems in the Common Areas, and that Landlord shall not incur any costs or expenses relating thereto unless Tenant fails to comply with its maintenance and repair obligations set forth herein. Each of the foregoing costs, if capitalized in accordance with GAAP and having a useful life in excess of five (5) years, shall be paid by Landlord in the same manner and according to the same procedures for payment of the Tenant Allowance and performance of the Tenant Improvements, except that each such capitalized costs advanced by Landlord shall be amortized over its respective useful life, at a rate of return per annum of prime (as stated in the Wall Street Journal) + 3% (the "Rate of Return") and Tenant shall reimburse Landlord for the portion of such cost attributable to the remaining Term of this Lease over the then-remaining Term; in all other instances Tenant shall pay the full cost of such operation, maintenance, repair and replacement. Tenant at its expense, shall (i) enter into an HVAC maintenance contract with a third party vendor acceptable to Landlord, which contract shall require quarterly inspections; and (ii) enter into a roof maintenance contract with a third party vendor acceptable to Landlord, which contract shall require annual roof inspections. Tenant shall be obligated to promptly and diligently perform all work required under either such contract but in no event shall Tenant 16 unreasonably delay commencement of such work beyond sixty (60) days after the date of any report requiring work to be performed. (ii) Parking Charges; Public Transportation Expenses. Any parking charges or other costs levied, assessed or imposed by, or at the direction of, or resulting from any Legal Requirement in connection with the use or occupancy of the Building or the Project, and the cost of maintaining any public transit system, vanpool, or other public or semi-public transportation imposed by Legal Requirement upon Landlord's ownership and operation of the Building and/or the Project. (iii) Maintenance and Repair Costs. Except for costs which are the responsibility of Landlord pursuant to Paragraph 13(b) below, or to the extent Landlord receives proceeds of Landlord's insurance with respect thereto or any condemnation award (subject to Landlord's obligation to diligently and reasonably attempt to recover all proceeds and awards available to cover such costs), all costs to maintain, repair, and replace the Premises, the Building and/or the Project or any part thereof and the personal property used in conjunction therewith, including without limitation, (a) all costs paid under maintenance, management and service agreements such as contracts for security and refuse removal, (b) all costs to maintain, repair and replace the roof coverings of the Building or the Project or any part thereof, (c) all costs to maintain, repair and replace the heating, ventilating, air conditioning, plumbing, sewer, drainage, electrical, fire protection, escalator, elevator, life safety and security systems and other mechanical, electrical and communications systems and equipment serving the Premises, the Building and/or the Project or any part thereof (collectively, the "Systems"), (d) the cost of window glass replacement and repair, and (e) the cost of maintenance, depreciation and replacement of machinery, tools and equipment (if owned by Landlord) and for rental paid for such machinery, tools and equipment (if rented) used in connection with the operation or maintenance of the Building, and (f) all costs and expenses incurred in causing the Project to be Year 2000 Compliant (as defined below). Each of the foregoing costs, if capitalized in accordance with GAAP and having a useful life in excess of five (5) years, shall be amortized over its respective useful life, and Tenant shall reimburse Landlord for the portion of such cost attributable to the remaining Term of this Lease over the then-remaining Term in all other instances Tenant shall pay the full amount of such cost. "Year 2000 Compliant" shall mean that all Systems containing or using computers or other information technology will function without material error or interruption resulting from the date change from year 1999 to year 2000, to the extent that information technology of third parties properly communicates date/time data with the Systems. Notwithstanding the foregoing, Landlord and Tenant intend that Tenant shall maintain, replace and repair all of those portions of the Premises, Building and Project which are not included within Landlord's obligations under Paragraph 13(b) below, or which are not covered by Landlord's insurance or any condemnation Award received by Landlord, and that Landlord shall not incur any costs or expenses relating to such portions of the Premises, Building and Project unless Tenant fails to comply with its maintenance and repair obligations set forth herein; provided, however, that Landlord shall advance and amortize the cost of capital repairs with a useful life in excess of five (5) years, as provided in Paragraph 4(b)(2)(A)(i) above. (iv) Life Safety Costs. All costs to install, maintain, repair and replace all life safety systems, including, without limitation, all fire alarm systems, serving the Premises, the Building and/or the Project or any part thereof (including all 17 maintenance contracts and fees payable to life safety consultants) whether such systems are or shall be required by Landlord's insurance carriers, Legal Requirements or otherwise, subject to the payment provisions of Paragraph 4(b)(2)(A)(i) above with respect to any capital repairs. (v) Management and Administration. All costs for management and administration of the Premises, the Building and/or the Project or any part thereof, which shall be covered by a property management fee in the amount of 2% of the Base Rent; provided, that if as a result of Tenant's special requests, including, without limitation, requesting approval of Alterations, or as a result of Tenant's failure to perform any of Tenant's obligations hereunder, Landlord uses a third party management company in which event, in addition to the property management fee paid to Landlord, Tenant shall also pay Landlord's actual cost of engaging such third party management company to respond to Tenant's special requests or Tenant's failure to perform. The property management fee paid to Landlord shall be deemed to cover all costs of accounting, auditing, billing, postage, salaries and benefits for all employees and contractors engaged in the management, operation, maintenance, repair and protection of the Building and the Project, whether located on the Project or off-site, payroll taxes and legal and accounting costs, and fees for licenses and permits related to the ownership and operation of the Project. (vi) Capital Improvements. The cost of capital improvements or other costs incurred in connection with the Project (a) to the extent they reduce the cost to Tenant of operating or maintaining the Project, or any portion thereof, (b) that are required to comply with present or anticipated conservation programs pursuant to any Legal Requirement, (c) which are replacements of nonstructural items located in the Project, including the Common Areas, required to keep the Project, including the Common Areas, in good order or condition, (d) that are required under any Legal Requirement, or (e) subject to Landlord's obligations under Paragraph 13(b), and not including any such costs to the extent Landlord receives proceeds of Landlord's insurance with respect thereto or any condemnation award received by Landlord (subject to Landlord's obligation to diligently and reasonably attempt to recover all proceeds and awards available to cover such costs), that are required in connection with the repair, replacement or improvement of any Systems; provided, that all such capital costs (where such improvements have a useful life in excess of five (5) years), shall be paid by Landlord in the same manner and according to the same procedures for payment of the Tenant Allowance and performance of the Tenant Improvements, except that each such capitalized cost advanced by Landlord shall be amortized over the useful life of the improvements at the Rate of Return, with Tenant's liability therefor limited to the annual cost thereof attributable to that portion of the useful life included within the remainder of the Term; and for any improvements having a useful life of five (5) years or less, Tenant shall pay the full cost of such improvements. Notwithstanding anything in this Paragraph 4(b) to the contrary, Insurance Expenses, Utility Expenses and Taxes shall not be deemed to constitute "Operating Expenses" for purposes of this Paragraph 4(b)(2)(A). (B) "Insurance Expenses" means the total costs and expenses paid or incurred by Landlord in connection with the obtaining of insurance on the Premises, the Building and/or the Project or any part thereof or interest therein, and to the extent reasonably allocable to the Project if such insurance covers more than one property, including, without 18 limitation, premiums for "all risk" fire and extended coverage insurance, commercial general liability insurance, environmental insurance (in the form of a Pollution Legal Liability Commercial Real Estate Policy (or any similar form of policy) and with a policy limit not to exceed $5,000,000), rent loss or abatement insurance for a period not to exceed one (1) year (except to the extent a longer period of time is required by Landlord's lender but in any event not to exceed two (2) years), earthquake insurance, flood or surface water coverage, and other insurance as Landlord deems necessary in its reasonable discretion or that is required to carry by any lender holding a security interest in the Project and any commercially reasonable deductibles paid under policies of any such insurance; provided, however, that any portion of such deductible which is applied to a casualty occurring during the last three (3) years of the Term and which is allocable to a capital replacement or repair having a useful life in excess of five (5) years, shall be paid by Landlord in the same manner and according to the same procedures for payment of the Tenant Allowance and performance of the Tenant Improvements, except that each such capitalized cost advanced by Landlord shall be amortized over the useful life of such repair or replacement at the Rate of Return, and Tenant shall reimburse Landlord for the portion of such cost which falls within the Term of the Lease. The foregoing shall not be deemed an agreement by Landlord to carry any particular insurance relating to the Premises, Building, or Project. (C) "Utility Expenses" means the cost of all electricity, water, gas, sewers, oil and other utilities (collectively, "Utilities"), including any surcharges imposed, serving the Premises, the Building and the Project or any part thereof to the extent not paid by Tenant in accordance with Section 5 below. (D) "Taxes" means all real estate taxes and assessments, which shall include any form of tax, assessment (including any special or general assessments and any assessments [subject to the limitations on Landlord's ability to place additional assessments on the Project as set forth above] or charges for Utilities or similar purposes included within any tax bill for the Building or the Project or any part thereof, including, without limitation, entitlement fees, allocation unit fees and/or any similar fees or charges), fee, license fee, business license fee, levy, penalty (if a result of Tenant's delinquency), sales tax, rent tax, occupancy tax or other tax (other than net income, estate, succession, inheritance, transfer or franchise taxes), imposed by any authority having the direct or indirect power to tax, or by any city, county, state or federal government or any improvement or other district or division thereof, whether such tax is determined by the area of the Premises, the Building and/or the Project or any part thereof, or the Rent and other sums payable hereunder by Tenant or by other tenants, including, but not limited to, (i) any gross income or excise tax levied by any of the foregoing authorities, with respect to receipt of Rent and/or other sums due under this Lease; (ii) upon any legal or equitable interest of Landlord in the Premises, the Building and/or the Project or any part thereof, (iii) upon this transaction or any document to which Tenant is a party creating or transferring any interest in the Premises, the Building and/or the Project; (iv) levied or assessed in lieu of, in substitution for, or in addition to, existing or additional taxes against the Premises, the Building and/or the Project, whether or not now customary or within the contemplation of the parties; or surcharged against the Parking Areas. "Taxes" shall also include reasonable legal and consultants' fees, costs and disbursements reasonably incurred in connection with proceedings to contest, determine or reduce taxes, Landlord specifically reserving the right, but not the obligation, to contest by appropriate legal proceedings the amount or validity of any taxes. Notwithstanding the 19 foregoing, the following shall be excluded from "Taxes": (a) all excess profits taxes, franchise taxes, gift taxes, capital stock taxes, inheritance and succession taxes, estate taxes, federal, state, and local income taxes, and other taxes applied or measured by Landlord's general or net income (as opposed to rents, receipts, or income attributable to operations at the Building), (b) any environmental assessments, charges or liens arising in connection with the remediation of Hazardous Materials (as defined below) from the Project, the causation of which arose prior to the delivery of the Premises to Tenant, or to the extent caused by Landlord or any of Landlord's Agents, (c) costs or fees (other than general real property taxes) payable in connection with Landlord's right to further develop the Project, and (d) property transfer taxes, stamp or recording taxes attributable to Landlord's transfer of ownership of the Project or any interest of Landlord therein. Tenant and Landlord acknowledge that Proposition 13 was adopted by the voters of the State of California in the June, 1978 election and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such purposes as fire protection, street, sidewalk, road, utility construction and maintenance, refuse removal and for other governmental services which may formerly have been provided without charge to property owners or occupants. It is the intention of the parties that all new and increased assessments (subject, however, to Tenant's right to approve any new or increased assessment within Landlord's control and not included within the assessments covered by Proposition 13), taxes, fees, levies and charges due to any cause whatsoever are to be included within the definition of real property taxes for purposes of this Lease. (E) "Computation Year" shall mean each twelve (12) consecutive month period commencing January 1 of each year during the Term, provided that Landlord, upon notice to Tenant, may change the Computation Year from time to time to any other twelve (12) consecutive month period, and, in the event of any such change, Tenant's Proportionate Share(s) of Operating Expenses, of Insurance Expenses, of Utility Expenses, and of Taxes shall be equitably adjusted for the Computation Years involved in any such change. (F) Notwithstanding anything to the contrary in this Lease, the term Operating Expenses does not include the following: (i) repairs, restoration or other work occasioned by condemnation, or by fire, wind, the elements or other casualty to the extent of any net insurance proceeds received by Landlord under any insurance policy maintained by Landlord covering the Project or any portion thereof (subject to Landlord's obligation to diligently and reasonably attempt to recover all proceeds and awards available to cover such costs); (ii) any ground lease payments or any interest or principal payments on any mortgage or other indebtedness of Landlord, and points, commissions and legal fees associated with financing; (iii) compensation paid to any employee of Landlord other than maintenance and property management personnel below the level of project manager, directly associated with the operation and maintenance of the Building or Project (it being agreed that the salaries of such management personnel are covered by the management fee); (iv) any depreciation allowance or expense; (v) repairs, alterations, additions, improvements or replacements made to rectify or correct any non-compliance with any requirements of any governmental authority as of the date of delivery of the Premises to Tenant; (vi) structural repairs or replacements of the Building or Site Improvements of a capital nature, as determined under GAAP; (viii) damage and repairs necessitated by the gross negligence or willful misconduct of Landlord or any of Landlord's Agents; (ix) Landlord's general overhead expenses in excess of the property management fee; and points, commissions 20 and legal fees associated with financing of any portion of the Project; (x) legal fees, accountants' fees and other expenses incurred in connection with disputes with Tenant or associated with the defense of Landlord's title to or Landlord's or Tenant's interest in the Project or any part thereof; (xi) charitable or political contributions of Landlord; (xii) any cost or expense related to the testing for, removal, transportation or storage of Hazardous Materials from the Premises or Project unless such cost or expense arises due to the existence of Hazardous Materials arising from the actions of Tenant or its Agents; (xiii) interest, penalties or other costs arising out of Landlord's failure to make timely payments of its obligations, to the extent not caused by Tenant's default; (xiv) renovations to the Premises to the extent not related to repairs, maintenance or replacement required to be performed by Tenant pursuant to this Lease or repairs or replacements made to rectify or correct any defect in the design, materials or workmanship of any portion of the Structural Components; (xv) any environmental assessments, charges or liens arising in connection with the remediation of Hazardous Materials (as defined below) from the Building or Project, the causation of which arose prior to the date of delivery of the Premises to Tenant, or to the extent caused by Landlord or any of its Agents; (xvi) costs or fees payable to public authorities in connection with any future construction, renovation and/or improvements to the Project other than Alterations to the Project made by or for Tenant, including fees for transit, housing, schools, open space, child care, arts programs, traffic mitigation measures, environmental impact reports, traffic studies, and transportation system management plans; and (xvii) reserves. (c) Tenant's Tax Liability. Tenant's liability for Taxes hereunder shall be prorated to reflect the Commencement Date and the date of expiration or termination of this Lease. In the case of any Taxes which may be evidenced by bonds or which may be paid in annual or other periodic installments, Landlord shall cause such bonds or assessments to be paid in installments over the maximum period permitted by law, and Tenant shall be responsible for paying only the installments which become due and payable during the Term; provided, however, that Landlord shall not initiate or consent to, the imposition of any such bonds or assessments other than those evidenced by a lien in effect as of the date of execution of this Lease. Tenant shall have the right, by appropriate proceedings, to protest or contest any assessment, reassessment or allocation of Taxes payable by Tenant hereunder, in whole or in part. Tenant may act in its own name and/or the name of Landlord, and Landlord shall, at Tenant's request and expense, cooperate with Tenant in any way Tenant may reasonably require in connection with such contest. Tenant may utilize any legal procedure for payment under protest, if available, provided that, if required by Landlord, Landlord's mortgagee or a prospective purchaser of the Project, Tenant shall utilize a legal procedure for payment that is satisfactory to such mortgagee or prospective purchaser, as applicable. Tenant shall indemnify, hold harmless and defend Landlord and the Project from any liens, liabilities or damages arising out of any contest of Taxes by Tenant and shall pay any Taxes ultimately determined to be due, together with any interest or penalties charged by the taxing entity. If a reduction in property taxes and/or assessments is obtained for any year of the Term during which Tenant paid Tenant's Proportionate Share of Taxes, then Landlord shall provide Tenant with a credit against Tenant's next due obligations for Rent and Tenant's Proportionate Share of Operating Expenses, Insurance Expenses, Utilities Expenses and Taxes or, if none, refund such amounts to Tenant within thirty (30) days based on such adjustment. 21 If at least twenty (20) days prior to the last day for filing application for abatement of real estate taxes for any tax year, Tenant shall give notice to Landlord that Tenant desires to file an application for abatement of real estate taxes for said tax year and, if within ten (10) days after the receipt of said notice, Landlord shall not give notice to Tenant that it shall file such application, Tenant shall have the right either in its own name or in the name of Landlord, but at its own cost and expense to file such application. If within ten (10) days after receipt by Landlord of such notice by Tenant, Landlord shall give Tenant notice that Landlord shall file such application, Landlord shall file the same prior to the expiration of the time for filing of the same, at its own cost and expense. In the event, notwithstanding the foregoing, if any abatement by whomever prosecuted shall be obtained, the cost and expense of obtaining the same shall be a first charge upon the said abatement. If Tenant shall file an application for abatement pursuant to the provisions of this paragraph, Tenant will prosecute the same to final determination with due diligence and shall not, without Landlord's written consent (which consent will not be unreasonably withheld, conditioned or delayed) settle, compromise or discontinue the same, except, however, Tenant may discontinue the prosecution of the same at any time after giving Landlord notice thereof and an opportunity to take over the prosecution of the same. If Landlord shall file an application for abatement for any tax year after having received notice from Tenant that Tenant desires to file an application for abatement for said tax year, Landlord shall prosecute the same to final determination with due diligence and shall not, without Tenant's written consent (which consent will not be unreasonably withheld, conditioned or delayed), settle, compromise or discontinue the same, except, however, Landlord may discontinue the prosecution of the same at any time after giving Tenant notice thereof and an opportunity to take over the prosecution of the same. If either party shall prosecute an application for abatement, the other party will cooperate and furnish any pertinent information in its files reasonably required by the prosecuting party at no expense to such party. Neither the filing of an application for abatement of real estate taxes, nor the prosecution of any other proceedings contesting the amount or validity of any real estate taxes, shall relieve Tenant of its obligations to pay real estate taxes as and when provided herein. All abatements of real estate taxes previously paid by Tenant shall belong to Tenant less the costs and expenses reasonably incurred in obtaining such abatement. (d) Payment of Additional Rent. (1) Except as otherwise provided in this Lease, Tenant shall pay all Additional Rent to Landlord within thirty (30) days after receipt of an invoice therefor from Landlord. With respect to any capital improvements which are to be amortized over the useful life of such improvements pursuant to Section 4(b)(2) above this Lease, Landlord shall pay the cost of such improvements and Tenant shall reimburse Landlord in the manner provided in Paragraph 4(b)(2)(A)(i) above. Even though the Term has expired and Tenant has vacated the Premises, with respect to the year in which this Lease expires or terminates, Tenant shall remain liable for payment of any amount due to Landlord in excess of the Additional Rent previously paid by Tenant, and, conversely, Landlord shall promptly return to Tenant any overpayment. Failure of Landlord to submit statements as called for herein shall not be deemed a waiver of Tenant's obligation to pay Additional Rent as herein provided. 22 (2) With respect to Operating Expenses, Insurance Expenses, Utility Expenses or Taxes which Landlord allocates to the Building, Tenant's "Proportionate Share" shall be the percentage set forth in the Basic Lease Information as Tenant's Proportionate Share of the Building. (e) General Payment Terms. The Base Rent, Additional Rent and all other sums payable by Tenant to Landlord hereunder, any late charges assessed pursuant to Paragraph 6 below and any interest assessed pursuant to Paragraph 46 below, are referred to as the "Rent". All Rent shall be paid in lawful money of the United States of America. Checks are to be made payable to ______________ and shall be mailed to: _________________________________, or to such other person or place as Landlord may, from time to time, designate to Tenant in writing. The Rent for any fractional part of a calendar month at the commencement or termination of the Term shall be a prorated amount of the Rent for a full calendar month based upon a thirty (30) day month. (f) Audit Rights. Tenant or its CPA (as defined below) shall have the right, at Tenant's sole cost and expense, provided Tenant utilizes a Certified Public Accountant (the "CPA"), upon at least thirty (30) days prior notice to Landlord at any time during regular business hours, and no more frequently than once per calendar year, to audit, review and photocopy Landlord's records pertaining to Operating Expenses for the immediately previous calendar year only, which shall be maintained in the State of California. Any disputes between Landlord and Tenant concerning Landlord's accounting of Additional Rent shall be resolved using generally accepted accounting principles ("GAAP"). If it is determined from Tenant's audit of such operating expenses that Tenant was overcharged by more than ten percent (10%), such overcharge shall entitle Tenant to credit against its next payment of operating expenses the amount of the overcharge and the costs associated with the audit (and, if such credit occurs following the expiration of the Term, Landlord shall pay the amount of such credit to Tenant within thirty (30) days after Landlord's receipt of an invoice from Tenant). If the audit determines that the Tenant was overcharged less than ten percent (10%), such overcharge shall entitle Tenant to credit against its next payment of operating expenses the amount of the overcharge and Tenant shall pay for all costs associated with the audit, including Landlord's out-of-pocket costs. If the audit shall determine that Tenant was undercharged for the operating expenses, Tenant shall promptly pay the amount of such undercharge to Landlord and Tenant shall pay for all costs associated with the audit, including Landlord's out-of-pocket costs. Assignees of Tenant may only audit periods for which they occupy the Leased Premises and subtenants of Tenant are not entitled to any audit rights. Tenant agrees to keep all information thereby obtained by Tenant confidential. 5. UTILITIES AND SERVICES (a) Tenant shall promptly pay, as the same become due, all charges for water, gas, electricity, telephone, oil, sewer service, waste pick-up and any other utilities, materials or services furnished directly to or used by Tenant on or about the Premises during the Lease Term (collectively, "Utilities"), including, without limitation, (i) meter, use and/or connection fees, hook-up fees, or standby fee (except to the extent such costs were included in the determination of the Turnkey Amount), and (ii) penalties for discontinued or interrupted service. Tenant, at Tenant's sole cost and expense, shall arrange for janitorial services for the Premises. Tenant 23 shall separately arrange with, and pay directly to, the applicable local public authorities or utilities, as the case may be, for the furnishing, installation and maintenance of all Utilities as may be required by Tenant in the use of the Premises. Tenant shall have the right to select the providers for all utilities servicing the Premises. Landlord shall not be liable for any damages resulting from interruption of, or Tenant's inability to receive such service, and any such inability shall not relieve Tenant of any of its obligations under this Lease. (b) Tenant shall have the right, at Tenant's expense (subject to the Tenant's right to receive the Tenant Allowance to cover such expense), to increase the electrical capacity within the Building at any time and from time to time, subject to compliance with all governmental regulations and in accordance with the rules and practices of the Board of Fire Underwriters. (c) Subject to Landlord's prior written approval, which shall not be unreasonably withheld, conditioned or delayed. Tenant shall have the right to install one or more emergency diesel-powered generators ("Emergency Generator(s)") in an area adjacent to or in the Building or within the Common Area. The location of the Emergency Generator(s) shall be reasonably acceptable to both parties. Tenant shall be responsible for all costs and expense associated with the Emergency Generator(s), including, but not limited to, design, permits, installation and any damage to the Building and Common Areas caused by the removal of the Emergency Generator(s) at the expiration of the Term, which removal shall be performed by Tenant on or before the Expiration Date. (d) Without limiting the terms of Paragraph 5(a) above, Tenant acknowledges that it shall contract directly with the local electrical supplier to provide electricity for the Building, and that Tenant reserves the right to change the provider of such service at any time and from time to time in Tenant's sole discretion (any such provider being referred to herein as the "Electric Service Provider"). Tenant shall cooperate with Landlord, and Landlord shall cooperate with Tenant, and the Electric Service Provider at all times to facilitate the delivery of electrical service to Tenant at the Premises and to the Building, including without limitation, either by contracting for, or by allowing Landlord and the Electric Service Provider, and their respective agents and contractors, (a) to install, repair, replace, improve and remove and any and all electric lines, feeders, risers, junction boxes, wiring, and other electrical equipment, machinery and facilities now or hereafter located within the Building or the Premises for the purpose of providing electrical service to or within the Premises or the Building, and (b) reasonable access for the purpose of maintaining, repairing, replacing or upgrading such electrical service from time to time. Tenant shall provide such information and specifications regarding Tenant's use or projected use of electricity at the Premises as shall be required from time to time by Landlord or the Electric Service Provider to efficiently provide electrical service to the Premises or the Building. Except to the extent arising from the gross negligence or willful misconduct of Landlord or any of Landlord's Agents in their activities on, in, under or about the Project or Premises, in no event shall Landlord be liable or responsible for any loss, damage, expense or liability, including without limitation loss of business or any consequential damages, arising from any failure or inadequacy of the electrical service being provided to the Premises or the Building, whether resulting from any change, failure, interference, disruption, or defect in the supply or character of the electrical service furnished to the Premises or the Building, or arising from the partial or total unavailability of electrical service to the Premises or the Building, from 24 any cause whatsoever, or otherwise, nor shall any such failure, inadequacy, change, interference, disruption, defect or unavailability constitute an actual or constructive eviction of Tenant, or entitle Tenant to any abatement or diminution of Rent or otherwise relieve Tenant from any of its obligations under this Lease. (e) Tenant acknowledges that the Premises, the Building and/or the Project may become subject to the rationing of Utility services or restrictions on Utility use as required by a public utility company, governmental agency or other similar entity having jurisdiction thereof. Tenant acknowledges and agrees that its tenancy and occupancy hereunder shall be subject to such rationing or restrictions as may be imposed upon Landlord, Tenant, the Premises, the Building and/or the Project by Legal Requirement, and Tenant shall in no event be excused or relieved from any covenant or obligation to be kept or performed by Tenant by reason of any such rationing or restrictions. Tenant agrees to comply with energy conservation programs implemented by Landlord by reason of governmentally-mandated rationing or restrictions or by Law. (f) Except to the extent arising from Landlord's or any of its Agents' gross negligence or willful misconduct, Landlord shall not be liable for any loss, injury or damage to property caused by or resulting from any variation, interruption, or failure of Utilities due to any cause whatsoever, or from failure to make any repairs or perform any maintenance. No temporary interruption or failure of such services incident to the making of repairs, alterations, improvements, or due to accident, strike, or conditions or other events shall be deemed an eviction of Tenant or relieve Tenant from any of its obligations hereunder. In no event shall Landlord be liable to Tenant for any damage to the Premises or for any loss, damage or injury to any property therein or thereon occasioned by bursting, rupture, leakage or overflow of any plumbing or other pipes (including, without limitation, water, steam, and/or refrigerant lines), sprinklers, tanks, drains, drinking fountains or washstands, or other similar cause in, above, upon or about the Premises, the Building, or the Project. (g) Landlord makes no representation with respect to the adequacy or fitness of the air-conditioning or ventilation equipment in the Building to maintain temperatures which may be required for, or because of, any equipment of Tenant, other than normal fractional horsepower office equipment, and Landlord shall have no liability for loss or damage in connection therewith. Tenant's consumption of electricity shall not exceed the Building's capacity as such capacity may be increased by Tenant from time to time in accordance with paragraph 5(b) above. 6. LATE CHARGE Notwithstanding any other provision of this Lease to the contrary, Tenant hereby acknowledges that late payment to Landlord of Rent, or other amounts due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. If any Rent or other sums due from Tenant are not received by Landlord or by Landlord's designated agent within three (3) days after their due date, then Tenant shall pay to Landlord a late charge equal to ten percent (10%) of such overdue amount, plus any costs and attorneys' fees incurred by Landlord by reason of Tenant's failure to pay Rent and/or other charges when due hereunder; provided, however, that if Tenant establishes and 25 maintains a direct deposit account with ______________ for payment to the account of ______________, during such period Landlord agrees that Tenant shall only be liable for a late charge equal to five percent (5%) if payment of any overdue amount is not received within five (5) days following notice from Landlord that such amounts were not received when due. Landlord and Tenant hereby agree that such late charges represent a fair and reasonable estimate of the cost that Landlord will incur by reason of Tenant's late payment and shall not be construed as a penalty. Landlord's acceptance of such late charges shall not constitute a waiver of Tenant's default with respect to such overdue amount or estop Landlord from exercising any of the other rights and remedies granted under this Lease. Initials: Landlord: /s/ MK Tenant: /s/ WJR ----------- ------------ 7. SECURITY DEPOSIT Concurrently with Tenant's execution of the Lease, Tenant shall deposit with Landlord the Security Deposit specified in the Basic Lease Information as security for the full and faithful performance of each and every term, covenant and condition of this Lease. Landlord may use, apply or retain the whole or any part of the Security Deposit as may be reasonably necessary (a) to remedy any Default by Tenant under this Lease, (b) to repair damage to the Premises caused by Tenant, (c) to clean the Premises upon termination of this Lease, (d) to reimburse Landlord for the payment of any amount which Landlord may reasonably spend or be -required to spend by reason of Tenant's Default, and (e) to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's Default. Should Tenant faithfully and fully comply with all of the terms, covenants and conditions of this Lease, within thirty (30) days following the expiration of the Term, the Security Deposit or any balance thereof shall be returned to Tenant or, at the option of Landlord, to the last assignee of Tenant's interest in this Lease. Landlord shall not be required to keep the Security Deposit separate from its general funds and Tenant shall not be entitled to any interest on such deposit. If Landlord so uses or applies all or any portion of said deposit, within five (5) days after written demand therefor Tenant shall deposit cash with Landlord in an amount sufficient to restore the Security Deposit to the full extent of the above amount, and Tenant's failure to do so shall be a default under this Lease. In the event Landlord transfers its interest in this Lease, Landlord shall transfer the then remaining amount of the Security Deposit to Landlord's successor in interest, and thereafter Landlord shall have no further liability to Tenant with respect to such Security Deposit. 8. POSSESSION (a) Tenant's Right of Possession. Subject to Paragraph 8(b), Tenant shall be entitled to possession of the Premises upon commencement of the Term. (b) Delay in Delivering Possession. If for any reason whatsoever, Landlord cannot deliver possession of the Premises to Tenant on or before the Estimated Commencement Date, this Lease shall not be void or voidable, nor shall Landlord, or Landlord's agents, advisors, employees, partners, shareholders, directors, invitees, independent contractors or Landlord's Investment Advisors (as hereinafter defined) (collectively, "Landlord's Agents"), be liable to 26 Tenant for any loss or damage resulting therefrom; provided, however, that if the Current Tenant has not vacated the Premises on or before March 31, 2000, Landlord shall immediately and diligently pursue such legal action as is reasonable under the circumstances to cause the Current Tenant to vacate the Premises as soon as possible after such date, including, but not limited to, diligently prosecuting an unlawful detainer action against the Current Tenant; further provided, however, if the Current Tenant has not vacated by June 15, 2000, Tenant or Landlord may terminate this Lease by written notice given to the other no later than June 15, 2000. Tenant shall not be liable for Rent until Landlord delivers possession of the Premises to Tenant. The Expiration Date shall be extended by the same number of days that Tenant's possession of the Premises was delayed beyond the Estimated Commencement Date. 9. USE OF PREMISES (a) Permitted Use. The use of the Premises by Tenant and Tenant's agents, advisors, employees, partners, shareholders, directors, customers, invitees and independent contractors (collectively, "Tenant's Agents") shall be solely for the Permitted Use specified in the Basic Lease Information and for no other use. Tenant shall not permit any objectionable or unpleasant odor, smoke, dust, gas, noise or vibration to emanate from the Project. The Premises shall not be used to create any nuisance or trespass, for any illegal purpose, for any purpose not permitted by Laws (as hereinafter defined), for any purpose that would invalidate the insurance on the Premises, the Building or the Project. Tenant agrees to pay to Landlord, as Additional Rent, any increases in premiums on policies resulting from Tenant's Permitted Use or any other use or action by Tenant or Tenant's Agents which increases Landlord's premiums or requires additional coverage by Landlord to insure the Premises. Tenant agrees not to overload the floor(s) of the Building. (b) Compliance with Governmental Regulations and Private Restrictions. Tenant and Tenant's Agents shall, at Tenant's expense, faithfully observe and comply with (1) all municipal, state and federal laws, statutes, codes, rules, regulations, ordinances, requirements, and orders (collectively, "Laws"), now in force or which may hereafter be in force pertaining to the Premises or Tenant's use of the Premises, the Building or the Project; (2) all recorded covenants, conditions and restrictions affecting the Project ("Private Restrictions") now in force or which may hereafter be in force (provided, however, that Landlord shall not impose any new Private Restrictions on the Project which will increase the cost of Operating Expenses or adversely affect Tenant's use or occupancy of the Premises without Tenant's prior written consent, which Tenant may withhold in its reasonable discretion); and (3) reasonable Rules and Regulations (as defined in Paragraph 41 of this Lease). Without limiting the generality of the foregoing, to the extent Landlord is required by the city or county in which the Building is located to maintain carpooling and public transit programs, Tenant shall reasonably cooperate in the implementation and use of these programs by and among Tenant's employees. The judgment of any court of competent jurisdiction, or the admission of Tenant in any action or proceeding against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any Laws or Private Restrictions, shall be conclusive of that fact as between Landlord and Tenant. 27 (c) Compliance with Americans with Disabilities Act. Landlord and Tenant hereby agree and acknowledge that the Premises, the Building and/or the Project may be subject to, among other Laws, the requirements of the Americans with Disabilities Act, a federal law codified at 42 U.S.C. 12101 et seq., including, but not limited to Title III thereof, and all regulations and guidelines related thereto, together with any and all laws, rules, regulations, ordinances, codes and statutes now or hereafter enacted by local or state agencies having jurisdiction thereof, as the same may be in effect on the date of this Lease and may be hereafter modified, amended or supplemented, including, without limitation, all requirements of Title 24 of the State of California Code (collectively, the "ADA"). Any tenant improvements to be constructed hereunder shall be in compliance with the requirements of the ADA, and all costs incurred for purposes of compliance of such tenant improvements therewith shall be a part of and included in the costs of the tenant improvements. Tenant shall be solely responsible for conducting its own independent investigation of this matter and for ensuring that the design of all tenant improvements strictly complies with all requirements of the ADA. If any barrier removal work or other work is required to the Building, the Common Areas or the Project under the ADA, then such work shall be the responsibility of Tenant, at Tenant's sole cost and expense. Tenant shall be responsible at its sole cost and expense for fully and faithfully complying with all applicable requirements of the ADA. Within ten (10) days after receipt, Tenant shall advise Landlord in writing, and provide Landlord with copies of (as applicable), any notices alleging violation of the ADA relating to any portion of the Premises, the Building or the Project; any claims made or threatened orally or in writing regarding noncompliance with the ADA and relating to any portion of the Premises, the Building, or the Project; or any governmental or regulatory actions or investigations instituted or threatened regarding noncompliance with the ADA and relating to any portion of the Premises, the Building or the Project. Tenant shall and hereby agrees to protect, defend (with counsel reasonably acceptable to Landlord) and hold Landlord and Landlord's Agents harmless and indemnify Landlord and Landlord's Agents from and against all liabilities, damages, claims, losses, penalties, judgments, charges and expenses (including attorneys' fees, costs of court and expenses necessary in the prosecution or defense of any litigation including the enforcement of this provision) arising from or in any way related to, directly or indirectly, Tenant's or Tenant's Agents violation of the ADA. Tenant agrees that its obligations herein shall survive the expiration or earlier termination of this Lease. Notwithstanding the foregoing, in the event Tenant is obligated to defend Landlord pursuant to any obligation hereunder, it shall not be reasonable for Landlord to object to counsel appointed by Tenant's insurance carrier as required by any applicable insurance policy covering the cost of such defense. 10. ACCEPTANCE OF PREMISES By entry hereunder, Tenant accepts the Premises as suitable for Tenant's intended use and as being in good and sanitary operating order, condition and repair, AS IS, and without representation or warranty by Landlord as to the condition, use or occupancy which may be made thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. 11. SURRENDER 28 Tenant agrees that on the last day of the Term, or on the sooner termination of this Lease, Tenant shall surrender the premises to Landlord (a) in good condition and repair (damage by acts of God, fire, and normal wear and tear excepted), but with all interior and exterior walls repainted and repaired, and all floors cleaned and waxed and on the last day of the Term Tenant shall also pay to Landlord a cash payment in the amount of 50% of the cost of the carpets installed in the Premises by Tenant as part of its Tenant Improvements (and Tenant shall provide to Landlord evidence of such amount within thirty (30) days after completion of the Tenant Improvements)(provided, that if Tenant fails to make such payment then Landlord shall be entitled to deduct such amount from any Security Deposit to which Tenant is entitled upon expiration of the Term) and (b) otherwise in accordance with Paragraph 32(e). Normal wear and tear shall not include any damage or deterioration that would have been prevented by proper maintenance by Tenant or Tenant otherwise performing all of its obligations under this Lease. On or before the expiration or sooner termination of this Lease, (i) Tenant shall remove all of Tenant's Property (as hereinafter defined) and Tenant's signage from the Premises, the Building and the Project and repair any damage caused by such removal, and (ii) Landlord may, by notice to Tenant given not later than ninety (90) days prior to the Expiration Date (except in the event of a termination of this Lease prior to the scheduled Expiration Date, in which event no advance notice shall be required), require Tenant at Tenant's expense to remove any or all Alterations and to repair any damage caused by such removal. Any of Tenant's Property not so removed by Tenant as required herein shall be deemed abandoned and may be stored, removed, and disposed of by Landlord at Tenant's expense, and Tenant waives all claims against Landlord for any damages resulting from Landlord's retention and disposition of such property; provided, however, that Tenant shall remain liable to Landlord for all costs incurred in storing and disposing of such abandoned property of Tenant. All tenant improvements and Alterations except those which Landlord requires Tenant to remove in accordance with Landlord's rights set forth in this Lease shall remain in the Premises as the property of Landlord. 12. ALTERATIONS AND ADDITIONS (a) Except with respect to any alterations, additions or improvements to the Premises or any part thereof costing less than $100,000, and which do not affect the Structural Components of the Building or any Building systems ("Non-structural Alterations"), Tenant shall not make, or permit to be made, any alterations, additions or improvements to the Premises or any part thereof (hereinafter referred to individually as an "Alteration" and collectively as the "Alterations") without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed; provided, however, that Landlord shall have the right in its sole and absolute discretion to consent or to withhold its consent to any Alteration which affects the Structural Components, the Systems or any portion thereof, as reasonably determined by Landlord. Tenant shall be required to notify Landlord in writing before making any Non-structural Alterations, and, within thirty (30) days after completion of such Non-structural Alterations, Tenant shall provide Landlord with accurate as-built drawings of such Non-structural Alterations. (b) Notwithstanding the provisions of Section 12(a), Tenant shall have the right, at its sole cost and expense, to remove or alter the Premises' tennis court, volleyball court, lap pool and/or Jacuzzi (the "Building Amenities") upon notice to Landlord but without obtaining the prior consent of Landlord, provided that at the end of the Term hereof, upon 29 Landlord's request, Tenant, at its sole cost and expense, shall restore and/or replace any such removed or altered Building Amenity to its condition as of the date of this Lease. (c) Notwithstanding the provisions of Section 12(a) above, Tenant shall have the right, at its sole cost and expense, to trench in any exterior area within the boundaries of the Land for the purposes of "hard wiring" voice and data transmissions ("Conduit") between (i) the street and the Building or, (ii) an adjacent parcel and the Building, subject in such event to the Landlord's right to require removal of such Conduit at the end of the Term and to Landlord's approval of any easements over such adjoining parcel required in connection with such Conduit, pursuant to reasonable specifications which have been approved in writing by Landlord and Tenant. Except as otherwise provided in this Section 12(c), at the end of the Term hereof, Tenant shall not be required to remove any properly installed underground Conduit. (d) Subject to the provisions of Section 12(a) above, Tenant shall have the exclusive right, at its sole cost and expense, to install communications systems and equipment on or around the Building, Parking Area and Common Areas ("Communications Systems"). All permits, application fees, and all costs associated with the Communications Systems shall be Tenant's responsibility. Tenant, at its sole cost and expense, shall have the exclusive right to install, maintain, and from time to time replace Communications Systems on the roof of the Building, provided that prior to commencing any installation or maintenance, Tenant shall (i) obtain Landlord's prior approval (which approval shall not be unreasonably withheld, conditioned or delayed) of the proposed size, weight and location of the Communications Systems and method for fastening the Communications Systems to the roof, (ii) such installation and/or replacement shall comply strictly with all Laws and the conditions of any bond or warranty maintained by Landlord on the roof, and (iii) obtain, at Tenant's sole cost and expense, any necessary federal, state, and municipal permits, licenses and approvals, and deliver copies thereof to Landlord. Landlord may supervise any roof penetration related to the installation of any Communications Systems, and Landlord may charge Landlord's reasonable out-of-pocket costs of any such supervision performed by a third-party consultant to Tenant. Tenant agrees that all installation, construction and maintenance shall be performed in a neat, responsible, and workmanlike manner, using generally acceptable construction standards, consistent with such reasonable requirements as shall be imposed by Landlord. Tenant shall repair any damage to the Building caused by Tenant's installation, maintenance, replacement, use or removal of the Communications Systems. The Communications Systems shall be considered Tenant's Trade Fixtures (as defined below) and shall remain the property of Tenant, and Tenant may remove the Communications Systems at its cost at any time during the Term. Tenant shall remove the Communication Systems at Tenant's cost and expense upon the expiration or termination of this Lease. Landlord makes no warranty or representation that the Building or any portions thereof are suitable for the use of a Communications Systems, it being assumed that Tenant has satisfied itself thereof. Tenant shall protect, defend, indemnify and hold harmless Landlord and Landlord's Agents from and against claims, damages, liabilities, costs and expenses of every kind and nature, including attorneys' fees, incurred by or asserted against Landlord arising out of Tenant's installation, maintenance, replacement, use or removal of the Communications Systems. (e) Any Alteration to the Premises shall be at Tenant's sole cost and expense (except to the extent that Tenant's initial improvements are covered by the Tenant Allowance), 30 in compliance with all Legal Requirements and the reasonable requirements of any insurer providing coverage for the Premises or the Project or any part thereof, and in accordance with plans and specifications approved in writing by Landlord, and shall be constructed and installed by a contractor approved in writing by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed. In connection with any Alteration, Tenant shall deliver plans and specifications therefor to Landlord. Before Alterations may begin, valid building permits or other permits or licenses required under applicable Laws must be furnished to Landlord, and, once the Alterations begin, Tenant will diligently and continuously pursue their completion. Landlord may monitor construction of the Alterations and Tenant shall reimburse Landlord for its reasonable out-of-pocket costs of hiring any third-party engineer or architect to review plans and documents. Tenant shall maintain during the course of construction, at its sole cost and expense, builders' risk insurance for the amount of the completed value of the Alterations on an all-risk non-reporting form covering all improvements under construction, including building materials, and other insurance in amounts and against such risks as Landlord shall reasonably require in connection with the Alterations. In addition to and without limitation on the generality of the foregoing, Tenant shall ensure that its contractors procure and maintain in full force and effect during the course of construction a "broad form" commercial general liability and property damage policy of insurance naming Landlord, Tenant, Landlord's Investment Advisors, any property manager designated by Landlord and Landlord's lenders as additional insureds. The minimum limit of coverage of the aforesaid policy shall be in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of one person in any one accident or occurrence and in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of more than one person in any one accident or occurrence, and shall contain a severability of interest clause or a cross liability endorsement. Such insurance shall further insure Landlord and Tenant against liability for property damage of at least One Million Dollars ($1,000,000.00). (f) Equipment, improvements and appurtenances other than Tenant's Trade Fixtures, furnishings and trade equipment (as described below) attached to or built into the Premises prior to or during the Term shall be and remain part of the Premises and are intended as real estate fixtures and shall not be removed by Tenant, unless otherwise instructed by Landlord to remove the same in accordance with this Section 12. All wiring, circuit breakers, transformers, cabling, plumbing, heating and sprinkling systems, fixtures and outlets, vaults, panelling, molding, shelving, radiator enclosures, flooring, HVAC equipment and HVAC ducts shall be deemed to be real estate fixtures, whether or not attached to or built into the Premises; provided, however, that any HVAC equipment installed by Tenant to handle loads in excess of that covered by the HVAC capacity of the Building as of the date of this Lease and electrical systems for backup emergency power may be removed by Tenant at any time prior to the expiration of the Term as long as Tenant repairs any damage to the Building which may result from such removal. Any trade fixtures, furniture and trade equipment installed by the Tenant which may be removed from the Premises without injury thereto (including, without limitation, demountable partitions, refrigerators and other kitchen appliances, computer racking and similar demountable fixtures) (collectively, "Trade Fixtures") shall remain the property of the Tenant and shall be removed by the Tenant, at the Tenant's sole cost and expense, from the Premises upon the expiration or earlier termination of this Lease. In the event Tenant fails to remove said articles prior to or upon the expiration or earlier termination, they shall be deemed abandoned and may be disposed of by Landlord in any way it sees fit, all at Tenant's sole cost and expense 31 (including any costs to repair any damage caused by such disposal). Except as otherwise provided herein, all alterations and improvements to the Premises put in at the expense of Tenant shall become the property of Landlord and shall remain upon and shall be surrendered with the Premises as part thereof at the termination of this Lease, or at Landlord's option, provided Landlord shall have advised Tenant in writing at the time of its consent to said alterations and improvements that the same must be removed and restored to its original condition; provided, that if Landlord's consent is not required with respect to any such Alterations, Landlord shall have the option to cause Tenant to remove any such Alterations unless Tenant obtained Landlord's consent prior to constructing or installing such Alterations and Landlord did not advise that the same must be removed and restored to its original condition. The Landlord acknowledges Tenant's right to finance and to secure under the Uniform Commercial Code, Tenant's inventory, furnishings, furniture, equipment, machinery, leasehold improvements and other personal property located at the Property, other than the fixtures, equipment and other improvements required to be titled in the name of Landlord, and Landlord agrees, at Tenant's cost and expenses, to execute Landlord's waiver forms and other similar documentation (in form and substance reasonably satisfactory to Landlord) in favor or any purchase money seller, Landlord or lender who has financed or may finance in the future such items. (g) Notwithstanding anything herein to the contrary, before installing any equipment or lights which generate an undue amount of heat in the Premises, or if Tenant plans to use any high-power usage equipment in the Premises, Tenant shall obtain the written permission of Landlord. Landlord may refuse to grant such permission unless either (1) Tenant agrees to pay the costs to Landlord for installation of supplementary air conditioning capacity or electrical systems necessitated by such equipment, or (2) such additional air conditioning capacity or electrical systems are included in Tenant's plans. (h) Tenant agrees not to proceed to make any Alterations, notwithstanding consent from Landlord to do so, until Tenant has provided Landlord with written notice of the date Tenant desires to commence construction or installation of such Alterations at least fifteen (15) days in advance of such commencement date, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. (i) Tenant shall not, at any time prior to or during the Term, directly or indirectly employ, or permit the employment of, any contractor, mechanic or laborer in the Premises, whether in connection with any Alteration or otherwise, if it is reasonably foreseeable that such employment will materially interfere or cause any material conflict with other contractors, mechanics, or laborers engaged in the construction, maintenance or operation of the Project by Landlord, Tenant or others. In the event of any such interference or conflict, Tenant, upon demand of Landlord, shall cause all contractors, mechanics or laborers causing such interference or conflict to leave the Project immediately. 13. MAINTENANCE AND REPAIRS OF PREMISES 32 (a) Maintenance by Tenant. Throughout the Term, Tenant shall, at its sole expense, subject to Paragraphs 5(a), 13(b), 21 and 22 hereof, keep, maintain, repair and replace in good order and condition to a standard consistent with a Class "A" office building comparable to other Class "A" office buildings in the vicinity of the Building, the following items: the Premises and Tenant's Property, including, without limitation, the roof coverings, the Parking Areas, pavement, landscaping, sprinkler systems, sidewalks, driveways, curbs, and lighting systems in the Common Areas, all specialty lamps, bulbs, starters and ballasts, and all of Tenant's security systems in or about or serving the Premises. Tenant shall not do nor shall Tenant allow Tenant's Agents to do anything to cause any damage, deterioration or unsightliness to the Premises, the Building or the Project. (b) Repair by Landlord. Subject to the provisions of Paragraphs 13(a), 21 and 22, Landlord, at its own cost and expense, agrees to repair and replace the Structural Components and, during the initial Term of this Lease, at the request of Tenant (which request shall be based on the recommendation of a reputable roofing consultant that replacement of the roof is necessary) to replace the roof; provided, however, with respect to the roof replacement, such replacement shall take place during regular business hours and Tenant shall have the responsibility, at its cost and expense, of moving any of Tenant's equipment located on the roof as necessary for such roof replacement and Landlord shall have no liability to Tenant as a result of any interference with Tenant's business as a result of such roof replacement or movement of such equipment; further provided that Landlord shall reasonably cooperate with Tenant to minimize any interference with Tenant's business during such replacement, and Tenant shall pay any resulting increase in the cost of replacement of the roof required by Tenant in order to minimize the interference with Tenant's business. Notwithstanding anything in this Paragraph 13 to the contrary, Landlord shall have the right to either repair or to require Tenant to repair any damage to any portion of the Premises, the Building and/or the Project, caused by or created due to any act, omission, negligence or willful misconduct of Tenant or Tenant's Agents, and require Tenant to restore the Premises, the Building and/or the Project, as applicable, to the condition existing prior to the occurrence of such damage; provided, however, that in the event Landlord elects to perform such repair and restoration work, Tenant shall reimburse Landlord upon demand for all costs and expenses incurred by Landlord in connection therewith; and further provided that the foregoing obligations of Tenant for such repairs or cost of repairs shall be limited to any repairs or costs of repairs not covered by any net insurance proceeds received by Landlord under any fire, extended coverage or "all risk" insurance policy which Landlord is obligated to maintain at Tenant's expense, . Landlord's obligation hereunder to repair and maintain is subject to the condition precedent that Landlord shall have received written notice of the need for such repairs and maintenance and a reasonable time to perform such repair and maintenance. Tenant shall promptly report in writing to Landlord any defective condition known to it which Landlord is required to repair, and failure to so report such defects shall make Tenant responsible to Landlord for any liability incurred by Landlord by reason of such condition. If Landlord fails to reasonably act to perform its repair obligations of this Paragraph 13 (b) or to restore any existing utilities interrupted between the street and the Building caused by Landlord's or any of its Agents' gross negligence or willful misconduct, and such failure materially affects Tenant's ability to use and occupy the Premises for the purposes permitted herein, Tenant shall have the right, but not the obligation, to perform such repairs and/or 33 maintenance if such failure continues for more than ten (10) business days after written notice from Tenant; provided, however, that if the nature of the repairs and/or maintenance to be completed by Landlord is such that more than ten (10) business days are required to complete such repairs and/or maintenance, Landlord shall have such additional time as is reasonably necessary to complete such repairs and/or maintenance and thereafter diligently pursue such repairs and/or maintenance to completion. In such event, Landlord shall reimburse Tenant for the reasonable costs incurred by Tenant to complete such repairs and/or maintenance within thirty (30) days after receipt of Tenant's written demand therefor, together with copies of the paid invoices evidencing the costs incurred by Tenant. Any repairs and/or maintenance permitted herein shall be performed in a good and workmanlike manner by licensed contractors. If Landlord objects to the repairs and/or maintenance performed or the expenses incurred by Tenant in performing such work, Landlord shall deliver a written notice of Landlord's objection to Tenant within thirty (30) days after Landlord's receipt of Tenant's invoice evidencing the expenses incurred by Tenant. Landlord's notice shall set forth in reasonable detail Landlord's reasons for its claim that such repairs and/or maintenance were not required or were not Landlord's obligations in the terms of this Lease and/or the reasons for Landlord's dispute of the expenses incurred by Tenant in performing such work. If Landlord and Tenant fail to resolve any such dispute within said thirty (30) day period, after Landlord has notified Tenant of Landlord's objections, the matter shall be resolved by binding arbitration. (c) Tenant's Waiver of Rights. Tenant hereby expressly waives all rights to make repairs at the expense of Landlord or to terminate this Lease, as provided for in California Civil Code Sections 1941 and 1942, and 1932(l), respectively, and any similar or successor statute or law in effect or any amendment thereof during the Term. 14. LANDLORD'S INSURANCE Landlord shall, unless Tenant is designated the insuring party by Landlord and Tenant in writing, purchase and keep in force at all times during the Term a policy of fire, vandalism, malicious mischief, extended coverage and so-called all risk coverage insurance insuring the Premises and Site Improvements in an amount equal to 100% of the full replacement value of the Building and Site Improvements (excluding the costs of work and improvements installed at Tenant's expense, and less a commercially reasonable deductible) and which shall provide coverage for damages caused by Tenant's negligence. Tenant shall, at its sole cost and expense, comply with any and all reasonable requirements pertaining to the Premises, the Building and the Project of any insurer necessary for the maintenance of reasonable fire and commercial general liability insurance, covering the Building and the Project. Landlord may, upon at least thirty (30) days prior written notice to Tenant (so that Tenant may adjust its business interruption insurance accordingly), obtain and maintain "Loss of Rents" insurance, insuring that the Rent will be paid in a timely manner to Landlord for a period not to exceed twelve (12) months (unless a longer period is required by Landlord's lender but not to exceed twenty-four (24) months) if the Premises, the Building or the Project or any portion thereof are destroyed or rendered unusable or inaccessible by any cause insured against under this Lease. If Landlord carries earthquake insurance, the premiums for such insurance shall not exceed the premium rate, as adjusted from time to time, of the California Earthquake Authority as applicable to the Premises or if no such rate is applicable to the Premise, then at a commercially reasonable rate, and in the event any earthquake damage occurs resulting in Tenant liability for the deductible during the last three (3) 34 years of the Term, Tenant's payment of such deductible shall be amortized over the useful life of the improvements subject to repair or replacement as a result of such damage, at the Rate of Return and shall be payable in monthly installments for the portion of the useful life which falls within the Lease Term. 15. TENANT'S INSURANCE (a) Commercial General Liability Insurance. Tenant shall, at Tenant's expense, secure and keep in force a "broad form" commercial general liability insurance and property damage policy covering the Premises, insuring Tenant, and naming Landlord, Landlord's investment advisors and agents from time to time, including, without limitation, ____________ (collectively "Landlord's Investment Advisors"), and Landlord's lenders as additional insureds, against any liability arising out of the ownership, use, occupancy or maintenance of the Premises. The minimum limit of coverage of such policy shall be in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of one person in any one accident or occurrence and in the amount of not less than Three Million Dollars ($3,000,000.00) for injury or death of more than one person in any one accident or occurrence, shall include an extended liability endorsement providing contractual liability coverage (which shall include coverage for Tenant's indemnification obligations in this Lease), and shall contain a severability of interest clause or a cross liability endorsement. Such insurance shall further insure Landlord and Tenant against liability for property damage of at least Three Million Dollars ($3,000,000.00). Landlord may from time to time require reasonable increases in any such limits if Landlord believes that additional coverage is necessary or desirable. The limit of any insurance shall not limit the liability of Tenant hereunder. No policy maintained by Tenant under this Paragraph 15(a) shall contain a deductible greater than twenty-five thousand dollars ($25,000.00). No policy shall be cancelable or subject to reduction of coverage without thirty (30) days prior written notice to Landlord. Such policies of insurance shall be issued as primary policies and not contributing with or in excess of coverage that Landlord may carry, by an insurance company authorized to do business in the state/commonwealth in which the Premises are located for the issuance of such type of insurance coverage and rated B+:XIII or better in Best's Key Rating Guide. (b) Personal Property Insurance. Tenant shall procure and maintain during the Term, at its expense, a policy of "special purpose" insurance covering leasehold improvements paid for by Tenant and Tenant's Trade Fixtures and other personal property from time to time in, on, or at the Premises, in an amount not less than eighty percent (80%) of the full replacement cost to provide protection against events protected under "fire and extended coverage," as well as against sprinkler damage, vandalism, and malicious mischief, with a commercially reasonable endorsement. During the term of this Lease the proceeds from any such policy or policies of insurance shall be used for the repair or replacement of the fixtures and equipment so insured. Landlord shall have no interest in the insurance upon Tenant's equipment and fixtures and will sign all documents reasonably necessary in connection with the settlement of any claim or loss by Tenant. Landlord will not carry insurance on Tenant's possessions. (c) Worker's Compensation Insurance; Employer's Liability Insurance. Tenant shall, at Tenant's expense, maintain in full force and effect worker's compensation 35 insurance with not less than the minimum limits required by law, and employer's liability insurance with a minimum limit of coverage of One Million Dollars ($1,000,000). (d) Evidence of Coverage. Tenant shall deliver to Landlord certificates of insurance and true and complete copies of any and all endorsements required herein for all insurance required to be maintained by Tenant hereunder at the time of execution of this Lease by Tenant. Tenant shall, at least thirty (30) days prior to expiration of each policy, furnish Landlord with certificates of renewal thereof. Each certificate shall expressly provide that such policies shall not be cancelable or otherwise subject to modification except after thirty (30) days prior written notice to Landlord and the other parties named as additional insureds as required in this Lease (except for cancellation for nonpayment of premium, in which event cancellation shall not take effect until at least ten (10) days notice has been given to Landlord). 16 . INDEMNIFICATION (a) Of Landlord. Tenant shall defend, protect, indemnify and hold harmless Landlord and Landlord's Agents against and from any and all claims, suits, liabilities, judgments, costs, demands, causes of action and expenses (including, without limitation, reasonable attorneys' fees, costs and disbursements) arising from (1) the use of the Premises, the Building or the Project by Tenant or Tenant's Agents, or from any activity done, permitted or suffered by Tenant or Tenant's Agents in or about the Premises, the Building or the Project, and (2) any act, neglect, fault, willful misconduct or omission of Tenant or Tenant's Agents, or from any breach or default in the terms of this Lease by Tenant or Tenant's Agents, and (3) any action or-proceeding brought on account of any matter in items (1) or (2). If any action or proceeding is brought against Landlord by reason of any such claim, upon notice from Landlord, Tenant shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord. As a material part of the consideration to Landlord, Tenant hereby releases Landlord and Landlord's Agents from responsibility for, waives its entire claim of recovery for and assumes all risk of (i) damage to property or injury to persons in or about the Premises, the Building or the Project from any cause whatsoever (except that which is caused by the sole active gross negligence or willful misconduct of Landlord or Landlord's Agents or by the failure of Landlord to observe any of the terms and conditions of this Lease, if such failure has persisted for an unreasonable period of time after written notice of such failure), or (ii) loss resulting from business interruption or loss of income at the Premises. The obligations of Tenant under this Paragraph 16 shall survive any termination of this Lease. (b) No Impairment of Insurance. The foregoing indemnity shall not relieve any insurance carrier of its obligations under any policies required to be carried by either party pursuant to this Lease, to the extent that such policies cover the peril or occurrence that results in the claim that is subject to the foregoing indemnity. (c) Of Tenant. Landlord shall indemnify and hold harmless Tenant and Tenant's Agents against and from any and all claims, suits, liabilities, judgments, costs, demands, causes of action and expenses (including, without limitation, reasonable attorney's fees, costs and disbursements) arising from the gross negligence or willful misconduct of Landlord or Landlord's Agents. 36 17. SUBROGATION Landlord and Tenant hereby mutually waive any claim against the other and its Agents for any loss or damage to any of their property located on or about the Premises, the Building or the Project that is caused by or results from perils covered by property or environmental insurance carried by the respective parties, to the extent of the proceeds of such insurance actually received with respect to such loss or damage, whether or not due to the negligence of the other party or its Agents. Because the foregoing waivers will preclude the assignment of any claim by way of subrogation to an insurance company or any other person, each party now agrees to immediately give to its insurer written notice of the terms of these mutual waivers and shall have their insurance policies endorsed to prevent the invalidation of the insurance coverage because of these waivers. Nothing in this Paragraph 17 shall relieve a party of liability to the other for failure to carry insurance required by this Lease. 18. SIGNS Tenant, at Tenant's sole cost and expense, shall have the exclusive right to place signs on the exterior of the Building, on monuments in the Common Areas, and elsewhere within the Project at Tenant's sole cost and expense and in compliance with all applicable Legal Requirements. 19. FREE FROM LIENS Tenant shall keep the Premises, the Building and the Project free from any liens arising out of any work performed, material furnished or obligations incurred by or for Tenant. In the event that Tenant shall not, within ten (10) days following the imposition of any such lien, cause the lien to be released of record by payment or posting of a proper bond, Landlord shall have in addition to all other remedies provided herein and by law the right but not the obligation to cause same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All such sums paid by Landlord and all expenses incurred by it in connection therewith (including, without limitation, attorneys' fees) shall be payable to Landlord by Tenant upon demand. Landlord shall have the right at all times to post and keep posted on the Premises any notices permitted or required by law or that Landlord shall deem proper for the protection of Landlord, the Premises, the Building and the Project, from mechanics' and materialmen's liens. Tenant shall give to Landlord at least five (5) business days' prior written notice of commencement of any repair or construction on the Premises. 20. ENTRY BY LANDLORD Tenant shall permit Landlord and Landlord's Agents to enter into and upon the Premises at all reasonable times, upon reasonable notice at least 24 hours in advance of such entry (except in the case of an emergency, for which no notice shall be required), and subject to Tenant's reasonable security arrangements, for the purpose of inspecting the same or showing the Premises to prospective purchasers, lenders or tenants or to alter, improve, maintain and repair the Premises or the Building as required or permitted of Landlord under the terms hereof, or for any other business purpose, without any rebate of Rent and without any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises thereby occasioned (except for actual 37 damages resulting from the sole active gross negligence or willful misconduct of Landlord or any of Landlord's Agents); and Tenant shall permit Landlord to post notices of non-responsibility and ordinary "for lease" signs during the last six months of the Term, provided that such "for lease" signs to be placed in a location that does not interfere with Tenant's then-existing signage, and the size of which shall not exceed one hundred (100) square feet, and shall include such riders as may be reasonably requested by Tenant (such as "do not disturb occupant" and "tenant relocating to larger space"). No such entry shall be construed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction or constructive eviction of Tenant from the Premises. Landlord may temporarily close entrances, doors, corridors, elevators or other facilities without liability to Tenant by reason of such closure in the case of an emergency. 21. DESTRUCTION AND DAMAGE (a) If the Premises are damaged by fire or other perils covered by extended coverage insurance, Tenant shall give Landlord immediate notice thereof and Landlord shall, at Landlord's option: (1) In the event of total destruction (which shall mean destruction or damage in excess of twenty-five percent (25%) of the full insurable value thereof) of the Premises, Landlord may elect, by written notice to Tenant within forty-five (45) days after the date of casualty: (A) to terminate this Lease as of the date when the Premises or the Building are so destroyed or made unfit for occupancy, if the amount of insurance proceeds is inadequate to cover the costs of repair or restoration of the Premises, or if the duration of such work of repairs or restoration is reasonably estimated by Landlord to exceed six (6) months after Landlord is able to take possession of the damaged Premises to make such repairs or undertake such restoration pursuant to a good faith estimate from a third-party general contractor reasonably qualified to perform such work; or (B) to repair, restore or rehabilitate the Premises or the Building at Landlord's expense within six (6) months after Landlord is enabled to take possession of the damaged Premises or the Building and undertake reconstruction or repairs; and if Landlord elects to so repair, restore or rehabilitate the Premises or the Building, this Lease shall not terminate, Landlord in good faith shall attempt to complete its work as promptly as reasonably possible, and Rent shall be abated on a per diem basis proportionate to the extent and for the period during which the Premises are unfit for occupancy (but only to the extent of rental abatement insurance proceeds received by Landlord and subject to Landlord's obligation to diligently and reasonably attempt to recover all proceeds and awards available to cover such costs). Landlord's failure to elect to terminate this Lease in a timely fashion shall constitute its election to proceed to repair the Premises. In the event Landlord shall proceed pursuant to the provisions of this paragraph 21(a)(1), and shall not substantially complete the work within said six (6) months period (excluding from said period loss of time (not to exceed twelve (12) additional months in the aggregate) resulting from adjustment of insurance, labor difficulties or other Acts of God) either Landlord or Tenant may then terminate this Lease, as of the date when the Premises or the Building were made unfit for occupancy, by written notice to the other not later than thirty (30) days after the expiration of said six (6) month period, computed as herein provided. In the event of termination of this Lease pursuant to this Paragraph 21(a)(1), Rent shall be apportioned on a per diem basis to and including the effective date of such termination, and Tenant shall promptly vacate the Premises and surrender the same to Landlord. In the event Landlord elects to terminate this Lease pursuant to clause (A) above, Tenant may elect to 38 preserve this Lease without modification or amendment by timely notification thereof to Landlord given within ten (10) business days following Landlord's termination notice, whereby Tenant agrees to either, (1) if termination is based on the duration of repairs, pay such excess costs (such as overtime or additional personnel) as Landlord and Tenant may reasonably determine are required in order to cause completion of such work of repairs to occur within such six (6) month period, or (2) if termination is based on the cost of repairs exceeding the proceeds of insurance, timely undertake such reconstruction or repairs at Tenant's sole cost and expense (except, and only to the extent insurance is available to Landlord for such reconstruction or repairs, such insurance proceeds shall be made available to Tenant for such purpose), all such reconstruction or repairs shall be performed by Tenant as "Alterations" in accordance with Section 12, with the cost of such reconstruction or repairs, in excess of the insurance proceeds received from Landlord, paid by Tenant (and Tenant shall provide Landlord with security satisfaction to Landlord assuring such payment). If Tenant gives such notice, then Tenant shall not have any further right to terminate this Lease as a result of such casualty. If neither Landlord nor Tenant elects to restore the Premises, this Lease shall be deemed to have terminated as of the date of such total destruction. (2) In the event of a partial destruction (which shall mean destruction or damage to an extent not exceeding twenty-five percent (25%) of the full insurable value thereof) of the Premises for which Landlord will receive insurance proceeds sufficient to cover the cost to repair and restore such partial destruction and, if the damage thereto is such that the Premises may be substantially repaired or restored to its condition existing immediately prior to such damage or destruction within the earlier of (A) six (6) months after Landlord is enabled to take possession of the damaged Premises or the Building, or (B) two hundred seventy (270) days from the Casualty Discovery Date, Landlord shall commence and proceed diligently with the work of repair and restoration, in which event the Lease shall continue in full force and effect. If such repair and restoration requires longer than six (6) months after Landlord is enabled to take possession of the damaged Premises or the Building or two hundred seventy (270) days or if the insurance proceeds therefor (plus any amounts Tenant may elect or is obligated to contribute) are not sufficient to cover the cost of such repair and restoration, Landlord may elect either to so repair and restore, in which event the Lease shall continue in full force and effect, and Rent shall be abated on a per diem basis proportionate to the extent and for the period during which the Premises are unfit for occupancy (but only to the extent of rental abatement insurance proceeds received by Landlord), or Landlord may elect not to repair or restore, in which event the Lease shall terminate except as provided below. In either case, Landlord shall give written notice to Tenant of its intention within sixty (60) days after the Casualty Discovery Date. If Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date of such partial destruction. Landlord's failure to elect to terminate this Lease in a timely fashion shall constitute its election to proceed to repair the Premises. In the event Landlord shall proceed pursuant to the provisions of this subparagraph 21(a)(2), and shall not substantially complete the work within said six (6) months period (excluding from said period loss or time resulting from adjustment of insurance, labor difficulties or other Acts of God) either Landlord or Tenant may then terminate this Lease, as of the date when the Premises or the Building were made unfit for occupancy, by written notice to the other not later than thirty (30) days after the expiration of said six (6) month period, computed as herein provided. In the event of termination of this Lease 39 pursuant to this paragraph 21(a)(2), Rent shall be apportioned on a per diem basis to and including the effective date of such termination, and Tenant shall promptly vacate the Premises and surrender the same to Landlord. In the event Landlord elects to terminate this Lease pursuant to this paragraph 21(a)(2), Tenant may elect to preserve this Lease without modification or amendment by timely notification thereof to Landlord given within ten (10) business days following Landlord's termination notice, whereby Tenant agrees to either, (1) if termination is based on the duration of repairs, pay such excess costs (such as overtime or additional personnel) as Landlord and Tenant may reasonably determine are required in order to cause completion of such work of repairs to occur within such six (6) month period, or (2) if termination is based on the cost of repairs exceeding the proceeds of insurance, timely undertake such reconstruction or repairs at Tenant's sole cost and expense (except, and only to the extent insurance is available to Landlord for such reconstruction or repairs, such insurance proceeds shall be made available to Tenant for such purpose), all such reconstruction or repairs shall be performed by Tenant as "Alterations" in accordance with Section 12, with the cost of such reconstruction or repairs, in excess of the insurance proceeds received from Landlord, paid by Tenant (and Tenant shall provide Landlord with security satisfactory to Landlord assuring such payment). If Tenant gives such notice, then Tenant shall not have any further right to terminate this Lease as a result of such casualty. If neither Landlord nor Tenant elects to restore the Premises, this Lease shall be deemed to have terminated as of the date of such total destruction. (3) Notwithstanding anything to the contrary contained in this Paragraph, in the event of damage to the Premises occurring during the last twelve (12) months of the Term, either Landlord or Tenant may elect to terminate this Lease by written notice of such election given to the other party within thirty (30) days after the Casualty Discovery Date. (b) If the Premises are damaged by any peril not fully covered by insurance proceeds to be received by Landlord, and the cost to repair such damage exceeds any amount Tenant may agree to contribute, Landlord may elect either to commence promptly to repair and restore the Premises and prosecute the same diligently to completion, in which event this Lease shall remain in full force and effect; or not to repair or restore the Premises, in which event this Lease shall terminate. Landlord shall give Tenant written notice of its intention within sixty (60) days after the Casualty Discovery Date. If Landlord elects not to restore the Premises, this Lease shall be deemed to have terminated as of the date on which Tenant surrenders possession of the Premises to Landlord, except that if the damage to the Premises materially impairs Tenant's ability to continue its business operations in the Premises, then this Lease shall be deemed to have terminated as of the date such damage occurred. (c) Notwithstanding anything to the contrary in this Paragraph 21, Landlord shall have the option to terminate this Lease, exercisable by notice to Tenant within sixty (60) days after the Casualty Discovery Date, in each of the following instances: (1) If the Building or the Project or any portion thereof is damaged or destroyed and the insurance proceeds therefor are not sufficient to cover the costs of repair and restoration, regardless of whether or not the Premises is destroyed, unless Tenant elects to contribute any shortfall, or to restore or repair the Premises as provided above; or 40 (2) If the Building or the Project or any substantial portion thereof is damaged or destroyed during the last twelve (12) months of the Term, regardless of whether or not the Premises is destroyed. (d) In the event of repair and restoration as herein provided, the monthly Rent shall be abated proportionately in the ratio which Tenant's use of the Premises is impaired during the period of such repair or restoration, but only to the extent of rental abatement insurance proceeds received by Landlord; provided, however, that Tenant shall not be entitled to such abatement to the extent that such damage or destruction resulted from the wrongful acts or negligent inaction of Tenant or Tenant's Agents, unless, and to the extent, rental abatement insurance proceeds are available for such period of repair or restoration. Except as expressly provided in this Section 21, Tenant shall have no claim against Landlord for, and hereby releases Landlord and Landlord's Agents from responsibility for and waives its entire claim of recovery for any cost, loss or expense suffered or incurred by Tenant as a result of any damage to or destruction of the Premises, the Building or the Project or the repair or restoration thereof, including, without limitation, any cost, loss or expense resulting from any loss of use of the whole or any part of the Premises, the Building or the Project and/or any inconvenience or annoyance occasioned by such damage, repair or restoration. (e) If Landlord is obligated to or elects to repair or restore as herein provided, Landlord shall repair or restore only the initial tenant improvements, if any, constructed by Landlord in the Premises pursuant to the terms of this Lease, substantially to their condition existing immediately prior to the occurrence of the damage or destruction; and Tenant shall promptly repair and restore, at Tenant's expense, Tenant's Alterations which were not constructed by Landlord. (f) Tenant hereby waives the provisions of California Civil Code Section 1932(2) and Section 1933(4) which permit termination of a lease upon destruction of the leased premises, and the provisions of any similar law now or hereinafter in effect, and the provisions of this Paragraph 21 shall govern exclusively in case of such destruction. (g) Notwithstanding anything to the contrary contained in this Lease, in the event Tenant pays to Landlord as Additional Rent an amount allocable to the premium for rent insurance and Landlord intentionally fails to obtain the rent insurance for which such payment was made by Tenant, then in the event of a casualty, Tenant shall not be required to pay Rent to the extent Tenant would have been entitled to an abatement of such Rent pursuant to this Section 21 had Landlord obtained the rent insurance for which Tenant had paid such premium. 22. CONDEMNATION (a) If twenty-five percent (25%) or more of either the Premises, the Building or the Project or the parking areas for the Building or the Project is taken for any public or quasi-public purpose by any lawful governmental power or authority, by exercise of the right of appropriation, inverse condemnation, condemnation or eminent domain, or sold to prevent such taking (each such event being referred to as a "Condemnation"), and the proceeds of any award received by landlord for such Condemnation are insufficient to restore the Building or the project to support the Permitted Uses in substantially the manner they were supported prior to such 41 Condemnation, Landlord may, at its option, terminate this Lease as of the date title vests in the condemning party. If twenty-five percent (25%) or more of the Premises is taken and if the Premises remaining after such Condemnation and any repairs by Landlord would be untenantable for the conduct of Tenant's business operations, Tenant shall have the right to terminate this Lease as of the date title vests in the condemning party. If either party elects to terminate this Lease as provided herein, such election shall be made by written notice to the other party given within thirty (30) days after the nature and extent of such Condemnation have been finally determined. If neither Landlord nor Tenant elects to terminate this Lease to the extent permitted above, Landlord shall promptly proceed to restore the Premises, to the extent of any Condemnation award received by Landlord, to substantially the same condition as existed prior to such Condemnation, allowing for the reasonable effects of such Condemnation, and a proportionate abatement shall be made to the Base Rent corresponding to the time during which, and to the portion of the floor area of the Premises (adjusted for any increase thereto resulting from any reconstruction) of which, Tenant is deprived on account of such Condemnation and restoration, as reasonably determined by Landlord. Except as expressly provided in the immediately preceding sentence with respect to abatement of Base Rent, Tenant shall have no claim against Landlord for, and hereby releases Landlord and Landlord's Agents from responsibility for and waives its entire claim of recovery against Landlord for any cost, loss or expense suffered or incurred by Tenant as a result of any Condemnation or the repair or restoration of the Premises, the Building or the Project or the parking areas for the Building or the Project following such Condemnation, including, without limitation, any cost, loss or expense resulting from any loss of use of the whole or any part of the Premises, the Building, the Project or the parking areas and/or any inconvenience or annoyance occasioned by such Condemnation, repair or restoration. The provisions of California Code of Civil Procedure Section 1265.130, which allows either party to petition the Superior Court to terminate the Lease in the event of a partial taking of the Premises, the Building or the Project or the parking areas for the Building or the Project, and any other applicable law now or hereafter enacted, are hereby waived by Tenant. (b) Landlord shall be entitled to any and all compensation, damages, income, rent, awards, or any interest therein whatsoever which may be paid or made in connection with any Condemnation, and Tenant shall have no claim against Landlord for the value of any unexplored term of this Lease or otherwise; provided, however, that Tenant shall be entitled to receive any award separately allocated by the condemning authority to Tenant for Tenant's relocation expenses or the value of Tenant's Property (specifically excluding fixtures, Alterations and other components of the Premises which under this Lease or by law are or at the expiration of the Term will become the property of Landlord) and Tenant's goodwill attributable to the Premises, provided that such award does not reduce any award otherwise allocable or payable to Landlord. 23. ASSIGNMENT AND SUBLETTING (a) Tenant shall not voluntarily or by operation of law, (1) mortgage, pledge, hypothecate or encumber this Lease or any interest herein, (2) assign or transfer this Lease or any interest herein, sublease the Premises or any part thereof, or any right or privilege appurtenant thereto, or allow any other person (the employees and invitees of Tenant excepted) to occupy or use the Premises, or any portion thereof, without first obtaining the written consent of Landlord, 42 which consent shall not be withheld unreasonably as set forth below in this Section 23, provided that Tenant is not then in Default under this Lease nor is any event then occurring which with the giving of notice or the passage of time, or both, would constitute a Default hereunder Unless Tenant is publicly traded on a national stock exchange of the United States, a transfer of greater than a fifty percent (50%) interest (whether stock, partnership interest, membership interest or otherwise) of Tenant, either in one (1) transaction or a series of transactions shall be deemed to be an assignment under this Lease. When Tenant requests Landlord's consent to such assignment or subletting, it shall notify Landlord in writing of the name and address of the proposed assignee or subtenant and the nature and character of the business of the proposed assignee or subtenant and shall provide current and prior financial statements for the proposed assignee or subtenant, which financial statements shall be audited to the extent available and shall in any event be prepared in accordance with generally accepted accounting principles. Tenant shall also provide Landlord with a copy of the proposed sublease or assignment agreement, including all material terms and conditions thereof. Landlord shall have the option, to be exercised within ten (10) business days of receipt of the foregoing, to (1) consent to the proposed assignment or sublease, or (2) refuse its consent to the proposed assignment or sublease, providing that such consent shall not be unreasonably withheld so long as Tenant is not then in Default under this Lease nor is any event then occurring which with the giving of notice or the passage of time, or both, would constitute a Default hereunder. If Landlord fails to exercise its options within said ten (10) business day period, Landlord shall be deemed to have consented to the proposed assignment or sublease. (b) Without otherwise limiting the criteria upon which Landlord may withhold its consent, Landlord shall be entitled to consider all reasonable criteria including, but not limited to, the following: (1) the business reputation of the proposed individuals who will be managing and operating the business operations of the assignee or subtenant, and the long-term financial and competitive business prospects of the proposed assignee or subtenant, and (2) the creditworthiness and financial stability of the proposed assignee or subtenant in light of the responsibilities involved. In any event, Landlord may withhold its consent to any assignment or sublease, if (i) the actual use proposed to be conducted in the Premises or portion thereof conflicts with the provisions of Paragraph 9(a) or (b) above or with any other lease which restricts the use to which any space in the Building or the Project may be put, or (ii) the portion of the Premises to be sublet does not permit safe or otherwise appropriate means of ingress and egress, or does not comply with governmental safety and other codes. (c) Notwithstanding the provisions of this Section 23 to the contrary, Tenant shall have the right to sublease or assign any portion of the Premises to any related entity, parent company, subsidiary, affiliate or any entity resulting from a transfer of control of Tenant ("Related Entity") with written notice to Landlord, but without Landlord's consent, provided that either (1) the Related Entity has a net worth equal to or greater than that of Tenant as of December 31, 1999, (or Four Hundred Ninety Eight Million Six Hundred Ninety Nine Thousand Dollars $498,699,000), or (2) the obligations of such Related Entity under this Lease are guaranteed by Tenant or a Related Entity of Tenant having a net worth equal to or greater than that of Tenant as of December 31, 1999. Landlord shall not be entitled to any of the excess rent resulting from an assignment or sublease to a Related Entity. 43 (d) If Landlord approves an assignment or subletting as herein provided, Tenant shall pay to Landlord, as Additional Rent, fifty percent (50%) of the excess, if any, of (1) the rent and any additional rent payable by the assignee or sublessee to Tenant, less reasonable and customary market-based leasing commissions, reasonable legal fees and costs, Landlord's fee for review and the cost of tenant improvements for the transferee (not to exceed $5.00 per rentable square foot leased by such transferee) if any, to the extent reasonably incurred by Tenant in connection with such assignment or sublease; minus (2) Base Rent plus Additional Rent allocable to that part of the Premises affected by such assignment or sublease pursuant to the provisions of this Lease, which commissions shall, for purposes of the aforesaid calculation, be amortized on a straight-line basis over the term of such assignment or sublease. The assignment or sublease agreement, as the case maybe, after approval by Landlord, shall not be amended without Landlord's prior written consent, and shall contain a provision directing the assignee or subtenant to pay the rent and other sums due thereunder directly to Landlord upon receiving written notice from Landlord that Tenant is in default under this Lease with respect to the payment of Rent. In the event that, notwithstanding the giving of such notice, Tenant collects any rent or other sums from the assignee or subtenant, then Tenant shall hold such sums in trust for the benefit of Landlord and shall immediately forward the same to Landlord. Landlord's collection of such rent and other sums shall not constitute an acceptance by Landlord of attornment by such assignee or subtenant. A consent to one assignment, subletting, occupation or use shall not be deemed to be a consent to any other or subsequent assignment, subletting, occupation or use, and consent to any assignment or subletting shall in no way relieve Tenant of any liability under this Lease. Any assignment or subletting without Landlord's consent shall be void, and shall, at the option of Landlord, constitute a Default under this Lease. (e) Notwithstanding any assignment or subletting, Tenant and any guarantor or surety of Tenant's obligations under this Lease shall at all times remain fully and primarily responsible and liable for the payment of the Rent and for compliance with all of Tenant's other obligations under this Lease (regardless of whether Landlord's approval has been obtained for any such assignment or subletting). (f) Tenant shall pay Landlord's reasonable fees (including, without limitation, the fees of Landlord's counsel), incurred in connection with Landlord's review and processing of documents regarding any proposed assignment or sublease. (g) Notwithstanding anything in this Lease to the contrary, in the event Landlord consents to an assignment or subletting by Tenant in accordance with the terms of this Paragraph 23, Tenant's assignee or subtenant shall have no right to further assign this Lease or any interest therein or thereunder or to further sublease all or any portion of the Premises without Landlord's prior written consent, which shall not be unreasonably withheld, conditioned or delayed. (h) If this Lease is assigned, whether or not in violation of the provisions of this Lease, Landlord may collect Rent from the assignee. If the Premises or any part thereof is sublet or used or occupied by anyone other than Tenant, whether or not in violation of this Lease, Landlord may, after an Event of Default by Tenant, collect Rent from the subtenant or occupant. In either event, Landlord may apply the net amount collected to Rent, but no such assignment, subletting, occupancy or collection shall be deemed a waiver of any of the provisions of this 44 Paragraph 23, or the acceptance of the assignee, subtenant or occupant as tenant, or a release of Tenant from the further performance by Tenant of Tenant's obligations under this Lease. The consent by Landlord to an assignment, mortgaging, pledging, encumbering, transfer, use, occupancy or subletting pursuant to any provision of this Lease shall not, except as otherwise provided herein, in any way be considered to relieve Tenant from obtaining the express consent of Landlord to any other or further assignment, mortgaging, pledging, encumbering, transfer, use, occupancy or subletting. References in this Lease to use or occupancy by anyone other than Tenant shall not be construed as limited to subtenants and those claiming under or through subtenants but as including also licensees or others claiming under or through Tenant, immediately or remotely. The listing of any name other than that of Tenant on any door of the Premises or on any directory or in any elevator in the Building, or otherwise, shall not, except as otherwise provided herein, operate to vest in the person so named any right or interest in this Lease or in the Premises, or be deemed to constitute, or serve as a substitute for, or any waiver of, any prior consent of Landlord required under this Paragraph 23. (i) Each subletting and/or assignment pursuant to this Paragraph shall be subject to all of the covenants, agreements, terms, provision and conditions contained in this Lease and each of the covenants, agreements, terms, provisions and conditions of this Lease shall be automatically incorporated therein. If Landlord shall consent to, or reasonably withhold its consent to, any proposed assignment or sublease, Tenant shall indemnify, defend and hold harmless Landlord against and from any and all loss, liability, damages, costs and expenses (including reasonable counsel fees) resulting from any claims that may be made against Landlord by the proposed assignee or sublessee or by any brokers or other persons claiming a commission or similar in connection with the proposed assignment or sublease. (j) Tenant acknowledges and agrees that the restrictions, conditions and limitations imposed by this Paragraph 23 on Tenant's ability to assign or transfer this Lease or any interest herein, to sublet the Premises or any part thereof, to transfer or assign any right or privilege appurtenant to the Premises, or to allow any other person to occupy or use the Premises or any portion thereof, are, for the purposes of California Civil Code Section 1951.4, as amended from time to time, and for all other purposes, reasonable at the time that the Lease was entered into, and shall be deemed to be reasonable at the time that Tenant seeks to assign or transfer this Lease or any interest herein, to sublet the Premises or any part thereof, to transfer or assign any right or privilege appurtenant to the Premises, or, subject to Tenant's rights acknowledged by Landlord under paragraph 23(k) below, to allow any other person to occupy or use the Premises or any portion thereof. (k) Landlord acknowledges that Tenant's business to be conducted in the Premises may require the installation of certain equipment by certain licensees and customers of Lessee (collectively, "Customers") in order for such Customers to interconnect with Tenant's equipment in the Premises or to permit Tenant to operate such Customers' equipment, and so long as such Customers are not granted possessory rights to any portion of the Premises (whether as assignees, sublettees or licensees), these contracts with the Customers shall not be deemed prevented by or subject to this Section 23, and these Customer contracts or licenses do hereby have the Landlord's consent at no additional consideration to Landlord for the limited purpose of permitting Tenant's services and uses described above. 45 24. TENANT'S DEFAULT The occurrence of any one of the following events shall constitute an event of default on the part of Tenant ("Default"): (a) The abandonment of the Premises by Tenant for a period of ten (10) consecutive days or any vacation or abandonment of the Premises by Tenant which would cause any insurance policy to be invalidated or otherwise lapse in each of the foregoing cases irrespective of whether or not Tenant is then in monetary default under this Lease. Tenant agrees to notice and service of notice as provided for in this Lease and waives any right to any other or further notice or service of notice which Tenant may have under any statute or law now or hereafter in effect; (b) Failure to pay any installment of Rent or any other monies due and payable hereunder, said failure continuing for a period of three (3) days after the same is due; (c) A general assignment by Tenant or any guarantor or surety of Tenant's obligations hereunder (collectively, "Guarantor") for the benefit of creditors; (d) The filing of a voluntary petition in bankruptcy by Tenant or any Guarantor, the filing by Tenant or any Guarantor of a voluntary petition for an arrangement, the filing by or against Tenant or any Guarantor of a petition, voluntary or involuntary, for reorganization, or the filing of an involuntary petition by the creditors of Tenant or any Guarantor, said involuntary petition remaining undischarged for a period of sixty (60) days; (e) Receivership, attachment, or other judicial seizure of substantially all of Tenant's assets on the Premises, such attachment or other seizure remaining undismissed or undischarged for a period of sixty (60) days after the levy thereof, (f) Intentionally Deleted; (g) Failure of Tenant to execute and deliver to Landlord any estoppel certificate, subordination agreement, or lease amendment within the time periods and in the manner required by Paragraphs 30 or 31 or 42, and/or failure by Tenant to deliver to Landlord any financial statement within the time period and in the manner required by Paragraph 40; (h) An assignment or sublease, or attempted assignment or sublease, of this Lease or the Premises by Tenant contrary to the provision of Paragraph 23, unless such assignment or sublease is expressly conditioned upon Tenant having received Landlord's consent thereto; (i) Failure of Tenant to restore the Security Deposit to the amount and within the time period provided in Paragraph 7 above; (j) Failure in the performance of any of Tenant's covenants, agreements or obligations hereunder (except those failures specified as events of Default in subparagraphs (b), (1) or (m) above or any other subparagraphs of this Paragraph 24, which shall be governed by such other Paragraphs), which failure continues for thirty (30) days after written notice thereof 46 from Landlord to Tenant, provided that, if Tenant has exercised reasonable diligence to cure such failure and such failure cannot be cured within such thirty (30) day period despite reasonable diligence, Tenant shall not be in default under this subparagraph so long as Tenant thereafter diligently and continuously prosecutes the cure to completion and actually completes such cure within sixty (60) days after the giving of the aforesaid written notice; (k) Chronic delinquency by Tenant in the payment of Rent, or any other periodic payments required to be paid by Tenant under this Lease. "Chronic delinquency" shall mean failure by Tenant to pay Rent, or any other payments required to be paid by Tenant under this Lease within three (3) days after written notice thereof for any three (3) months (consecutive or nonconsecutive) during any period of twelve (12) months; and (l) Any failure by Tenant to discharge any lien or encumbrance placed on the Project or any part thereof in violation of this Lease within ten (10) days after the date such lien or encumbrance is filed or recorded against the Project or any part thereof. (m) Tenant agrees that any notice given by Landlord pursuant to Paragraph 24(k) above shall satisfy the requirements for notice under California Code of Civil Procedure Section 1161.1, and Landlord shall not be required to give any additional notice in order to be entitled to commence an unlawful detainer proceeding. 25. LANDLORD'S REMEDIES (a) Termination. In the event of any Default by Tenant, then in addition to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event that Landlord shall elect to so terminate this Lease then Landlord may recover from Tenant: (1) the worth at the time of award of any unpaid Rent and any other sums due and payable which have been earned at the time of such termination; plus (2) the worth at the time of award of the amount by which the unpaid Rent and any other sums due and payable which would have been earned after termination until the time of award exceeds the amount of such rental loss Tenant proves could have been reasonably avoided; plus (3) the worth at the time of award of the amount by which the unpaid Rent and any other sums due and payable for the balance of the term of this Lease after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; plus (4) 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 would be likely to result therefrom, including, without limitation, (A) any costs or expenses incurred by Landlord (1) in retaking possession of the Premises; (2) in maintaining, repairing, preserving, restoring, replacing, cleaning, altering, remodeling or 47 rehabilitating the Premises or any affected portions of the Building or the Project, including such actions undertaken in connection with the reletting or attempted reletting of the Premises to a new tenant or tenants; (3) for leasing commissions, advertising costs and other expenses of reletting the Premises; or (4) in carrying the Premises, including taxes, insurance premiums, utilities and security precautions; (B) any unearned brokerage commissions paid in connection with this Lease; (C) reimbursement of any previously waived or abated Base Rent or Additional Rent or any free rent or reduced rental rate granted hereunder; and (D) any concession made or paid by Landlord to the benefit of Tenant in consideration of this Lease including, but not limited to, any moving allowances, contributions, payments or loans by Landlord for tenant improvements or build-out allowances (including without limitation, any unamortized portion of the Tenant Allowance (such Tenant Allowance to be amortized over the Term in the manner reasonably determined by Landlord), if any, and any outstanding balance (principal and accrued interest) of the Tenant Improvement Loan, if any), or assumptions by Landlord of any of Tenant's previous lease obligations; plus (5) such reasonable attorneys' fees incurred by Landlord as a result of a Default, and costs in the event suit is filed by Landlord to enforce such remedy; and plus (6) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law (7) As used in subparagraphs (1) and (2) above, the "worth at the time of award" is computed by allowing interest at an annual rate equal to twelve percent (12%) per annum or the maximum rate permitted by law, whichever is less. As used in subparagraph (3) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of Federal Reserve Bank of San Francisco at the time of award, plus one percent (1%). Tenant hereby waives for Tenant and for all those claiming under Tenant all right now or hereafter existing to redeem by order or judgment of any court or by any legal process or writ, Tenant's right of occupancy of the Premises after any termination of this Lease. Tenant waives redemption or relief from forfeiture under California Code of Civil Procedure Sections 1 174 and II 79, or under any other pertinent present or future Law, in the event Tenant is evicted or Landlord takes possession of the Premises by reason of any Default of Tenant hereunder. (b) Continuation of Lease. In the event of any Default by Tenant, then in addition to any other remedies available to Landlord at law or in equity and under this Lease, Landlord shall have the remedy described in California Civil Code Section 1951.4 (Landlord may continue this Lease in effect after Tenant's Default and abandonment and recover Rent as it becomes due, provided Tenant has the right to sublet or assign, subject only to reasonable limitations). In addition, Landlord shall not be liable in any way whatsoever for its failure or refusal to relet the Premises. For purposes of this Paragraph 25(b), the following acts by Landlord will not constitute the termination of Tenant's. right to possession of the Premises: 48 (1) Acts of maintenance or preservation or efforts to relet the Premises, including, but not limited to, alterations, remodeling, redecorating, repairs, replacements and/or painting as Landlord shall consider advisable for the purpose of reletting the Premises or any part thereof, or (2) The appointment of a receiver upon the initiative of Landlord to protect Landlord's interest under this Lease or in the Premises. (c) Re-entry. In the event of any Default by Tenant, Landlord shall also have the right, with or without terminating this Lease, in compliance with applicable law, to re-enter the Premises, by force if necessary, and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. (d) Reletting. In the event of the abandonment of the Premises by Tenant or in the event that Landlord shall elect to re-enter as provided in Paragraph 25(c) or shall take possession of the Premises pursuant to legal proceeding or pursuant to any notice provided by law, then if Landlord does not elect to terminate this Lease as provided in Paragraph 25(a), Landlord may from time to time, without terminating this Lease, relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable with the right to make alterations and repairs to the Premises in Landlord's sole discretion. In the event that Landlord shall elect to so relet, then rentals received by Landlord from such reletting shall be applied in the following order: (1) to reasonable attorneys' fees incurred by Landlord as a result of a Default and costs in the event suit is filed by Landlord to enforce such remedies; (2) to the payment of any indebtedness other than Rent due hereunder from Tenant to Landlord; (3) to the payment of any costs of such reletting; (4) to the payment of the costs of any alterations and repairs to the Premises; (5) to the payment of Rent due and unpaid hereunder; and (6) the residue, if any, shall be held by Landlord and applied in payment of future Rent and other sums payable by Tenant hereunder as the same may become due and payable hereunder. Should that portion of such rentals received from such reletting during any month, which is applied to the payment of Rent hereunder, be less than the Rent payable during the month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. (e) Termination. No re-entry or taking of possession of the Premises by Landlord pursuant to this Paragraph 25 shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination thereof is decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of any Default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such Default. (f) Cumulative Remedies. The remedies herein provided are not exclusive and Landlord shall have any and all other remedies provided herein or by law or in equity. 49 (g) No Surrender. No act or conduct of Landlord, whether consisting of the acceptance of the keys to the Premises, or otherwise, shall be deemed to be or constitute an acceptance of the surrender of the Premises by Tenant prior to the expiration of the Term, and such acceptance by Landlord of surrender by Tenant shall only flow from and must be evidenced by a written acknowledgment of acceptance of surrender signed by Landlord. The surrender of this Lease by Tenant, voluntarily or otherwise, shall not work a merger unless Landlord elects in writing that such merger take place, but shall operate as an assignment to Landlord of any and all existing subleases, or Landlord may, at its option, elect in writing to treat such surrender as a merger terminating Tenant's estate under this Lease, and thereupon Landlord may terminate any or all such subleases by notifying the sublessee of its election so to do within five (5) days after such surrender. (h) Landlord's Lien. In addition to any statutory lien Landlord has, but subject and subordinate to any purchase money financing, capital lease or similar security interest of any third parties in Tenant's personal property, Tenant hereby grants to Landlord a continuing security interest for all sums of money becoming due hereunder upon personal property of Tenant situated on or about the Premises which cannot be removed without material damage to the Project and such property will not be removed therefrom without the consent of Landlord until all sums of money then due Landlord have been first paid and discharged. If a default occurs under this Lease, Landlord will have, in addition to all other remedies provided herein or by law, all rights and remedies under the Uniform Commercial Code, including, without limitation, the right to sell the property described in this subjection (h) at public or private sale upon five (5) days' notice to Tenant, subject to any such prior interest in the Tenant's personal property. This contractual lien will be in addition to any statutory lien for rent. 26. LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS (a) Without limiting the rights and remedies of Landlord contained in Paragraph 25 above, if Tenant shall be in Default in the performance of any of the terms, provisions, covenants or conditions to be performed or complied with by Tenant pursuant to this Lease, then Landlord may at Landlord's option, without any obligation to do so, and without notice to Tenant perform any such term, provision, covenant, or condition, or make any such payment and Landlord by reason of so doing shall not be liable or responsible for any loss or damage thereby sustained by Tenant or anyone holding under or through Tenant or any of Tenant's Agents. (b) Without limiting the rights of Landlord under Paragraph 26(a) above, Landlord shall have the right at Landlord's option, without any obligation to do so, to perform any of Tenant's covenants or obligations under this Lease without notice to Tenant in the case of an emergency, as determined by Landlord in its sole and absolute judgment, or if Landlord otherwise determines in its sole discretion that such performance is necessary or desirable for the proper management and operation of the Building or the Project or for the preservation of the rights and interests or safety of other tenants of the Building or the Project. (c) If Landlord performs any of Tenant's obligations hereunder in accordance with this Paragraph 26, the full amount of the cost and expense incurred or the payment so made or the amount of the loss so sustained shall immediately be owing by Tenant to Landlord, and 50 Tenant shall promptly pay to Landlord upon demand, as Additional Rent, the full amount thereof with interest thereon from the date of payment by Landlord at the lower of (i) twelve percent (12%) per annum, or (ii) the highest rate permitted by applicable law. 27. ATTORNEY'S FEES (a) If either party hereto fails to perform any of its obligations under this Lease or if any dispute arises between the parties hereto concerning the meaning or interpretation of any provision of this Lease, then the defaulting party or the party not prevailing in such dispute, as the case may be, shall pay any and all costs and expenses incurred by the other party on account of such default and/or in enforcing or establishing its rights hereunder, including, without limitation, court costs and reasonable attorneys' fees and disbursements. Any such attorneys' fees and other expenses incurred by either party in enforcing a judgment in its favor under this Lease shall be recoverable separately from and in addition to any other amount included in such judgment, and such attorneys' fees obligation is intended to be severable from the other provisions of this Lease and to survive and not be merged into any such judgment. (b) Without limiting the generality of Paragraph 26(a) above, if Landlord utilizes the services of an attorney for the purpose of collecting any Rent due and unpaid by Tenant or in connection with any other breach of this Lease by Tenant, Tenant agrees to pay Landlord actual attorneys' fees as determined by Landlord for such services, regardless of the fact that no legal action may be commenced or filed by Landlord. 28. TAXES Tenant shall be liable for and shall pay directly to the taxing authority, prior to delinquency, all taxes levied against Tenant's Property. If any Alteration installed by Tenant pursuant to Paragraph 12 or any of Tenant's Property is assessed and taxed with the Project or Building, Tenant shall pay such taxes directly to the taxing authority, prior to delinquency. 29. EFFECT OF CONVEYANCE The term "Landlord" as used in this Lease means, from time to time, the then current owner of the Building or the Project containing the Premises, so that, in the event of any sale of the Building or the Project, Landlord shall be and hereby is entirely freed and relieved of all covenants and obligations of Landlord hereunder, and it shall be deemed and construed, without further agreement between the parties and the purchaser at any such sale, that the purchaser of the Building or the Project has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder. 30. TENANT'S ESTOPPEL CERTIFICATE From time to time, upon written request of Landlord, Tenant shall execute, acknowledge and deliver to Landlord or its designee, an Estoppel Certificate in substantially the form attached hereto as Exhibit "D" and with any other statements reasonably requested by Landlord or its designee. Any such Estoppel Certificate delivered pursuant to this Paragraph 30 may be relied upon by a prospective purchaser of Landlord's interest or a mortgagee of Landlord's interest or 51 assignment of any mortgage upon Landlord's interest in the Premises. If Tenant shall fail to provide such certificate within seven (7) business days of receipt by Tenant of a written request by Landlord as herein provided, such failure shall, at Landlord's election, constitute a Default under this Lease. 31. SUBORDINATION This Lease, and all rights of Tenant hereunder, are and shall be subject and subordinate to all ground leases, overriding leases and underlying leases affecting the Building or the Project now or hereafter existing and each of the terms, covenants and conditions thereto (the "Superior Lease(s)"), and to all mortgages which may now or hereafter affect the Building, the Property or any of such leases and each of the terms, covenants and conditions thereto (the "Superior Mortgage(s)"), whether or not such mortgages shall also cover other lands, buildings or leases, to each and every advance made or hereafter to be made under such mortgages, and to all renewals, modifications, replacements and extensions of such leases and such mortgages and spreaders and consolidations of such mortgages. This Paragraph shall be self-operative and no further instrument of subordination shall be required. Tenant shall promptly execute, acknowledge and deliver the instrument attached hereto as Exhibit "E" or any other reasonable instrument that Landlord, the lessor under any such lease or the holder of any such mortgage or any of their respective successors in interest may reasonably request to evidence such subordination; provided that such instrument shall contain a Nondisturbance Agreement (as defined below). If Tenant fails to execute, acknowledge or deliver any such instrument within seven (7) business days after request therefor, Tenant hereby irrevocably constitutes and appoints Landlord as Tenant's attorney-in-fact, coupled with an interest, to execute and deliver any such instrument for and on behalf of Tenant. As used herein the lessor of a Superior Lease or its successor in interest is herein called "Superior Lessor"; and the holder of a Superior Mortgage is herein called "Superior Mortgagee". Notwithstanding the foregoing terms of this Paragraph 31, if a Superior Lease or Superior Mortgage is hereafter placed against or affecting any or all of the Building or the Premises or any or all of the Building and improvements now or at any time hereafter constituting a part of or adjoining the Building, Landlord shall deliver to Tenant nondisturbance agreements ("Nondisturbance Agreements") in writing as part of any required subordination instrument from all lessors under all Superior Leases, from all beneficiaries under all Superior Mortgages, in form and content reasonably acceptable to Tenant, stating that so long as Tenant is not in default under any of the terms, covenants, conditions, or agreements of this Lease, this Lease and all of the terms, provisions, and conditions of this Lease, shall remain in full force and effect, and neither this Lease, nor Tenant's rights nor Tenant's possession of the Premises will be disturbed during the Term of this Lease or any extension thereof. Provided the foregoing provisions are satisfied, Tenant agrees to execute within seven (7) business days after written request of Landlord, any commercially reasonable statements or instruments necessary to effectuate the provisions of this Section. If any Superior Lessor or Superior Mortgagee shall succeed to the rights of Landlord under this Lease, whether through possession or foreclosure action or delivery of a new lease or deed (such party so succeeding to Landlord's rights herein called "Successor Landlord"), then Tenant shall attorn to and recognize such Successor Landlord as Tenant's landlord under this 52 Lease (without the need for further agreement) and shall promptly execute and deliver any reasonable instrument that such Successor Landlord may reasonably request to evidence such attornment. This Lease shall continue in full force and effect as a direct lease between the Successor Landlord and Tenant upon all of the terms, conditions and covenants as are set forth in this Lease, except that the Successor Landlord shall not (a) be liable for any previous act or omission of Landlord under this Lease, except to the extent such act or omission shall constitute a continuing Landlord default hereunder; (b) be subject to any offset, not expressly provided for in this Lease; or (c) be bound by any previous modification of this Lease or by any previous prepayment of more than one month's Base Rent, unless such modification or prepayment shall have been expressly approved in writing by the Successor Landlord (or predecessor in interest). 32. ENVIRONMENTAL COVENANTS (a) As used in this Lease, the term "Hazardous Materials" shall mean and include any substance that is or contains petroleum, asbestos, polychlorinated biphenyls, lead, or any other substance, material or waste which is now or is hereafter classified or considered to be hazardous or toxic under any federal, state or local law, rule, regulation or ordinance relating to pollution or the protection or regulation of human health, natural resources or the environment including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), 42 U.S.C. Section 9601, et. seq., the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et. seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et. seq., the Clean Water Act (33 U.S.C. Section 1251 et seq.), the Safe Drinking Water Act (42 U.S.C. Section 300f et seq.), the Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.), the California Hazardous Waste Control Law (California Health and Safety Code Sections 25100-25600), the Porter-Cologne Water Quality Control Act (California Health and Safety Code Section 13000 et seq.), and the Safe Drinking Water and Toxic Enforcement Act (California Health and Safety Code Section 25249.5 et seq.). (collectively "Environmental Laws") or poses or threatens to pose a hazard to the health or safety of persons on the Premises or any adjacent property. The parties acknowledge that the Premises may have been affected by Hazardous Materials as described on Exhibit "F" attached hereto (the "Disclosed Matters") and neither party shall have any liability to the other in connection with the Disclosed Matters. (b) Tenant agrees that during its use and occupancy of the Premises it will not permit Hazardous Materials to be present on or about the Premises except for fuel and other supplies for the operation and maintenance of the for the Emergency Generator(s), materials required for the maintenance and repair of the Systems, cleaning supplies and other business supplies customarily used and stored in an office and that it will comply with all Environmental Laws relating to the use, storage or disposal of any such Hazardous Materials. Attached hereto as Exhibit "G" is a list of all Hazardous Materials to be used at the Premises by Tenant and the quantities thereof (such Hazardous Materials in the quantities described on Exhibit "G" are herein referred to as the "Permitted Hazardous Materials"), which Hazardous Materials and the quantities thereof shall be subject to Landlord's approval; and following such approval, there shall be no change in Hazardous Materials identified on such list or the quantities thereof without Landlord's approval, which shall not be unreasonably withheld, conditioned or delayed. 53 (c) If Tenant's use of Hazardous Materials on or about the Premises results in a release, discharge or disposal of Hazardous Materials on, in, at, under, or emanating from, the Premises or the property in which the Premises are located, Tenant agrees to investigate, clean up, remove or remediate such Hazardous Materials in full compliance with (a) the requirements of (i) all Environmental Laws and (ii) any governmental agency or authority responsible for the enforcement of any Environmental Laws; and (b) any additional requirements of Landlord that are necessary, in Landlord's sole discretion, to protect the value of the Premises or the property in which the Premises are located; provided that any applicable and available proceeds from any environmental insurance carried by Landlord shall be made available to Tenant for the cost of performing such obligations. Landlord shall also have the right, but not the obligation, to take whatever action with respect to any such Hazardous Materials that it deems necessary, in Landlord's sole discretion, to protect the value of the Premises or the property in which the Premises are located. All costs and expenses paid or incurred by Landlord in the exercise of such right shall be payable by Tenant upon demand, to the extent not covered by proceeds of environmental insurance received by Landlord. (d) Upon reasonable notice to Tenant, Landlord may inspect the Premises for the purpose of determining whether there exists on the Premises any Hazardous Materials or other condition or activity that is in violation of the requirements of this Lease or of any Environmental Laws. The right granted to Landlord herein to perform inspections shall not create a duty on Landlord's part to inspect the Premises, or liability on the part of Landlord for Tenant's use, storage or disposal of Hazardous Materials, it being understood that Tenant shall be solely responsible for all liability in connection therewith. (e) Tenant shall surrender the Premises to Landlord upon the expiration or earlier termination of this Lease free of debris, waste or Hazardous Materials placed on or about the Premises by Tenant or its agents, employees, contractors or invitees, and in a condition which complies with all Environmental Laws. (f) Tenant agrees to indemnify and hold harmless Landlord from and against any and all claims, damages, fines, judgments, penalties, costs, losses (including, without limitation, loss in value of the Premises or the property in which the Premises is located, damages due to loss or restriction of rentable or useable space, or any damages due to any adverse impact on marketing of the space and any and all sums paid for settlement of claims), liabilities and expenses (including, without limitation, attorneys' fees, consultant and expert fees) sustained by Landlord during or after the term of this Lease and attributable to (i) any Hazardous Materials placed on or about the Premises, the Building or the Project by Tenant or Tenant's agents, employees, contractors or invitees, or (ii) Tenant's breach of any provision of this Paragraph 32. This indemnification includes, without limitation, any and all costs incurred due to any investigation of the site or any cleanup, removal or restoration mandated by a federal, state or local agency or political subdivision. Landlord shall indemnify, protect, hold harmless and defend Lessee from and against any liabilities, claims, demands, costs, expenses (including without limitation attorneys fees and disbursements) and damages arising in connection with hazardous wastes or substances existing in or about the Land, Project or Premises (i) prior to the Commencement Date of this Lease but only to the extent Landlord is indemnified by a third party and only to the extent Tenant pays any additional cost or liability to Landlord whatsoever 54 in connection with such indemnity of Tenant, or (ii) to the extent brought onto the Project or Premises by Landlord or any of its Agents during the term of this Lease. (g) The provisions of this Paragraph 32 shall survive the expiration or earlier termination of this Lease. 33. NOTICES All notices and demands which are required or may be permitted to be given to either party by the other hereunder shall be in writing and shall be sent by United States mail, postage prepaid, certified, or by personal delivery or nationally recognized overnight courier, addressed to the addressee at Tenant's Address or Landlord's Address as specified in the Basic Lease Information, or to such other place as either party may from time to time designate in a notice to the other party given as provided herein. Copies of all notices and demands given to Landlord shall additionally be sent to Landlord's property manager at the address specified in the Basic Lease Information or at such other address as Landlord may specify in writing from time to time. Notice shall be deemed given upon actual receipt (or attempted delivery if delivery is refused). 34. WAIVER The waiver of any breach of any term, covenant or condition of this Lease shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent breach of the same or any other term, covenant or condition herein contained. The subsequent acceptance of Rent by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. No delay or omission in the exercise of any right or remedy of Landlord in regard to any Default by Tenant shall impair such a right or remedy or be construed as a waiver. Any waiver by Landlord of any Default must be in writing and shall not be a waiver of any other Default concerning the same or any other provisions of this Lease. 35. HOLDING OVER Any holding over after the expiration of the Term, without the express written consent of Landlord, shall constitute a Default and, without limiting Landlord's remedies provided in this Lease, such holding over shall be construed to be a tenancy at sufferance, at a rental rate equal to (i) one hundred twenty five percent (125%) of the Base Rent last due in this Lease, plus Additional Rent, for the first two months of the hold over, and (ii) the greater of (x) one hundred twenty five percent (125%) of the fair market rental value for the Premises as determined by Landlord or (y) one hundred twenty five percent (125%) of the Base Rent last due in this Lease, plus Additional Rent for the third through the sixth months of the hold over, and shall otherwise be on the terms and conditions herein specified, so far as applicable; provided, however, in no event shall any renewal or expansion option, option to purchase, or other similar right or option contained in this Lease be deemed applicable to any such tenancy at sufferance. Under no circumstances shall Tenant hold over for a period in excess of six (6) months. If the Premises are not surrendered at the end of the Term or sooner termination of this Lease, and in accordance with the provisions of Paragraphs 1 and 32(g), Tenant shall indemnify, defend and hold Landlord 55 harmless from and against any and all loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any loss or liability resulting from any claim against Landlord made by any succeeding tenant or prospective tenant founded on or resulting from such delay and losses to Landlord due to lost opportunities to lease any portion of the Premises to any such succeeding tenant or prospective tenant, together with, in each case, actual attorneys' fees and costs; provided that, as long as Tenant's holdover does not exceed six (6) months, Tenant shall not be liable for such loss or liability in excess of six (6) month's fair market rental value for the Premises as reasonably determined by Landlord. 36. SUCCESSORS AND ASSIGNS The terms, covenants and conditions of this Lease shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of all of the parties hereto. If Tenant shall consist of more than one entity or person, the obligations of Tenant under this Lease shall be joint and several. 37. TIME Time is of the essence of this Lease and each and every term, condition and provision herein. 38. BROKERS Landlord and Tenant each represents and warrants to the other that neither it nor its officers or agents nor anyone acting on its behalf has dealt with any real estate broker except the Broker(s) specified in the Basic Lease Information in the negotiating or making of this Lease, and each party agrees to indemnify and hold harmless the other from any claim or claims, and costs and expenses, including attorneys' fees, incurred by the indemnified party in conjunction with any such claim or claims of any other broker or brokers to a commission in connection with this Lease as a result of the actions of the indemnifying party. Landlord shall pay a leasing commission to Landlord's Broker which shall pay a commission to Tenant's Broker in connection with their representation of Tenant pursuant to Landlord's agreement with BT Commercial. 39. LIMITATION OF LIABILITY Tenant agrees that, in the event of any default or breach by Landlord under this Lease or arising in connection herewith or with Landlord's operation, management, leasing, repair, renovation, alteration or any other matter relating to the Project or the Premises Tenant's remedies shall be limited solely and exclusively to an amount which is equal to the greater of (a) the interest in the Building of the then current Landlord or (b) the equity interest Landlord would have in the Building if the Building were encumbered by third party debt in an amount equal to eighty percent (80%) of the value of the Building (as such value is reasonably determined by Landlord) provided that in no event shall such limitation of liability extend to any sales or insurance proceeds received by Landlord or the "Landlord Parties" in connection with the Project, Building or Premises. For purposes of this Lease, "Landlord Parties" shall mean, collectively Landlord, its partners, shareholders, officers, directors, employees, investment 56 advisors, or any successor in interest of any of them. Neither Landlord, nor any of the Landlord Parties shall have any personal liability therefor, and Tenant hereby expressly waives and releases such personal liability on behalf of itself and all persons claiming by, through or under Tenant. The limitations of liability contained in this Paragraph 39 shall inure to the benefit of Landlord's and the Landlord Parties' present and future partners, beneficiaries, officers, directors, trustees, shareholders, agents and employees, and their respective partners, heirs, successors and assigns. Under no circumstances shall any present or future partner of Landlord (if Landlord is a partnership), future member in Landlord (if Landlord is a limited liability company) or trustee or beneficiary (if Landlord or any partner or member of Landlord is a trust), have any liability for the performance of Landlord's obligations under this Lease beyond the limitations set forth herein. Notwithstanding any contrary provision herein, neither Landlord nor the Landlord Parties shall be liable under any circumstances for injury or damage to, or interference with Tenant's business, including but not limited to, loss or profits, loss of rents or other revenues, loss of business opportunity, loss of goodwill or loss of use, in each case, however occurring. The provisions of this section shall apply only to the Landlord and the parties herein described, and shall not be for the benefit of any insurer nor any other third party. 40. FINANCIAL STATEMENTS Within seven (7) business days after Landlord's request, but no more than once in any 12-month period, Tenant shall deliver to Landlord the then current audited financial statements of Tenant (including interim periods following the end of the last fiscal year for which annual statements are available), prepared or compiled by a certified public accountant, including a balance sheet and profit and loss statement for the most recent prior year, all prepared in accordance with generally accepted accounting principles consistently applied; provided that notwithstanding Tenant's obligation to prepare and provide such audited financial statement only once in any 12-month period, Tenant shall, upon Landlord's reasonable request from time to time within such 12-month period provide written confirmation of such financial statement, or written confirmation of Tenant's financial statement in its most recent quarterly or annual report, as applicable. 41. RULES AND REGULATIONS Tenant agrees to comply with such reasonable rules and regulations as Landlord may adopt in the future, from time to time, for the orderly and proper operation of the Building and the Project (collectively, the "Rules and Regulations"). The Rules and Regulations may include, but shall not be limited to, the following: (a) restriction of employee parking to a limited, designated area or areas; and (b) regulation of the removal, storage and disposal of Tenant's refuse and other rubbish. The then current Rules and Regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant. Landlord shall not be responsible to Tenant for the failure of any other person to observe and abide by any of said Rules and Regulations. 42. MORTGAGEE PROTECTION (a) Modifications for Lender. If, in connection with obtaining financing for the Project or any portion thereof, Landlord's lender shall request reasonable modifications to this Lease as a condition to such financing, Tenant shall not unreasonably withhold, delay or 57 defer its consent to such modifications, provided such modifications do not materially adversely affect Tenant's rights or increase Tenant's obligations under this Lease. (b) Rights to Cure. Tenant agrees to give to any trust deed or mortgage holder ("Holder"), by a method provided for in Paragraph 33 above, at the same time as it is given to Landlord, a copy of any notice of default given to Landlord, provided that prior to such notice Tenant has been notified, in writing, (by way of notice of assignment of rents and leases, or otherwise) of the address of such Holder. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then the Holder shall have an additional reasonable period within which to cure such default, or if such default cannot be cured without Holder pursuing its remedies against Landlord, then such additional time as may be necessary to commence and complete a foreclosure proceeding, provided Holder commences and thereafter diligently pursues the remedies necessary to cure such default (including but not limited to commencement of foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated. 43. INTENTIONALLY OMITTED 44. PARKING (a) Neither Landlord nor its Agents shall be liable for: (i) loss or damage to any vehicle or other personal property parked or located upon or within the Parking Areas whether caused by fire, theft, explosion, strikes, riots or any other cause whatsoever; or (ii) injury to or death of any person in, about or around any Parking Areas or any vehicles parking therein or in proximity thereto whether caused by fire, theft, assault, explosion, riot or any other cause whatsoever and Tenant hereby waives any claim for or in respect to the above and against all claims or liabilities arising out of loss or damage to property or injury to or death of persons, or both, relating to any of the foregoing. Tenant shall not assign any of its rights hereunder and in the event an attempted assignment is made, it shall be void. (b) Tenant shall have the right to designate parking spaces within the Parking Area as "Reserved" or "Visitor," in its sole discretion. All parking spaces shall be free of charge for the Term of this Lease. (c) Tenant shall be permitted to restripe the Parking Area from time to time in order to increase the number of parking spaces on the Property, provided that Tenant complies with all applicable Laws, Private Restrictions, and the ADA. (d) In the event any tax, surcharge or regulatory fee is at any time imposed by any governmental authority upon or with respect to parking or vehicles parking in the parking spaces referred to herein, Tenant shall pay such tax, surcharge or regulatory fee as Additional Rent under this Lease, such payments to be made in advance and from time to time as required by Landlord (except that they shall be paid monthly with Base Rent payments if permitted by the governmental authority). 45. ENTIRE AGREEMENT 58 This Lease, including the Exhibits and any Addenda attached hereto, which are hereby incorporated herein by this reference, contains the entire agreement of the parties hereto, and no representations, inducements, promises or agreements, oral or otherwise, between the parties, not embodied herein or therein, shall be of any force and effect. If there is more than one Tenant, the obligations hereunder imposed shall be joint and several. 46. INTEREST Any installment of Rent and any other sum due from Tenant under this Lease which is not received by Landlord within three (3) days from when the same is due shall bear interest from the date such payment was originally due under this Lease until paid at the greater of (a) an annual rate equal to the maximum rate of interest permitted by law, or (b) twelve percent (12%) per annum. Payment of such interest shall not excuse or cure any Default by Tenant. In addition, Tenant shall pay all costs and attorneys' fees incurred by Landlord in collection of such amounts. 47. GOVERNING LAW; CONSTRUCTION This Lease shall be construed and interpreted in accordance with the laws of state in which the Premises is located. The parties acknowledge and agree that no rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall be employed in the interpretation of this Lease, including the Exhibits and any Addenda attached hereto. All captions in this Lease are for reference only and shall not be used in the interpretation of this Lease. Whenever required by the context of this Lease, the singular shall include the plural, the masculine shall include the feminine, and vice versa. If any provision of this Lease shall be determined to be illegal or unenforceable, such determination shall not affect any other provision of this Lease and all such other provisions shall remain in full force and effect. 48. REPRESENTATIONS AND WARRANTIES OF TENANT Tenant (and, if Tenant is a corporation, partnership, limited liability company or other legal entity) hereby makes the following representations and warranties, each of which is material and being relied upon by Landlord, is true in all respects as of the date of this Lease, and shall survive the expiration or termination of the Lease. (a) If Tenant is an entity, Tenant is duly organized, validly existing and in good standing under the laws of the state of its organization, and is qualified to do business in the state in which the Premises is located, and the persons executing this Lease on behalf of Tenant have the full right and authority to execute this Lease on behalf of Tenant and to bind Tenant without the consent or approval of any other person or entity. Tenant has full power, capacity, authority and legal right to execute and deliver this Lease and to perform all of its obligations hereunder. This Lease is a legal, valid and binding obligation of Tenant, enforceable in accordance with its terms. (b) Tenant has not (1) made a general assignment for the benefit of creditors, (2) filed any voluntary petition in bankruptcy or suffered the filing of an involuntary petition by any creditors, (3) suffered the appointment of a receiver to take possession of all or substantially 59 all of its assets, (4) suffered the attachment or other judicial seizure of all or substantially all of its assets, (5) admitted in writing its inability to pay its debts as they come due, or (6) made an offer of settlement, extension or composition to its creditors generally. 49. INTENTIONALLY DELETED 50. SECURITY Tenant shall be responsible for all security for the Premises and the Building. Tenant shall be permitted, without obligation, to install security systems within the Building, provided that at the end of the Term, Tenant shall remove any such security systems at its sole cost and expense, and shall repair and restore the Premises and the Building to their original condition at the commencement of the Term. Landlord and Tenant acknowledge and agree that Landlord shall not provide any security services with respect to the Premises and that Landlord shall not be liable to Tenant for, and Tenant waives any claim against Landlord with respect to, any loss by theft or any other damage suffered or incurred by Tenant in connection with any unauthorized entry into the Premises or any other breach of security with respect to the Premises or the Building. 51. JURY TRIAL WAIVER Tenant hereby waives any right to trial by jury with respect to any action or proceeding (i) brought by Landlord, Tenant or any other party, relating to (A) this Lease and/or any understandings or prior dealings between the parties hereto, or (B) the Premises, the Building or the Project or any part thereof, or (ii) to which Landlord is a party. Tenant hereby agrees that this Lease constitutes a written consent to waiver of trial by jury pursuant to the provisions of California Code of Civil Procedure Section 63 1, and Tenant does hereby constitute and appoint Landlord its true and lawful attorney-in-fact, which appointment is coupled with an interest, and Tenant does hereby authorize and empower Landlord, in the name, place and stead of Tenant, to file this Lease with the clerk or judge of any court of competent jurisdiction as a statutory written consent to waiver of trial by jury. 52. RECORDATION With the exception of a memorandum of Tenant's renewal option under Section 56 hereof, and Tenant's right of first offer to purchase set forth in Section 57 hereof, executed and in a form suitable for recording in the official records of Santa Clara County, California, which Tenant shall be permitted to record against Landlord's title to the Project, neither this Lease, nor any memorandum, affidavit or other writing with respect thereto, shall be recorded by Tenant or by any one acting through, under or on behalf of Tenant, and the recording thereof in violation of this provision shall make this Lease null and void at Landlord's election. 53. INTENTIONALLY OMITTED 54. FORCE MAJEURE Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes therefor, governmental 60 actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform, except with respect to the obligations imposed with regard to Rent and other charges to be paid by Tenant pursuant to this Lease (collectively, the "Force Majeure"), notwithstanding anything to the contrary contained in this Lease, shall excuse the performance of such party for a period equal to any such prevention, delay or stoppage and therefore, if this Lease specifies a time period for performance of an obligation of either party, that time period shall be extended by the period of any delay in such party's performance cause by a Force Majeure. 55. ACCEPTANCE This Lease shall only become effective and binding upon full execution hereof by Landlord and delivery of a signed copy to Tenant. 56. RENEWAL OPTION (WITH FMV RENT) (a) Exercise of Options. Provided Tenant is not in default (beyond applicable notice and grace periods) pursuant to any of the terms and conditions of this Lease, Tenant shall have one (1) option (the "Option") to renew this Lease for an additional ten (10) year period under each Option (the "Option Period") for the period commencing on the date following the Expiration Date upon the terms and conditions contained in this Lease, except, as provided in this Paragraph 56. To exercise the Option, Tenant shall give Landlord notice (the "Extension Notice") of the intent to exercise said Option not less than nine (9) months or more than fifteen (15) months prior to the date on which the Option Period which is the subject of the notice will commence. The notice shall be given as provided in Paragraph 33 hereof. In the event Tenant shall exercise the Option, this Lease will terminate in its entirety at the end of the Option Period and Tenant will have no further Options to renew or extend the Term of this Lease. (b) Determination of Base Rent. The Base Rent for the Option shall be determined as follows: (i) Landlord and Tenant will have twenty-one (21) days after Landlord receives the Extension Notice within which to agree on the fair market rental value of the Premises as of the commencement date of the Option Period, as defined in subsection (iii) below. If they agree on the Base Rent within twenty-one (21) days, they will amend this Lease by stating the Base Rent; (ii) If Landlord and Tenant are unable to agree on the Base Rent for the Option Period within twenty-one (21) days, the Base Rent for the Option Period will be the greater of (i) the-fair market rental value of the Premises as of the commencement date of the Option Period as determined in accordance with subsection (iii) hereof, and (ii) the last Base Rent set forth in the Basic Lease Information. As used in this Lease, the "fair market rental value of the Premises means what a landlord under no compulsion to lease the Premises, and a tenant under no compulsion to lease the Premises, would determine as Base Rent (including initial monthly rent and rental increases) for the Option Period, as of the commencement of the Option Period, taking into consideration the uses permitted under this Lease, the quality, size, 61 design and location of the Premises, and the rent for comparable buildings located in the vicinity of the Project; and (iii) Within fifteen (15) days after the expiration of the twenty-one (21) day period set forth in subparagraph (ii) above, Landlord and Tenant shall each appoint one licensed real estate broker with at least ten (10) years experience in the northern San Jose office market, and the two brokers so appointed shall jointly attempt to determine and agree upon the then fair market rental value of the Premises based on documented evidence of comparable transactions in comparable buildings in the general vicinity of the Project. If they are unable to agree, then each broker so appointed shall set one value, and notify the other broker, of the value set by him or her, concurrently with such broker's receipt of the value set by the other broker. The two brokers then shall, together, select a licensed real estate broker, who shall make a determination of the then fair market rental value, after reviewing the reports of the two brokers appointed by the parties, and after doing such independent research as he/she deems appropriate. The value determined by the jointly-selected broker shall be the then fair market rental value of the Premises. 57. RIGHT OF FIRST OFFER TO PURCHASE If at any time during the Lease Term, should Landlord contemplate selling the Building, Landlord shall be required to provide Tenant with the first opportunity to purchase the Building ("Right of First Offer") by delivering written notice to Tenant pursuant to Paragraph 33 hereof ("Right of First Offer Notice"). Tenant shall exercise its Right of First Offer within five (5) business days of Tenant's receipt of the Right of First Offer Notice, by declining such Offer or by accepting the terms of the Offer, in writing. The failure of Tenant to provide Landlord with its written election within such five (5) business day period shall be deemed Tenant's election to decline the Offer. Within thirty (30) days of Tenant's receipt of the Right of First Offer Notice, Landlord and Tenant shall negotiate the fair market sale price of the Building, and the terms and conditions of the purchase agreement ("Negotiation Period"), and within such thirty (30) day period Tenant shall perform its due diligence inspections of the Building and Building parcel ("Due Diligence Period") and shall close thereafter in accordance with the provisions of the purchase agreement but in no event later than ten (10) days after the end of the aforementioned thirty (30) day period. The parties hereto agree to use their good faith best efforts to arrive at the fair market sales price and a mutually acceptable purchase agreement for the Building. In the event that the parties hereto have not agreed upon a sale price and entered into a purchase agreement by the expiration of the Negotiation Period, Landlord shall deliver to Tenant a written statement indicating the final sale price, terms and conditions upon which Landlord is willing to sell the Building ("First Offer Price") and thereafter Landlord may enter into negotiations with third parties for the sale of the Building. In the event that Landlord subsequently negotiates a sale of the Building to a third party at a certain sale price (the "Third Party Price"), with certain terms and conditions (the "Third Party Terms"), and the Third Party Price is more than five percent (5%) less than the First Offer Price, Landlord shall be required to re-offer the Building to Tenant at the Third Party Price with the Third Party Terms. Tenant shall thereafter have five (5) business days to notify Landlord in writing of its acceptance or rejection of the Third Party Price. Failure of Tenant to so notify Landlord within such five (5) business day period shall be deemed Tenant's rejection of the Third Party Price. 62 58. ARBITRATION In the event of any dispute under this Lease, but excluding any dispute as to whether any action or inaction by either party constitutes a default under this Lease, the parties hereby agree to submit such claims and controversies to arbitration in San Jose, California, according to the rules and practices of the American Arbitration Association from time to time in force. Arbitration may proceed in the absence of either party if fifteen (15) days' notice of the proceedings has been given to such party. There shall be three (3) arbitrators: two (2) attorneys and/or retired judges, and one (1) certified public accountant. A decision agreed on by two (2) of the arbitrators shall be the decision of the arbitration panel. The parties agree to abide by all awards rendered in such proceedings. Any award shall include costs and reasonable attorneys' fees to the successful party. Such awards shall be final and binding on all parties. There shall be no appeal therefrom other than for fraud or misconduct. All awards may be filed with the clerk of one or more courts, State or Federal, having jurisdiction over the party against whom such an award is rendered or its property as a basis of judgment and of the issuance of execution for its collection. Nothing in this Lease shall be deemed to prevent the arbitration panel from exercising authority to permit exercise by a party of its legal remedies and it is understood by the parties that there is not intended in this Lease that there be a waiver of a party's right to any remedy which may not be enforced through arbitration, specifically including, but not by way of limitation, the right of setoff, injunctive relief or specific performance. LANDLORD: By: /s/ MICHEL KYAN ----------------------------------- Print Name: Michel Kyan --------------------------- Its: CEO ---------------------------------- By: /s/ WILLIAM J. RUEHLE ----------------------------------- Print Name: William J. Ruehle --------------------------- Its: VP & CFO ---------------------------------- 63 EXHIBIT A DESCRIPTION OF THE LAND All that certain real property situate in the City of San Jose, County of Santa Clara, State of California, described as follows: PARCEL 2, as shown on that Parcel Map filed for record in the office of the Recorder of the County of Santa Clara, State of California on October 30, 1989 in Book 607 of Maps, Pages 12 and 13. 64 EXHIBIT B SITE PLAN 65 EXHIBIT C COMMENCEMENT AND EXPIRATION DATE MEMORANDUM LANDLORD: TENANT: LEASE DATE: February __, 2000 PREMISES: Located at Tenant hereby accepts the Premises as being in the condition required under the Lease, with all Tenant Improvements completed (except for minor punchlist items which Landlord agrees to complete). The Commencement Date of the Lease is hereby established as ____________, 2000 and the Expiration Date is _________________, ____. TENANT: By: ----------------------------------- Print Name: --------------------------- Its: ---------------------------------- Approved and Agreed: LANDLORD: - --------------------------------------, a ------------------------------------- By: ----------------------------------- Print Name: --------------------------- Its: ---------------------------------- 66 EXHIBIT D FORM OF ESTOPPEL CERTIFICATE ___________________________ (herein "Tenant") hereby certifies to and its successors and assigns that Tenant leases from ("Landlord") approximately _____ square feet of space (the "Premises") in __________ pursuant to that certain Lease Agreement dated ______ by and between Landlord and Tenant, as amended by ________________ (collectively, the "Lease"), a true and correct copy of which is attached hereto as Exhibit A. Tenant hereby certifies to _____________, that as of the date hereof: 1. The Lease is in full force and effect and has not been modified, supplemented or amended, except as set forth in the introductory paragraph hereof. 2. Tenant is in actual occupancy of the Premises under the Lease and Tenant has accepted the same. Landlord has performed all obligations under the Lease to be performed by Landlord, including, without limitation, completion of all tenant work required under the Lease and the making of any required payments or contributions therefor. Tenant is not entitled to any further payment or credit for tenant work. 3. The initial term of the lease commenced _________________ and shall expire ______________. Tenant has the following rights to renew or extend the term of the Lease or to expand the Premises: ________________________________________. 4. Tenant has not paid any rentals or other payments more than one (1) month in advance except as follows: _______________________. 5. Base Rent payable under the Lease is ____________. Base Rent and additional Rent have been paid through ___________________. There currently exists no claims, defenses, rights of set-off or abatement to or against the obligations of Tenant to pay Base Rent or Additional Rent or relating to any other term, covenant or condition under the Lease. 6. There are no concessions, bonuses, free months' rent, rebates or other matters affecting the rentals except as follows _____________________________ . 7. No security or other deposit has been paid with respect to the Lease except as follows: ________________________________________. 8. To Tenant's actual knowledge, Landlord is not currently in default under the Lease and there are no events or conditions existing which, with or without notice or the lapse of time, or both, could constitute a default of the Landlord under the Lease or entitle Tenant to offsets or defenses against the prompt payment of rent except as follows: ________________________________________. Tenant is not in default under any of the terms and conditions of the lease nor is there now any fact or condition which, with notice or lapse of time or both, will become such a default. 67 9. Tenant has not assigned, transferred, mortgaged or otherwise encumbered its interest under the lease, nor subleased any of the Premises nor permitted any person or entity to use the Premises except as follows: _______________________ 10. Tenant has no rights of first refusal or options to purchase the property of which the Premises is a part, except as set for the Lease. The Lease represents the entire agreement between the parties with respect to Tenant's right to use and occupy the Premises. Tenant acknowledges that the parties to whom this certificate is addressed will be relying upon the accuracy of this certificate in connection with their acquisition and/or financing of the Premises. IN WITNESS WHEREOF, Tenant has caused this certificate to be executed this day of ____________ , __ 2000. "TENANT" - --------------------------------------- By: ----------------------------------- Print Name: --------------------------- Its: ---------------------------------- 68 EXHIBIT E FORM OF SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT THIS AGREEMENT is dated the _____day of ____________, 19___, and is made between ________________________, a __________________ having a place of business and mailing address of _________________________________ ("Mortgagee"), and __________________, a _____________ having a place of business and mailing address of ______________________ ("Tenant"). RECITALS: II. Tenant has entered into a certain lease ("Lease") dated _____________, 20___, with _________________, as lessor ("Landlord") covering certain premises known as _______________________, being part of a premises commonly known as ________________________ and located in ______________________________ (the "Premises"). III. Mortgagee has agreed to make a mortgage loan in the amount of ____________ ($__________) Dollars (together with all amendments, modifications, supplements, renewals, extensions, spreaders and consolidations thereto, the "Mortgage") to the Landlord, secured by the Premises, and the parties desire to set forth their agreement herein. NOW, THEREFORE, in consideration of the Premises, and of the sum of One Dollar ($1.00) by each party in hand paid to the other, the receipt of which is hereby acknowledged, the parties hereby agree as follows: A. Said Lease is and shall be subject and subordinate to the Mortgage insofar as it affects the real property of which the Premises form a part to the full extent of the amounts secured thereby and interest thereon. B. Tenant agrees that it will attorn to and recognize any purchaser at a foreclosure sale under the Mortgage, any transferee who acquires the Premises by deed in lieu of foreclosure, and the successors and assigns of such purchaser(s), as its landlord for the unexpired balance (and any extensions, if exercised) of the term of said Lease upon the same terms and conditions set forth in said Lease. C. If it becomes necessary to foreclose the Mortgage, Mortgagee will not terminate said Lease nor join Tenant in summary or foreclosure proceedings (unless such joinder shall be required to protect Mortgagee's interest under the Mortgage and in which case Mortgagee shall not seek affirmative relief from Tenant in such action or proceeding), and so long as Tenant is not in default under any of the terms, covenants, or condition of said Lease beyond all applicable notice and cure periods, this Lease and all of the terms, provisions, and conditions of this Lease, shall remain in full force and effect, and neither this Lease, nor Tenant's rights nor Tenant's 69 possession of the Premises will be disturbed during the Term of this Lease or any extension thereof D. If Mortgagee succeeds to the interest of Landlord under the Lease, Mortgagee shall not be: 1. liable for any act or omission of any prior landlord (including Landlord) except to the extent such Landlord default continues uncured after Mortgagee's taking ownership of the Premises and is susceptible of cure by Mortgagee; or 2. liable for the return of any security deposit not actually received by Mortgagee; or 3. subject to any offsets or defenses which Tenant might have against any prior landlord (including Landlord) provided that Tenant shall have the right to offset against rent any unfunded Tenant Allowance owing to Tenant; or 4. bound by any rent or additional rent which Tenant might have paid for more than the current month to any prior landlord (including Landlord) without Mortgagee's consent and except as expressly required under the Lease; or 5. bound by any amendment, modification, extensions or renewal of the Lease made without Mortgagee's consent; or 6. bound by any representation or warranty made by any prior landlord (including Landlord) without Mortgagee's consent. E. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their successors and assigns. F. Tenant agrees to give Mortgagee, by registered or certified mail, return receipt requested, a copy of any notice of default served upon Landlord, provided that prior to such notice Tenant has been notified in writing (by way of Notice of Assignment of Rent and Leases, or otherwise) of the address of such Mortgagee. Tenant further agrees that Tenant shall not terminate the Lease nor abate rents thereunder or claim an offset against rents thereunder unless notice has been given to Mortgagee and Mortgagee has been given a reasonable period of time (including a period of time to commence and complete a foreclosure proceeding, if foreclosure is necessary to cure such default) to cure such default. G. Tenant acknowledges that it has notice that Landlord's interest under the Lease and the rents thereunder have been collaterally assigned to Mortgagee as part of the security for the obligations secured by the Mortgage. Notice from Mortgagee to Tenant directing payment of rent and all other sums due under the Lease shall have the same effect under the Lease as a notice to Tenant from Landlord and Tenant agrees to be bound by such notice. In the event of any conflict or inconsistency between a notice from Landlord and a notice from Mortgagee, the notice from Mortgagee shall control. 70 H. This Agreement shall not be modified, amended or terminated except by a writing duly executed by the party against whom the same is sought to be enforced. I. This Agreement shall be governed by and construed in accordance with the internal laws (as opposed to the laws of conflicts) of the state in which the Premises are located. IN WITNESS WHEREOF, the parties hereto have executed these presents as of the day and year first above written. Mortgagee: Date: --------------------------------- By: ----------------------------------- Its: ---------------------------------- Address: ------------------------------ Tenant: By: ----------------------------------- Print Name: --------------------------- Its: ---------------------------------- 71 EXHIBIT F HAZARDOUS MATERIAL DISCLOSURE 72 EXHIBIT G PERMITTED HAZARDOUS MATERIALS 73 EX-10.18 4 a78920ex10-18.txt EXHIBIT 10.18 Exhibit 10.18 LEASE AGREEMENT BETWEEN Sobrato Interests a California Limited Partnership and Broadcom Corporation a California corporation November 20, 2000 LEASE BETWEEN SOBRATO INTERESTS AND BROADCOM CORPORATION
SECTION..........................................................................PAGE # Parties...............................................................................1 Premises..............................................................................1 Use...................................................................................1 Permitted Uses.....................................................................1 Uses Prohibited....................................................................2 Advertisements and Signs...........................................................2 Covenants, Conditions and Restrictions.............................................2 Parking............................................................................2 Term and Rental.......................................................................2 Base Monthly Rent..................................................................2 Late Charges.......................................................................3 Security Deposit...................................................................4 Construction..........................................................................4 Landlord's Obligations.............................................................4 Tenant Improvement Plans...........................................................5 Tenant Improvement Costs...........................................................5 Construction.......................................................................6 Insurance..........................................................................6 Punch List & Warranty..............................................................6 Other Work by Tenant...............................................................6 Acceptance of Possession and Covenants to Surrender...................................6 Delivery and Acceptance............................................................6 Condition Upon Surrender...........................................................6 Failure to Surrender...............................................................7 Alterations and Additions.............................................................7 Tenant's Alterations...............................................................7 Free From Liens....................................................................8 Compliance With Governmental Regulations...........................................8 Back-Up Generator..................................................................8 Communications and Power Conduits and Equipment....................................9 Maintenance of Premises..............................................................10 Landlord's Obligations............................................................10 Tenant's Obligations..............................................................10 Landlord and Tenant's Obligations Regarding Reimbursable Operating Costs..........11 Reimbursable Operating Costs......................................................11 Tenant's Allocable Share..........................................................12
Page i Waiver of Liability...............................................................13 Audit Rights......................................................................13 Hazard Insurance.....................................................................13 Tenant's Use......................................................................13 Landlord's Insurance..............................................................14 Tenant's Insurance................................................................14 Waiver............................................................................14 Taxes................................................................................14 Utilities............................................................................15 Toxic Waste and Environmental Damage.................................................15 Tenant's Responsibility...........................................................15 Tenant's Indemnity Regarding Hazardous Materials..................................16 Actual Release by Tenant..........................................................16 Environmental Monitoring..........................................................17 Landlord's Indemnity Regarding Hazardous Materials................................17 Tenant's Default.....................................................................18 Remedies..........................................................................18 Right to Re-enter.................................................................19 Abandonment.......................................................................19 No Termination....................................................................19 Non-Waiver........................................................................19 Performance by Landlord...........................................................20 Habitual Default..................................................................20 Landlord's Liability................................................................20 Limitation on Landlord's Liability................................................20 Limitation on Tenant's Recourse...................................................21 Indemnification of Landlord.......................................................21 Destruction of Premises..............................................................21 Landlord's Obligation to Restore..................................................21 Limitations on Landlord's Restoration Obligation..................................21 Condemnation.........................................................................22 Assignment or Sublease...............................................................22 Consent by Landlord...............................................................22 Assignment or Subletting Consideration............................................23 No Release........................................................................23 Reorganization of Tenant..........................................................24 Permitted Transfers...............................................................24 Effect of Default.................................................................24 Effects of Conveyance.............................................................25 Successors and Assigns............................................................25 Customer Equipment................................................................25 Option to Extend the Lease Term......................................................25 Grant and Exercise of Option......................................................25 Determination of Fair Market Rental...............................................26 Resolution of a Disagreement over the Fair Market Rental..........................26 Personal to Tenant................................................................27 General Provisions...................................................................27 Attorney's Fees...................................................................27

Page ii Authority of Parties..............................................................27 Brokers...........................................................................27 Choice of Law.....................................................................27 Dispute Resolution................................................................27 Entire Agreement..................................................................29 Entry by Landlord.................................................................29 Estoppel Certificates.............................................................29 Exhibits..........................................................................29 Interest..........................................................................29 Modifications Required by Lender..................................................30 No Presumption Against Drafter....................................................30 Notices...........................................................................30 Property Management...............................................................30 Rent..............................................................................30 Representations...................................................................30 Rights and Remedies...............................................................30 Severability......................................................................31 Submission of Lease...............................................................31 Subordination.....................................................................31 Survival of Indemnities...........................................................31 Time..............................................................................31 Transportation Demand Management Programs.........................................31 Waiver of Right to Jury Trial.....................................................32 General Provisions...................................................................32 Grant.............................................................................32 Exclusions........................................................................32 Nortel Sublease...................................................................33 EXHIBIT A - Premises, Building & Project.............................................35 EXHIBIT B - Draft Letter of Credit...................................................36 EXHIBIT C - Therma Mechanical Report.................................................37 EXHIBIT D - Nortel Sublease Space....................................................38

Page iii 1. PARTIES: THIS LEASE, is entered into on this 20th day of November 2000, ("Effective Date") between Sobrato Interests, a California Limited Partnership, whose address is 10600 North De Anza Boulevard, Suite 200, Cupertino, CA 95014, and Broadcom Corporation, a California Corporation, whose address is 16215 Alton Parkway, Irvine, California, 92618, hereinafter called respectively Landlord and Tenant. 2. PREMISES: Landlord hereby leases to Tenant, and Tenant hires from Landlord those certain Premises with the appurtenances, situated in the City of Santa Clara, County of Santa Clara, State of California, commonly known and designated as 2451-2465 Mission College Boulevard consisting of a three story building of 136,708 rentable square feet ("Building") as outlined in red on Exhibit "A" attached hereto, and all improvements located therein including but not limited to parking areas and structures, landscaping, loading docks, sidewalks, service areas and other facilities. The Building is situated within a project site shared with three additional buildings owned by Landlord as outlined in green on Exhibit "A" ("Project"). Tenant shall be entitled to use (on a non-assigned basis) its Allocable Share (as defined in Lease section 8.E. below) of the parking stalls within the project, which shall not be less than 460 parking spaces. Notwithstanding the foregoing, Tenant shall be allowed to designate approximately 35 parking stalls for Tenant's exclusive use near the lobby of the Building in the location depicted on Exhibit "A". Tenant acknowledges Landlord's right to and hereby consents to construction of additional building(s) within the Project or on adjacent land owned by Landlord. The Building has the address and contains the square footage specified above; provided, however, that any statement of square footage set forth in this Lease, or that may have been used in calculating any of the economic terms hereof is an approximation which Landlord and Tenant agree is reasonable and no economic terms based thereon shall be subject to revision whether or not the actual square footage is more or less. Tenant's leasehold interest in the Premises, which is the entire Building, includes, without limitation, the utility raceways and risers and the rooftop of such Building. Notwithstanding the foregoing, Tenant agrees and acknowledges that Landlord shall have non-exclusive access to and use of any and all mechanical, electrical, telephone and similar rooms, janitor closets, elevators, pipe and other vertical shafts and ducts, flues and stairwells of the Building, to the extent that such access and use is required (A) to comply with Landlord's obligations under this Lease, (B) to enforce Landlord's rights under this Lease and (C) to otherwise protect Landlord's interest in the Building. In connection with any of the foregoing activities of Landlord, Landlord shall use reasonable efforts while conducting such activities to minimize any interference with Tenant's use and occupancy of the Premises. 3. USE: A. PERMITTED USES: Tenant shall use the Premises as permitted under applicable zoning laws only for the following purposes and shall not change the use of the Premises without the prior written consent of Landlord: Office, research and development, marketing, light manufacturing, incidental warehouse, ancillary storage, electronics labs, and other incidental Page 1 uses. Tenant shall use only the number of parking spaces allocated to Tenant under this Lease. All commercial trucks and delivery vehicles shall (i) be parked at the rear of the Building, (ii) loaded and unloaded in a manner which does not interfere with the businesses of other occupants of the Project, and (iii) permitted to remain within the Project only so long as is reasonably necessary to complete the loading and unloading. Landlord makes no representation or warranty that any specific use of the Premises desired by Tenant is permitted pursuant to any Laws. B. USES PROHIBITED: Tenant shall not commit or suffer to be committed on the Premises any waste, nuisance, or other act or thing which may disturb the quiet enjoyment of any other tenant in or around the Premises, nor allow any sale by auction or any other use of the Premises for an unlawful purpose. Tenant shall not (i) damage or overload the electrical, mechanical or plumbing systems of the Premises, (ii) attach, hang or suspend anything from the ceiling, walls or columns of the building (except for decorations and wall hangings typically found in buildings with similar permitted uses) or set any load on the floor in excess of the load limits for which such items are designed, or (iii) generate dust, fumes or waste products which create a fire or health hazard or damage the Premises or any portion of the Project, including without limitation the soils or ground water in or around the Project. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature, or any waste materials, refuse, scrap or debris, shall be stored upon or permitted to remain on any portion of the Premises outside of the Building without Landlord's prior approval, which approval may be withheld in its sole discretion. C. ADVERTISEMENTS AND SIGNS: Tenant will not place or permit to be placed, in, upon or about the Premises any signs not approved by the city and other governing authority having jurisdiction. Tenant will not place or permit to be placed upon the Premises any signs, advertisements or notices without the written consent of Landlord as to type, size, design, lettering, coloring and location, which consent will not be unreasonably withheld, conditioned or delayed; provided, however, that Tenant shall have the exclusive right to place signs on the exterior of the Building, and the non-exclusive right to place signs on monuments of the Project, subject to Landlord's consent as provided herein. Any sign placed on the Premises shall be removed by Tenant, at its sole cost, prior to the Expiration Date or promptly following the earlier termination of the Lease, and Tenant shall repair, at its sole cost, any damage or injury to the Premises caused thereby, and if not so removed, then Landlord may have same so removed at Tenant's expense. D. COVENANTS, CONDITIONS AND RESTRICTIONS: This Lease is subject to the effect of (i) any covenants, conditions, restrictions, easements, mortgages or deeds of trust, ground leases, rights of way of record and any other matters or documents of record; and (ii) any zoning laws of the city, county and state where the Building is situated (collectively referred to herein as "Restrictions") and Tenant will conform to and will not violate the terms of any such Restrictions. E. PARKING:: No charge or fee (other than rent payable hereunder, and except as required by law) shall be imposed in exchange for the right of Tenant and its employees, invitees and contractors to have access to or from, or to park in, the parking areas of the Project during the Term of this Lease. 4. TERM AND RENTAL: A. BASE MONTHLY RENT: The term ("Lease Term") shall be for ninety six (96) months, commencing on March 1, 2001 (the "Commencement Date") and ending on February 28, 2009, ("Expiration Date"). Notwithstanding the parties' agreement that the Lease Term begins on the Commencement Date, this Lease and all of the obligations of Landlord and Tenant shall be binding and in full force and effect from and after the Effective Date. In addition to all other sums payable by Tenant Page 2 under this Lease, Tenant shall pay base monthly rent ("Base Monthly Rent") for the Premises according to the following schedule: Months 01-12: $751,894.00 per month $5.50 psf Months 13-24: $781,969.76 per month $5.72 psf Months 25-36: $813,412.60 per month $5.95 psf Months 37-48: $846,222.52 per month $6.19 psf Months 49-60: $879,032.44 per month $6.43 psf Months 61-72: $914,576.52 per month $6.69 psf Months 73-84: $951,487.68 per month $6.96 psf Months 85-96: $989,765.92 per month $7.24 psf Base Monthly Rent shall be due in advance on or before the first day of each calendar month during the Lease Term. All sums payable by Tenant under this Lease shall be paid to Landlord in lawful money of the United States of America, without offset or deduction and without prior notice or demand, at the address specified in Section 1 of this Lease or at such place or places as may be designated in writing by Landlord during the Lease Term. Base Monthly Rent for any period less than a calendar month shall be a pro rata portion of the monthly installment. Concurrently with Tenant's execution of this Lease, Tenant shall pay to Landlord the sum of Seven Hundred Fifty One Thousand Eight Hundred Ninety Four and No/100 Dollars ($751,894.00) as prepaid rent for the first month of the Lease. Notwithstanding the Commencement Date, Tenant shall have the right, but not the obligation, upon Tenant's receipt of a temporary certificate of occupancy (or its legal equivalent), to take early occupancy before the Commencement Date, of all or any portion of the Premises for the Permitted Use and to enable Tenant and its contractors to install the Initial Improvements described in Section 5 below, equipment, trade fixtures, furnishings and decorations in the Premises ("Early Occupancy"). Such Early Occupancy shall not change the Term Commencement Date or Term Expiration Date. Tenant's occupancy of the Premises under this Section 3(b) shall be upon all the terms, covenants and conditions contained in the Lease, except that Tenant shall only be obligated to pay Base Monthly Rent and Tenant's Allocable Share of Reimbursable Operating Costs during any Early Occupancy based on that portion of the Premises that Tenant is actually occupying for the conduct of Tenant's business. B. LATE CHARGES: Tenant hereby acknowledges that late payment by Tenant to Landlord of Base Monthly Rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which is extremely difficult to ascertain. Such costs include but are not limited to: administrative, processing, accounting, and late charges which may be imposed on Landlord by the terms of any contract, revolving credit, mortgage, or trust deed covering the Premises. Accordingly, if any installment of Base Monthly Rent or other sum due from Tenant shall not be received by Landlord or its designee within five (5) business days after the date the rent is due, Tenant shall pay to Landlord a late charge equal to five (5%) percent of such overdue amount, which late charge shall be due and payable on the same date that the overdue amount was due. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant, excluding interest and attorneys fees and costs. Notwithstanding the foregoing, upon the first failure of Tenant to make timely payment in any calendar year of the Term, Tenant shall not be liable for such late charge if Tenant pays such overdue amount to Landlord within three (3) business days after receipt of written notice that such amount was not received when due. If any rent or other sum due from Tenant remains delinquent for a period in excess of thirty (30) days then, in addition to such late charge, Tenant shall pay to Landlord interest on any rent that is not paid when due at the Agreed Interest Rate specified in Section 19.J following the date such amount became due until paid. Acceptance by Landlord of such late charge shall not constitute a waiver of Tenant's default with respect to such overdue amount nor prevent Landlord from exercising any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for Page 3 three (3) consecutive installments of Base Monthly Rent, then the Base Monthly Rent shall automatically become due and payable quarterly in advance, rather than monthly, notwithstanding any provision of this Lease to the contrary. C. SECURITY DEPOSIT: Prior to March 1, 2005, Tenant shall deposit with Landlord the sum of Seven Hundred Fifty One Thousand Eight Hundred Ninety Four and No/100 Dollars ($751,894.00) ("Security "Deposit"). Landlord shall not be deemed a trustee of the Security Deposit, may use the Security Deposit in business, and shall not be required to segregate it from its general accounts. Tenant shall not be entitled to interest on the Security Deposit. If Tenant defaults with respect to any provisions of the Lease, including but not limited to the provisions relating to payment of Base Monthly Rent or other charges, Landlord may, after the expiration of all applicable notice and cure periods, to the extent reasonably necessary to remedy Tenant's default, use any or all of the Security Deposit towards payment of the following: (i) Base Monthly Rent or other charges in default; (ii) any other amount which Landlord may spend or become obligated to spend by reason of Tenant's default including, but not limited to Tenant's failure to restore or clean the Premises following vacation thereof. If any portion of the Security Deposit is so used or applied, Tenant shall, within ten (10) business days after written demand from Landlord, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its full original amount, and shall pay to Landlord such other sums as necessary to reimburse Landlord for any sums paid by Landlord. If Tenant shall default more than three (3) times in any twelve (12) month period, irrespective of whether or not such default is cured, then the Security Deposit shall, within ten (10) days after demand by Landlord, be increased by Tenant to an amount equal to three (3) times the Base Monthly Rent. Tenant may not assign or encumber the Security Deposit without the consent of Landlord. Any attempt to do so shall be void and shall not be binding on Landlord. The Security Deposit shall be returned to Tenant within thirty (30) days after the Expiration Date and surrender of the Premises to Landlord, less any amount deducted in accordance with this Section, together with Landlord's written notice itemizing the amounts and purposes for such deduction. In the event of termination of Landlord's interest in this Lease, Landlord may deliver or credit the Security Deposit to Landlord's successor in interest in the Premises and thereupon be relieved of further responsibility with respect to the Security Deposit provided such successor assumes, in writing, Landlord's obligations with respect to such Security Deposit. Landlord agrees that in lieu of a cash Security Deposit, Tenant may deposit a letter of credit ("Letter of Credit") substantially in the form attached hereto as Exhibit "B". Landlord shall be entitled to draw against the Letter of Credit at any time provided only that Landlord certifies to the issuer of the Letter of Credit that Tenant is in default under the Lease. Tenant shall keep the letter of credit in effect during the entire Lease Term, as the same may be extended, plus a period of four (4) weeks after expiration of the Lease Term. At least thirty (30) days prior to expiration of any Letter of Credit, the term thereof shall be renewed or extended for a period of at least one (1) year. Tenant's failure to so renew or extend the Letter of Credit shall be a material default of this Lease by Tenant. In the event Landlord draws against the Letter of Credit, Tenant shall replenish the existing Letter of Credit or cause a new Letter of Credit to be issued such that the aggregate amount of letters of credit available to Landlord at all times during the Lease Term is the amount of the Security Deposit originally required. 5. CONSTRUCTION: A. LANDLORD'S OBLIGATIONS: Landlord shall ensure that the existing Building systems are in good operating condition and repair including the plumbing, sprinklers, electrical (including panels and outlets), and doors (both shipping and personnel) With regard to the HVAC systems, Landlord agrees perform the work specified in the inspection report issued by Page 4 Therma Mechanical dated July 20, 2000 and attached as Exhibit "C" necessary to put such systems into good condition and repair. B. TENANT IMPROVEMENT PLANS: Tenant, at Tenant's sole cost and expense, shall retain an interior architect ("Architect") to prepare plans and outline specifications to be attached as Exhibit "C" ("Tenant Improvement Plans and Specifications") with respect to the construction of initial interior improvements to the Premises ("Tenant Improvements"). The Tenant Improvement Plans and Specifications shall be completed for all aspects of the work (either in one package or in phases as provided below) by June 30, 2001 with all detail necessary for submittal to the city, within three (3) days thereafter, for issuance of building permits and for construction, and shall include any information required by the relevant agencies regarding Tenant's use of Hazardous Materials if applicable. The Tenant Improvements shall: (i) be reasonably compatible with (and not damaging to) the structural, mechanical, electrical, plumbing and other systems of the Building, (ii) not materially adversely impact (in Landlord's reasonable judgment) the exterior appearance or operations of the Building, the currently existing interior improvements in the Building, or the appearance or operations of the public areas of the Building and (iii) comply with all any law, statute, ordinance, order, rule, regulation or requirement of any governmental or quasi-governmental authority. All Tenant Improvements shall be subject to Landlord's reasonable approval, which shall not be unreasonably withheld or delayed beyond five (5) business days following receipt of Tenant's Plans and Specifications, provided the above conditions are met. Landlord's failure to approve, or reasonably disapprove, the Tenant Improvement Plans and Specifications (or revised Plans and Specifications) within five (5) business days following Landlord's receipt thereof shall be deemed Landlord's approval. The Tenant Improvement Plans and Specifications shall include all detail required by the City of Santa Clara necessary to obtain a Certificate of Occupancy. Construction of the Tenant Improvements shall be performed by a general contractor ("General Contractor") selected by Tenant, subject to Landlord's reasonable approval. Tenant shall not be required to use union labor as a condition of receiving Landlord's approval hereunder. The Tenant Improvement Plans and Specifications shall be prepared in sufficient detail to allow General Contractor to construct the Tenant Improvements. The Tenant shall contract directly with General Contractor for construction of the Tenant Improvements and shall cause the General Contractor to construct the Tenant Improvements in accordance with all Tenant Improvement Plans and Specifications. Tenant shall have no obligation to remove the Tenant Improvements at the expiration or earlier termination of the Lease. The Tenant Improvements (other than Tenant's trade fixtures, equipment and furnishings and other personal property of Tenant that can be removed without permanent damage to the Premises) shall not be removed or altered by Tenant without the prior written consent of Landlord as provided in Section 7. Tenant shall have the right to depreciate and claim and collect any investment tax credits in the Tenant Improvements during the Lease Term. Upon expiration of the Lease Term or any earlier termination of the Lease, the Tenant Improvements (other than Tenant's trade fixtures, equipment and furnishings and other personal property of Tenant that can be removed without permanent damage to the Premises) shall become the property of Landlord and shall remain upon and be surrendered with the Premises, and title thereto shall automatically vest in Landlord without any payment therefore. C. TENANT IMPROVEMENT COSTS: Tenant shall pay all costs associated with the Tenant Improvements. The cost of Tenant Improvements shall include the following to the extent actually incurred by Tenant or General Contractor in connection with the construction of Tenant Improvements: architectural design fees, construction costs, all permit fees, and construction taxes or other costs imposed by governmental authorities related to the Tenant Improvements. Landlord shall not charge Page 5 Tenant any fee of any kind for its involvement in the construction or design of the Tenant Improvement, other than the out-of-pocket costs paid to professional consultants for review of the Tenant Improvement Plans and Specifications, and any revisions thereto. Tenant shall pay directly to the General Contractor all amounts due pursuant to the construction of Tenant Improvements. D. CONSTRUCTION: Tenant shall diligently supervise the construction of Tenant Improvements until they are substantially complete as hereinafter defined. The Tenant Improvements shall be deemed substantially complete ("Substantially Complete" or "Substantial Completion") when the Tenant Improvements have been substantially completed in accordance with the Tenant Improvement Plans and Specifications, as evidenced by the completion of a final inspection or the issuance of a certificate of occupancy or its equivalent by the appropriate governmental authority, and the issuance of a certificate by the Architect certifying that the Tenant Improvements have been completed in accordance with the plans. Installation of Tenant's data and phone cabling and furniture shall not be required in order to deem the Premises Substantially Complete. E. INSURANCE: General Contractor shall procure builder's risk insurance for the full replacement cost of the Tenant Improvements while the Tenant Improvements are under construction, up until the date that the casualty insurance policy described in Section 9 is in full force and effect. F. PUNCH LIST & WARRANTY: After the Tenant Improvements are Substantially Complete, Tenant shall cause the General Contractor to immediately correct any construction defects or other "punch list" items which require attention. The General Contractor shall provide a standard contractor's warranty with respect to the Tenant Improvements for one (1) year from the Commencement Date. Such warranty shall exclude routine maintenance, damage caused by Tenant's negligence or misuse, and acts of God. G. OTHER WORK BY TENANT: All work not described in the Tenant Improvement Plans and Specifications, such as furniture, telephone equipment, telephone wiring and office equipment work, shall be furnished and installed by Tenant at Tenant' cost. Prior to Substantial Completion, Tenant shall be obligated to contract with a firm to monitor the fire system. 6. ACCEPTANCE OF POSSESSION AND COVENANTS TO SURRENDER: A. DELIVERY AND ACCEPTANCE: On the Commencement Date, Landlord shall deliver and Tenant shall accept possession of the Premises and enter into occupancy of the Premises on the Commencement Date. Tenant acknowledges that it has had an opportunity to conduct, and has conducted, such inspections of the Premises as it deems necessary to evaluate its condition. Except as otherwise specifically provided herein, Tenant agrees to accept possession of the Premises in its then existing condition, subject to all Restrictions and without representation or warranty by Landlord. B. CONDITION UPON SURRENDER: Tenant further agrees on the Expiration Date or on the sooner termination of this Lease, to surrender the Premises to Landlord in good condition and repair, normal wear and tear excepted. In this regard, "normal wear and tear" shall be construed to mean wear and tear caused to the Premises by the natural aging process which occurs in spite of prudent application of the best commercially reasonable standards for maintenance, repair replacement, and janitorial practices, and does not include items of neglected or deferred maintenance. In any event, Tenant shall cause the following to be done prior to the Expiration Date or sooner termination of this Lease: (i) all interior walls shall be repaired, patched, cleaned, and otherwise made paint-ready, (ii) all tiled floors shall be cleaned and waxed, (iii) all carpets shall be cleaned and shampooed, (iv) all broken, marred, stained or nonconforming acoustical Page 6 ceiling tiles shall be replaced except to the extent such staining or discoloration is attributable to Landlord's failure to maintain the Building to the extent required by Section 8.A. of this Lease, (v) all cabling placed above the ceiling by Tenant or Tenant's contractors shall be removed unless such cabling has been properly suspended in accordance with applicable code and is not weighing on the ceiling, (vi) all windows shall be washed; (vii) the HVAC system shall be serviced by a reputable and licensed service firm and left in "good operating condition and repair" as so certified by such firm, (viii) the plumbing and electrical systems and lighting shall be placed in good order and repair (including replacement of any burned out, discolored or broken light bulbs, ballasts, or lenses. On or before the Expiration Date or sooner termination of this Lease, Tenant shall remove all its personal property and trade fixtures from the Premises. All property and fixtures not so removed shall be deemed as abandoned by Tenant. Tenant shall ascertain from Landlord within ninety (90) days before the Expiration Date whether Landlord desires to have any Alterations made by Tenant (as defined in Section 7) removed and the Premises or any parts thereof restored to a standard open office plan with materials and finishes consistent with the other open office areas with the Premises, or to cause Tenant to surrender all Alterations in place to Landlord. If Landlord shall so desire, Tenant shall, at Tenant's sole cost and expense, remove such Alterations as Landlord requires and shall repair and restore said Premises or such parts thereof before the Expiration Date. Such repair and restoration shall include causing the Premises to be brought into compliance with all applicable building codes and laws in effect at the time of the removal to the extent such compliance is necessitated by the repair and restoration work. C. FAILURE TO SURRENDER: If the Premises are not surrendered at the Expiration Date or sooner termination of this Lease in the condition required by this Section 6, Tenant shall be deemed in a holdover tenancy pursuant to this Section 6.C and Tenant shall indemnify, defend, and hold Landlord harmless against loss or liability resulting from delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay and costs incurred by Landlord in returning the Premises to the required condition, plus interest at the Agreed Interest Rate. Any holding over after the termination or Expiration Date with Landlord's express written consent, shall be construed as month-to-month tenancy, terminable on thirty (30) days written notice from either party, and Tenant shall pay as Base Monthly Rent to Landlord a rate equal to one hundred twenty five percent (125%) of the Base Monthly Rent due in the month preceding the termination or Expiration Date, plus all other amounts payable by Tenant under this Lease. Any holding over shall otherwise be on the terms and conditions herein specified, except those provisions relating to the Lease Term and any options to extend or renew, which provisions shall be of no further force and effect following the expiration of the applicable exercise period. If Tenant remains in possession of the Premises after the Expiration Date or sooner termination of this Lease without Landlord's consent, Tenant's continued possession shall be on the basis of a tenancy at sufferance and Tenant shall pay as rent during the holdover period an amount equal to one hundred fifty percent (150%) of the Base Monthly Rent due in the month preceding the termination or Expiration Date, plus all other amounts payable by Tenant under this Lease. This provision shall survive the termination or expiration of the Lease. 7. ALTERATIONS AND ADDITIONS: A. TENANT'S ALTERATIONS: Tenant shall not make, or suffer to be made, any alteration or addition to the Premises ("Alterations"), or any part thereof, without obtaining Landlord's prior written consent and delivering to Landlord the proposed architectural and structural plans for all such Alterations at least fifteen (15) days prior to the start of construction. If such Alterations affect the structure of the Building, Tenant additionally agrees to reimburse Landlord its reasonable out-of-pocket costs incurred in reviewing Tenant's plans. After Page 7 obtaining Landlord's consent, which consent shall state whether or not Landlord will require Tenant to remove such Alteration at the expiration or earlier termination of this Lease, Tenant shall not proceed to make such Alterations until Tenant has obtained all required governmental approvals and permits, and provides Landlord reasonable security, in form reasonably approved by Landlord, to protect Landlord against mechanics' lien claims. Tenant agrees to provide Landlord (i) written notice of the anticipated and actual start-date of the work, (ii) a complete set of half-size (15" X 21") vellum as-built drawings, and (iii) a certificate of occupancy for the work upon completion of the Alterations. All Alterations shall be constructed in compliance with all applicable building codes and laws including, without limitation, the Americans with Disabilities Act of 1990 as amended from time to time. Upon the Expiration Date, all Alterations, except movable furniture and trade fixtures, shall become a part of the realty and belong to Landlord but shall nevertheless be subject to removal by Tenant as provided in Section 6 above. Alterations which are not deemed as trade fixtures include heating, lighting, electrical systems, air conditioning, walls, carpeting, or any other installation which has become an integral part of the Premises. Landlord approves Tenant's right to finance and to secure under the California Uniform Commercial Code, Tenant's trade fixtures, equipment and other personal property which may be affixed to the Premises, and Landlord shall reasonably cooperate with the requests of any lessors of, or lenders holding a security interest in, such trade fixtures and equipment, provided that such cooperation does not materially affect Landlord's rights under this Lease. All Alterations shall be maintained, replaced or repaired by Tenant at its sole cost and expense. Notwithstanding the foregoing, Tenant shall be entitled, without obtaining Landlord's consent, to make Alterations which do not affect the structure of the Building and which do not cost more than Fifty Thousand Dollars ($50,000.00) per Alteration ("Permitted Alterations"); provided, however, that: (i) Tenant shall still be required to comply with all other provisions of this paragraph; and (ii) such Permitted Alterations are subject to removal by Tenant at Landlord's election pursuant to Section 6.B. above at the expiration or earlier termination of the Lease. B. FREE FROM LIENS: Tenant shall keep the Premises free from all liens arising out of work performed, materials furnished, or obligations incurred by Tenant or claimed to have been performed for Tenant. In the event Tenant fails to discharge any such lien within ten (10) days after receiving notice of the filing, Landlord shall be entitled to discharge the lien at Tenant's expense and all resulting costs incurred by Landlord, including attorney's fees shall be due from Tenant as additional rent. C. COMPLIANCE WITH GOVERNMENTAL REGULATIONS: The term Laws or Governmental Regulations shall include all federal, state, county, city or governmental agency laws, statutes, ordinances, standards, rules, requirements, or orders now in force or hereafter enacted, promulgated, or issued. The term also includes government measures regulating or enforcing public access, traffic mitigation, occupational, health, or safety standards for employers, employees, landlords, or tenants. Tenant, at Tenant's sole expense shall make all repairs, replacements, alterations, or improvements to the Premises (other than repairs, replacements, Alterations or improvements to the structural portions of the Building and the Common Areas of the Project unless such are required due to Tenant's specific use, occupancy or Alterations) needed to comply with all Governmental Regulations. The judgment of any court of competent jurisdiction or the admission of Tenant in any action or proceeding against Tenant (whether Landlord be a party thereto or not) that Tenant has violated any such law, regulation or other requirement in its use of the Premises shall be conclusive of that fact as between Landlord and Tenant. D. BACK-UP GENERATOR: Tenant shall have the right, subject to Landlord's prior written Page 8 consent (which consent shall be subject to the terms in this Section 7.C. but which shall not otherwise be unreasonably withheld, conditioned or delayed) to install one 300 KW back-up electrical generator, together with reasonably necessary connections from the location of such generator to the Premises and related above-ground diesel fuel storage tanks (collectively, "Generator"), either in the parking lot area of the Common Area or on the roof of the Building in a location reasonably designated by Landlord and reasonably acceptable to Tenant. Without otherwise limiting the criteria upon which Landlord may withhold its consent to any proposed Generator, withholding of consent shall be presumptively reasonable if Landlord withholds its consent due to concerns regarding the appearance of the Generator, its impact on structural aspects of the Building or Common Area improvements, ventilation concerns, or actual or potential loss of any parking spaces or areas for the Project due to installation of the Generator, provided that if Tenant agrees to take steps (at Tenant's expense) to mitigate any such concerns raised by Landlord in a manner reasonably satisfactory to Landlord, Landlord shall grant its consent to the Generator subject to such mitigation. All locations or areas on the Building roof or within the Common Area where the Generator is located shall be provided by Landlord without additional rent. Tenant shall install the Generator at its sole expense and with components reasonably acceptable to Landlord, and shall be responsible for maintenance of the Generator, for compliance with all applicable Laws with respect to the Generator, and for any damage caused by the installation of the Generator or related to the Generator. At the end of the Term, Tenant shall remove the Generator from the Project and restore those affected areas of the Premises to their condition prior to the installation of the Generator. E. COMMUNICATIONS AND POWER CONDUITS AND EQUIPMENT: Notwithstanding the provisions of Section 7.A above, Tenant shall have the right, at its sole cost and expense, to trench in any exterior area within the boundaries of the Project reasonably approved by Landlord (which approval may be denied if such trenching adversely affects other Tenant's in the Project) for the purposes of "hard wiring" voice, data and power transmissions to the Building ("Conduit"), pursuant to reasonable specifications which have been approved in writing by Landlord and Tenant. At the end of the Term hereof, Tenant shall not be required to remove any properly installed underground Conduit. Tenant shall also have the exclusive right, at its sole cost and expense, to construct, maintain, operate and repair an equipment area outside of the Building, including, without limitation, the rooftop of the Building, which area shall include, without limitation, the following equipment and systems: UPS battery systems (the "Power Systems"), and antennae, satellite dishes and other communications systems and equipment ("Communications Systems"). All permits, application fees, and all costs associated with the Power and Communications Systems shall be Tenant's responsibility. Tenant, at its sole cost and expense, shall have the exclusive right to install, maintain, and from time to time replace all or a portion of the Power and Communications Systems on the roof of the Building, provided that prior to commencing any installation or maintenance, Tenant shall (i) obtain Landlord's prior approval (which approval shall not be unreasonably withheld, conditioned or delayed) of the proposed size, weight and location of such Power and Communications Systems and method for fastening such Power and Communications Systems to the roof, (ii) such installation and/or replacement shall comply strictly with all Laws and the conditions of any bond or warranty maintained by Landlord on the roof, and (iii) obtain, at Tenant's sole cost and expense, any necessary federal, state, and municipal permits, licenses and approvals, and deliver copies thereof to Landlord. Landlord may supervise any roof penetration related to the installation of any Power or Communications Systems, and Landlord may charge Landlord's reasonable out-of-pocket costs of any such supervision performed by a third-party consultant to Tenant. Tenant agrees that all installation, construction and maintenance shall be performed in a neat, Page 9 responsible, and workmanlike manner, using generally acceptable construction standards, consistent with such reasonable requirements as shall be imposed by Landlord. Tenant shall repair any damage to the Building caused by Tenant's installation, maintenance, replacement, use or removal of the Power and Communications Systems. The Power and Communications Systems shall be considered Tenant's Trade Fixtures (as defined below) and shall remain the property of Tenant, and Tenant may remove the Power and Communications Systems at its cost at any time during the Term. Tenant shall remove the Communications Systems at Tenant's cost and expense upon the expiration or termination of this Lease and shall restore the Building and Premises to their condition prior to the installation of the Communications Systems. Landlord makes no warranty or representation that the Building or any portions thereof are suitable for the use of the Power or Communications Systems, it being assumed that Tenant has satisfied itself thereof. Tenant shall protect, defend, indemnify and hold harmless Landlord and Landlord's Agents from and against claims, damages, liabilities, costs and expenses of every kind and nature, including attorneys' fees, incurred by or asserted against Landlord arising out of Tenant's installation, maintenance, replacement, use or removal of the Power and Communications Systems. 8. MAINTENANCE OF PREMISES: A. LANDLORD'S OBLIGATIONS: Landlord at its sole cost and expense, shall maintain in good condition, order, and repair, and replace as and when necessary, the foundation, footings, poured concrete floors, exterior walls, load bearing walls, and roof structure of the Building. Notwithstanding the foregoing, during the initial Term of this Lease, Landlord shall be obligated to perform and pay for the work of replacement of the roof membrane at the end of its useful life (as determined in accordance with Landlord's reasonable judgement and consistent with prudent standards for building owners in the San Jose area) at Landlord's sole cost and expense. If Landlord fails to reasonably act to perform its repair obligations of this Paragraph 8.A, and such failure materially affects Tenant's ability to use and occupy the Premises for the purposes permitted herein, Tenant shall have the right, but not the obligation, to perform such repairs and/or maintenance if such failure continues for more than ten (10) business days after written notice from Tenant; provided, however, that if the nature of the repairs and/or maintenance to be completed by Landlord is such that more than 10 business days are required to complete such repairs and/or maintenance, Landlord shall have such additional time as is reasonably necessary to complete such repairs and/or maintenance and thereafter diligently pursue such repairs and/or maintenance to completion. In such event, Landlord shall reimburse Tenant for the reasonable costs incurred by Tenant to complete such repairs and/or maintenance within thirty (30) days after receipt of Tenant's written demand therefore, together with copies of the paid invoices evidencing the costs incurred by Tenant. Any repairs and/or maintenance permitted herein shall be performed in a good and workmanlike manner by licensed contractors. If Landlord objects to the repairs and/or maintenance performed or the expenses incurred by Tenant in performing such work, Landlord shall deliver a written notice of Landlord's objection to Tenant within thirty (30) days after Landlord's receipt of Tenant's invoice evidencing the expenses incurred by Tenant. Landlord's notice shall set forth in reasonable detail Landlord's reasons for its claim that such repairs and/or maintenance were not required or were not Landlord's obligations in the terms of this lease and/or the reasons for Landlord's dispute of the expenses incurred by Tenant in performing such work. If Landlord and Tenant fail to resolve any such dispute within said thirty (30) day period, after Landlord has notified Tenant of Landlord's objections, the matter shall be resolved pursuant to Section 19.E. below. B. TENANT'S OBLIGATIONS: Except those items for which Landlord is obligated pursuant to Section 8.A. above, Tenant shall clean, Page 10 maintain, repair and replace when necessary the Premises and every part thereof through regular inspections and servicing, including but not limited to: (i) all plumbing and sewage facilities, (ii) all heating ventilating and air conditioning facilities and equipment, (iii) all fixtures, interior walls floors, carpets and ceilings, (iv) all windows, door entrances, plate glass and glazing systems including caulking, and skylights, (v) all electrical facilities and equipment, (vi) all automatic fire extinguisher equipment, (vii) the parking lot and all underground utility facilities servicing the Premises, (viii) all elevator equipment, (ix) the roof membrane system, and (x) all waterscape, landscaping and shrubbery. All wall surfaces and floor tile are to be maintained in an as good a condition as when Tenant took possession free of holes, gouges, or defacements. With respect to items (ii), (viii) and (ix) above, Tenant shall provide Landlord a copy of a service contract between Tenant and a licensed service contractor providing for periodic maintenance of all such systems or equipment in conformance with the manufacturer's recommendations. Tenant shall provide Landlord a copy of such preventive maintenance contracts and paid invoices for the recommended work if requested in writing by Landlord. C. LANDLORD AND TENANT'S OBLIGATIONS REGARDING REIMBURSABLE OPERATING COSTS: In addition to the direct payment by Tenant of expenses as provided in Sections 8.B, 9, 10 and 11 of this Lease, Tenant agrees to reimburse Landlord for Tenant's Allocable Share (as defined in Section 8.E below) of Reimbursable Operating Costs (as defined in Section 8.D below) resulting from Landlord payment of expenses related to the Building or Project which are not otherwise paid by Tenant directly. Tenant agrees to pay its Allocable Share of the Reimbursable Operating Costs as additional rental within ten (10) business days of written invoice from Landlord. D. REIMBURSABLE OPERATING COSTS: For purposes of calculating Tenant's Allocable Share of Building and Project Costs, the term "Reimbursable Operating Costs" is defined as all costs and expenses of the nature hereinafter described which are incurred by Landlord in connection with ownership and operation of the Building or the Project in which the Premises are located (excluding any costs allocable to any other occupant of the Project), together with such additional facilities as may be determined by Landlord to be reasonably desirable or necessary to the ownership and operation of the Building and/or Project. All costs and expenses shall be determined in accordance with generally accepted accounting principles which shall be consistently applied (with accruals appropriate to Landlord's business), including but not limited to the following: (i) Common Area utilities, including water, power, telephone, heating, lighting, air conditioning, ventilating, and Building utilities to the extent not separately metered; (ii) Common Area maintenance and service agreements for the Building and/or Project and the equipment therein, including without limitation, common area janitorial services, alarm and security services, exterior window cleaning, and maintenance of the sidewalks, landscaping, waterscape, roof membrane of the Building (except as provided in Section 8.A.), parking areas, driveways, service areas, mechanical rooms, elevators, and the Building exterior; (iii) insurance premiums and costs, including without limitation, the premiums and cost of fire, casualty and liability coverage and rental abatement and, if elected by Landlord, earthquake insurance applicable to the Building or Project; (iv) repairs, replacements and general maintenance (excluding repairs and general maintenance paid by proceeds of insurance or by Tenant or other third parties, and repairs or alterations attributable solely to tenants of the Building or Project other than Tenant); and (v) all Taxes which may be levied on the Building or Project, upon the occupancy of the Building or Project and including any substitute or additional charges which may be imposed during, or applicable to the Lease Term including real estate tax increases due to a sale, transfer or other change of ownership of the Building or Project, as such Taxes are levied or appear on the City and County tax bills and Page 11 assessment rolls. Landlord shall have no obligation to provide guard services or other security measures for the benefit of the Project. Tenant assumes all responsibility for the protection of Tenant and Tenant's Agents from acts of third parties; provided, however, that nothing contained herein shall prevent Landlord, at its sole option, from providing security measures for the Project. This is a "Net" Lease, meaning that Base Monthly Rent is paid to Landlord absolutely net of all costs and expenses. The provision for payment of Reimbursable Operating Costs by means of periodic payment of Tenant's Allocable Share of Building and/or Project Costs is intended to pass on to Tenant and reimburse Landlord for all costs of operating and managing the Building and/or Project. Notwithstanding anything to the contrary contained in this Lease, the following shall not be included within Reimbursable Operating Costs: (i) leasing commissions, attorneys' fees, costs, disbursements, and other expenses incurred in connection with negotiations or disputes with tenants or in connection with leasing, renovating, or improving space for tenants or other occupants or prospective tenants or other occupants of the Building or the Project; (ii) the cost of any service sold to any tenant (including Tenant) or other occupant for which Landlord is entitled to be reimbursed as an additional charge or rental over and above the basic rent and escalations payable under the lease with that tenant; (iii) any depreciation on the Building or the Project; (iv) expenses in connection with services or other benefits of a type that are not provided to Tenant but which are provided another tenant or occupant of the Building or Project; (v) costs incurred due to Landlord's violation of any terms or conditions of this Lease or any other lease relating to the Building or Project; (vi) overhead profit increments paid to Landlord's subsidiaries or affiliates for services on or to the Building or Project or for supplies or other materials to the extent that the cost of the services, supplies, or materials exceeds the cost that would have been paid had the services, supplies, or materials been provided by unaffiliated parties on a competitive basis; (vii) all interest, loan fees, and other carrying costs related to any mortgage or deed of trust or related to any capital item, and all rental and other payable due under any ground or underlying lease, or any lease for any equipment ordinarily considered to be of a capital nature (except janitorial equipment which is not affixed to the Building); (viii) any compensation paid to clerks, attendants, or other persons in commercial concessions operated by Landlord; (ix) advertising and promotional expenditures; (x) costs of repairs and other work occasioned by fire, windstorm, or other casualty of an insurable nature and intended to be covered by insurance required to be carried by Landlord; (xi) any costs, fines, or penalties incurred due to violations by Landlord of any governmental rule or authority, this Lease or any other lease in the Project, or due to Landlord's negligence or willful misconduct; (xii) costs for sculpture, paintings, or other objects of art (nor insurance thereon or extraordinary security in connection therewith); (xiii) wages, salaries, or other compensation paid to any executive employees above the grade of building manager; (xiv) the cost of correcting any building code or other violations which were violations prior to the Commencement Date; (xv) the cost of containing, removing, or otherwise remediating any contamination of the Project (including the underlying land and ground water) by any toxic or hazardous materials where such contamination was not caused by Tenant or its agents, invitees, employees, or suppliers; (xvi) reserves for any Reimbursable Operating Costs; (xvii) repairs and maintenance to buildings of the Project in which Tenant is not an occupant, and (xviii) any property management or similar fee in excess of three percent (3%) of the Base Monthly Rent. E. TENANT'S ALLOCABLE SHARE: For purposes of prorating Reimbursable Operating Costs which Tenant shall pay, Tenant's Allocable Share of Reimbursable Operating Costs shall be computed by multiplying the Reimbursable Operating Costs by a fraction, the numerator of which is the rentable square footage of the Premises and the denominator of Page 12 which is either the total rentable square footage of the Building if the service or cost is allocable only to the Building, or the total square footage of the Project if the service or cost is allocable to the entire Project. Tenant's obligation to share in Reimbursable Operating Costs shall be adjusted to reflect the Lease Commencement Date and Expiration Date of this Lease and is subject to recalculation in the event of expansion of the Building or Project. Tenant's Allocable Share of the Project is 32.6% F. WAIVER OF LIABILITY: Failure by Landlord to perform any defined services, or any cessation thereof, when such failure is caused by accident, breakage, repairs, strikes, lockout or other labor disturbances or labor disputes of any character or by any other cause, similar or dissimilar, shall not render Landlord liable to Tenant in any respect, including damages to either person or property, nor be construed as an eviction of Tenant, nor cause an abatement of rent, nor relieve Tenant from fulfillment of any covenant or agreement hereof. Should any equipment or machinery utilized in supplying the services listed herein break down or for any cause cease to function properly, upon receipt of written notice from Tenant of any deficiency or failure of any services, Landlord shall use reasonable diligence to repair the same promptly, but Tenant shall have no right to terminate this Lease and shall have no claim for rebate of rent or damages on account of any interruptions in service occasioned thereby or resulting therefrom. Tenant waives the provisions of California Civil Code Sections 1941 and 1942 concerning the Landlord's obligation of tenantability and Tenant's right to make repairs and deduct the cost of such repairs from the rent. Landlord shall not be liable for a loss of or injury to person or property, however occurring, through or in connection with or incidental to furnishing, or its failure to furnish, any of the foregoing. G. AUDIT RIGHTS: Tenant shall have the right, at Tenant's sole cost and expense, provided Tenant utilizes a Certified Public Accountant (the "CPA"), upon at least thirty (30) days prior notice to Landlord at any time during regular business hours, and no more frequently than twice per calendar year, to audit Landlord's records pertaining to Operating Expenses for the immediately previous calendar year only, which shall be maintained in the State of California. Any disputes between Landlord and Tenant concerning Landlord's accounting of Additional Rent shall be resolved using generally accepted accounting principles ("GAAP"). If it is determined from Tenant's audit of such operating expenses that Tenant was overcharged by more than three percent (3%), such overcharge shall entitle Tenant to credit against its next payment of Reimbursable Operations Costs the amount of the overcharge and the costs associated with the audit (and, if such credit occurs following the expiration of the Term, Landlord shall pay the amount of such credit to Tenant within thirty (30) days after Landlord's receipt of an invoice from Tenant). If the audit determines that the Tenant was overcharged less than three percent (3%), such overcharge shall entitle Tenant to credit against its next payment of Reimbursable Operations Costs the amount of the overcharge and Tenant shall pay for all costs associated with the audit. If the audit shall determine that Tenant was undercharged for the Reimbursable Operations Costs, Tenant shall promptly pay the amount of such undercharge to Landlord and Tenant shall pay for all costs associated with the audit. Permitted Assignees of Tenant may only audit periods for which they occupy the Leased Premises and subtenants of Tenant are not entitled to any audit rights. Tenant agrees to keep all information thereby obtained by Tenant confidential. 9. HAZARD INSURANCE: A. TENANT'S USE: Tenant shall not use or permit the Premises, or any part thereof, to be used for any purpose other than that for which the Premises are hereby leased; and no use of the Premises shall be made or permitted, nor acts done, which will cause any permanent increase in premiums or a cancellation of any insurance policy covering the Premises or any part thereof, nor shall Tenant sell or permit to be sold, kept, or used in or about the Premises, any Page 13 article prohibited by the standard form of fire insurance policies, unless such use is covered by an endorsement to such policies. Tenant shall, at its sole cost, comply with all requirements of any insurance company or organization necessary for the maintenance of reasonable fire and public liability insurance covering the Premises and appurtenances. B. LANDLORD'S INSURANCE: Landlord agrees to purchase and keep in force fire, extended coverage insurance in an amount equal to the replacement cost of the Building (not including Tenant's Alterations, the Tenant Improvements or Tenant's Trade Fixtures) as determined by Landlord's insurance company's appraisers. At Landlord's election, such fire and property damage insurance may be endorsed to cover loss caused by such additional perils against which Landlord may elect to insure, including earthquake and/or flood, and shall contain reasonable deductibles. Additionally Landlord may maintain a policy of (i) commercial general liability insurance insuring Landlord (and such others with an insurable interest in the Premises designated in writing by Landlord) against liability for personal injury, bodily injury, death and damage to property occurring or resulting from an occurrence in, on or about the Premises or Project in an amount as Landlord determines is reasonably necessary for its protection, and (ii) rental loss insurance covering a twelve (12) month period. All insurance procured by Landlord pursuant to this Section shall be at commercially reasonable rates. Tenant agrees to pay Landlord as additional rent, on demand, the full cost of said insurance as evidenced by insurance billings to Landlord, and in the event of damage covered by said insurance, the amount of any deductible under such policy. Payment shall be due to Landlord within ten (10) days after written invoice to Tenant. It is understood and agreed that Tenant's obligation under this Section will be prorated to reflect the Lease Commencement and Expiration Dates. C. TENANT'S INSURANCE: Tenant agrees, at its sole cost, to insure its personal property, Tenant Improvements, and Alterations for their full replacement value (without depreciation) and to obtain worker's compensation and public liability and property damage insurance for occurrences within the Premises with a combined single limit of not less than Five Million Dollars ($5,000,000.00). Tenant's liability insurance shall be primary insurance containing a cross-liability endorsement, and shall provide coverage on an "occurrence" rather than on a "claims made" basis. Tenant shall name Landlord and any Landlord's lender designated in writing as an additional insured and shall deliver certificates of insurance and renewal certificates to Landlord. All such policies shall provide for thirty (30) days' prior written notice to Landlord of any cancellation, termination, or reduction in coverage. D. WAIVER: Landlord and Tenant hereby waive all rights each may have against the other on account of any loss or damage sustained by Landlord or Tenant, as the case may be, or to the Premises or its contents, which may arise from any risk covered by their respective insurance policies (or which would have been covered had such insurance policies been maintained in accordance with this Lease) as set forth above. The Parties shall use their reasonable efforts to obtain from their respective insurance companies a waiver of any right of subrogation which said insurance company may have against Landlord or Tenant, as the case may be. 10. TAXES: Tenant shall be liable for and shall pay as additional rental, prior to delinquency, (provided Tenant receives a tax bill at least 30 days prior to the delinquency date) the following (collectively referred to herein as "Taxes"): (i) all taxes and assessments levied against Tenant's personal property and trade or business fixtures; (ii) all real estate taxes and assessment installments or other impositions or charges which may be levied on the Premises or upon the occupancy of the Premises, including any substitute or additional charges which may be imposed applicable to the Lease Term; and (iii) real estate tax increases due to an increase in assessed value resulting from a sale, transfer or other change of ownership of the Premises as it appears on the City and County tax bills during Page 14 the Lease Term (other than a change of ownership within the existing partnership structure resulting in a reassessment). All real estate taxes shall be prorated to reflect the Lease Commencement and Expiration Dates. If, at any time during the Lease Term a tax, excise on rents, business license tax or any other tax, however described, is levied or assessed against Landlord as a substitute or addition, in whole or in part, for taxes assessed or imposed on land or Buildings, Tenant shall pay and discharge its pro rata share of such tax or excise on rents or other tax before it becomes delinquent; except that this provision is not intended to cover net income taxes, franchise inheritance, gift or estate tax imposed upon Landlord. In the event that a tax is placed, levied, or assessed against Landlord and the taxing authority takes the position that Tenant cannot pay and discharge its pro rata share of such tax on behalf of Landlord, then at Landlord's sole election, Landlord may increase the Base Monthly Rent by the exact amount of such tax and Tenant shall pay such increase. If by virtue of any application or proceeding brought by Landlord, there results a reduction in the assessed value of the Premises during the Lease Term, Tenant agrees to pay Landlord a fee consistent with reasonable fees typically charged by a third party appeal firm for such services. Property Taxes also shall not include any tax or assessment expense: (i) levied on Landlord's rental income unless such tax or assessment expense is imposed in lieu of real property taxes; (ii) in excess of the amount which would be payable if such tax or assessment expense were paid in installments over the longest possible term; or (iii) imposed on land and improvements other than the land upon which the Building is situated. Tenant, at its sole cost, shall have the right, by appropriate proceeding, to contest or protest any change in Taxes in its own name, and/or the name of Landlord if Landlord does not elect to contest such change. If a reduction in Taxes is obtained for any year in which Tenant paid such Taxes, then Tenant shall receive a credit or a refund of Tenant's over payment along with Tenant's pro-rata share of interest corresponding to such amount to the extent received from the taxing authority. 11. UTILITIES: Tenant shall pay directly to the providing utility all water, gas, electric, telephone, and other utilities supplied to the Premises. Landlord shall not be liable for loss of or injury to person or property, however occurring, through or in connection with or incidental to furnishing or the utility company's failure to furnish utilities to the Premises, and in such event Tenant shall not be entitled to abatement or reduction of any portion of Base Monthly Rent or any other amount payable under this Lease unless utility services to the Premises are interrupted and such interruption is due to the active negligence or willful misconduct of Landlord, in which case Tenant shall be entitled to an abatement of rent unless such Utility or Utilities are restored within three (3) business days thereafter. 12. TOXIC WASTE AND ENVIRONMENTAL DAMAGE: A. TENANT'S RESPONSIBILITY: Without the prior written consent of Landlord, Tenant or Tenant's agents, employees, contractors and invitees ("Tenant's Agents") shall not bring, use, or permit upon the Premises, or generate, create, release, emit, or dispose (nor permit any of the same) from the Premises any chemicals, toxic or hazardous gaseous, liquid or solid materials or waste, including without limitation, material or substance having characteristics of ignitability, corrosivity, reactivity, or toxicity or substances or materials which are listed on any of the Environmental Protection Agency's lists of hazardous wastes or which are identified in Division 22 Title 26 of the California Code of Regulations as the same may be amended from time to time or any wastes, materials or substances which are or may become regulated by or under the authority of any applicable local, state or federal laws, judgments, ordinances, orders, rules, regulations, codes or other governmental restrictions, guidelines or requirements. ("Hazardous Materials") except for those substances customary in typical office uses and the other Permitted Uses and fuel and other supplies for the operation and maintenance of Tenant's emergency Page 15 generator(s), if any, and the Building Systems to be maintained by Tenant, for which no consent shall be required. In order to obtain consent, Tenant shall deliver to Landlord its written proposal describing the toxic material to be brought onto the Premises, measures to be taken for storage and disposal thereof, safety measures to be employed to prevent pollution of the air, ground, surface and ground water. Landlord's approval may be withheld in its reasonable judgment. In the event Landlord consents to Tenant's use of Hazardous Materials on the Premises or such consent is not required, Tenant represents and warrants that it shall comply with all Governmental Regulations applicable to Hazardous Materials including doing the following: (i) adhere to all reporting and inspection requirements imposed by Federal, State, County or Municipal laws, ordinances or regulations and will provide Landlord a copy of any such reports or agency inspections; (ii) obtain and provide Landlord copies of all necessary permits required for the use and handling of Hazardous Materials on the Premises; (iii) enforce Hazardous Materials handling and disposal practices consistent with industry standards; (iv) surrender the Premises free from any Hazardous Materials arising from Tenant's bringing, using, permitting, generating, creating, releasing, emitting or disposing of Hazardous Materials; and (v) properly close the facility with regard to Hazardous Materials including the removal or decontamination of any process piping, mechanical ducting, storage tanks, containers, or trenches which have come into contact with Hazardous Materials as a result of Tenant's acts, and only if required, obtain a closure certificate from the local administering agency prior to the Expiration Date. B. TENANT'S INDEMNITY REGARDING HAZARDOUS MATERIALS: Tenant shall, at its sole cost and expense, comply with all laws pertaining to, and shall with counsel reasonably acceptable to Landlord, indemnify, defend and hold harmless Landlord and Landlord's trustees, shareholders, directors, officers, employees, partners, affiliates, and agents from, any claims, liabilities, costs or expenses incurred or suffered arising from the bringing, using, permitting, generating, emitting or disposing of Hazardous Materials by Tenant, Tenant's Agents or a third party (other than adjoining landowners or occupants of adjacent properties) through the surface soils of the Premises during the Lease Term or the violation of any Governmental Regulation or environmental law, by Tenant or Tenant's Agents. Tenant's indemnification, defense, and hold harmless obligations include, without limitation, the following to the extent relating to Tenant's indemnification obligations under the preceding sentence: (i) claims, liability, costs or expenses resulting from or based upon administrative, judicial (civil or criminal) or other action, legal or equitable, brought by any private or public person under common law or under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended ("CERCLA"), the Resource Conservation and Recovery Act of 1980 ("RCRA") or any other Federal, State, County or Municipal law, ordinance or regulation now or hereafter in effect; (ii) claims, liabilities, costs or expenses pertaining to the identification, monitoring, cleanup, containment, or removal of Hazardous Materials from soils, riverbeds or aquifers including the provision of an alternative public drinking water source; (iii) all costs of defending such claims; (iv) losses attributable to diminution in the value of the Premises or the Building; (v) loss or restriction of use of rentable space in the Building; (vi) Adverse effect on the marketing of any space in the Building; and (vi) all other liabilities, obligations, penalties, fines, claims, actions (including remedial or enforcement actions of any kind and administrative or judicial proceedings, orders or judgments), damages (including consequential and punitive damages), and costs (including attorney, consultant, and expert fees and expenses) resulting from the release or violation. This Section 12.B shall survive the expiration or termination o this Lease. C. ACTUAL RELEASE BY TENANT: Tenant agrees to notify Landlord of any lawsuits or orders which relate to the remedying of or Page 16 actual release of Hazardous Materials on or into the soils or ground water at or under the Premises of which Tenant is aware or responsible for. Tenant shall also provide Landlord all notices required by Section 25359.7(b) of the Health and Safety Code and all other notices required by law to be given to Landlord in connection with Hazardous Materials. Without limiting the foregoing, Tenant shall also deliver to Landlord, within twenty (20) days after receipt thereof, any written notices from any governmental agency alleging a material violation of, or material failure to comply with, any laws, regulations, ordinances or orders, the violation of which or failure to comply with poses a foreseeable and material risk of contamination of the ground water or injury to humans (other than injury solely to Tenant or Tenant's Agents. In the event of any release on or into the Premises or into the soil or ground water under the Premises, the Building or the Project of any Hazardous Materials used, treated, stored or disposed of by Tenant or Tenant's Agents, Tenant agrees to comply, at its sole cost, with all laws, regulations, ordinances and orders of any federal, state or local agency relating to the monitoring or remediation of such Hazardous Materials. In the event of any such release of Hazardous Materials Tenant shall immediately give verbal and follow-up written notice of the release to Landlord, and Tenant agrees to meet and confer with Landlord and its lender to attempt to eliminate and mitigate any financial exposure to such lender and resultant exposure to Landlord under California Code of Civil Procedure Section 736(b) as a result of such release, and promptly to take reasonable monitoring, cleanup and remedial steps given, inter alia, the historical commercial uses to which the Property has and continues to be used, the risks to public health posed by the release, the then available technology and the costs of remediation, cleanup and monitoring, consistent with acceptable customary practices for the type and severity of such contamination and all applicable laws. Nothing in the preceding sentence shall eliminate, modify or reduce the obligation of Tenant under 12.B of this Lease to indemnify, defend and hold Landlord harmless from any claims liabilities, costs or expenses incurred or suffered by Landlord. Tenant shall provide Landlord prompt written notice of Tenant's monitoring, cleanup and remedial steps. In the absence of an order of any federal, state or local governmental or quasi-governmental agency relating to the cleanup, remediation or other response action required by applicable law, any dispute arising between Landlord and Tenant concerning Tenant's obligation to Landlord under this Section 12.C concerning the level, method, and manner of cleanup, remediation or response action required in connection with such a release of Hazardous Materials shall be resolved by mediation and/or arbitration pursuant to this Lease. D. ENVIRONMENTAL MONITORING: Landlord and its agents shall have the right to inspect, investigate, sample and monitor the Premises including any air, soil, water, ground water or other sampling or any other testing, digging, drilling or analysis to determine whether Tenant is complying with the terms of this Section 12. If Landlord discovers that Tenant is not in compliance with the terms of this Section 12, any such costs incurred by Landlord, including attorneys' and consultants' fees, shall be due and payable by Tenant to Landlord within ten (10) business days following Landlord's written demand therefore. E. LANDLORD'S INDEMNITY REGARDING HAZARDOUS MATERIALS: Landlord represents and warrants, to the best of its knowledge, that as of the Commencement Date, there do not exist any Hazardous Materials in the Building, Premises or the Project. Landlord shall indemnify and hold Tenant harmless from any claims, liabilities, costs or expenses incurred or suffered by Tenant related to the removal, investigation, monitoring or remediation of Hazardous Materials which are present or which come to be present on the Premises except to the extent the presence of such Hazardous Materials is caused by Tenant or by Page 17 Tenant's failure to prevent a third party from dumping Hazardous Materials through the surface of the Premises. Landlord's indemnification and hold harmless obligations include, without limitation, (i) claims, liability, costs or expenses resulting from or based upon administrative, judicial (civil or criminal) or other action, legal or equitable, brought by any private or public person under common law or under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the Resource Conservation and Recovery Act of 1980 ("RCRA") or any other Federal, State, County or Municipal law, ordinance or regulation, (ii) claims, liabilities, costs or expenses pertaining to the identification, monitoring, cleanup, containment, or removal of Hazardous Materials from soils, riverbeds or aquifers including the provision of an alternative public drinking water source, and (iii) all costs of defending such claims. In no event shall Landlord be liable for any consequential damages suffered or incurred by Tenant as a result of any such contamination. 13. TENANT'S DEFAULT: The occurrence of any of the following shall constitute a material default and breach of this Lease by Tenant: (i) Tenant's failure to pay the Base Monthly Rent including additional rent or any other payment due under this Lease by the date such amount is due, where such failure continues for three (3) business days beyond written notice from Landlord that such amount was not received by the due date, (ii) the abandonment or vacation of the Premises by Tenant; (iii) Tenant's failure to observe and perform any other required provision of this Lease, where such failure continues for thirty (30) days after written notice from Landlord provided, however, that if the nature of the Default is such that it cannot reasonably be cured within thirty (30) days, Tenant shall not be in Default if Tenant commences within such thirty (30) day period to cure and thereafter diligently prosecutes the same to completion; (iv) Tenant's making of any general assignment for the benefit of creditors; (v) the filing by or against Tenant of a petition to have Tenant adjudged a bankrupt or of a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed after the filing); (vi) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or (vii) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days. A. REMEDIES: In the event of any such default by Tenant, then in addition to other remedies available to Landlord at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder by giving written notice of such intention to terminate. In the event Landlord elects to so terminate this Lease, Landlord may recover from Tenant all the following: (i) the worth at time of award of any unpaid rent which had been earned at the time of such termination; (ii) the worth at time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss for the same period that Tenant proves could have been reasonably avoided; (iii) the worth at time of award of the amount by which the unpaid rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; (iv) any other amount necessary to compensate Landlord for all 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; including the following: (x) expenses for repairing the Premises to the condition required upon surrender of this Lease for purposes of reletting, (y) broker's fees, advertising costs or other expenses of reletting the Premises, and (z) costs of carrying the Premises such as taxes, insurance premiums, utilities and security precautions; and (v) at Landlord's election, such other amounts in Page 18 addition to or in lieu of the foregoing as may be permitted by applicable California law. The term "rent", as used herein, is defined as the minimum monthly installments of Base Monthly Rent and all other sums required to be paid by Tenant pursuant to this Lease, all such other sums being deemed as additional rent due hereunder. As used in (i) and (ii) above, "worth at the time of award" shall be computed by allowing interest at a rate equal to the discount rate of the Federal Reserve Bank of San Francisco plus five (5%) percent per annum. As used in (iii) above, "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%). B. RIGHT TO RE-ENTER: In the event of any such default by Tenant, Landlord shall have the right, after terminating this Lease, as permitted by law, to re-enter the Premises and remove all persons and property. Such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant, and disposed of by Landlord in any manner permitted by law. C. ABANDONMENT: If Landlord does not elect to terminate this Lease as provided in Section 13.A or 13.B above, then the provisions of California Civil Code Section 1951.4, (Landlord may continue the lease in effect after Tenant's breach and abandonment and recover rent as it becomes due if Tenant has a right to sublet and assign, subject only to reasonable limitations) as amended from time to time, shall apply and Landlord may from time to time, without terminating this Lease, either recover all rental as it becomes due or relet the Premises or any part thereof for such term or terms and at such rental or rentals and upon such other terms and conditions as Landlord in its sole discretion may deem advisable, with the right to make alterations and repairs to the Premises. In the event that Landlord elects to so relet, rentals received by Landlord from such reletting shall be applied in the following order to: (i) the payment of any indebtedness other than Base Monthly Rent due hereunder from Tenant to Landlord; (ii) the payment of any cost of such reletting; (iii) the payment of the cost of any alterations and repairs to the Premises; and (iv) the payment of Base Monthly Rent due and unpaid hereunder. The residual rentals, if any, shall be held by Landlord and applied in payment of future Base Monthly Rent as the same may become due and payable hereunder. Landlord shall have the obligation to market the space but shall have no obligation to relet the Premises following a default if Landlord has other comparable available space within the Building or Project. In the event the portion of rentals received from such reletting which is applied to the payment of rent hereunder during any month be less than the rent payable during that month by Tenant hereunder, then Tenant shall pay such deficiency to Landlord immediately upon demand. Such deficiency shall be calculated and paid monthly. Tenant shall also pay to Landlord, as soon as ascertained, any costs and expenses incurred by Landlord in such reletting or in making such alterations and repairs not covered by the rentals received from such reletting. D. NO TERMINATION: Landlord's re-entry or taking possession of the Premises pursuant to 13.B or 13.C shall not be construed as an election to terminate this Lease unless written notice of such intention is given to Tenant or unless the termination is decreed by a court of competent jurisdiction. Notwithstanding any reletting without termination by Landlord because of any default by Tenant, Landlord may at any time after such reletting elect to terminate this Lease for any such default. E. NON-WAIVER: Landlord may accept Tenant's payments without waiving any rights under this Lease, including rights under a previously served notice of default. No payment by Tenant or receipt by Landlord of a lesser amount than any installment of rent due shall be deemed as other than payment on account of the amount due. If Landlord accepts payments after serving a notice of default, Landlord may nevertheless commence and pursue an action to enforce rights and remedies under the previously served notice of default without Page 19 giving Tenant any further notice or demand. Furthermore, the Landlord's acceptance of rent from the Tenant when the Tenant is holding over without express written consent does not convert Tenant's Tenancy from a tenancy at sufferance to a month to month tenancy. No waiver of any provision of this Lease shall be implied by any failure of Landlord to enforce any remedy for the violation of that provision, even if that violation continues or is repeated. Any waiver by Landlord of any provision of this Lease must be in writing. Such waiver shall affect only the provision specified and only for the time and in the manner stated in the writing. No delay or omission in the exercise of any right or remedy by Landlord shall impair such right or remedy or be construed as a waiver thereof by Landlord. No act or conduct of Landlord, including, without limitation, the acceptance of keys to the Premises, shall constitute acceptance of the surrender of the Premises by Tenant before the Expiration Date. Only written notice from Landlord to Tenant of acceptance shall constitute such acceptance of surrender of the Premises. Landlord's consent to or approval of any act by Tenant which requires Landlord's consent or approvals shall not be deemed to waive or render unnecessary Landlord's consent to or approval of any subsequent act by Tenant. F. PERFORMANCE BY LANDLORD: If Tenant fails to perform any obligation required under this Lease or by law or governmental regulation, Landlord in its sole discretion may, without notice, without waiving any rights or remedies and without releasing Tenant from its obligations hereunder, perform such obligation, in which event Tenant shall pay Landlord as additional rent all reasonable sums paid by Landlord in connection with such substitute performance, including interest at the Agreed Interest Rate (as defined in Section 19.J) within ten (10) business days of Landlord's written notice for such payment. G. HABITUAL DEFAULT: The provisions of Section 13 notwithstanding, the Parties agree that if Tenant shall have defaulted in the performance of any (but not necessarily the same) monetary term or condition of this Lease for three or more times during any twelve (12) month period during the Lease Term, then such conduct shall, at the election of the Landlord, represent a separate event of default which cannot be cured by Tenant ("Habitual Default"). Tenant acknowledges that the purpose of this provision is to prevent repetitive defaults by Tenant, which work a hardship upon Landlord and deprive Landlord of Tenant's timely performance under this Lease. 14. LANDLORD'S LIABILITY: A. LIMITATION ON LANDLORD'S LIABILITY: In the event of Landlord's failure to perform any of its covenants or agreements under this Lease, Tenant shall give Landlord written notice of such failure and shall give Landlord thirty (30) days to cure or commence to cure such failure prior to any claim for breach or resultant damages, provided, however, that if the nature of the default is such that it cannot reasonably be cured within the 30-day period, Landlord shall not be deemed in default if it commences within such period to cure, and thereafter diligently prosecutes the same to completion. In addition, upon any such failure by Landlord, Tenant shall give notice by registered or certified mail to any person or entity with a security interest in the Premises ("Mortgagee") that has provided Tenant with notice of its interest in the Premises, and shall provide Mortgagee a reasonable opportunity to cure such failure, including such time to obtain possession of the Premises by power of sale or judicial foreclosure, if such should prove necessary to effectuate a cure. Tenant agrees that each of the Mortgagees to whom this Lease has been assigned is an expressed third-party beneficiary hereof. Tenant waives any right under California Civil Code Section 1950.7 or any other present or future law to the collection of any payment or deposit from Mortgagee or any purchaser at a foreclosure sale of Mortgagee's interest unless Mortgagee or such purchaser shall have actually received and not refunded the applicable payment or deposit. Tenant Further waives any right to terminate this Lease and to vacate the Premises on Landlord's default under this Lease. Tenant's Page 20 sole remedy on Landlord's default is an action for damages or injunctive or declaratory relief. B. LIMITATION ON TENANT'S RECOURSE: If Landlord is a corporation, trust, partnership, joint venture, unincorporated association or other form of business entity, then (i) the obligations of Landlord shall not constitute personal obligations of the officers, directors, trustees, partners, joint venturers, members, owners, stockholders, or other principals or representatives except to the extent of their interest in the Premises. Tenant shall have recourse only to the interest of Landlord in the Premises or for the satisfaction of the obligations of Landlord and shall not have recourse to any other assets of Landlord for the satisfaction of such obligations. C. INDEMNIFICATION OF LANDLORD: As a material part of the consideration rendered to Landlord, Tenant hereby waives all claims against Landlord for damages to goods, wares and merchandise, and all other personal property in, upon or about said Premises and for injuries to persons in or about said Premises, from any cause (except due to the gross negligence or willful misconduct of Landlord) arising at any time to the fullest extent permitted by law, and Tenant shall indemnify, defend with counsel reasonably acceptable to Landlord and hold Landlord, and their shareholders, directors, officers, trustees, employees, partners, affiliates and agents from any claims, liabilities, costs or expenses incurred or suffered arising from the use of occupancy of the Premises or any part of the Project by Tenant or Tenant's Agents, the acts or omissions of Tenant or Tenant's Agents, Tenant's breach of this Lease, or any damage or injury to person or property from any cause, except to the extent caused by the willful misconduct or active negligence of Landlord or from the failure of Tenant to keep the Premises in good condition and repair as herein provided, except to the extent due to the gross negligence or willful misconduct of Landlord. Further, in the event Landlord is made party to any litigation due to the acts or omission of Tenant and Tenant's Agents, Tenant will indemnify, defend (with counsel reasonably acceptable to Landlord) and hold Landlord harmless from any such claim or liability including Landlord's costs and expenses and reasonable attorney's fees incurred in defending such claims except to the extent due to the gross negligence or willful misconduct of Landlord. 15. DESTRUCTION OF PREMISES: A. LANDLORD'S OBLIGATION TO RESTORE: In the event of a destruction of the Premises during the Lease Term Landlord shall repair the same to a similar condition to that which existed prior to such destruction. Such destruction shall not annul or void this Lease; however, Tenant shall be entitled to a proportionate reduction of Base Monthly Rent while repairs are being made, such proportionate reduction to be based upon the extent to which the repairs interfere with Tenant's business in the Premises, as reasonably determined by Landlord and Tenant. In no event shall Landlord be required to replace or restore Alterations, Tenant Improvements paid for by Tenant from sources other than the Work Allowance or Tenant's fixtures or personal property. With respect to a destruction which Landlord is obligated to repair or may elect to repair under the terms of this Section, Tenant waives the provisions of Section 1932, and Section 1933, Subdivision 4, of the Civil Code of the State of California, and any other similarly enacted statute, and the provisions of this Section 15 shall govern in the case of such destruction. B. LIMITATIONS ON LANDLORD'S RESTORATION OBLIGATION: Notwithstanding the provisions of Section 15.A, Landlord shall have no obligation to repair, or restore the Premises if any of the following occur: (i) if the repairs cannot be made in one hundred eighty (180) days from the date of receipt of all governmental approvals necessary under the laws and regulations of State, Federal, County or Municipal authorities, as reasonably determined by Landlord, (ii) if the holder of the first deed of trust or mortgage encumbering the Building elects not to permit the insurance proceeds payable upon damage or destruction to be used for such repair or restoration (unless Tenant, within 45 days after the casualty, agrees in writing to pay all costs associated with rebuilding), (iii) the damage or destruction is not fully covered by the insurance maintained by Landlord (unless Tenant, within 45 days after Page 21 the casualty, agrees in writing to contribute any shortfall), (iv) the damage or destruction occurs in the last eighteen (18) months of the Lease Term unless Tenant has exercised or promptly exercises an option to extend the Lease Term, (v) Tenant is in default pursuant to the provisions of Section 13, or (vi) Tenant has vacated the Premises for more than ninety (90) days without payment of rent. In any such event Landlord may elect either to complete the repair or restoration, or terminate this Lease by providing Tenant written notice of its election within sixty (60) days following the damage or destruction. Tenant shall also have the right to terminate this Lease in the event of either (i) or (iv) above, by providing Landlord with written notice of its election to do so within sixty (60) days following the damage or destruction. 16. CONDEMNATION: If any part of the Premises shall be taken for any public or quasi-public use, under any statute or by right of eminent domain or private purchase in lieu thereof, and only a part thereof remains which is susceptible of occupation hereunder, this Lease shall, as to the part so taken, terminate as of the day before title vests in the condemnor or purchaser ("Vesting Date") and Base Monthly Rent payable hereunder shall be adjusted so that Tenant is required to pay for the remainder of the Lease Term only such portion of Base Monthly Rent as the value of the part remaining after such taking bears to the value of the entire Premises prior to such taking. Further, in the event of such partial taking in excess of 25% of the Premises, either Tenant or Landlord shall have the option to terminate this Lease as of the Vesting Date. If all of the Premises or such part thereof be taken so that there does not remain a portion susceptible for the operation of Tenant's business as such business was performed in the Premises prior to the Vesting Date, this Lease shall terminate on the Vesting Date. If part or all of the Premises be taken, all compensation awarded upon such taking shall go to Landlord, and Tenant shall have no claim thereto; except Landlord shall cooperate with Tenant, without cost to Landlord, to recover compensation for damage to or taking of any Alterations, Tenant Improvements paid for by Tenant, or for Tenant's moving costs. Tenant hereby waives the provisions of California Code of Civil Procedures Section 1265.130 and any other similarly enacted statue, and the provisions of this Section 16 shall govern in the case of a taking but not Government Code Section 7262 with respect to those claims which Tenant may pursue by separate action. 17. ASSIGNMENT OR SUBLEASE: A. CONSENT BY LANDLORD: Except as specifically provided in Section 17.E, Tenant may not assign, sublet, hypothecate, or allow a third party to use the Premises without the express written consent of Landlord which consent shall not be unreasonably withheld, conditioned or delayed. In the event Tenant desires to assign this Lease or any interest herein or sublet the Premises or any part thereof, Tenant shall deliver to Landlord (i) executed counterparts of any agreement and of all ancillary agreements with the proposed assignee/subtenant, (ii) current financial statements of the transferee covering the preceding year, (iii) the nature of the proposed transferee's business to be carried on in the Premises, (iv) a statement outlining all consideration to be given on account of the Transfer, and (v) a current financial statement of Tenant. Landlord may condition its approval of any Transfer on receipt of a certification from both Tenant and the proposed transferee of all consideration to be paid to Tenant in connection with such Transfer. At Landlord's request, Tenant shall also provide additional information reasonably required by Landlord to determine whether it will consent to the proposed assignment or sublease. Landlord shall have a ten (10) business day period following receipt of all the foregoing within which to notify Tenant in writing that Landlord elects to: (i) terminate this Lease in the event the proposed sublease or assignment is for substantially all of space in the Premises provided, however, that Landlord Page 22 shall not have the right to terminate on any sublease or assignment expiring two (2) or more years before the Expiration Date; (ii) permit Tenant to assign or sublet such space to the named assignee/subtenant on the terms and conditions set forth in the notice; or (iii) refuse consent upon conditions set forth below. If Landlord should fail to notify Tenant in writing of such election within the 10 business-day period, Landlord shall be deemed to have elected option (iii) above. In the event Landlord elects option (i) above, this Lease shall expire with respect to such part of the Premises on the date upon which the proposed sublease or transfer was to commence, and from such date forward, Base Monthly Rent and Tenant's Allocable Share of all other costs and charges shall be adjusted based upon the proportion that the rentable area of the Premises remaining bears to the total rentable area of the Building. In the event Landlord elects option (ii) above, Landlord's written consent to the proposed assignment or sublease shall not be unreasonably withheld, conditioned or delayed, provided and upon the condition that: (i) the proposed assignee or subtenant is engaged in a business that is limited to the use expressly permitted under this Lease; (ii) the Tenant or the proposed assignee or subtenant is a company with sufficient financial worth and management ability to undertake the financial obligation of this Lease and Landlord has been furnished with reasonable proof thereof; (iii) the proposed assignment or sublease is in form reasonably satisfactory to Landlord; (iv) the proposed sublease will not result in there being greater than three (3) subtenants within the Premises at any time during the Lease Term; (v) Tenant reimburses Landlord on demand for any costs that may be incurred by Landlord in connection with said assignment or sublease, including the reasonable costs of making investigations as to the acceptability of the proposed assignee or subtenant and legal costs incurred in connection with the granting of any requested consent, said reasonable out-of-pocket costs not to exceed $2,500.00 in total; and (vi) Tenant shall not have advertised or publicized in any way the availability of the Premises without prior notice to Landlord. In the event all or any one of the foregoing conditions are not satisfied, Landlord shall be considered to have acted reasonably if it withholds its consent. Failure by Landlord to either consent to or disapprove a proposed assignment or sublease within the ten (10) business day time period specified above shall be deemed to be Landlord's approval thereof, so long as Tenant's request includes the following statement in capitalized and boldfaced letters: By failing to respond to this request, you will be deemed to have approved the lease assignment or sublease described herein. B. ASSIGNMENT OR SUBLETTING CONSIDERATION: Landlord and Tenant hereby agree that Landlord shall receive fifty percent (50%) of any rent or other economic consideration (i) realized by Tenant under any sublease or assignment, or (ii) realized by any subtenant under any sub-sublease of the Premises, in excess of (a) the Base Monthly Rent payable hereunder, (b) reasonable subletting and assignment costs incurred by Tenant including lease commissions, attorneys fees, costs of demising or otherwise preparing the sublease space for occupancy, and (c) the unamortized cost of Tenant Improvements initially installed by Tenant provided such Tenant Improvements are specifically utilized by the subtenant or assignee. Tenant's obligation to pay over Landlord's portion of the consideration constitutes an obligation for additional rent hereunder. The above provisions relating to Landlord's right to terminate the Lease and relating to the allocation of excess rent are independently negotiated terms of the Lease which constitute a material inducement for the Landlord to enter into the Lease, and are agreed by the Parties to be commercially reasonable. No assignment or subletting by Tenant shall relieve it of any obligation under this Lease. Any assignment or subletting which conflicts with the provisions hereof shall be void. C. NO RELEASE: Any assignment or sublease shall be made only if and shall not be effective until the assignee or subtenant shall execute, acknowledge, and deliver to Landlord an agreement, in form and substance reasonably Page 23 satisfactory to Landlord, whereby the assignee or subtenant shall assume all the obligations of this Lease on the part of Tenant to be performed or observed and shall be subject to all the covenants, agreements, terms, provisions and conditions in this Lease. Notwithstanding any such sublease or assignment and the acceptance of rent by Landlord from any subtenant or assignee, Tenant shall remain fully liable for the payment of Base Monthly Rent and additional rent due, and to become due hereunder, for the performance of all the covenants, agreements, terms, provisions and conditions contained in this Lease on the part of Tenant to be performed and for all acts and omissions of any licensee, subtenant, assignee or any other person claiming under or through any subtenant or assignee that shall be in violation of any of the terms and conditions of this Lease, and any such violation shall be deemed a violation by Tenant. Tenant shall indemnify, defend and hold Landlord harmless from and against all losses, liabilities, damages, costs and expenses (including reasonable attorney fees) resulting from any claims that may be made against Landlord by the proposed assignee or subtenant or by any real estate brokers or other persons claiming compensation in connection with the proposed assignment or sublease. D. REORGANIZATION OF TENANT: The provisions of this Section 17.D shall apply if Tenant is a corporation and: (i) there is a dissolution, merger, consolidation, or other reorganization of or affecting Tenant, where Tenant is not the surviving corporation, or (ii) there is a sale or transfer to one person or entity (or to any group of related persons or entities) of stock possessing more than 50% of the total combined voting power of all classes of Tenant's capital stock issued, outstanding and entitled to vote for the election of directors, and after such sale or transfer of stock Tenant's stock is no longer publicly traded. In a transaction under clause (i) the surviving corporation shall promptly execute and deliver to Landlord an agreement in form reasonably satisfactory to Landlord under which such surviving corporation assumes the obligations of Tenant hereunder, and in a transaction under clause (ii) the transferee or buyer shall promptly execute and deliver to Landlord an agreement in form reasonably satisfactory to Landlord under which such transferee or buyer assumes the obligations of Tenant under the Lease. E. PERMITTED TRANSFERS: Notwithstanding anything contained in this Section 17, so long as Tenant otherwise complies with the provisions of this Article, Tenant may enter into any of the following transfers (a "Permitted Transfer") without Landlord's prior consent, and Landlord shall not be entitled to terminate the Lease or to receive any part of any subrent resulting therefrom that would otherwise be due pursuant to Sections 17.A and 17.B. Tenant may sublease all or part of the Premises or assign its interest in this Lease to (i) any corporation which controls, is controlled by, or is under common control with the original Tenant to this Lease by means of an ownership interest of more than 50%; (ii) a corporation which results from a merger, consolidation or other reorganization in which Tenant is not the surviving corporation, so long as the surviving corporation has a net worth at the time of such assignment that is equal to or greater than the net worth of Tenant immediately prior to such transaction; and (iii) a corporation which purchases or otherwise acquires all or substantially all of the assets of Tenant so long as such acquiring corporation has a net worth at the time of such assignment that is equal to or greater than the net worth of Tenant immediately prior to such transaction. F. EFFECT OF DEFAULT: In the event of Tenant's default, Tenant hereby assigns all rents due from any assignment or subletting to Landlord as security for performance of its obligations under this Lease, and Landlord may collect such rents as Tenant's Attorney-in-Fact, except that Tenant may collect such rents unless a default occurs as described in Section 13 above. A termination if the Lease due to Tenant's default shall not automatically terminate an assignment or sublease then in existence; rather at Landlord's election, such assignment or sublease shall survive the Lease termination, the assignee or subtenant shall Page 24 attorn to Landlord, and Landlord shall undertake the obligations of Tenant under the sublease or assignment; except that Landlord shall not be liable for prepaid rent, security deposits or other defaults of Tenant to the subtenant or assignee, or for any acts or omissions of Tenant and Tenant's Agents. G. CONVEYANCE BY LANDLORD: As used in this Lease, the term "Landlord" is defined only as the owner for the time being of the Premises, so that in the event of any sale or other conveyance of the Premises or in the event of a master lease of the Premises, Landlord shall be entirely freed and relieved of all its covenants and obligations hereunder, and it shall be deemed and construed, without further agreement between the Parties and the purchaser at any such sale or the master tenant of the Premises, that the purchaser or master tenant of the Premises has assumed and agreed to carry out any and all covenants and obligations of Landlord hereunder. Such transferor shall transfer and deliver Tenant's security deposit to the purchaser at any such sale or the master tenant of the Premises, and thereupon the transferor shall be discharged from any further liability in reference thereto. H. SUCCESSORS AND ASSIGNS: Subject to the provisions this Section 17, the covenants and conditions of this Lease shall apply to and bind the heirs, successors, executors, administrators and assigns of all Parties hereto; and all Parties hereto comprising Tenant shall be jointly and severally liable hereunder. I. CUSTOMER EQUIPMENT: Landlord acknowledges that Tenant's business in the Premises may require the installation of certain communications equipment by certain licensees and customers of Tenant (collectively, "Customers") in order for such Customers to interconnect with Tenant's equipment in the Premises or to permit Tenant to manage or operate such Customers' equipment, and so long as such Customers are not granted possessory rights to any portion of the Premises (whether as assignees, sublessees, licensees, or in any other capacity), these contracts with the Customers shall not require Landlord's consent, and these Customer contracts do hereby have the Landlord's consent at no consideration to Landlord for the limited purpose of permitting the services and uses described above and so long as Tenant causes such Customers to comply, and all such services and uses are conducted in a manner in compliance with, all of the terms and conditions of this Lease. 18. OPTION TO EXTEND THE LEASE TERM: A. GRANT AND EXERCISE OF OPTION: Landlord grants to Tenant, subject to the terms and conditions set forth in this Section 18.A, two (2) options (the "Options") to extend the Lease Term for an additional term (the "Option Term"). Each Option Term shall be for a period of sixty (60) months and shall be exercised, if at all, by written notice to Landlord no earlier than fifteen (15) months prior to the date the Lease Term would expire but for such exercise but no later than nine (9) months prior to the date the Lease Term would expire but for such exercise, time being of the essence for the giving of such notice. If Tenant exercises the Option, all of the terms, covenants and conditions of this Lease except for the grant of additional Options pursuant to this Section, provided that Base Monthly Rent for the Premises payable by Tenant during the Option Term shall be the greater of (i) the Base Monthly Rent applicable to the period immediately prior to the commencement of the Option Term, and (ii) ninety five percent (95%) of the Fair Market Rental as hereinafter defined. Notwithstanding anything herein to the contrary, if Tenant is in monetary or material non-monetary default under any of the terms, covenants or conditions of this Lease (beyond applicable notice and cure periods) either at the time Tenant exercises the Option or at any time thereafter prior to the commencement date of the Option Term, then Landlord shall have, in addition to all of Landlord's other rights and remedies provided in this Lease, the right to terminate the Option upon notice to Tenant, in which event the Lease Term shall not be extended pursuant to this Section 18.A. As used herein, the term "Fair Market Rental" is defined as the rental and all Page 25 other monetary payments, including any escalations and adjustments thereto (including without limitation Consumer Price Indexing) that Landlord could obtain during the Option Term from a third party desiring to lease the Premises, based upon the current use and other potential uses of the Premises, as determined by the rents then being obtained for new leases of space comparable in age and quality to the Premises in the same real estate submarket as the Building. The appraisers shall be instructed that the foregoing five percent (5%) discount is intended to offset comparable rents that include the following costs which Landlord will not incur in the event Tenant exercises its option (i) brokerage commissions, (ii) tenant improvement allowances, (iii) building improvement costs, and (iv) vacancy costs. B. DETERMINATION OF FAIR MARKET RENTAL: If Tenant exercises the Option, Landlord shall send Tenant a notice setting forth the Fair Market Rental for the Option Term within thirty (30) days following the Exercise Date. If Tenant disputes Landlord's determination of Fair Market Rental for the Option Term, Tenant shall, within thirty (30) days after the date of Landlord's notice setting forth Fair Market Rental for the Option Term, send to Landlord a notice stating that Tenant either elects to terminate its exercise of the Option, in which event the Option shall lapse and this Lease shall terminate on the Expiration Date, or that Tenant disagrees with Landlord's determination of Fair Market Rental for the Option Term and elects to resolve the disagreement as provided in Section 18.C below. If Tenant does not send Landlord a notice as provided in the previous sentence, Landlord's determination of Fair Market Rental shall be the Base Monthly Rent payable by Tenant during the Option Term. If Tenant elects to resolve the disagreement as provided in Section 18.C and such procedures are not concluded prior to the commencement date of the Option Term, Tenant shall pay to Landlord as Base Monthly Rent the Fair Market Rental as determined by Landlord in the manner provided above. If the Fair Market Rental as finally determined pursuant to Section 18.C is greater than Landlord's determination, Tenant shall pay Landlord the difference between the amount paid by Tenant and the Fair Market Rental as so determined in Section 18.C within thirty (30) days after such determination. If the Fair Market Rental as finally determined in Section 18.C is less than Landlord's determination, the difference between the amount paid by Tenant and the Fair Market Rental as so determined in Section 18.C shall be credited against the next installments of Base Monthly Rent due from Tenant to Landlord hereunder. C. RESOLUTION OF A DISAGREEMENT OVER THE FAIR MARKET RENTAL: Any disagreement regarding Fair Market Rental shall be resolved as follows: 1. Within thirty (30) days after Tenant's response to Landlord's notice setting forth the Fair Market Rental, Landlord and Tenant shall meet at a mutually agreeable time and place, in an attempt to resolve the disagreement. 2. If within the 30-day period referred to above, Landlord and Tenant cannot reach agreement as to Fair Market Rental, each party shall select one appraiser to determine Fair Market Rental. Each such appraiser shall arrive at a determination of Fair Market Rental and submit their conclusions to Landlord and Tenant within thirty (30) days after the expiration of the 30-day consultation period described above. 3. If only one appraisal is submitted within the requisite time period, it shall be deemed as Fair Market Rental. If both appraisals are submitted within such time period and the two appraisals so submitted differ by less than ten percent (10%), the average of the two shall be deemed as Fair Market Rental. If the two appraisals differ by more than 10%, the appraisers shall immediately select a third appraiser who shall, within thirty (30) days after his selection, make and submit to Landlord and Tenant a determination of Fair Market Rental. This third appraisal will then be averaged with the closer of the two previous Page 26 appraisals and the result shall be Fair Market Rental. 4. All appraisers specified pursuant to this Section shall be members of the American Institute of Real Estate Appraisers with not less than ten (10) years experience appraising office and industrial properties in the Santa Clara Valley. Each party shall pay the cost of the appraiser selected by such party and one-half of the cost of the third appraiser. D. PERSONAL TO TENANT: All Options provided to Tenant in this Lease are personal and granted to Broadcom Corporation (and any surviving corporation, transferee or buyer pursuant to Section 17.D. above; or any permitted transferee pursuant to Section 17.E. above) and are not exercisable by any third party should Tenant assign or sublet all or a portion of its rights under this Lease, unless Landlord consents to permit exercise of any option by any assignee or subtenant, in Landlord's sole and absolute discretion. In the event Tenant has multiple options to extend this Lease, a later option to extend the Lease cannot be exercised unless the prior option has been properly exercised. 19. GENERAL PROVISIONS: A. ATTORNEY'S FEES: In the event a suit or alternative form of dispute resolution is brought for the possession of the Premises, for the recovery of any sum due hereunder, to interpret the Lease, or because of the breach of any other covenant herein; then the losing party shall pay to the prevailing party reasonable attorney's fees including the expense of expert witnesses, depositions and court testimony as part of its costs which shall be deemed to have accrued on the commencement of such action. The prevailing party shall also be entitled to recover all costs and expenses including reasonable attorney's fees incurred in enforcing any judgment or award against the other party. The foregoing provision relating to post-judgment costs is severable from all other provisions of this Lease. B. AUTHORITY OF PARTIES: Tenant represents and warrants that it is duly formed and in good standing, and is duly authorized to execute and deliver this Lease on behalf of said corporation, in accordance with a duly adopted resolution of the Board of Directors of said corporation or in accordance with the by-laws of said corporation, and that this Lease is binding upon said corporation in accordance with its terms. At Landlord's request, Tenant shall provide Landlord with corporate resolutions or other proof in a form acceptable to Landlord, authorizing the execution of the Lease. C. BROKERS: Tenant represents it has not utilized or contacted a real estate broker or finder with respect to this Lease other than Real Estate & Logistics Technology, Inc. ("Broker") and Tenant agrees to indemnify, defend and hold Landlord harmless against any claim, cost, liability or cause of action asserted by any other broker or finder claiming through Tenant. Landlord shall pay Broker a real estate commission equal to $751,894.00, payable one half upon Landlord's receipt of the executed Lease and a check from Tenant for prepaid Base Monthly Rent for the first month of the Lease, and the remaining half upon the Commencement Date of the Lease. D. CHOICE OF LAW: This Lease shall be governed by and construed in accordance with California law. Except as provided in Section 19.E, venue shall be Santa Clara County. E. DISPUTE RESOLUTION: Landlord and Tenant and any other party that may become a party to this Lease or be deemed a party to this Lease including any subtenants agree that, except for any claim by Landlord for unlawful detainer or any claim within the jurisdiction of the small claims court (which small claims court shall be the sole court of competent jurisdiction), any controversy, dispute, or claim of whatever nature arising out of, in connection with or in relation to the interpretation, performance or breach of this Lease, including any claim based on contract, tort, or statute, shall be resolved at the request of any party to this agreement through a two-step dispute resolution process Page 27 administered by J.A.M.S. or another judicial mediation service mutually acceptable to the parties located in Santa Clara County, California. The dispute resolution process shall involve first, mediation, followed, if necessary, by final and binding arbitration administered by and in accordance with the then existing rules and practices of J.A.M.S. or other judicial mediation service selected. In the event of any dispute subject to this provision, either party may initiate a request for mediation and the parties shall use reasonable efforts to promptly select a J.A.M.S. mediator and commence the mediation. In the event the parties are not able to agree on a mediator within thirty (30) days, J. A. M. S. or another judicial mediation service mutually acceptable to the parties shall appoint a mediator. The mediation shall be confidential and in accordance with California Evidence Code Section 1119 et. seq. The mediation shall be held in Santa Clara County, California and in accordance with the existing rules and practice of J. A. M. S. (or other judicial and mediation service selected). The parties shall use reasonable efforts to conclude the mediation within sixty (60) days of the date of either party's request for mediation. The mediation shall be held prior to any arbitration or court action (other than a claim by Landlord for unlawful detainer or any claim within the jurisdiction of the small claims court which are not subject to this mediation/arbitration provision and may be filed directly with a court of competent jurisdiction). Should the prevailing party in any dispute subject to this Section 19.E attempt an arbitration or a court action before attempting to mediate, the prevailing party shall not be entitled to attorney's fees that might otherwise be available to them in a court action or arbitration and in addition thereto, the party who is determined by the arbitrator to have resisted mediation, shall be sanctioned by the arbitrator or judge. If a mediation is conducted but is unsuccessful, it shall be followed by final and binding arbitration administered by and in accordance with the then existing rules and practices of J.A.M.S. or the other judicial and mediation service selected, and judgment upon any award rendered by the arbitrator(s) may be entered by any state or Federal court having jurisdiction thereof AS PROVIDED BY CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 1280 ET. SEQ, AS SAID STATUTES THEN APPEAR, INCLUDING ANY AMENDMENTS TO SAID STATUTES OR SUCCESSORS TO SAID STATUTES OR AMENDED STATUTES, EXCEPT THAT in no event shall the parties be entitled to propound interrogatories or request for admissions during the arbitration process. The arbitrator shall be a retired judge or a licensed California attorney. The venue for any such arbitration or mediation shall be in Santa Clara County, California. NOTICE: BY INITIALING IN THE SPACE BELOW YOU ARE AGREEING TO HAVE ANY DISPUTE ARISING OUT OF THE MATTERS INCLUDED IN THE "MEDIATION AND ARBITRATION OF DISPUTES" PROVISION DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY INITIALING IN THE SPACE BELOW YOU ARE GIVING UP YOUR JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE "MEDIATION AND ARBITRATION OF DISPUTES" PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY. WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING OUT OF THE MATTERS INCLUDED IN THE "MEDIATION AND Page 28 ARBITRATION OF DISPUTES" PROVISION TO NEUTRAL ARBITRATION. LANDLORD: ______ TENANT: _______ F. ENTIRE AGREEMENT: This Lease and the exhibits attached hereto contains all of the agreements and conditions made between the Parties hereto and may not be modified orally or in any other manner other than by written agreement signed by all parties hereto or their respective successors in interest. This Lease supersedes and revokes all previous negotiations, letters of intent, lease proposals, brochures, agreements, representations, promises, warranties, and understandings, whether oral or in writing, between the parties or their respective representatives or any other person purporting to represent Landlord or Tenant. G. ENTRY BY LANDLORD: Upon at least 24 hours' notice to Tenant (except in case of emergency when no prior notice shall be required) and subject to Tenant's reasonable security regulations, Tenant shall permit Landlord and his agents to enter into and upon the Premises at all reasonable times, and without any rent abatement or reduction or any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises thereby occasioned, for the following purposes: (i) inspecting and maintaining the Premises; (ii) making repairs, alterations or additions to the Premises; (iii) erecting additional building(s) and improvements on the land where the Premises are situated or on adjacent land owned by Landlord; provided that Tenant's use of and access to the Premises are not materially adversely affected; (iv) performing any obligations of Landlord under this Lease including remediation of Hazardous Materials if determined to be the responsibility of Landlord, (v) posting and keeping posted thereon notices of non-responsibility for any construction, alteration or repair thereof, as required or permitted by any law, and (vi) showing the Premises to Landlord's or the Master Landlord's existing or potential successors, purchaser, tenants and lenders. Tenant shall permit Landlord and his agents, at any time within one hundred eighty (180) days prior to the Expiration Date (or at any time during the Lease if Tenant is in default hereunder), to place upon the Premises "For Lease" signs and exhibit the Premises to real estate brokers and prospective tenants at reasonable hours. H. ESTOPPEL CERTIFICATES: At any time during the Lease Term, Tenant shall, within ten (10) business days following written notice from Landlord, execute and deliver to Landlord a written statement certifying, if true, the following: (i) that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification); (ii) the date to which rent and other charges are paid in advance, if any; (iii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on Landlord's part hereunder (or specifying such defaults if they are claimed); and (iv) such other information as Landlord may reasonably request. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of Landlord's interest in the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon the Tenant that this Lease is in full force and effect without modification, except as may be represented by Landlord, and that there are no uncured defaults in Landlord's performance. Tenant agrees to provide, within five (5) business days of Landlord's request, Tenant's most recent three (3) years of audited financial statements for Landlord's use in financing or sale of the Premises or Landlord's interest therein. I. EXHIBITS: All exhibits referred to are attached to this Lease and incorporated by reference. J. INTEREST: All rent due hereunder, if not paid when due, shall bear interest at the rate of the Reference Rate published by Bank of America, San Francisco Branch, plus two percent (2%) per annum from that date until paid in full ("Agreed Interest Rate"). This provision shall survive the expiration or sooner termination of the Lease. Despite any other Page 29 provision of this Lease, the total liability for interest payments shall not exceed the limits, if any, imposed by the usury laws of the State of California. Any interest paid in excess of those limits shall be refunded to Tenant by application of the amount of excess interest paid against any sums outstanding in any order that Landlord requires. If the amount of excess interest paid exceeds the sums outstanding, the portion exceeding those sums shall be refunded in cash to Tenant by Landlord. To ascertain whether any interest payable exceeds the limits imposed, any non-principal payment (including late charges) shall be considered to the extent permitted by law to be an expense or a fee, premium, or penalty rather than interest. K. MODIFICATIONS REQUIRED BY LENDER: If any lender of Landlord or ground lessor of the Premises requires a modification of this Lease that will not increase Tenant's cost or expense or materially or adversely change Tenant's rights and obligations, this Lease shall be so modified and Tenant shall execute whatever documents are required and deliver them to Landlord within ten (10) days after the request. L. NO PRESUMPTION AGAINST DRAFTER: Landlord and Tenant understand, agree and acknowledge that this Lease has been freely negotiated by both Parties; and that in any controversy, dispute, or contest over the meaning, interpretation, validity, or enforceability of this Lease or any of its terms or conditions, there shall be no inference, presumption, or conclusion drawn whatsoever against either party by virtue of that party having drafted this Lease or any portion thereof. M. NOTICES: All notices, demands, requests, or consents required to be given under this Lease shall be sent in writing by U.S. certified mail, return receipt requested by a reputable overnight service such as FedEx at the address for such party specified in Section 1 of this Lease (and when sending to Tenant, marked Attn: Director of Corporate Services), or to such other place as the party to be notified may from time to time designate by at least fifteen (15) days prior notice to the notifying party. Any notice received on Saturday, Sunday or legal holiday shall be deemed received on the next business day. Copies of all default notices shall be sent concurrently to Brobeck, Phleger & Harrison LLP, 12390 El Camino Real, San Diego, CA 92130; Attn: W. Scott Biel, Esq. When this Lease requires service of a notice, that notice shall replace rather than supplement any equivalent or similar statutory notice, including any notices required by Code of Civil Procedure Section 1161 or any similar or successor statute. When a statute requires service of a notice in a particular manner, service of that notice (or a similar notice required by this Lease) shall replace and satisfy the statutory service-of-notice procedures, including those required by Code of Civil Procedure Section 1162 or any similar or successor statute. N. PROPERTY MANAGEMENT: Tenant agrees to pay Landlord along with the expenses to be reimbursed by Tenant a monthly fee for management services rendered by either Landlord or a third party manager engaged by Landlord (which may be a party affiliated with Landlord), in the amount of three percent (3%) of the Base Monthly Rent. O. RENT: All monetary sums due from Tenant to Landlord under this Lease, including, without limitation those referred to as "additional rent", shall be deemed as rent. P. REPRESENTATIONS: Tenant acknowledges that neither Landlord nor any of its employees or agents have made any agreements, representations, warranties or promises with respect to the Premises or with respect to present or future rents, expenses, operations, tenancies or any other matter. Except as herein expressly set forth herein, Tenant relied on no statement of Landlord or its employees or agents for that purpose. Q. RIGHTS AND REMEDIES: Subject to Section 14 above, All rights and remedies hereunder are cumulative and not alternative to the extent permitted by law, and are in addition to all other rights and remedies in law and in equity. Page 30 R. SEVERABILITY: If any term or provision of this Lease is held unenforceable or invalid by a court of competent jurisdiction, the remainder of the Lease shall not be invalidated thereby but shall be enforceable in accordance with its terms, omitting the invalid or unenforceable term. S. SUBMISSION OF LEASE: Submission of this document for examination or signature by the parties does not constitute an option or offer to lease the Premises on the terms in this document or a reservation of the Premises in favor of Tenant. This document is not effective as a lease or otherwise until executed and delivered by both Landlord and Tenant. T. SUBORDINATION: This Lease is subject and subordinate to ground and underlying leases, mortgages and deeds of trust (collectively "Encumbrances") which may now affect the Premises, to any covenants, conditions or restrictions of record, and to all renewals, modifications, consolidations, replacements and extensions thereof; provided, however, if the holder or holders of any such Encumbrance ("Holder") require that this Lease be prior and superior thereto, within ten (10) business days after written request of Landlord to Tenant, Tenant shall execute, have acknowledged and deliver all documents or instruments, in the form presented to Tenant (provided such form is commercially reasonable), which Landlord or Holder deems necessary or desirable for such purposes. Landlord shall have the right to cause this Lease to be and become and remain subject and subordinate to any and all Encumbrances which are now or may hereafter be executed covering the Premises or any renewals, modifications, consolidations, replacements or extensions thereof, for the full amount of all advances made or to be made thereunder and without regard to the time or character of such advances, together with interest thereon and subject to all the terms and provisions thereof; provided only, that in the event of termination of any such lease or upon the foreclosure of any such mortgage or deed of trust, Holder agrees to recognize Tenant's rights under this Lease as long as Tenant is not then in default and continues to pay Base Monthly Rent and additional rent and observes and performs all required provisions of this Lease. Within thirty (30) days after Landlord's written request, Tenant shall execute any documents required by Landlord or the Holder to make this Lease subordinate to any lien of the Encumbrance. If Tenant fails to do so, then in addition to such failure constituting a default by Tenant, it shall be deemed that this Lease is so subordinated to such Encumbrance. Notwithstanding anything to the contrary in this Section, Tenant hereby attorns and agrees to attorn to any entity purchasing or otherwise acquiring the Premises at any sale or other proceeding or pursuant to the exercise of any other rights, powers or remedies under such encumbrance. Landlord shall use its best efforts to obtain and deliver to Tenant as soon as reasonably possible following the Effective Date written nondisturbance agreements ("Nondisturbance Agreements") from all lessors under all ground leases or underlying leases, from all beneficiaries under all deeds of trust and all mortgagees under all mortgages affecting the Premises, stating that so long as no event of default has occurred, this Lease and all of the terms, provisions, and conditions of this Lease, shall remain in full force and effect, and neither this Lease, nor Tenant's rights nor Tenant's possession of the Premises will be disturbed during the Term of this Lease or any extension thereof. U. SURVIVAL OF INDEMNITIES: All indemnification, defense, and hold harmless obligations of Landlord and Tenant under this Lease shall survive the expiration or sooner termination of the Lease. V. TIME: Time is of the essence hereunder. W. TRANSPORTATION DEMAND MANAGEMENT PROGRAMS: Should a government agency or municipality require Landlord to institute TDM (Transportation Demand Management) facilities and/or programs, Tenant agrees that the cost of Page 31 TDM imposed facilities and programs required on the Premises, including but not limited to employee showers, lockers, cafeteria, or lunchroom facilities, shall be paid by Tenant. Further, any ongoing costs or expenses associated with a TDM program which are required for the Premises and not provided by Tenant, such as an on-site TDM coordinator, shall be provided by Landlord with such costs being included as additional rent and reimbursed to Landlord by Tenant within thirty (30) days after demand. If TDM facilities and programs are instituted on a Project wide basis, Tenant shall pay its proportionate share of such costs in accordance with Section 8 above. X. WAIVER OF RIGHT TO JURY TRIAL: Landlord and Tenant waive their respective rights to trial by jury of any contract or tort claim, counterclaim, cross-complaint, or cause of action in any action, proceeding, or hearing brought by either party against the other on any matter arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, or Tenant's use or occupancy of the Premises, including any claim of injury or damage or the enforcement of any remedy under any current or future law, statute, regulation, code, or ordinance. 20. RIGHT OF FIRST OFFER: A. GRANT: Subject to the existing rights of any third parties and provided Tenant concurrently exercises it right of first offering as described below on all three buildings as a group, Landlord hereby grants Tenant a right of first offering to lease the adjacent buildings at 2421, 2431 and 2441 Mission College Boulevard ("Expansion Buildings") totaling 282,649 square feet as highlighted in green on Exhibit "A"; provided that if Landlord intends to offer less than all of the Expansion Buildings to any third party, Tenant shall have similar rights with respect to such lesser additional premises to be so offered. Prior to Landlord offering to lease the Expansion Buildings to a third party (other than the third parties with existing rights), Landlord shall give Tenant written notice of such desire and the terms and other information under which Landlord intends to lease the Expansion Buildings. Provided at the time of exercise, (i) Tenant is not in default and (ii) Tenant's then current net worth (as evidenced by its most recent financial statements) is at least equal to its net worth at the time of execution of this Lease, Tenant shall have the option, which must be exercised, if at all, by written notice to Landlord within ten (10) days after Tenant's receipt of Landlord's notice, to lease the Expansion Buildings at the rent and terms of lease specified in the notice. In the event Tenant timely exercises such option to lease the Expansion Buildings, Landlord shall lease the Expansion Buildings to Tenant, and Tenant shall lease the Expansion Buildings from Landlord in accordance with the rent and terms specified in Landlord's notice. Landlord and Tenant shall, in good faith, attempt to reach agreement on the terms of a mutually acceptable lease agreement consistent with the terms set forth in Landlord's notice and otherwise on the terms of this Lease within fifteen (15) business days of Landlord's notice. In the event (i) Landlord and Tenant are unable to reach agreement on a mutually acceptable lease within such 15 business-day period or (ii) Tenant fails to exercise Tenant's option within said ten (10) day period, Landlord shall have one hundred eighty (180) days thereafter to lease the Expansion Buildings at no less than ninety percent (90%) of the rental rate and upon the same or substantially the same other terms of lease as specified in the notice to Tenant. In the event Landlord fails to lease the Expansion Buildings within said one hundred eighty (180) day period or in the event Landlord proposes to lease the Expansion Buildings at less than ninety percent (90%) of the rental rate or on other material terms which are more favorable to the prospective tenant than that proposed to Tenant, Landlord shall be required to resubmit such offer to Tenant in accordance with this Right of First Offering. B. EXCLUSIONS: Notwithstanding the foregoing, this Right of First Offering shall automatically terminate, (i) upon the expiration or sooner termination of the Lease, or (ii) in the event that Landlord transfers its interest in the Premises or in the Expansion Buildings. Page 32 21. NORTEL SUBLEASE: Within thirty (30) days of the Effective Date, Tenant agrees to enter into a mutually agreeable sublease with Nortel Networks for 310 square feet of the Premises as shown on the attached Exhibit "D". Page 33 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease on the day and year first above written. LANDLORD: Sobrato Interests, TENANT: Broadcom Corporation, a California Limited Partnership a California Corporation By: /s/ JOHN M. SOBRATO * By: /s/ WILLIAM J. RUEHLE ---------------------------------- ----------------------------------- Its: General Partner Its: Vice President --------------------------------- ------------------------------------ * By: /s/ WILLIAM J. RUEHLE ---------------------------------- Its: Chief Financial Officer ----------------------------------- * NOTE: This lease must be signed by two (2) officers of such corporation: one being the chairman of the board, the president, or a vice president, and the other being the secretary, an assistant secretary, the chief financial officer or an assistant treasurer. If one (1) individual is signing in two (2) of the foregoing capacities, that individual must sign twice; once as one officer and again as the other officer and in such event, Tenant must deliver to Landlord a certified copy of a corporate resolution authorizing the signatory to execute this Lease. Page 34 EXHIBIT "A" - PREMISES, BUILDING & PROJECT Page 35 EXHIBIT "B" - DRAFT LETTER OF CREDIT Page 36 EXHIBIT "C" - THERMA MECHANICAL REPORT Page 37 EXHIBIT "D" - NORTEL SUBLEASE SPACE Page 38 SECOND AMENDMENT TO LEASE This SECOND AMENDMENT TO LEASE ("Second Amendment") is made as of March 30, 2001, by and between Sobrato Interests, a California limited partnership ("Landlord"), and Broadcom Corporation, a California corporation ("Tenant"). RECITALS WHEREAS, Landlord and Tenant entered into that certain Lease dated November 20, 2000 ("Lease") relating to certain premises located at 2451-2465 Mission College Boulevard, Santa Clara, California ("Premises"), as more fully described in the Lease; and WHEREAS, Landlord and Tenant desire to amend the Lease in accordance with the terms and provisions hereof. AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants set forth below, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. All capitalized terms not specifically defined in this Second Amendment shall have the meanings set forth in the Lease. 2. The first sentence of Section 4.A of the Lease is hereby deleted and the following is substituted therefor: "The term ("Lease Term") shall be for ninety-six (96) months, commencing on July 1, 2001 (the "Commencement Date") and ending on June 30, 2009 ("Expiration Date")." 3. The schedule of Base Monthly Rent as set forth in Section 4.A of the Lease is hereby deleted and the following is substituted therefor: Months 01-12: $768,925 per month $5.62 psf Months 13-24: $799,000.76 per month $5.84 psf Months 25-36: $830,443.60 per month $6.07 psf Months 37-48: $863,253.52 per month $6.31 psf Months 49-60: $896,063.44 per month $6.55 psf Months 61-72: $931,607.52 per month $6.81 psf Months 73-84: $968,518.68 per month $7.08 psf Months 85-96: $1,006,796.92 per month $7.36 psf

4. The first sentence of Section 4.C of the Lease is hereby deleted and the following is substituted therefor: "On or prior to May 1, 2001, Tenant shall deposit with Landlord the sum of Three Million One Hundred Thousand and No/100 Dollars ($3,100,000.00) ("Security Deposit")." 5. The sixth sentence of Section 4.C of the Lease, which currently reads "If Tenant shall default more than three (3) times in any twelve (12) month period, irrespective of whether or not such default is cured, then the Security Deposit shall, within ten (10) days after demand by Landlord, be increased by Tenant to an amount equal to three (3) times the Base Monthly Rent" is hereby deleted. 6. The last full paragraph of Section 4.C of the Lease, regarding Tenant's right to deposit a Letter of Credit in lieu of a cash Security Deposit, is hereby deleted in its entirety. 7. Except as amended in this Second Amendment, all of the terms and provisions of the Lease remain unchanged and in full force and effect. 8. This Second amendment may be executed in any number of counterparts, each of which shall be deemed an original and all of which taken together shall constitute a single instrument. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be executed as of the day and year first above written. LANDLORD: TENANT: SOBRATO INTERESTS, BROADCOM CORPORATION, a California limited partnership a California corporation By: /s/ JOHN M. SOBRATO By: /s/ WILLIAM J. RUEHLE ---------------------------- --------------------------- Name: John M. Sobrato Title: Vice President -------------------------- ------------------------ Title: General Partner By: /s/ WILLIAM J. RUEHLE ------------------------- --------------------------- Title: Chief Financial Officer ------------------------ 2 EX-10.19 5 a78920ex10-19.txt EXHIBIT 10.19 EXHIBIT 10.19 EXECUTION COPY ================================================================================ Credit Agreement between Broadcom Corporation and Bank of America, N.A. Dated as of December 21, 2001 ================================================================================ TABLE OF CONTENTS
Section Page - ------- ---- SECTION 1. DEFINITIONS AND ACCOUNTING TERMS..................................................1 1.01 Defined Terms.................................................................1 1.02 Use of Certain Terms.........................................................15 1.03 Accounting Terms.............................................................16 1.04 Rounding.....................................................................16 1.05 Exhibits and Schedules.......................................................16 1.06 References to Agreements and Laws............................................16 SECTION 2. THE COMMITMENT AND EXTENSIONS OF CREDIT..........................................16 2.01 The Commitment...............................................................16 2.02 Borrowings, Conversions and Continuations of Loans...........................17 2.03 Prepayments..................................................................17 2.04 Reduction or Termination of Commitment.......................................17 2.05 Principal and Interest.......................................................18 2.06 Fees.........................................................................18 2.07 Computation of Interest and Fees.............................................18 2.08 Making Payments..............................................................19 2.09 Funding Sources..............................................................19 SECTION 3. TAXES, YIELD PROTECTION AND ILLEGALITY...........................................19 3.01 Taxes........................................................................19 3.02 Illegality...................................................................21 3.03 Inability to Determine Offshore Rate.........................................21 3.04 Increased Cost and Reduced Return; Capital Adequacy..........................21 3.05 Breakfunding Costs...........................................................22 3.06 Matters Applicable to all Requests for Compensation..........................22 3.07 Survival.....................................................................23 SECTION 4. CONDITIONS PRECEDENT TO EXTENSIONS OF CREDIT.....................................23 4.01 Conditions of Initial Extension of Credit....................................23 4.02 Conditions to all Extensions of Credit.......................................24 SECTION 5. REPRESENTATIONS AND WARRANTIES...................................................24 5.01 Existence and Qualification; Power; Compliance with Laws.....................24 5.03 Power; Authorization; Enforceable Obligations................................25 5.04 No Legal Bar.................................................................25 5.05 Financial Statements; No Material Adverse Effect.............................25 5.06 Litigation...................................................................26 5.07 No Default...................................................................26 5.08 Ownership of Property; Liens.................................................26 5.09 Taxes........................................................................26 5.10 Margin Regulations; Investment Company Act; Public Utility Holding Company Act..................................................................26 5.11 ERISA Compliance.............................................................27 5.12 Intangible Assets............................................................27 5.13 Compliance With Laws.........................................................27 5.14 Environmental Compliance.....................................................27 5.15 Insurance....................................................................27
-i- 5.16 Disclosure...................................................................28 SECTION 6. AFFIRMATIVE COVENANTS............................................................28 6.01 Financial Statements.........................................................28 6.02 Certificates, Notices and Other Information..................................28 6.03 Payment of Taxes.............................................................29 6.04 Preservation of Existence....................................................30 6.05 Maintenance of Properties....................................................30 6.06 Maintenance of Insurance.....................................................30 6.07 Compliance With Laws.........................................................30 6.08 Inspection Rights............................................................30 6.09 Keeping of Records and Books of Account......................................30 6.10 Compliance with ERISA........................................................30 6.11 Compliance With Agreements...................................................30 6.12 Use of Proceeds..............................................................31 SECTION 7. NEGATIVE COVENANTS...............................................................31 7.01 Indebtedness.................................................................31 7.02 Liens and Negative Pledges...................................................32 7.03 Fundamental Changes..........................................................33 7.04 Dispositions.................................................................34 7.05 Investments; Acquisitions....................................................34 7.06 Restricted Payments..........................................................35 7.07 ERISA........................................................................35 7.08 Change in Nature of Business.................................................35 7.09 Transactions with Affiliates.................................................35 7.10 Hostile Acquisitions.........................................................35 7.11 Margin Regulations...........................................................35 7.12 Financial Covenants..........................................................36 7.13 Change in Auditors...........................................................36 SECTION 8. EVENTS OF DEFAULT AND REMEDIES...................................................36 8.01 Events of Default............................................................36 8.02 Remedies Upon Event of Default...............................................38 SECTION 9. MISCELLANEOUS....................................................................39 9.01 Amendments; Consents.........................................................39 9.02 Requisite Notice; Effectiveness of Signatures and Electronic Mail............39 9.03 Attorney Costs, Expenses and Taxes...........................................40 9.04 Successors and Assigns; Participations.......................................41 9.05 Set-Off......................................................................41 9.06 No Waiver; Cumulative Remedies...............................................42 9.07 Usury........................................................................42 9.08 Counterparts.................................................................42 9.09 Integration..................................................................42 9.10 Nature of Lender's Obligations...............................................42 9.11 Survival of Representations and Warranties...................................43 9.12 Indemnity by Borrower........................................................43 9.13 Nonliability of Lender.......................................................43 9.14 No Third Parties Benefited...................................................44 9.15 Severability.................................................................44 9.16 Confidentiality..............................................................44

-ii- 9.17 Further Assurances...........................................................45 9.18 Headings.....................................................................45 9.19 Time of the Essence..........................................................45 9.20 Governing Law................................................................45 9.21 Waiver of Right to Trial by Jury.............................................46 SIGNATURES.....................................................................................S-1

EXHIBITS FORM OF A Request for Extension of Credit B Compliance Certificate C Opinion of Counsel SCHEDULES 5.02 Subsidiaries 7.01 Existing Indebtedness, Liens and Negative Pledges 9.02 Notice Addresses and Lending Office -iii- CREDIT AGREEMENT This CREDIT AGREEMENT ("Agreement") is entered into as of December 21, 2001, by and between BROADCOM CORPORATION, a California corporation ("Borrower"), and BANK OF AMERICA, N.A. ("Lender"). RECITAL Borrower has requested that Lender provide a revolving line of credit, and Lender is willing to do so on the terms and conditions set forth herein. In consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows: SECTION 1. DEFINITIONS AND ACCOUNTING TERMS 1.01 DEFINED TERMS. As used in this Agreement, the following terms shall have the meanings set forth below: "Acquisition" means the acquisition, by purchase or otherwise, of all or substantially all of the assets, capital stock or other ownership of any Person or any division or line of business of any Person. "Affiliate" means any Person directly or indirectly controlling, controlled by, or under direct or indirect common control with, another Person. A Person shall be deemed to be "controlled by" any other Person if such other Person possesses, directly or indirectly, power (a) to vote 10% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managing general partners; or (b) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "Agreement" means this Credit Agreement, as amended, restated, extended, supplemented or otherwise modified in writing from time to time. "Applicable Amount" means a per annum rate equal to: (a) with respect to Base Rate Loans, 0 percent; (b) with respect to Offshore Rate Loans, 1 percent; and (c) with respect to the Commitment fee, 0.35 percent. "Applicable Payment Date" means, (a) as to any Offshore Rate Loan, the last day of the relevant Interest Period, any date that such Loan is prepaid or converted in whole or in part and the Maturity Date; and (b) as to any other Obligations, the last Business Day of each calendar quarter and the Maturity Date; provided, further, that interest accruing at the Default Rate shall be payable from time to time upon demand of Lender. -1- "Applicable Time" means California time. "Attorney Costs" means and includes all reasonable and documented fees and disbursements of any law firm or other external counsel and the reasonable and documented allocated cost of internal legal services and all reasonable and documented out of pocket disbursements of internal counsel. "Audited Financial Statements" means the audited consolidated balance sheet of Borrower and its Subsidiaries for the fiscal year ended December 31, 2000, and the related consolidated statements of income and cash flows for such fiscal year of Borrower. "Base Rate" means for any day a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus 1/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by Lender as its "prime rate." Such rate is a rate set by Lender based upon various factors including Lender's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by Lender shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan which bears interest based on the Base Rate. "Borrower" has the meaning set forth in the introductory paragraph hereto. "Business Day" means any day other than a Saturday, Sunday, or other day on which commercial banks are authorized to close under the Laws of, or are in fact closed in, the state where Lender's Lending Office is located and, if such day relates to any Offshore Rate Loan, means any such day on which dealings in Dollar deposits are conducted by and between banks in the offshore Dollar interbank market. "Cash" means money, currency or a credit balance in a Deposit Account. "Cash Equivalents" means, as of any date, (a) marketable securities (i) issued or directly and unconditionally guaranteed as to interest and principal by the United States government or (ii) issued by any agency of the United States of America the obligations of which are backed by the full faith and credit of the United States of America, in each case maturing within one year after such date; (b) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof, in each case maturing within one year after such date and having, at the time of the acquisition thereof, one of the two highest ratings obtainable from either Standard & Poor's ("S&P") or Moody's Investors Service, Inc. ("Moody's"); (c) (i) commercial paper maturing no more than one year from the date of creation thereof, or (ii) marketable debt securities maturing within one year after such date, and, in each case, either issued by a Lender (or an Affiliate of a Lender) or having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody's; (d) certificates of deposit or bankers' acceptances maturing within one year after such date and issued or accepted by any Lender or by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia that (i) is at least "adequately capitalized" (as defined in the regulations of its primary Federal banking -2- regulator) and (ii) has Tier 1 capital (as defined in such regulations) of not less than $100,000,000; or (e) shares of any money market mutual fund that (i) has at least 95% of its assets invested continuously in the types of investments referred to in subsections (a), (b) or (c) above, (ii) has net assets of not less than $500,000,000, and (iii) has the highest rating obtainable from either S&P or Moody's. "Change of Control" means, with respect to any Person, an event or series of events by which: (a) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding (i) any employee benefit plan of such Person or its subsidiaries, (ii) any Person acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan or (iii) any Permitted Holder), becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person shall be deemed to have "beneficial ownership" of all securities that such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of 50% or more of the membership interests of such Person; or (b) during any period of 12 consecutive months, a majority of the members of the board of directors or other equivalent governing body of such Person cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in subsection (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals referred to in subsections (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body. "Closing Date" means the date all the conditions precedent in Section 4.01 are satisfied or waived by Lender. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Commitment" means $90,000,000, as such amount may be reduced or adjusted from time to time in accordance with the terms of this Agreement. "Compliance Certificate" means a certificate substantially in the form of Exhibit B, properly completed and signed by a Responsible Officer of Borrower. "Consolidated Current Liabilities" means, as of any date of determination, the total liabilities of Borrower and its Subsidiaries on a consolidated basis which may properly be classified as current liabilities in conformity with GAAP. "Consolidated Interest Charges" means, for any period, for Borrower and its Subsidiaries on a consolidated basis, the sum of (a) all interest, premium payments, fees, charges and related expenses of Borrower and its Subsidiaries in connection with borrowed money (including -3- capitalized interest) or in connection with the deferred purchase price of assets, in each case to the extent treated as interest in accordance with GAAP, and (b) the portion of rent expense of Borrower and its Subsidiaries with respect to such period under capital leases that is treated as interest in accordance with GAAP. "Consolidated LTM Adjusted EBITDA" means, for any period, for Borrower and its Subsidiaries on a consolidated basis, an amount equal to (a) the sum of (i) Consolidated Net Income, (ii) Consolidated Interest Charges, (iii) the amount of taxes, based on or measured by income, used or included in the determination of such Consolidated Net Income, (iv) the amount of depreciation and amortization expense deducted in determining such Consolidated Net Income including amortization of intangibles (including goodwill), (v) non-cash stock compensation expense and all other non-cash expenses (other than any such non-cash expenses to the extent they represent an accrual of, or reserve for, cash expenditures in any future period) but only to the extent deducted in the calculation of Consolidated Net Income, (vi) merger and acquisition costs, (vii) write-offs of goodwill and in process research and development costs, (viii) restructuring costs, and (ix) extraordinary, unusual or non-recurring charges or losses to the extent deducted in the calculation of Consolidated Net Income, minus (b) the sum of (i) extraordinary, unusual or non-recurring gains to the extent added in the calculation of Consolidated Net Income and (ii) all other non-cash items added in the calculation of Consolidated Net Income (other than any such non-cash items to the extent they will result in the receipt of cash payments in any future period). "Consolidated Net Income" means, for any period, for Borrower and its Subsidiaries on a consolidated basis, the net income (or loss) of Borrower and its Subsidiaries determined in accordance with GAAP. "Consolidated Quick Assets" means, as of any date of determination, for Borrower and its Subsidiaries on a consolidated basis, (a) Cash, (b) Cash Equivalents, and (c) net current accounts receivable. "Consolidated Tangible Net Worth" means, as of any date of determination, for Borrower and its Subsidiaries on a consolidated basis, Shareholders' Equity of Borrower and its Subsidiaries on that date minus the Intangible Assets of Borrower and its Subsidiaries on that date. "Continuation" and "Continue" mean, with respect to any Offshore Rate Loan, the continuation of such Offshore Rate Loan as an Offshore Rate Loan on the last day of the Interest Period for such Loan. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or undertaking to which such Person is a party or by which it or any of its property is bound. "Conversion" and "Convert" mean, with respect to any Loan, the conversion of such Loan from or into another type of Loan. "Debtor Relief Laws" means the Bankruptcy Code of the United States of America, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, -4- moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States of America or other applicable jurisdictions from time to time in effect affecting the rights of creditors generally. "Default" means any event that, with the giving of any notice, the passage of time, or both, would be an Event of Default. "Default Rate" means an interest rate equal to the Base Rate plus the Applicable Amount, if any, applicable to Base Rate Loans plus 2% per annum; provided, however, that with respect to an Offshore Rate Loan, the Default Rate shall be an interest rate equal to the interest rate (including any Applicable Amount) otherwise applicable to such Loan plus 2% per annum, in each case to the fullest extent permitted by applicable Laws. "Deposit Account" means a demand, time, savings, passbook or similar account maintained with a Person engaged in the business of banking, including a savings bank, savings and loan association, credit union or trust company. "Disposition" or "Dispose" means the sale, transfer, license or other disposition (including any sale and leaseback transaction) of any property by any Person, including any sale, assignment, transfer or other disposal with or without recourse of any notes or accounts receivable or any rights and claims associated therewith. "Dollar" and "$" means lawful money of the United States of America. "Environmental Laws" means all Laws relating to environmental, health, safety and land use matters applicable to any property. "ERISA" means the Employee Retirement Income Security Act of 1974 and any regulations issued pursuant thereto, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with Borrower within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by Borrower or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by Borrower or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Sections 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon Borrower or any ERISA Affiliate. -5- "Event of Default" means any of the events specified in Section 8. "Extension of Credit" means the borrowing, Conversion or Continuation of any Loan (collectively, the "Extensions of Credit"). "Federal Funds Rate" means, for any day, the rate per annum (rounded upwards to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate charged to Lender on such day on such transactions as determined by Lender. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other principles as may be approved by a significant segment of the accounting profession, that are applicable to the circumstances as of the date of determination, consistently applied. If at any time any change in GAAP would affect the computation of any financial ratio or requirement set forth in any Loan Document, and either Borrower or Lender shall so request, Lender and Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP (subject to the approval of Lender and Borrower), provided that, until so amended, (a) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein and (b) Borrower shall provide to Lender financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP. "Governmental Authority" means (a) any international, foreign, federal, state, county or municipal government, or political subdivision thereof, (b) any governmental or quasi-governmental agency, authority, board, bureau, commission, department, instrumentality, central bank or public body, or (c) any court, administrative tribunal or public utility. "Guaranty Obligation" means, as to any Person, any (a) guaranty by such Person of Indebtedness of, or other obligation payable or performable by, any other Person or (b) assurance, agreement, letter of responsibility, letter of awareness, undertaking or arrangement given by such Person to an obligee of any other Person with respect to the payment or performance of an obligation by, or the financial condition of, such other Person, whether direct, indirect or contingent, including any purchase or repurchase agreement covering such obligation or any collateral security therefor, any agreement to provide funds (by means of loans, capital contributions or otherwise) to such other Person, any agreement to support the solvency or level of any balance sheet item of such other Person or any "keep-well" or other arrangement of whatever nature given for the purpose of assuring or holding harmless such obligee against loss with respect to any obligation of such other Person; provided, however, that the term Guaranty Obligation shall not include endorsements of instruments for deposit or collection in the ordinary -6- course of business. The amount of any Guaranty Obligation shall be deemed to be an amount equal to the maximum reasonably anticipated liability in respect thereof as determined by the Person in good faith. "Indebtedness" means, as to any Person at a particular time, all of the following: (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (b) any direct or contingent obligations of such Person arising under letters of credit (including standby and commercial), banker's acceptances, bank guaranties, surety bonds and similar instruments; (c) net obligations under any Swap Contract in an amount equal to (i) if such Swap Contract has been closed out, the termination value thereof, or (ii) if such Swap Contract has not been closed out, the mark-to-market value thereof determined on the basis of readily available quotations provided by any recognized dealer in such Swap Contract; (d) whether or not so included as liabilities in accordance with GAAP, all obligations of such Person to pay the deferred purchase price of property or services, and indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse; (e) lease payment obligations under capital leases or Synthetic Lease Obligations; or (f) all Guaranty Obligations of such Person in respect of any of the foregoing. For all purposes of this Agreement, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture in which such Person is a general partner or a joint venturer, unless such Indebtedness is expressly made non-recourse to such Person except for customary exceptions reasonably acceptable to Lender. "Indemnified Liabilities" has the meaning set forth in Section 9.12. "Indemnitees" has the meaning set forth in Section 9.12. "Intangible Assets" means assets that are considered to be intangible assets under GAAP, including customer lists, goodwill, computer software, copyrights, trade names, trade marks, patents, unamortized deferred charges, unamortized debt discount and capitalized research and development costs. "Interest Period" means for each Offshore Rate Loan, (a) initially, the period commencing on the date such Offshore Rate Loan is disbursed or Continued or Converted into such Offshore Rate Loan and (b) thereafter, the period commencing on the last day of the -7- preceding Interest Period, and ending, in each case, on the earlier of (x) the scheduled Maturity Date, or (y) to the extent then available, one, two, or three months thereafter (as selected by Borrower); provided that: (i) any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day; (ii) any Interest Period which begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) unless Lender otherwise consents, there may not be more than five Interest Periods for Offshore Rate Loans in effect at any time. "Investment" means, as to any Person, any acquisition or any investment by such Person, whether by means of the purchase or other acquisition of stock or other securities of any other Person or by means of a loan, creating a debt, capital contribution, guaranty or other debt or equity participation or interest in any other Person, including any partnership and joint venture interests in such other Person. For purposes of covenant compliance, the amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the value of such Investment. "IRS" means the United States Internal Revenue Service. "Laws" or "Law" means all international, foreign, federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law. "Lending Office" means the office or offices of Lender described as such on Schedule 9.02, or such other office or offices as Lender may from time to time notify Borrower. "Lien" means any mortgage, pledge, hypothecation, assignment, deposit arrangement (in the nature of compensating balances, Cash collateral accounts or security interests), encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of any financing statement under the Uniform Commercial Code or comparable Laws of any jurisdiction), including the interest of a purchaser of accounts receivable. "Loan" means any advance made as provided in Section 2 (collectively, the "Loans"). -8- "Loan Documents" means this Agreement, each Request for Extension of Credit, each Compliance Certificate, each certificate, each fee letter, and each other instrument, document and agreement from time to time delivered in connection with this Agreement. "Long Term Cash Equivalents" means, as of any date, (a) marketable securities (i) issued or directly and unconditionally guaranteed as to interest and principal by the United States government or (ii) issued by any agency of the United States of America the obligations of which are backed by the full faith and credit of the United States of America, in each case maturing within three years after such date; (b) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof, in each case maturing within three years after such date and having, at the time of the acquisition thereof, one of the two highest ratings obtainable from either S&P or Moody's; (c) (i) commercial paper maturing no more than three years from the date of creation thereof, or (ii) marketable debt securities maturing within three years after such date, and, in each case, either issued by a Lender (or an Affiliate of a Lender) or having, at the time of the acquisition thereof, a rating of at least A-1 from S&P or at least P-1 from Moody's; (d) certificates of deposit or bankers' acceptances maturing within three years after such date and issued or accepted by any Lender or by any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia that (i) is at least "adequately capitalized" (as defined in the regulations of its primary Federal banking regulator) and (ii) has Tier 1 capital (as defined in such regulations) of not less than $100,000,000; or (e) shares of any money market mutual fund that (i) has at least 95% of its assets invested continuously in the types of investments referred to in subsections (a), (b) or (c) above, (ii) has net assets of not less than $500,000,000, and (iii) has the highest rating obtainable from either S&P or Moody's. "Material Adverse Effect" means any set of circumstances or events which (a) has a material adverse effect upon the validity or enforceability of any Loan Document and (b) is material and adverse to the condition (financial or otherwise), business, assets, operations or prospects of Borrower and its Subsidiaries, taken as a whole, and which materially impairs the ability of Borrower to perform the Obligations. "Material Subsidiaries" means one or more Subsidiaries having, alone or in the aggregate, (a) 5% or more of the gross revenue of Borrower and its Subsidiaries on a consolidated basis, or (b) 5% or more of the fair market value of the assets of Borrower and its Subsidiaries on a consolidated basis. "Maturity Date" means (a) December 19, 2002, or (b) such earlier date upon which the Commitment may be terminated in accordance with the terms of this Agreement. "Minimum Amount" means, with respect to each of the following actions, the minimum amount and any multiples in excess thereof set forth opposite such action: -9-
MULTIPLES IN TYPE OF ACTION MINIMUM AMOUNT EXCESS THEREOF - --------------------------------- -------------- -------------- Borrowing or prepayment of, or $1,000,000 $500,000 Conversion into, Base Rate Loans Borrowing, prepayment or $1,000,000 $500,000 Continuation of, or Conversion into, Offshore Rate Loans Reduction in Commitments $5,000,000 $500,000
"Multiemployer Plan" means any employee benefit plan of the type described in Section 4001(a)(3) of ERISA. "Negative Pledge" means a Contractual Obligation that restricts Liens on property. "Net Securities Proceeds" means the Cash proceeds (net of underwriting discounts and commissions and other reasonable costs and expenses associated therewith, including legal fees and expenses) from the issuance of Indebtedness (as defined in subsections (a), (e) and (f) of the definition thereof) by Borrower or any of its Subsidiaries. "Obligations" means all advances to, and debts, liabilities, obligations, covenants and duties of, Borrower arising under any Loan Document, whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising and including interest that accrues after the commencement of any proceeding under any Debtor Relief Laws by or against Borrower or any Subsidiary or Affiliate of Borrower. "Offshore Base Rate" has the meaning set forth in the definition of Offshore Rate. "Offshore Rate" means for any Interest Period with respect to any Offshore Rate Loan, a rate per annum determined by Lender pursuant to the following formula: Offshore Base Rate Offshore Rate = ------------------------------------ 1.00 - Eurodollar Reserve Percentage -10- Where, "Offshore Base Rate" means, for such Interest Period: (a) the rate per annum equal to the rate determined by Lender to be the offered rate that appears on the page of the Telerate screen that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (b) in the event the rate referenced in the preceding subsection (a) does not appear on such page or service or such page or service shall cease to be available, the rate per annum equal to the rate determined by Lender to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (c) in the event the rates referenced in the preceding subsections (a) and (b) are not available, the rate per annum (rounded upward to the next 1/100th of 1%) determined by Lender as the rate of interest at which Dollar deposits for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Offshore Rate Loan being made, Converted or Continued and with a term equivalent to such Interest Period would be offered by Lender's London Branch to major banks in the offshore Dollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period. "Eurodollar Reserve Percentage" means, for any day during any Interest Period, the reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day applicable to Lender under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"). The Offshore Rate for each outstanding Offshore Rate Loan shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. The determination of the Eurodollar Reserve Percentage and the Offshore Base Rate by Lender shall be prima facie evidence absent demonstrable error. "Offshore Rate Loan" means a Loan bearing interest based on the Offshore Rate. "Ordinary Course Swap Obligations" means all obligations (contingent or otherwise) of Borrower or any Subsidiary existing or arising under any Swap Contract, provided that each of the following criteria is satisfied: (a) such obligations are (or were) entered into by such Person in the ordinary course of business for the purpose of directly mitigating risks associated with liabilities, commitments, investments, assets, or property held or reasonably anticipated by such -11- Person, or changes in the value of securities issued by such Person and not for purposes of speculation or taking a "market view;" and (b) such Swap Contracts do not contain any provision ("walk-away" provision) exonerating the non-defaulting party from its obligation to make payments on outstanding transactions to the defaulting party. "Organization Documents" means, (a) with respect to any corporation, the certificate or articles of incorporation and the bylaws; (b) with respect to any limited liability company, the articles of formation and operating agreement; and (c) with respect to any partnership, joint venture, trust or other form of business entity, the partnership or joint venture agreement and any agreement, instrument, filing or notice with respect thereto filed in connection with its formation with the secretary of state or other department in the state of its formation, in each case as amended from time to time. "Outstanding Obligations" means, as of any date, and giving effect to making any Extensions of Credit requested on such date and all payments, repayments and prepayments made on such date, the aggregate outstanding principal amount of all Loans. "PBGC" means the Pension Benefit Guaranty Corporation or any successor thereto established under ERISA. "Pension Plan" means any "employee pension benefit plan" (as such term is defined in Section 3(2) of ERISA), other than a Multiemployer Plan, that is subject to Title IV of ERISA and is sponsored or maintained by Borrower or any ERISA Affiliate or to which Borrower or any ERISA Affiliate contributes or has an obligation to contribute, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five plan years. "Permitted Holder" means (a) any current member of Borrower's Board of Directors, (b) any current officer of Borrower, (c) any intervivos trust or public or private foundation founded by any of the individuals set forth in subsections (a) or (b), (d) any estate succeeding to the interests of any of the individuals set forth in subsections (a) or (b), (e) any heirs, legatees or devisees of any of the individuals set forth in subsections (a) or (b), and any beneficiaries of any intervivos trust set forth in subsection (c), and (f) any Affiliates of any of the foregoing. "Person" means any individual, trustee, corporation, general partnership, limited partnership, limited liability company, joint stock company, trust, unincorporated organization, bank, business association, firm, joint venture, Governmental Authority, or otherwise. "Plan" means any employee benefit plan maintained or contributed to by a Borrower or by any trade or business (whether or not incorporated) under common control with a Borrower as defined in Section 4001(b) of ERISA and insured by the Pension Benefit Guaranty Corporation under Title IV of ERISA. "Quick Ratio" means, as of any date of determination, the ratio of (a) Consolidated Quick Assets to (b) Consolidated Current Liabilities. -12- "Reportable Event" means any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder, a withdrawal from a Plan described in Section 4063 of ERISA, or a cessation of operations described in Section 4062(e) of ERISA. "Request for Extension of Credit" means, unless otherwise specified herein, a written request substantially in the form of Exhibit A, duly completed and signed by a Responsible Officer of Borrower and delivered by Requisite Notice. "Requisite Notice" means a notice delivered in accordance with Section 9.02. "Requisite Time" means, with respect to any of the actions listed below, the time and date set forth below opposite such action (all times are in Pacific time):
APPLICABLE TYPE OF ACTION TIME DATE OF ACTION --------------------------------------- ---------- ------------------------------------- Delivery of Request for Extension of Credit for, or notice for: [ ] Borrowing of a Base Rate Loan 10:00 a.m. Same Business Day as such borrowing or prepayment [ ] Conversion into a Base Rate Loan 10:00 a.m. 3 Business Days prior such Conversion [ ] Borrowing, prepayment or 11:00 a.m. 3 Business Days prior to such Continuation of, or Conversion into, borrowing, prepayment Continuation an Offshore Rate Loan or Conversion [ ] Voluntary reduction in or 11:00 a.m. 2 Business Days prior to such termination of Commitment reduction or termination [ ] Payments and prepayment of a Base 12:00 p.m. On date payment is due Rate Loan to Borrower or Lender
"Responsible Officer" means the president, chief financial officer, treasurer, assistant treasurer or controller of Borrower. Any document or certificate hereunder that is signed by a Responsible Officer of Borrower shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of Borrower and such Responsible Officer shall be conclusively presumed to have acted on behalf of Borrower. "Restricted Payment" means: (a) the declaration or payment of any dividend or distribution by Borrower or any Subsidiary, either in Cash or property, on any shares of the capital stock of any class of Borrower or any Subsidiary (except dividends or other distributions (i) payable solely in shares of capital stock of Borrower or any Subsidiary or (ii) payable by any Subsidiary to Borrower or to a wholly-owned Subsidiary); (b) the purchase, redemption or retirement by Borrower or any Subsidiary of any shares of its capital stock of any class or any warrants, rights or options to purchase or acquire any shares of its capital stock, whether directly or indirectly (except purchases, -13- redemptions or retirements (i) payable solely in shares of capital stock of Borrower or any Subsidiary or (ii) payable by any Subsidiary to Borrower or to a wholly-owned Subsidiary); (c) any other payment or distribution by Borrower or any Subsidiary in respect of its capital stock, either directly or indirectly; (d) any Investment other than an Investment otherwise permitted under any Loan Document; or (e) the prepayment, repayment, redemption, defeasance or other acquisition or retirement for value prior to any scheduled maturity, scheduled repayment or scheduled sinking fund payment, of any Indebtedness subordinated in right of payment to the Obligations. "ServerWorks" means ServerWorks Corporation, a Delaware corporation. "Shareholders' Equity" means, as of any date of determination for Borrower and its Subsidiaries on a consolidated basis, shareholders' equity as of that date determined in accordance with GAAP. "Subsidiary" of a Person means a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise specified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of Borrower. "Swap Contract" means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, as amended, restated, extended, supplemented or otherwise modified in writing from time to time, a "Master Agreement"), including any such obligations or liabilities under any Master Agreement. -14- "Swap Termination Value" means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in subsection (a) the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include Lender). "Synthetic Lease Obligations" means all monetary obligations of a Person under (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property creating obligations which do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such Person, would be characterized as the Indebtedness of such Person (without regard to accounting treatment). "Threshold Amount" means $30,000,000. "to the best knowledge of" means, when modifying a representation, warranty or other statement of any Person, that the fact or situation described therein is known by such Person (or, in the case of a Person other than a natural Person, known by any officer of such Person) making the representation, warranty or other statement, or with the exercise of reasonable due diligence under the circumstances (in accordance with the standard of what a reasonable Person in similar circumstances would have done) would have been known by such Person (or, in the case of a Person other than a natural Person, would have been known by an officer of such Person). "type" of Loan means (a) a Base Rate Loan, and (b) an Offshore Rate Loan. "Unfunded Pension Liability" means the excess of a Pension Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Pension Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. 1.02 USE OF CERTAIN TERMS. (a) All terms defined in this Agreement shall have the defined meanings when used in any certificate or other document made or delivered pursuant hereto or thereto, unless otherwise defined therein. (b) As used herein, unless the context requires otherwise, the masculine, feminine and neuter genders and the singular and plural include one another. (c) The words "herein" and "hereunder" and words of similar import when used in any Loan Document shall refer to the Loan Documents as a whole and not to any particular provision thereof. The term "including" is by way of example and not limitation. References herein to a Section, subsection or clause shall, unless the context otherwise requires, refer to the appropriate Section, subsection or clause in this Agreement. -15- (d) The term "or" is disjunctive; the term "and" is conjunctive. The term "shall" is mandatory; the term "may" is permissive. 1.03 ACCOUNTING TERMS. All accounting terms not specifically or completely defined in this Agreement shall be construed in conformity with, and all financial data required to be submitted by this Agreement shall be prepared in conformity with, GAAP applied on a consistent basis, as in effect from time to time, applied in a manner consistent with that used in preparing the Audited Financial Statements, except as otherwise specifically prescribed herein. 1.04 ROUNDING. Any financial ratios required to be maintained by Borrower pursuant to this Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed in this Agreement and rounding the result up or down to the nearest number (with a round-up if there is no nearest number) to the number of places by which such ratio is expressed in this Agreement. 1.05 EXHIBITS AND SCHEDULES. All exhibits and schedules to this Agreement, either as originally existing or as the same may from time to time be supplemented, modified or amended, are incorporated herein by this reference. A matter disclosed on any Schedule shall be deemed disclosed on all Schedules. 1.06 REFERENCES TO AGREEMENTS AND LAWS. Unless otherwise expressly provided herein, (a) references to agreements (including the Loan Documents) and other contractual instruments shall include all amendments, restatements, extensions, supplements and other modifications thereto (unless prohibited by any Loan Document), and (b) references to any Law shall include all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting such Law. SECTION 2. THE COMMITMENT AND EXTENSIONS OF CREDIT 2.01 THE COMMITMENT. (a) Subject to the terms and conditions set forth in this Agreement, Lender agrees to make, Convert and Continue Loans until the Maturity Date in such amounts as Borrower may from time to time request; provided, however, that the Outstanding Obligations shall not exceed the Commitment at any time. Subject to the foregoing and the other terms and conditions hereof, Borrower may borrow, Convert, Continue, prepay and reborrow Loans as set forth herein without premium or penalty. (b) Loans made by Lender shall be evidenced by one or more loan accounts or records maintained by Lender in the ordinary course of business. Upon the request of Lender, the Loans may be evidenced by one or more notes, instead of or in addition to loan accounts. Lender may attach schedules to its note(s) and endorse thereon the date, amount and maturity of its Loans and payments with respect thereto. Such notes, loan accounts and records shall be prima facie evidence absent demonstrable error of the amount of such Loans and payments -16- thereon. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of Borrower to pay any amount owing with respect to the Loans. 2.02 BORROWINGS, CONVERSIONS AND CONTINUATIONS OF LOANS. (a) Borrower may irrevocably request a borrowing, Conversion or Continuation of Loans on any Business Day in a Minimum Amount therefor by delivering a Request for Extension of Credit therefor by Requisite Notice to Lender not later than the Requisite Time therefor. All borrowings, Conversions and Continuations of Loans shall constitute Base Rate Loans unless properly and timely otherwise designated as set forth in the prior sentence. (b) Lender shall promptly notify Borrower of the interest rate applicable to any Offshore Rate Loan upon determination of same (or upon Borrower's request with respect to Offshore Rate Loans which Borrower is considering). Lender shall from time to time notify Borrower of any change in its prime rate used in determining the Base Rate promptly following the public announcement of such change. Upon satisfaction of the applicable conditions set forth in Section 4, all funds shall be credited in immediately available funds to Borrower. (c) Except as otherwise provided herein, an Offshore Rate Loan may be Continued or Converted only on the last day of the Interest Period for such Offshore Rate Loan. During the existence of a Default or Event of Default, no Loans may be requested as, Converted into or Continued as Offshore Rate Loans. (d) If a Loan is to be made on the same date that another Loan is due and payable, Borrower or Lender, as the case may be, shall, unless Lender otherwise requests, make available the net amount of funds giving effect to both such Loans and the effect for purposes of this Agreement shall be the same as if separate transfers of funds had been made with respect to each such Loan. 2.03 PREPAYMENTS. (a) Upon Requisite Notice to Lender not later than the Requisite Time therefor, Borrower may at any time and from time to time voluntarily prepay Loans in part in the Minimum Amount therefor or in full without premium or penalty. Any prepayment of an Offshore Rate Loan shall be accompanied by all accrued interest thereon, together with the costs set forth in Section 3.05. (b) If for any reason the Outstanding Obligations exceed the Commitment as in effect or as reduced or because of any limitation set forth in this Agreement or otherwise, Borrower shall immediately prepay Loans in an aggregate amount equal to such excess. 2.04 REDUCTION OR TERMINATION OF COMMITMENT. (a) Upon Requisite Notice to Lender not later than the Requisite Time therefor, Borrower may at any time and from time to time, without premium or penalty, permanently and irrevocably reduce the Commitment in a Minimum Amount therefor to an amount not less than the Outstanding Obligations at such time or terminate the Commitment. Any such reduction or -17- termination shall be accompanied by payment of all accrued and unpaid Commitment fees with respect to the portion of the Commitment being reduced or terminated. (b) On the date of receipt of the Net Securities Proceeds from the issuance of any Indebtedness of Borrower or any of its Subsidiaries (other than Indebtedness permitted pursuant to Sections 7.01 (a)-(m)), the Commitment shall be permanently reduced in an aggregate amount equal to such Net Securities Proceeds. 2.05 PRINCIPAL AND INTEREST. (a) Except as otherwise provided hereunder, if not sooner paid, Borrower agrees to pay the outstanding principal amount of each Loan on the Maturity Date. (b) Subject to subsection (c) below, and unless otherwise specified herein, Borrower shall pay interest on the unpaid principal amount of each Loan (before and after default, before and after maturity, before and after judgment, and before and after the commencement of any proceeding under any Debtor Relief Laws) from the date borrowed until paid in full (whether by acceleration or otherwise) on each Applicable Payment Date at a rate per annum equal to the interest rate determined in accordance with the definition of such type of Loan, plus, to the extent applicable in each case, the Applicable Amount for such type of Loan. (c) If any amount payable by Borrower under any Loan Document is not paid when due (after taking into account any applicable grace, notice and cure periods), it shall thereafter bear interest (after as well as before entry of judgment thereon to the extent permitted by law) at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Law. Accrued and unpaid interest on past due amounts (including interest on past due interest) shall be payable upon demand. 2.06 FEES. (a) COMMITMENT FEE. Borrower shall pay to Lender a Commitment fee equal to the Applicable Amount times the actual daily amount by which the Commitment exceeds the Outstanding Obligations. The Commitment fee shall accrue at all times from the Closing Date until the Maturity Date and shall be payable quarterly in arrears on each Applicable Payment Date. The Commitment fee shall be calculated quarterly in arrears, and if there is any change in the Applicable Amount during any quarter, the actual daily amount shall be computed and multiplied by the Applicable Amount separately for each period during such quarter that such Applicable Amount was in effect. The Commitment fee shall accrue at all times, including at any time during which one or more conditions in Section 4 are not met. (b) ARRANGEMENT FEE. On the Closing Date, Borrower shall pay to Lender an upfront fee in an amount equal to $100,000. Such upfront fee is for the credit facilities committed by Lender under this Agreement and are fully earned on the date paid. 2.07 COMPUTATION OF INTEREST AND FEES. Computation of interest on Base Rate Loans when the Base Rate is determined by Lender's "prime rate" shall be calculated on the basis of a year of 365 or 366 days, as the case may be, and the actual number of days elapsed. Computation of all other types of interest and all fees shall be calculated on the basis of a year of -18- 360 days and the actual number of days elapsed which results in a higher yield to Lender than a method based on a year of 365 or 366 days. Interest shall accrue on each Loan for the day on which the Loan is made, and shall not accrue on a Loan, or any portion thereof, for the day on which the Loan or such portion is paid, provided that any Loan that is repaid on the same day on which it is made shall bear interest for one day. 2.08 MAKING PAYMENTS. (a) Except as otherwise provided herein, all payments by Borrower shall be made to Lender at its Lending Office, and all payments by Lender shall be made to Lender in the deposit account from time to time designated by Borrower to Lender, in each case not later than the Requisite Time for such type of payment. All payments received after such Requisite Time shall be deemed received on the next succeeding Business Day. All payments shall be made in immediately available funds in lawful money of the United States of America. All payments by Borrower shall be made without condition or deduction for any counterclaim, defense, recoupment or setoff. (b) Subject to the definition of "Interest Period," if any payment to be made by Borrower shall come due on a day other than a Business Day, payment shall instead be considered due on the next succeeding Business Day, and such extension of time shall be reflected in computing interest and fees. 2.09 FUNDING SOURCES. Nothing in this Agreement shall be deemed to obligate Lender to obtain the funds for any Loan in any particular place or manner or to constitute a representation by Lender that it has obtained or will obtain the funds for any Loan in any particular place or manner. SECTION 3. TAXES, YIELD PROTECTION AND ILLEGALITY 3.01 TAXES. (a) Any and all payments by Borrower to or for the account of Lender under any Loan Document shall be made free and clear of and without deduction for any and all taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and all liabilities with respect thereto, excluding taxes imposed on or measured by its net income, and franchise taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any political subdivision thereof) under the Laws of which Lender is organized or maintains a lending office (all such non-excluded taxes, duties, levies, imposts, deductions, assessments, fees, withholdings or similar charges, and liabilities being hereinafter referred to as "Taxes"). If Borrower shall be required by any Laws to deduct any Taxes from or in respect of any sum payable under any Loan Document to Lender, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section), Lender receives an amount equal to the sum it would have received had no such deductions been made, (ii) Borrower shall make such deductions, (iii) Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with -19- applicable Laws, and (iv) within 30 days after the date of such payment, Borrower shall furnish to Lender the original or a certified copy of a receipt evidencing payment thereof. (b) In addition, Borrower agrees to pay any and all stamp, court or documentary taxes and any other excise or property taxes or charges or similar levies which arise from any payment made under any Loan Document or from the execution, delivery, performance, enforcement or registration of, or otherwise with respect to, any Loan Document (hereinafter referred to as "Other Taxes"). (c) If Borrower shall be required to deduct or pay any Taxes or Other Taxes from or in respect of any sum payable under any Loan Document to Lender, Borrower shall also pay to Lender, at the time interest is paid, such additional amount that Lender specifies as necessary to preserve the after-tax yield (after factoring in all taxes, including taxes imposed on or measured by net income) Lender would have received if such Taxes or Other Taxes had not been imposed. (d) Borrower agrees to indemnify Lender for the full amount of Taxes and Other Taxes (including any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section) paid by Lender, amounts payable under Section 3.01(c) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. (e) Lender is a national banking association organized under the laws of the United States of America and is a United States person as defined under Section 7701(a)(30) of the Code. (f) If any Lender is organized under the laws of any jurisdiction other than the United States of America or any state or other political subdivision thereof (for purposes of this Section 3.01(f), a "NON-US LENDER"), such Non-US Lender shall deliver to Borrower, on or prior to the Closing Date, and at such other times as may be necessary in the determination of Borrower (in the reasonable exercise of its discretion), two original copies of IRS Form W-8BEN or W-8ECI (or any successor forms) properly completed and duly executed by Lender, or, in the case of a Non-US Lender claiming exemption from United States federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest," a form W-8BEN. Each Non-US Lender hereby agrees, from time to time after the initial delivery by such Lender of such forms, whenever a lapse in time or change in circumstances renders such forms, certificates or other evidence so delivered obsolete or inaccurate in any material respect, that such Lender shall promptly (i) deliver to Borrower two original copies of renewals, amendments or additional or successor forms, properly completed and duly executed by such Lender, together with any other certificate or statement of exemption required in order to confirm or establish that such Lender is not subject to United States withholding tax with respect to payments to such Lender under the Loan Documents, or (ii) notify Borrower of its inability to deliver any such forms, certificates or other evidence. Borrower shall not be required to pay any additional amount to any Non-US Lender under this Section 3.01 if such Lender shall have failed to satisfy the requirements of this subsection (f); provided that if such Lender shall have satisfied the requirements of this subsection (f) on the date such Lender became a Lender, nothing in this subsection (f) shall -20- relieve Borrower of its obligation to pay any amounts pursuant to Section 3.01 in the event that, as a result of any change in any applicable law, treaty or governmental rule, regulation or order, or any change in the interpretation, administration or application thereof, such Lender is no longer properly entitled to deliver forms, certificates or other evidence at a subsequent date establishing the fact that such Lender is not subject to withholding as described in this subsection (f). 3.02 ILLEGALITY. If Lender determines that any Laws have made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for Lender or its Lending Office to make, maintain or fund Offshore Rate Loans, or materially restricts the authority of Lender to purchase or sell, or to take deposits of, Dollars in the applicable offshore Dollar market, or to determine or charge interest rates based upon the Offshore Rate, then, on notice thereof by Lender to Borrower, any obligation of Lender to make Offshore Rate Loans shall be suspended until Lender notifies Borrower that the circumstances giving rise to such determination no longer exist. Upon receipt of such notice, Borrower shall, upon demand from Lender, prepay or Convert all Offshore Rate Loans, either on the last day of the Interest Period thereof, if Lender may lawfully continue to maintain such Offshore Rate Loans to such day, or immediately, if Lender may not lawfully continue to maintain such Offshore Rate Loans. Lender agrees to designate a different Lending Office if such designation will avoid the need for such notice and will not, in the good faith judgment of Lender, otherwise be materially disadvantageous to Lender. 3.03 INABILITY TO DETERMINE OFFSHORE RATE. If, in connection with any Request for Extension of Credit involving any Offshore Rate Loan, Lender determines that (a) Dollar deposits are not being offered to banks in the applicable offshore dollar market for the applicable amount and Interest Period of the requested Offshore Rate Loan, (b) adequate and reasonable means do not exist for determining the underlying interest rate for such Offshore Rate Loan, or (c) such underlying interest rate does not adequately and fairly reflect the cost to Lender of funding such Offshore Rate Loan, Lender shall promptly notify Borrower. Thereafter, the obligation of Lender to make or maintain such Offshore Rate Loan shall be suspended until Lender revokes such notice. Upon receipt of such notice, Borrower may revoke any pending request for an Offshore Rate Loan or, failing that, be deemed to have converted such request into a request for a Base Rate Loan in the amount specified therein. 3.04 INCREASED COST AND REDUCED RETURN; CAPITAL ADEQUACY. (a) If Lender determines that any Law or change therein or in the interpretation or administration thereof, in each case that becomes effective after the date hereof: (i) subject Lender to any Tax, duty, or other charge with respect to any Offshore Rate Loans or its obligation to make Offshore Rate Loans, or change the basis on which taxes are imposed on any amounts payable to Lender under this Agreement in respect of any Offshore Rate Loans; (ii) shall impose or modify any reserve, special deposit, or similar requirement (other than the reserve requirement utilized in the determination of the Offshore Rate) -21- relating to any extensions of credit or other assets of, or any deposits with or other liabilities or commitments of, Lender (including the Commitment); or (iii) shall impose on Lender or on the offshore interbank market any other condition affecting this Agreement or any of such extensions of credit or liabilities or commitments; and the result of any of the foregoing is to increase the cost to Lender of making, Converting into, Continuing, or maintaining any Offshore Rate Loans or to reduce any sum received or receivable by Lender under this Agreement with respect to any Offshore Rate Loans, then from time to time upon demand of Lender, Borrower shall pay to Lender such additional amounts as will compensate Lender for such increased cost or reduction. (b) If Lender determines that any change in or the interpretation of any Laws have the effect of reducing the rate of return on the capital of Lender or compliance by Lender (or its Lending Office) or any corporation controlling Lender as a consequence of Lender's obligations hereunder (taking into consideration its policies with respect to capital adequacy and Lender's desired return on capital), then from time to time upon demand of Lender, Borrower shall pay to Lender such additional amounts as will compensate Lender for such reduction. 3.05 BREAKFUNDING COSTS. Upon demand of Lender from time to time, Borrower shall promptly compensate Lender for and hold Lender harmless from any loss, cost or expense incurred by it as a result of: (a) any Continuation, Conversion, payment or prepayment of any Loan other than a Base Rate Loan on a day other than the last day of the Interest Period for such Loan (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise); or (b) any failure by Borrower (for a reason other than the failure of Lender to make a Loan) to prepay, borrow, Continue or Convert any Loan other than a Base Rate Loan on the date or in the amount notified by Borrower; including any loss of anticipated profits and any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain such Loan or from fees payable to terminate the deposits from which such funds were obtained. Borrower shall also pay any customary administrative fees charged by Lender in connection with the foregoing. 3.06 MATTERS APPLICABLE TO ALL REQUESTS FOR COMPENSATION. A certificate of Lender claiming compensation under this Section 3 and setting forth the additional amount or amounts to be paid to it hereunder shall be prima facie evidence of the amount thereof absent demonstrable error. In determining such amount, Lender may use any reasonable averaging and attribution methods. For purposes of this Section 3, Lender shall be deemed to have funded each Offshore Rate Loan at the Offshore Base Rate used in determining the Offshore Rate for such Loan by a matching deposit or other borrowing in the applicable offshore interbank market, whether or not such Offshore Rate Loan was in fact so funded. Lender agrees that it will use reasonable efforts to make, fund or maintain Offshore Rate Loans through another lending office of Lender if (i) as a result thereof the additional amounts that would otherwise be required to be paid to Lender pursuant to Sections 3.01 and 3.04 would be materially reduced and (ii) as -22- determined by Lender in its sole discretion, such action would not otherwise be disadvantageous to Lender. 3.07 SURVIVAL. All of Borrower's obligations under this Section 3 shall survive termination of the Commitment and payment in full of all Obligations. SECTION 4. CONDITIONS PRECEDENT TO EXTENSIONS OF CREDIT 4.01 CONDITIONS OF INITIAL EXTENSION OF CREDIT. The obligation of Lender to make the initial Extension of Credit hereunder is subject to satisfaction of the following conditions precedent: (a) Except as otherwise specified by Lender, Lender's receipt of the following, each of which shall be originals or facsimiles (followed promptly by originals) unless otherwise specified, each properly executed by a Responsible Officer of the signing Borrower, each dated on, or in the case of third-party certificates, recently before the Closing Date and each in form and substance satisfactory to Lender and its legal counsel: (i) executed counterparts of this Agreement, sufficient in number for distribution to Lender and Borrower; (ii) such certificates of resolutions or other action, incumbency certificates and/or other certificates of Responsible Officers of Borrower as Lender may require to establish the identities of and verify the authority and capacity of each Responsible Officer thereof authorized to act as a Responsible Officer thereof; (iii) such evidence as Lender may reasonably require to verify that Borrower is duly organized or formed, validly existing, in good standing and qualified to engage in business in each jurisdiction in which it is required to be qualified to engage in business, including certified copies of Borrower's Organization Documents, certificates of good standing and/or qualification to engage in business, tax status certificates, and the like; (iv) a certificate signed by a Responsible Officer of Borrower certifying (A) that the conditions specified in Sections 4.01(c) and (d) have been satisfied, and (B) that there has been no event or circumstance since June 30, 2001 which has a Material Adverse Effect; (v) an opinion of counsel to Borrower substantially in the form of Exhibit C; and (vi) such other assurances, certificates, documents, consents or opinions as Lender reasonably may require. (b) Any fees required to be paid on or before the Closing Date shall have been paid. -23- (c) The representations and warranties made by Borrower herein, or which are contained in any certificate, document or financial or other statement furnished at any time under or in connection herewith or therewith, shall be correct on and as of the Closing Date. (d) Borrower shall be in compliance with all the terms and provisions of the Loan Documents to which it is a party, and no Default or Event of Default shall have occurred and be continuing. (e) Borrower shall have paid all Attorney Costs of Lender to the extent invoiced prior to or on the Closing Date, plus such additional amounts of Attorney Costs as shall constitute its reasonable estimate of Attorney Costs incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between Borrower and Lender). 4.02 CONDITIONS TO ALL EXTENSIONS OF CREDIT. In addition to any applicable conditions precedent set forth elsewhere in this Section 4 or in Section 2, the obligation of Lender to honor any Request for Extension of Credit is subject to the following conditions precedent: (a) the representations and warranties of Borrower contained in Section 5, or which are contained in any certificate, document or financial or other statement furnished at any time under or in connection herewith or therewith, shall be correct on and as of the date of such Extension of Credit, except to the extent that such representations and warranties specifically refer to any earlier date. (b) no Default or Event of Default exists, or would result from such proposed Extension of Credit. (c) Lender shall have timely received a Request for Extension of Credit by Requisite Notice by the Requisite Time therefor. (d) Lender shall have received, in form and substance satisfactory to it, such other assurances, certificates, documents or consents related to the foregoing as Lender reasonably may require. Each Request for Extension of Credit by Borrower shall be deemed to be a representation and warranty that the conditions specified in Sections 4.02(a) and (b) have been satisfied on and as of the date of such Extension of Credit. SECTION 5. REPRESENTATIONS AND WARRANTIES Borrower represents and warrants to Lender that: 5.01 EXISTENCE AND QUALIFICATION; POWER; COMPLIANCE WITH LAWS. Borrower is a corporation duly organized or formed, validly existing and in good standing under the Laws of the state of its incorporation or organization, has the power and authority and the legal right to own and operate its properties, to lease the properties it operates and to conduct its business, is -24- duly qualified and in good standing under the Laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification, and is in compliance with all Laws except to the extent that lack of qualification or noncompliance does not have a Material Adverse Effect. 5.02 SUBSIDIARIES. All of the Subsidiaries of Borrower as of the Closing Date and their jurisdictions of organization are listed on Schedule 5.02 and Schedule 5.02 correctly sets forth, as of the Closing Date, the ownership interest of Borrower and each of its Subsidiaries in each of the Subsidiaries of Borrower identified therein. 5.03 POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. Borrower has the power and authority and the legal right to make, deliver and perform each Loan Document, and Borrower has power and authority to borrow hereunder and has taken all necessary action to authorize the borrowings on the terms and conditions of this Agreement and to authorize the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party. No consent or authorization of, filing with, or other act by or in respect of any Governmental Authority or any other person is required in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement or any of the other Loan Documents. The Loan Documents have been duly executed and delivered by Borrower, and constitute a legal, valid and binding obligation of Borrower, enforceable against Borrower in accordance with their respective terms, subject to the effect of Debtor Relief Laws, the effect of equitable principles (whether applied in an action at law or a suit in equity), and the other exceptions and qualifications set forth in the legal opinion furnished to Lender pursuant to Section 4.01(a)(v). 5.04 NO LEGAL BAR. The execution, delivery, and performance by Borrower of the Loan Documents to which it is a party and compliance with the provisions thereof have been duly authorized by all requisite action on the part of Borrower and do not and will not (a) violate or conflict with, or result in a breach of, or require any consent under (i) any Organization Documents of Borrower or any of its Subsidiaries, (ii) any applicable Laws, rules, or regulations or any order, writ, injunction, or decree of any Governmental Authority or arbitrator, or (iii) any Contractual Obligation of Borrower or any of its Subsidiaries or by which any of them or any of their property is bound or subject, (b) constitute a default under any such agreement or instrument, or (c) result in, or require, the creation or imposition of any Lien on any of the properties of Borrower or any of its Subsidiaries. 5.05 FINANCIAL STATEMENTS; NO MATERIAL ADVERSE EFFECT. (a) The Audited Financial Statements (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; (ii) fairly present the financial condition of Borrower and its Subsidiaries as of the date thereof and their results of operations for the period covered thereby in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; and (iii) show all material indebtedness and other liabilities, direct or contingent, of Borrower and its Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Indebtedness in accordance with GAAP consistently applied throughout the period covered thereby. -25- (b) Since June 30, 2001, there has been no event or circumstance which has a Material Adverse Effect. 5.06 LITIGATION. Except as disclosed in Borrower's filings with the Securities and Exchange Commission on or prior to August 15, 2001, no litigation, investigation or proceeding of or before an arbitrator or Governmental Authority is pending or, to the knowledge of Borrower after due and diligent investigation, threatened by or against Borrower or any of its Subsidiaries or against any of their properties or revenues which is reasonably likely to have a Material Adverse Effect. 5.07 NO DEFAULT. Neither Borrower nor any its Subsidiaries are in default under or with respect to any Contractual Obligation which has a Material Adverse Effect, and no Default or Event of Default has occurred and is continuing or will result from the consummation of this Agreement or any of the other Loan Documents, or the making of the Extensions of Credit hereunder. 5.08 OWNERSHIP OF PROPERTY; LIENS. Borrower and its Subsidiaries have valid fee or leasehold interests in all real property which they use in their respective businesses, and Borrower and its Subsidiaries have good and marketable title to all their other property, and none of such property is subject to any Lien, except as permitted in Section 7.02. 5.09 TAXES. Borrower and its Subsidiaries have filed all tax returns which are required to be filed, and have paid, or made provision for the payment of, all taxes with respect to the periods, property or transactions shown to be due on said returns, or pursuant to any assessment received by Borrower or its respective Subsidiaries, except (a) such taxes, if any, as are being contested in good faith by appropriate proceedings and as to which adequate reserves have been established and maintained, and (b) immaterial taxes; provided, however, that in each case no material item or portion of property of Borrower or any of its Subsidiaries is in jeopardy of being seized, levied upon or forfeited. 5.10 MARGIN REGULATIONS; INVESTMENT COMPANY ACT; PUBLIC UTILITY HOLDING COMPANY ACT. (a) Borrower is not engaged, and will not engage, principally or as one of its important activities, in the business of extending credit for the purpose of "purchasing" or "carrying" "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the Federal Reserve System as now and from time to time hereafter in effect. No part of the proceeds of any Extensions of Credit hereunder will be used for "purchasing" or "carrying" "margin stock" as so defined or for any purpose which violates, or which would be inconsistent with, the provisions of Regulations T, U or X of such Board of Governors. (b) Neither Borrower nor any of its Subsidiaries (i) is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, or (ii) is or is required to be registered as an "investment company" under the Investment Company Act of 1940. -26- 5.11 ERISA COMPLIANCE. (a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state Laws. Each Plan that is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS or an application for such a letter is currently being processed by the IRS with respect thereto and, to the best knowledge of Borrower, nothing has occurred which would prevent, or cause the loss of, such qualification. Borrower and each ERISA Affiliate have made all required contributions to each Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan. (b) There are no pending or, to the best knowledge of Borrower, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan that has a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan that has a Material Adverse Effect. (c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither Borrower nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither Borrower nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither Borrower nor any ERISA Affiliate has engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. 5.12 INTANGIBLE ASSETS. Borrower and its Subsidiaries own, or possess the right to use, all trademarks, trade names, copyrights, patents, patent rights, franchises, licenses and other intangible assets that are used in the conduct of their respective businesses as now operated except where failure to own or possess the same has a Material Adverse Effect, and none of such items, to the best knowledge of Borrower, conflicts with the valid trademark, trade name, copyright, patent, patent right or intangible asset of any other Person to the extent that such conflict has a Material Adverse Effect. 5.13 COMPLIANCE WITH LAWS. Borrower and its Subsidiaries are in compliance with all Laws and applicable orders of any Governmental Authority that are applicable to it, noncompliance with which has a Material Adverse Effect. 5.14 ENVIRONMENTAL COMPLIANCE. Existing Environmental Laws and claims alleging potential liability or responsibility for violation of any Environmental Law on the respective businesses, operations and properties of Borrower and its Subsidiaries do not, individually or in the aggregate, have a Material Adverse Effect. 5.15 INSURANCE. The properties of Borrower and its Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of Borrower, in such -27- amounts, with such deductibles and covering such risks as Borrower has determined in good faith to be necessary. 5.16 DISCLOSURE. No statement, information, report, representation, or warranty made by Borrower in any Loan Document or furnished to Lender in connection with any Loan Document contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements herein or therein not misleading, and Borrower has disclosed to Lender all facts and circumstances which can reasonably be expected to have a Material Adverse Effect. SECTION 6. AFFIRMATIVE COVENANTS So long as any Obligation remains unpaid or unperformed, or any portion of the Commitment remains outstanding, Borrower shall, and shall (except in the case of Borrower's reporting covenants), cause each Subsidiary to: 6.01 FINANCIAL STATEMENTS. Deliver to Lender in form and detail satisfactory to Lender: (a) as soon as available, but in any event within 100 days after the end of each fiscal year of Borrower, a consolidated balance sheet of Borrower and its Subsidiaries as at the end of such fiscal year, and the related consolidated statements of income and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail, audited and accompanied by an opinion of an independent certified public accountant of nationally recognized standing reasonably acceptable to Lender, which opinion shall be prepared in accordance with GAAP and shall not be subject to any qualifications or exceptions as to the scope of the audit nor to any qualifications and exceptions not reasonably acceptable to Lender; and (b) as soon as available, but in any event within 50 days after the end of each of the first three fiscal quarters of each fiscal year of Borrower, a consolidated balance sheet of Borrower and its Subsidiaries as at the end of such fiscal quarter, and the related consolidated statements of income and cash flows for such fiscal quarter and for the portion of Borrower's fiscal year then ended, setting forth in each case in comparative form the figures for the corresponding fiscal quarter of the previous fiscal year and the corresponding portion of the previous fiscal year, all in reasonable detail and certified by a Responsible Officer of Borrower as fairly presenting the financial condition, results of operations and cash flows of Borrower and its Subsidiaries in accordance with GAAP, subject only to normal year-end audit adjustments and the absence of footnotes. 6.02 CERTIFICATES, NOTICES AND OTHER INFORMATION. Deliver to Lender in form and detail satisfactory to Lender: (a) concurrently with the delivery of the financial statements referred to in Sections 6.01(a) and (b), a duly completed Compliance Certificate signed by a Responsible Officer of Borrower; -28- (b) promptly after reasonable request by Lender, copies of any detailed audit reports and management letters or recommendations with respect to the annual financial statements delivered to Lender pursuant to Section 6.01(a) submitted to the board of directors (or the audit committee of the board of directors) of Borrower by independent accountants in connection with the audit of the accounts or books of Borrower or any Subsidiary; (c) promptly after the same are available, copies of each annual report, proxy or financial statement or other report or communication sent to the stockholders of Borrower, and copies of all annual and quarterly reports which Borrower may file or be required to file with the Securities and Exchange Commission under Sections 13 or 15(d) of the Securities Exchange Act of 1934, and not otherwise required to be delivered to Lender pursuant hereto; (d) promptly after the occurrence thereof becomes known or should have become known to a Responsible Officer or the general counsel of Borrower, notice of any Default or Event of Default; (e) notice of any material change in accounting policies or financial reporting practices by Borrower or any Subsidiary; (f) promptly after the commencement thereof becomes known or should have become known to a Responsible Officer or the general counsel of Borrower, notice of any litigation, investigation or proceeding against Borrower or any Subsidiary where the amount sought exceeds the Threshold Amount, or in which injunctive relief or similar relief is sought, which relief is reasonably likely to have a Material Adverse Effect; (g) promptly after the occurrence thereof becomes known to a Responsible Officer or the general counsel of Borrower, notice of any Reportable Event with respect to any Plan or the intent to terminate any Plan, or the institution of proceedings or the taking or expected taking of any other action to terminate any Plan or withdraw from any Plan; (h) promptly after the occurrence thereof becomes known to a Responsible Officer or the general counsel of Borrower, notice of any Material Adverse Effect; and (i) promptly, such other data and information as from time to time may be reasonably requested by Lender. Each notice under Section 6.02 (d), (f), (g), or (h) pursuant to this Section shall be accompanied by a statement of a Responsible Officer of Borrower setting forth details of the occurrence referred to therein and stating what action Borrower has taken and proposes to take with respect thereto. 6.03 PAYMENT OF TAXES. Pay and discharge when due all taxes, assessments, and governmental charges, Liens or levies imposed on Borrower or its Subsidiaries or on its income or profits or any of its property, except for any such tax, assessment, charge, or levy permitted under Section 7.02(c) or excepted from Section 5.09. -29- 6.04 PRESERVATION OF EXISTENCE. Preserve and maintain its existence, licenses, permits, rights, franchises and privileges necessary or desirable in the normal conduct of its business, except where failure to do so does not have a Material Adverse Effect. 6.05 MAINTENANCE OF PROPERTIES. Maintain, preserve and protect all of its material properties and equipment necessary in the operation of its business in good order and condition, subject to wear and tear in the ordinary course of business, and not permit any waste of its properties. 6.06 MAINTENANCE OF INSURANCE. Maintain liability and casualty insurance with financially sound and reputable insurance companies in such amounts with such deductibles and against such risks as Borrower has determined in good faith to be necessary. 6.07 COMPLIANCE WITH LAWS. (a) Comply with the requirements of all applicable Laws and orders of any Governmental Authority, noncompliance with which has a Material Adverse Effect. (b) Conduct its operations and keep and maintain its property in compliance with all Environmental Laws, noncompliance with which has a Material Adverse Effect. 6.08 INSPECTION RIGHTS. At any time during regular business hours and as often as reasonably requested, upon reasonable prior notice, permit Lender, or any employee, agent or representative thereof upon execution of Borrower's standard confidentiality agreement for visitors and contractors and at Lender's sole cost and expense, to examine, audit and make copies and abstracts from the Borrower's records and books of account and to visit and inspect its properties and to discuss its affairs, finances and accounts with any of its officers and key employees for the sole purpose of determining compliance with and monitoring the Commitment, and, upon request, furnish promptly to Lender true copies of all financial information and internal management reports made available to its senior management. 6.09 KEEPING OF RECORDS AND BOOKS OF ACCOUNT. Keep adequate records and books of account reflecting all financial transactions in conformity with GAAP, consistently applied, and in material conformity with all applicable requirements of any Governmental Authority having regulatory jurisdiction over Borrower or the applicable Subsidiary. 6.10 COMPLIANCE WITH ERISA. Cause, and cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code. 6.11 COMPLIANCE WITH AGREEMENTS. Promptly and fully comply with all Contractual Obligations to which any one or more of them is a party, except for any such Contractual Obligations (a) the performance of which would cause a Default or Event of Default, (b) then being contested by any of them in good faith by appropriate proceedings, or (c) if the failure to comply therewith does not have a Material Adverse Effect. -30- 6.12 USE OF PROCEEDS. Use the proceeds of Extensions of Credit for lawful general corporate purposes not otherwise in contravention of this Agreement. SECTION 7. NEGATIVE COVENANTS So long as any Obligations remain unpaid or unperformed, or any portion of the Commitment remains outstanding, Borrower shall not, nor shall it permit any Subsidiary to, directly or indirectly do any of the following without the written consent of Lender: 7.01 INDEBTEDNESS. Create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness under the Loan Documents; (b) Indebtedness outstanding on the date hereof and listed on Schedule 7.01 and any refinancings, refundings, renewals or extensions thereof, provided that the amount of such Indebtedness is not increased at the time of such refinancing, refunding, renewal or extension except by an amount equal to the premium or other amount paid, and fees and expenses incurred, in connection with such refinancing and by an amount equal to any utilized commitments thereunder; (c) intercompany Guaranty Obligations of Borrower or any Subsidiaries guarantying Indebtedness otherwise permitted hereunder of Borrower or any wholly-owned Subsidiary; (d) Indebtedness arising from the honoring of a check, draft or similar instrument against insufficient funds or the endorsement of negotiable instruments for deposit or collection in the ordinary course of business; (e) Ordinary Course Swap Obligations; (f) trade and other accounts payable in the ordinary course of business in accordance with customary trade terms and which are not overdue for a period of more than 90 days; (g) deferred taxes; (h) Indebtedness of ServerWorks in an aggregate principal amount not to exceed $10,000,000 at any time; (i) Indebtedness of Borrower to any of its Subsidiaries and of any Subsidiary to Borrower or any other Subsidiary; (j) Indebtedness that is (i) convertible into the capital stock of Borrower, (ii) subordinated in right of payment to the Obligations and (iii) due after the Maturity Date; (k) Unsecured Indebtedness in an aggregate principal amount not to exceed $20,000,000 at any time; -31- (l) Indebtedness secured by Liens permitted pursuant to Section 7.02 (i) and any refinancings, refundings, renewals or extensions thereof, provided that the amount of such Indebtedness is not increased at the time of such refinancing, refunding, renewal or extension except by an amount equal to the premium or other amount paid, and fees and expenses incurred, in connection with such refinancing and by an amount equal to any utilized commitments thereunder;; (m) Indebtedness of any Person assumed by Borrower or any of its Subsidiaries, or Indebtedness of any Person that becomes a Subsidiary of Borrower, in each case as a result of any Acquisition of such Person permitted under Section 7.05 and any refinancings, refundings, renewals or extensions of such Indebtedness, provided that the amount of such Indebtedness is not increased at the time of such refinancing, refunding, renewal or extension except by an amount equal to the premium or other amount paid, and fees and expenses incurred, in connection with such refinancing and by an amount equal to any utilized commitments thereunder; provided further that such Indebtedness is not incurred in connection with any such Acquisition or in anticipation thereof; and (n) Unsecured Indebtedness to no more than two lenders that is entirely used to permanently reduce the Commitment pursuant to Section 2.04(b); provided that, to the extent required by Section 2.03(b), Borrower also prepays the Loans if necessary as a consequence of such reduction in the Commitment. 7.02 LIENS AND NEGATIVE PLEDGES. Incur, assume or suffer to exist, any Lien or Negative Pledge upon any of its property, assets or revenues, whether now owned or hereafter acquired, except: (a) Liens pursuant to any Loan Document; (b) Liens and Negative Pledges existing on the date hereof and listed on Schedule 7.01 and any renewals or extensions thereof, provided that the property covered thereby is not increased and any renewal or extension of the obligations secured or benefited thereby is permitted by Section 7.01(b); (c) Liens for taxes or other governmental charges not yet due or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP; (d) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 60 days or which are being contested in good faith and by appropriate proceedings, if adequate reserves with respect thereto are maintained on the books of the applicable Person; (e) pledges or deposits in connection with worker's compensation, unemployment insurance and other social security legislation or statutory obligations in the ordinary course of business; -32- (f) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (g) easements, rights-of-way, restrictions and other similar encumbrances affecting real property which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the applicable Person; (h) attachment, judgment or other similar Liens arising in connection with litigation or other legal proceedings (and not otherwise a Default hereunder) in the ordinary course of business that are currently being contested in good faith by appropriate proceedings, adequate reserves have been set aside and no material property is subject to a material risk of loss or forfeiture or the claims in respect of such Liens are fully covered by insurance (subject to ordinary and customary deductibles); (i) Liens on any asset existing at the time of acquisition of such asset by Borrower or a Subsidiary, or Liens to secure the payment of all or any part of the purchase price of an asset upon the acquisition of such asset by Borrower or a Subsidiary; provided that the Lien shall apply only to the asset so acquired; (j) Liens securing Indebtedness permitted under Section 7.01(m); provided that such Liens apply only to the assets acquired in connection with the permitted Acquisition or the assets of the Person that becomes a Subsidiary of Borrower as a result of the permitted Acquisition; and (k) Replacements, extensions and renewals of Liens permitted under subsections (i) and (j) of this Section 7.02. 7.03 FUNDAMENTAL CHANGES. Merge or consolidate with or into any Person or liquidate, wind-up or dissolve itself, or permit or suffer any liquidation or dissolution or sell all or substantially all of its assets, except, that so long as no Default or Event of Default exists or would result therefrom: (a) Borrower may merge with any Person, so long as Borrower is the continuing or surviving Person; (b) any Subsidiary may merge with (i) Borrower provided that Borrower shall be the continuing or surviving corporation, (ii) any other Subsidiary, and (iii) any other Person, so long as such other Person will, as a result of making such merger and all other contemporaneous related transactions, become a Subsidiary; provided that when any wholly-owned Subsidiary is merging into another Subsidiary, the wholly-owned Subsidiary shall be the continuing or surviving Person; (c) any Subsidiary may sell all or substantially all of its assets (upon voluntary liquidation or otherwise), to Borrower or to another Subsidiary; provided that when any wholly-owned Subsidiary is selling all or substantially all of its assets to another Subsidiary, the Subsidiary acquiring such assets shall be a wholly-owned Subsidiary; and -33- (d) any Subsidiary which is not a Material Subsidiary may liquidate, wind-up or dissolve itself or suffer any liquidation or dissolution. 7.04 DISPOSITIONS. Make any Dispositions, except: (a) Dispositions of obsolete or worn out property, whether now owned or hereafter acquired, in the ordinary course of business; (b) Dispositions of Cash, Cash Equivalents, inventory and other property in the ordinary course of business; (c) Dispositions of assets or property to the extent that such property is exchanged for credit against the purchase price of similar replacement property, or the proceeds of such sale are reasonably promptly applied to the purchase price of such replacement property or where Borrower or any Subsidiary determine in good faith that the failure to replace such equipment will not be detrimental to the business of Borrower or such Subsidiary; and (d) Dispositions of assets or property by any Subsidiary to Borrower or another wholly-owned Subsidiary; provided, however, that no such Disposition pursuant to subsections (a), (b), or (c) above shall be for less than the fair market value of the property being disposed of; and (e) Dispositions permitted by Section 7.03. 7.05 INVESTMENTS; ACQUISITIONS. Make any Investments or Acquisitions, except: (a) Investments existing on the date hereof and disclosed to Lender in writing on or prior to the date hereof; (b) Cash and Cash Equivalents; (c) loans and advances to officers, directors and employees of Borrower and Subsidiaries; (d) Investments of any Subsidiary in Borrower or another Subsidiary; (e) Investments of Borrower in its Subsidiaries; (e) extensions of credit to customers or suppliers of Borrower and Subsidiaries in the ordinary course of business and any Investments received in satisfaction or partial satisfaction thereof; (f) Guaranty Obligations permitted by Section 7.01; (g) Investments permitted by Section 7.03; (h) Acquisitions, provided that (i) the total purchase price is paid solely in shares of the capital stock of Borrower and (ii) Borrower shall have delivered a Compliance Certificate to -34- Lender demonstrating that, after giving effect to such proposed Acquisition, Borrower shall be in compliance with the requirements of Section 7.12; (i) Long Term Cash Equivalents; and (j) additional Investments and Acquisitions not exceeding $250,000,000 in the aggregate. 7.06 RESTRICTED PAYMENTS. Make any Restricted Payments except: (a) redemptions or other repurchases of Borrower's capital stock, stock equivalents or stock options from departing employees, directors or officers of Borrower or any Subsidiary; (b) purchases of previously unissued or treasury capital stock of Borrower by a Subsidiary for share exchanges arising from Acquisitions; and (c) prepayments, repayments, redemptions, defeasances or other acquisitions or retirements for value of any Indebtedness permitted to be incurred under Section 7.01(j); provided, however, that, five days prior to any such proposed prepayment, repayment, redemption, defeasance or other acquisition or retirement, Borrower delivers to Lender a Compliance Certificate demonstrating in reasonable detail that (i) no Default or Event of Default exists and (ii) no Event of Default would result under Section 7.12 from the proposed prepayment, repayment, redemption, defeasance or other acquisition or retirement. 7.07 ERISA. At any time engage in a transaction which could be subject to Section 4069 or 4212(c) of ERISA, or permit any Pension Plan to (a) engage in any non-exempt "prohibited transaction" (as defined in Section 4975 of the Code); (b) fail to comply with ERISA or any other applicable Laws; or (c) incur any material "accumulated funding deficiency" (as defined in Section 302 of ERISA), which, with respect to each event listed above, has a Material Adverse Effect. 7.08 CHANGE IN NATURE OF BUSINESS. Make any change in the nature of the business of Borrower as conducted and as proposed to be conducted as of the date hereof. 7.09 TRANSACTIONS WITH AFFILIATES. Enter into any transaction of any kind with any Affiliate of Borrower other than (i) arm's-length transactions with Affiliates that are otherwise permitted hereunder and (ii) transactions with any Person who is an Affiliate of Borrower solely as a result of Borrower or any Subsidiary having an investment in such Person. 7.10 HOSTILE ACQUISITIONS. Use the proceeds of any Loan in connection with the acquisition of a voting interest of 5% or more in any Person if such acquisition is opposed by the board of directors or management of such Person. 7.11 MARGIN REGULATIONS. Borrower shall not use the proceeds of any Extensions of Credit hereunder for "purchasing" or "carrying" "margin stock" as so defined or for any purpose which violates, or which would be inconsistent with, the provisions of Regulations U or X of such Board of Governors. -35- 7.12 FINANCIAL COVENANTS. (a) CONSOLIDATED TANGIBLE NET WORTH. Permit Consolidated Tangible Net Worth as of the end of any fiscal quarter of Borrower to be less than the greater of (a) $750,000,000 or (b) the sum of (i) 80% of Consolidated Tangible Net Worth as of June 30, 2001 and, (ii) an amount equal to 100% of the aggregate increases in Stockholders' Equity of Borrower and its Subsidiaries after the date hereof by reason of the issuance and sale of capital stock of Borrower (including upon any conversion of debt securities of Borrower into such capital stock) minus (b) the sum of (i) stock-based compensation expense and (ii) in process research and development write offs associated with Acquisitions taken within 90 days of the consummation thereof. (b) MINIMUM CONSOLIDATED LTM ADJUSTED EBITDA. Permit Consolidated LTM Adjusted EBITDA as of the end of any fiscal quarter of Borrower for the four consecutive fiscal quarters then ended to be less than <$125,000,000>. (c) QUICK RATIO. Permit the Quick Ratio as of the end of any fiscal quarter of Borrower to be less than 1.0 to 1.0. 7.13 CHANGE IN AUDITORS. Change the certified public accountants auditing the books of Borrower except to another certified public accountant of nationally recognized standing reasonably acceptable to Lender. SECTION 8. EVENTS OF DEFAULT AND REMEDIES 8.01 EVENTS OF DEFAULT. Any one or more of the following events shall constitute an Event of Default: (a) Borrower fails to pay any principal on any Outstanding Obligation (other than fees) within two days after the date when due; or (b) Borrower fails to pay any interest on any Outstanding Obligations, any Commitment fees due hereunder, or any other fees or amount payable to Lender under any Loan Document, in each case within five days after Lender notifies Borrower that such interest, Commitment fees, fees or other amounts are due; or (c) Any default occurs in the observance or performance of any agreement contained in Section 6.02(d), 6.02(e), 6.02(f), 6.02(h), 6.04, 7.03, 7.10, 7.11 or 7.12; or (d) Any default occurs in the observance or performance of any agreement contained in Section 6.01, 6.02(a), 6.02(b). 6.02(c), 6.02(g), 6.02(i), 6.08, 7.01, 7.02, 7.04-7.09, or 7.13 and such default continues for three days after Lender notifies Borrower; or (e) The occurrence of an Event of Default (as such term is or may hereafter be specifically defined in any other Loan Document) under any other Loan Document; or Borrower fails to perform or observe any other covenant or agreement (not specified in subsection (a), (b), -36- (c) or (d) above) contained in any Loan Document on its part to be performed or observed and such failure continues for 30 days after Lender notifies Borrower; or (f) Any representation or warranty in any Loan Document or in any certificate, agreement, instrument or other document made or delivered by Borrower pursuant to or in connection with any Loan Document proves to have been incorrect in any material respect when made or deemed made; or (g) (i) Borrower or one or more of its Subsidiaries which, alone or together, constitute Material Subsidiaries, (x) defaults beyond applicable cure, grace and notice periods in any payment when due of principal of or interest on any Indebtedness (other than Indebtedness hereunder) having an aggregate principal amount in excess of the Threshold Amount or (y) defaults beyond applicable cure, grace and notice periods in the observance or performance of any other agreement or condition relating to any Indebtedness (other than Indebtedness hereunder) or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur, the effect of which default or other event is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, Indebtedness having an aggregate principal amount in excess of the Threshold Amount to be demanded or become due (automatically or otherwise) prior to its stated maturity, or any Guaranty Obligation in such amount to become payable or Cash collateral in respect thereof to be demanded, or Borrower or any of its Subsidiaries is unable or admits in writing its inability to pay its debts as they mature, and such default continues for three days after Lender notifies Borrower; or (ii) the occurrence under any Swap Contract of an Early Termination Date (as defined in such Swap Contract) resulting from (x) any event of default under such Swap Contract as to which Borrower or any Subsidiary is the Defaulting Party (as defined in such Swap Contract) or (y) the occurrence of any Termination Event under such Swap Contract (as defined therein) as to which Borrower or any Subsidiary is an Affected Party (as so defined) as a result of which, in either event, the Swap Termination Value owed by Borrower or such Subsidiary is greater than the Threshold Amount and such Early Termination Date shall not have been rescinded within three days after Lender notifies Borrower; or (h) Any Loan Document, at any time after its execution and delivery and for any reason other than the agreement of Lender or satisfaction in full of all the Obligations, ceases to be in full force and effect or is declared by a court of competent jurisdiction to be null and void, invalid or unenforceable in any material respect; or Borrower denies that it has any or further liability or obligation under any Loan Document, or purports to revoke, terminate or rescind any Loan Document; or (i) (i) A final judgment against Borrower or any of its Subsidiaries is entered for the payment of money in excess of the Threshold Amount, or any non-monetary final judgment is entered against Borrower or any of its Subsidiaries which has a Material Adverse Effect and, in each case, if such judgment remains unsatisfied without procurement of a stay of execution within (A) 45 calendar days after the date of entry of judgment or, (B) if earlier, five days prior to the date of any proposed sale, or (ii) any writ or warrant of attachment or execution or similar process is issued or levied against all or any material part of the property of any such Person and is not released, vacated or fully bonded within 45 calendar days after its issue or levy; or -37- (j) Borrower or one or more of its Subsidiaries which, alone or together, constitute Material Subsidiaries, institutes or consents to the institution of any proceeding under Debtor Relief Laws, or makes an assignment for the benefit of creditors; or applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its property; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of that Person and the appointment continues undischarged or unstayed for 60 calendar days; or any proceeding under Debtor Relief Laws relating to any such Person or to all or any part of its property is instituted without the consent of that Person and continues undismissed or unstayed for 60 calendar days, or an order for relief is entered in any such proceeding; or (k) (i) An ERISA Event occurs with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of Borrower under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of the Threshold Amount; (ii) the aggregate amount of Unfunded Pension Liability among all Pension Plans at any time exceeds the Threshold Amount; or (iii) Borrower or any ERISA Affiliate fails to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of the Threshold Amount; or (l) There occurs any Change of Control of Borrower. 8.02 REMEDIES UPON EVENT OF DEFAULT. Without limiting any other rights or remedies of Lender provided for elsewhere in this Agreement, the Loan Documents, or by applicable Law, or in equity, or otherwise: (a) Upon the occurrence and during the continuance of any Event of Default other than an Event of Default described in Section 8.01(j), Lender may terminate the Commitment and/or declare all or any part of the unpaid principal of all Loans, all interest accrued and unpaid thereon and all other amounts payable under the Loan Documents to be immediately due and payable, whereupon the same shall become and be immediately due and payable, without protest, presentment, notice of dishonor, demand or notice of any kind, all of which are expressly waived by Borrower. (b) Upon the occurrence of any Event of Default described in Section 8.01(j), the Commitment and all other obligations of Lender under the Loan Documents shall automatically terminate without notice to or demand upon Borrower, which are expressly waived by Borrower, and the unpaid principal of all Loans, all interest accrued and unpaid thereon and all other amounts payable under the Loan Documents shall be immediately due and payable, without protest, presentment, notice of dishonor, demand or notice of any kind, all of which are expressly waived by Borrower. (c) Upon the occurrence and during the continuance of any Event of Default, Lender, without notice to (except as expressly provided for in any Loan Document) or demand upon Borrower, which are expressly waived by Borrower (except as to notices expressly provided for in any Loan Document), may proceed to protect, exercise and enforce its rights and remedies -38- under the Loan Documents against Borrower and such other rights and remedies as are provided by Law or equity. (d) The order and manner in which Lender's rights and remedies are to be exercised shall be determined by Lender in its sole and absolute discretion. Regardless of how Lender may treat payments for the purpose of its own accounting, for the purpose of computing the Obligations hereunder, payments shall be applied first, to costs and expenses (including Attorney Costs) incurred by Lender, second, to the payment of accrued and unpaid interest on the Loans to and including the date of such application, third, to the payment of the unpaid principal of the Loans, and fourth, to the payment of all other amounts (including fees) then owing to Lender under the Loan Documents. No application of payments will cure any Event of Default, or prevent acceleration, or continued acceleration, of amounts payable under the Loan Documents, or prevent the exercise, or continued exercise, of rights or remedies of Lender hereunder or thereunder or at Law or in equity. SECTION 9. MISCELLANEOUS 9.01 AMENDMENTS; CONSENTS. No amendment, modification, supplement, extension, termination or waiver of any provision of this Agreement or any other Loan Document, no approval or consent thereunder, and no consent to any departure by Borrower therefrom shall be effective unless in writing signed by Lender and Borrower and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 9.02 REQUISITE NOTICE; EFFECTIVENESS OF SIGNATURES AND ELECTRONIC MAIL. (a) REQUISITE NOTICE. Notices given in connection with any Loan Document shall be delivered to the intended recipient at the number and/or address set forth on Schedule 9.02 (or as otherwise specified from time to time by such recipient in writing to Lender) and shall be given by (i) irrevocable written notice or (ii) except as otherwise provided, irrevocable telephonic (not voicemail) notice. Such notices may be delivered, must be confirmed and shall be effective as follows:
MODE OF DELIVERY EFFECTIVE ON EARLIER OF ACTUAL RECEIPT, AND: - ---------------------- ------------------------------------------------------- Mail Fourth Business Day after deposit in U.S. mail, first class postage pre-paid Courier or hand delivery One Business Day after signed for by recipient Telephone (not When conversation completed (must be confirmed in voicemail) writing) Facsimile When confirmed by telephone (not voicemail) Electronic Mail When delivered (usage subject to subsection (c) below)
-39- provided, however, that notices delivered to Lender pursuant to Section 2 shall not be effective until actually received by Lender; provided, further, that Lender may require that any notice be confirmed or followed by a manually-signed hardcopy thereof. Notices shall be in any form prescribed herein and, if sent by Borrower, shall be made by a Responsible Officer of Borrower. Notices delivered and, if required, confirmed in accordance with this subsection shall be deemed to have been delivered by Requisite Notice. (b) EFFECTIVENESS OF FACSIMILE DOCUMENTS AND SIGNATURES. Loan Documents may be transmitted and/or signed by facsimile. The effectiveness of any such documents and signatures shall, subject to applicable Law, have the same force and effect as manually-signed hardcopies and shall be binding on Borrower and Lender. Lender may also require that any such documents and signatures be confirmed by a manually-signed hardcopy thereof; provided, however, that the failure to request or deliver the same shall not limit the effectiveness of any facsimile document or signature. (c) LIMITED USAGE OF ELECTRONIC MAIL, TELEPHONE AND FACSIMILE. Facsimile or electronic mail and internet and intranet websites may be used to distribute routine communications, such as financial statements and other information, or to distribute agreements and other documents to be signed by Lender and Borrower. No other legally-binding and/or time-sensitive communication or Request for Extension of Credit may be sent by electronic mail, facsimile or telephone without the consent of, the intended recipient in each instance; provided, however, that notwithstanding the foregoing, Borrower may deliver Requests for Extension of Credit to Lender by telephone and facsimile by the required time provided that any such telephonic notice shall be promptly confirmed in writing by delivery by facsimile of a Request for Extension of Credit to Lender on or before the proposed borrowing date. (d) RELIANCE BY LENDER. Lender shall be entitled to rely and act upon any notices purportedly given by or on behalf of Borrower even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof. Borrower shall indemnify Lender- from any loss, cost, expense or liability as a result of relying on any notices purportedly given by or on behalf of Borrower. 9.03 ATTORNEY COSTS, EXPENSES AND TAXES. Borrower agrees (a) to pay or reimburse Lender for all reasonable and documented costs and expenses incurred in connection with the development, preparation, negotiation and execution of the Loan Documents, and the development, preparation, negotiation and execution of any amendment, waiver, consent, supplement or modification to, any Loan Documents, and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including all Attorney Costs, and (b) to pay or reimburse Lender for all reasonable and documented costs and expenses incurred in connection with any refinancing, restructuring, reorganization (including a bankruptcy reorganization) and enforcement or attempted enforcement, or preservation of any rights under any Loan Documents, and any other documents prepared in connection herewith or therewith, or in connection with any refinancing, or restructuring of any such documents in the nature of a "workout" or of any insolvency or bankruptcy proceeding, including Attorney Costs. The foregoing costs and expenses shall include all reasonable and documented search, filing, recording, title insurance -40- and appraisal charges and fees and taxes related thereto, and other reasonable and documented out-of-pocket expenses incurred by Lender and the reasonable and documented cost of independent public accountants and other outside experts retained by Lender. Any amount payable to Lender under this Section shall bear interest from the second Business Day following the date of demand for payment at the Default Rate. The agreements in this Section shall survive repayment of all Obligations. 9.04 SUCCESSORS AND ASSIGNS; PARTICIPATIONS. (a) This Agreement and the other Loan Documents to which Borrower is a party will be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns, except that Borrower may not assign or transfer any of its rights under this Agreement without the prior written consent of Lender and any such attempted assignment shall be void. Lender in its sole and absolute discretion may at any time, and from time to time, sell, assign (with the consent of Borrower other than during the existence of a Default or an Event of Default, which consent shall not be unreasonably withheld) or grant participations in all or a portion of the Commitment and/or the Obligations outstanding under this Agreement or any Loan Document; provided, however, that the aggregate amount of the Commitment, Loans and other Obligations of the assigning Lender and the assignee subject to each such assignment shall not be less than $20,000,000. Borrower hereby acknowledges and agrees that any such assignment or participation will give rise to a direct obligation of Borrower to the assignee or participant upon written notice from Lender to Borrower. Borrower agrees to execute, and cause each other Borrower to execute, any documents reasonably requested by Lender in connection with any such assignment. All information provided by or on behalf of Borrower to Lender or its Affiliates may be furnished by Lender to its Affiliates and to any actual or proposed assignee or participant. (b) In the event that Lender assigns any portion of the Commitment, Loans and other Obligations to one or more assignees, Borrower and Lender agree that this Agreement shall be amended pursuant to a mutually agreed upon amendment in order to provide that (i) Lender shall act as agent for itself and all such assignees, (ii) amendments, modifications and waivers of provisions of this Agreement (other than those that reduce the principal amount of any Loan, postpone the scheduled final maturity date of any Loan, postpone the date on which any interest or fees are payable, decrease the interest rate borne by any Loan (other than any waiver of any increase in the interest rate applicable to any of the Loans pursuant to Section 2.05(c)) or the amount of fees payable hereunder or increase the maximum duration of interest periods, which shall not be effective without the written consent of all lenders) shall not be effective without the written consent of lenders holding 51% or more of the Commitment and (ii) Requests for Extension of Credit, payments and Compliance Certificates shall be delivered to the agent. 9.05 SET-OFF. In addition to any rights and remedies of Lender or any assignee or participant of Lender or any Affiliates thereof (each, a "Proceeding Party") provided by law, upon the occurrence and during the continuance of any Event of Default, each Proceeding Party is authorized at any time and from time to time, without prior notice to Borrower, any such notice being waived by Borrower to the fullest extent permitted by law, to proceed directly, by right of set-off, banker's lien, or otherwise, against any assets of Borrower which may be in the hands of such Proceeding Party (including all general or special, time or demand, provisional or other deposits and other indebtedness owing by such Proceeding Party to or for the credit or the account of Borrower) and apply such assets against the Obligations, irrespective of whether such -41- Proceeding Party shall have made any demand therefor and although such Obligations may be unmatured. 9.06 NO WAIVER; CUMULATIVE REMEDIES. No failure by Lender to exercise, and no delay by Lender in exercising, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege under any Loan Document preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein or therein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by Law. Any decision by Lender not to require payment of any interest (including Default Interest), fee, cost or other amount payable under any Loan Document or to calculate any amount payable by a particular method on any occasion shall in no way limit or be deemed a waiver of Lender's right to require full payment thereof, or to calculate an amount payable by another method that is not inconsistent with this Agreement, on any other or subsequent occasion. 9.07 USURY. Notwithstanding anything to the contrary contained in any Loan Document, the interest and fees paid or agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by applicable Law (the "Maximum Rate"). If Lender shall receive interest or a fee in an amount that exceeds the Maximum Rate, the excessive interest or fee shall be applied to the principal of the Outstanding Obligations or, if it exceeds the unpaid principal, refunded to Borrower. In determining whether the interest or a fee contracted for, charged, or received by Lender exceeds the Maximum Rate, Lender may, to the extent permitted by applicable Law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations. 9.08 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 9.09 INTEGRATION. This Agreement, together with the other Loan Documents and any letter agreements referred to herein, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. In the event of any conflict between the provisions of this Agreement and those of any other Loan Document, the provisions of this Agreement shall control and govern; provided that the inclusion of supplemental rights or remedies in favor of Lender in any other Loan Document shall not be deemed a conflict with this Agreement. Each Loan Document was drafted with the joint participation of the respective parties thereto and shall be construed neither against nor in favor of any party, but rather in accordance with the fair meaning thereof. 9.10 NATURE OF LENDER'S OBLIGATIONS. Nothing contained in this Agreement or any other Loan Document and no action taken by Lender pursuant hereto or thereto may, or may be deemed to, make Lender a partnership, an association, a joint venture or other entity with Borrower or any Affiliate of Borrower. -42- 9.11 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made hereunder and in any other Loan Document, certificate or statement delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery thereof. Such representations and warranties have been or will be relied upon by Lender, notwithstanding any investigation made by Lender or on its behalf. 9.12 INDEMNITY BY BORROWER. Whether or not the transactions contemplated hereby are consummated, Borrower agrees to indemnify, save and hold harmless Lender, its Affiliates and their respective officers, directors, employees, agents and attorneys-in-fact (collectively the "Indemnitees") from and against: (a) any and all claims, demands, actions or causes of action that are asserted against any Indemnitee by any Person relating directly or indirectly to a claim, demand, action or cause of action that such Person asserts or may assert against Borrower, any of their Affiliates or any of their officers or directors; (b) any and all claims, demands, actions or causes of action arising out of or relating to, the Loan Documents, any predecessor loan documents, the Commitment, the use or contemplated use of the proceeds of any Loan, or the relationship of Borrower and Lender under this Agreement; (c) any administrative or investigative proceeding by any Governmental Authority arising out of or related to a claim, demand, action or cause of action described in subsection (a) or (b) above; and (d) any and all liabilities (including liabilities under indemnities), losses, reasonable and documented out of pocket costs or expenses (including Attorney Costs) that any Indemnitee suffers or incurs as a result of the assertion of any foregoing claim, demand, action, cause of action or proceeding, or as a result of the preparation of any defense in connection with any foregoing claim, demand, action, cause of action or proceeding, in all cases, whether or not arising out of the negligence of an Indemnitee, whether or not an Indemnitee is a party to such claim, demand, action, cause of action or proceeding (all the foregoing, collectively, the "Indemnified Liabilities"); provided that no Indemnitee shall be entitled to indemnification for any loss caused by the gross negligence or willful misconduct of any Indemnitee or for any loss asserted against it by another Indemnitee. The agreements in this Section shall survive repayment of all Obligations. 9.13 NONLIABILITY OF LENDER. Borrower acknowledges and agrees that: (a) Any inspections of any property of Borrower made by or through Lender are for purposes of administration of the Loan Documents only, and Borrower is not entitled to rely upon the same (whether or not such inspections are at the expense of Borrower); (b) By accepting or approving anything required to be observed, performed, fulfilled or given to Lender pursuant to the Loan Documents, Lender shall not be deemed to have warranted or represented the sufficiency, legality, effectiveness or legal effect of the same, or of any term, provision or condition thereof, and such acceptance or approval thereof shall not constitute a warranty or representation to anyone with respect thereto by Lender; (c) The relationship between Borrower and Lender created by this Agreement is, and shall at all times remain, solely that of borrower and lender; Lender shall not under any circumstance be deemed to be in a relationship of confidence or trust or a fiduciary relationship with Borrower or its Affiliates, or to owe any fiduciary duty to Borrower or its Affiliates as a consequence of this Agreement; by virtue of entering into this Agreement, Lender does not undertake or assume any responsibility or duty to Borrower or its Affiliates to select, review, -43- inspect, supervise, pass judgment upon or inform Borrower or its Affiliates of any matter in connection with their property or the operations of Borrower or its Affiliates; Borrower and its Affiliates shall rely entirely upon their own judgment with respect to such matters; and any review, inspection, supervision, exercise of judgment or supply of information undertaken or assumed by Lender in connection with this Agreement relative to such matters is solely for the protection of Lender and neither Borrower nor any other Person is entitled to rely thereon; and (d) Lender shall not be responsible or liable to any Person for any loss, damage, liability or claim of any kind relating to injury or death to Persons or damage to property caused by the actions, inaction or negligence of Borrower and/or its Affiliates and Borrower hereby indemnifies and holds Lender harmless from any such loss, damage, liability or claim. 9.14 NO THIRD PARTIES BENEFITED. This Agreement is made for the purpose of defining and setting forth certain obligations, rights and duties of Borrower and Lender in connection with the Extensions of Credit, and is made for the sole benefit of Borrower and Lender, and Lender's successors and assigns. Except as provided in Sections 9.04 and 9.12, no other Person shall have any rights of any nature hereunder or by reason hereof. 9.15 SEVERABILITY. Any provision of the Loan Documents that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 9.16 CONFIDENTIALITY. Lender and each participant and assignee shall use any confidential non-public information concerning Borrower and its Subsidiaries that is furnished to it by or on behalf of Borrower and its Subsidiaries in connection with the Loan Documents (collectively, "Confidential Information") solely for the purpose of evaluating and providing products and services to them and administering and enforcing the Loan Documents, and it will hold the Confidential Information in confidence. Notwithstanding the foregoing, Lender may disclose Confidential Information (a) to its Affiliates or any of its or its Affiliates' directors, officers, employees, auditors, counsel, advisors, or representatives (collectively, the "Representatives") whom it determines need to know such information for the purposes set forth in this Section; (b) to any bank or financial institution or other entity to which Lender has assigned or desires to assign an interest or participation in the Loan Documents or the Obligations, provided that any such foregoing recipient of such Confidential Information agrees to keep such Confidential Information confidential as specified herein; (c) to any governmental agency or regulatory body having or claiming to have authority to regulate or oversee any aspect of Lender's business in connection with the exercise of such authority or claimed authority; (d) to the extent necessary or appropriate to effect or preserve Lender's or any of its Affiliates' security (if any) for any Obligation or to enforce any right or remedy or in connection with any claims asserted by or against Lender or any of its Representatives; and (e) pursuant to any subpoena or any similar legal process; provided that, unless specifically prohibited by applicable law or court order, Lender shall notify Borrower of any request by any governmental or regulatory agency (other than any such request in connection with any examination of the financial condition of Lender by such regulatory agency) for disclosure of any such non-public information prior to disclosure of such information. For purposes hereof, the term "Confidential -44- Information" shall not include information that (x) is in Lender's possession prior to its being provided by or on behalf of Borrower, provided that such information is not known by Lender to be subject to another confidentiality agreement with, or other legal or contractual obligation of confidentiality to, a Borrower, (y) is or becomes publicly available (other than through a breach hereof by Lender), or (z) becomes available to Lender on a nonconfidential basis, provided that the source of such information was not known by Lender to be bound by a confidentiality agreement or other legal or contractual obligation of confidentiality with respect to such information. 9.17 FURTHER ASSURANCES. Borrower and its Subsidiaries shall, at their expense and without expense to Lender, do, execute and deliver such further acts and documents as Lender from time to time reasonably requires for the assuring and confirming unto Lender of the rights hereby created or intended now or hereafter so to be, or for carrying out the intention or facilitating the performance of the terms of any Loan Document. 9.18 HEADINGS. Section headings in this Agreement and the other Loan Documents are included for convenience of reference only and are not part of this Agreement or the other Loan Documents for any other purpose. 9.19 TIME OF THE ESSENCE. Time is of the essence of the Loan Documents. 9.20 GOVERNING LAW. (a) THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE; PROVIDED THAT LENDER SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. (b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT SHALL BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA SITTING IN ORANGE COUNTY OR OF THE UNITED STATES FOR THE CENTRAL DISTRICT OF SUCH STATE, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, BORROWER AND LENDER CONSENTS, FOR THEMSELVES AND IN RESPECT OF THEIR PROPERTY, TO THE EXCLUSIVE JURISDICTION OF THOSE COURTS. BORROWER AND LENDER IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH THEY MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF ANY LOAN DOCUMENT OR OTHER DOCUMENT RELATED HERETO. BORROWER AND LENDER AGREE THAT SERVICE OF ALL PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE MADE BY REGISTERED OR CERTIFIED MAIL, RETURN RECEIPT REQUESTED, TO BORROWER OR LENDER AT THEIR RESPECTIVE ADDRESSES PROVIDED IN ACCORDANCE WITH SECTION 9.02, THAT SUCH SERVICE IS SUFFICIENT TO CONFER PERSONAL JURISDICTION OVER BORROWER OR LENDER IN ANY SUCH -45- ACTION OR PROCEEDINGS AND OTHERWISE CONSTITUTES EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT AND THAT BORROWER AND LENDER RETAIN THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. 9.21 WAIVER OF RIGHT TO TRIAL BY JURY. EACH PARTY TO THIS AGREEMENT HEREBY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING UNDER ANY LOAN DOCUMENT OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO ANY LOAN DOCUMENT, OR THE TRANSACTIONS RELATED THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER FOUNDED IN CONTRACT OR TORT OR OTHERWISE; AND EACH PARTY HEREBY AGREES AND CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE SIGNATORIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. -46- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. BROADCOM CORPORATION By: /s/ WILLIAM J. RUEHLE ------------------------------------- Name: William J. Ruehle ----------------------------------- Title: CFO and Vice President ---------------------------------- BANK OF AMERICA, N.A. By: /s/ KEVIN MCMAHON ------------------------------------- Name: Kevin McMahon ----------------------------------- Title: Managing Director ---------------------------------- -S1- CREDIT AGREEMENT BETWEEN BROADCOM CORPORATION AND BANK OF AMERICA, N.A. DATED AS OF DECEMBER 21, 2001 Exhibit A Form of Request for Extension of Credit Exhibit B Form of Compliance Certificate Exhibit C Form of Opinion of Counsel Schedule 5.02 Subsidiaries Schedule 7.01 Existing Indebtedness, Liens and Negative Pledges Schedule 9.02 Notice Addresses and Lending Office Broadcom Corporation agrees to furnish supplementally a copy of any of the foregoing exhibits to the SEC upon request. EX-21.1 6 a78920ex21-1.txt EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF THE COMPANY State or Other Jurisdiction of Name of Entity Incorporation or Organization -------------- ------------------------------ Altima Communications, Inc. California AltoCom, Inc. California Armedia, Inc. Delaware Broadcom (BVI) Limited British Virgin Islands Broadcom Canada Ltd. British Columbia Broadcom HomeNetworking, Inc. California Broadcom India Private Limited India Broadcom Netherlands B.V. The Netherlands Broadcom Singapore Pte Ltd. Singapore Broadcom UK, Ltd. Delaware ServerWorks Corporation Delaware Broadcom Israel Ltd. Israel EX-23.1 7 a78920ex23-1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-60763, 333-80317, 333-87673, 333-93457, 333-33170, 333-41110, 333-49158, 333-49680, 333-51632, 333-53492, 333-58498, 333-58574, 333-67702, 333-71338, and Form S-3 No. 333-90903) of our reports dated January 23, 2002 (except for Notes 3, 11 and 14 as to which the date is March 15, 2002), with respect to the consolidated financial statements and financial statement schedule of Broadcom Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 2001. /s/ ERNST & YOUNG LLP Orange County, California March 15, 2002 -----END PRIVACY-ENHANCED MESSAGE-----


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


California		33-0480482
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)


PART I
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
PART II
	Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Consolidated Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 7A. Quantitative and Qualitative Disclosures about Market Risk
	Item 8. Financial Statements and Supplementary Data
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III.
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13. Certain Relationships and Related Transactions
PART IV.
	Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
EXHIBIT 10.17
EXHIBIT 10.18
EXHIBIT 10.19
EXHIBIT 21.1
EXHIBIT 23.1


		Page

PART I
Item 1.	Business		1
Item 2.	Properties		14
Item 3.	Legal Proceedings		15
Item 4.	Submission of Matters to a Vote of Security Holders		15
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		15
Item 6.	Selected Consolidated Financial Data		16
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
	Risk Factors		30
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		43
Item 8.	Financial Statements and Supplementary Data		44
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		44
PART III
Item 10.	Directors and Executive Officers of the Registrant		44
Item 11.	Executive Compensation		44
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		45
Item 13.	Certain Relationships and Related Transactions		45
PART IV
Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		45


		High		Low

Year Ended December 31, 2000
	First Quarter	$	253.00	$	110.88
	Second Quarter		235.75		113.00
	Third Quarter		274.75		203.50
	Fourth Quarter		256.19		74.75
Year Ended December 31, 2001
	First Quarter	$	139.50	$	27.09
	Second Quarter		49.65		20.88
	Third Quarter		48.94		18.70
	Fourth Quarter		52.33		18.40
Year Ending December 31, 2002
	First Quarter (through March 11, 2002)	$	53.35	$	30.10


	*Wireless Communications — Wireless Networking, Terrestrial Digital Broadcast and Broadband Fixed Wireless*


	*Optical and Metropolitan and Wide Area Networking Products*



		Years Ended December 31,

		2001			2000			1999		1998		1997


		(In thousands, except per share data)
Consolidated Statement of Operations Data
Net revenue		$	961,821		$	1,096,160		$	521,225	$	216,729	$	42,341
Cost of revenue			557,733			484,219			211,991		91,403		15,563

Gross profit			404,088			611,941			309,234		125,326		26,778
Operating expense:
	Research and development		446,648			250,676			119,300		54,285		22,776
	Selling, general and administrative		155,448			103,305			61,475		33,595		11,871
	Stock-based compensation		484,039			115,307			3,560		1,786		61
	Amortization of goodwill		753,042			136,984			—		—		—
	Amortization of purchased intangible assets		27,192			1,255			—		—		—
	Impairment of goodwill		1,181,649			—			—		—		—
	In-process research and development		109,710			713,050			—		—		—
	Restructuring costs		34,281			—			—		—		—
	Litigation settlement costs		3,000			—			17,036		—		—
	Merger-related costs		—			4,745			15,210		—		—

Income (loss) from operations			(2,790,921	)		(713,381	)		92,653		35,660		(7,930	)
Interest income, net			23,019			24,299			8,388		4,101		107
Other income (expense), net			(30,875	)		(2,693	)		260		79		—

Income (loss) before income taxes			(2,798,777	)		(691,775	)		101,301		39,840		(7,823	)
Provision (benefit) for income taxes			(56,729	)		(3,953	)		28,830		18,451		(852	)

Net income (loss)		$	(2,742,048	)	$	(687,822	)	$	72,471	$	21,389	$	(6,971	)

Basic earnings (loss) per share(1)		$	(10.79	)	$	(3.13	)	$	.36	$	.13	$	(.06	)

Diluted earnings (loss) per share(1)		$	(10.79	)	$	(3.13	)	$	.31	$	.10	$	(.06	)



	December 31,

	2001		2000		1999		1998		1997


	(In thousands)
Consolidated Balance Sheet Data
Cash and cash equivalents	$	403,758	$	523,904	$	180,816	$	77,555	$	34,512
Working capital		261,849		673,092		310,625		136,341		35,349
Goodwill and purchased intangible assets, net		2,338,740		3,260,464		—		—		—
Total assets		3,623,298		4,677,822		609,753		271,147		63,708
Long-term debt, including current portion		118,046		23,649		4,862		12,784		4,743
Convertible preferred stock		—		—		—		—		28,617
Total shareholders’ equity		3,207,410		4,475,260		516,872		224,424		45,872


		Weighted
		Average		Average		Estimated		Risk
		Estimated		Estimated		Cost to		Adjusted
Purchase		Percent		Time to		Complete		Discount			IPR&D
Transaction	Development Projects	Complete		Complete		(In millions)		Rate			(In millions)

2001 Acquisitions
Visiontech	Video compression integrated circuits		60%		1 year	$	5.2		30- 35	%	$	30.4
ServerWorks	High-performance SystemI/O integrated circuits for servers		45%		1.5 years		21.2		29- 34	%		79.3
2000 Acquisitions
Innovent	RF integrated circuits for wireless		43%		1.5 years	$	6.9		30-35	%	$	41.7
Altima	Ethernet physical layer transceivers		47%		1 year		2.9		30- 35	%		4.0
NewPort	Integrated circuits for optical communications equipment		70%		1 year		3.7		30- 35	%		198.5
Silicon Spice	Communications processors		84%		1 year		10.0		30	%		219.3
Element 14.	Integrated circuits used in DSL		49%		1 year		13.2		40-45	%		64.6
Allayer	Integrated circuits for wide area and Ethernet switching applications		43%		1.5 years		5.0		31- 36	%		11.6
SiByte	Network processors		42%		1.5 years		31.4		30-35	%		173.4



	Payment Obligations by Year (In thousands)

											There-
	2002		2003		2004		2005		2006		after		Total

Credit facility	$	90,000	$	—	$	—	$	—	$	—	$	—	$	90,000
Note payable		21,051		—		—		—		—		—		21,051
Capital leases		2,989		2,794		1,212		—		—		—		6,995
Operating leases		82,111		78,192		65,044		36,819		27,751		89,699		379,616
Purchase commitments		2,459		—		—		—		—		—		2,459

Total	$	198,610	$	80,986	$	66,256	$	36,819	$	27,751	$	89,699	$	500,121


Our products typically have lengthy sales cycles. A customer may decide to cancel or change its product plans, which could cause us to lose anticipated sales. In addition, our average product cycles tend to be short and, as a result, we may hold excess or obsolete inventory that could adversely affect our operating results.


Our acquisition strategy may require us to undertake significant capital infusions, be dilutive to our existing shareholders, result in unanticipated accounting charges or otherwise adversely affect our results of operations, and result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies or businesses.


We may be unable to retain key technical and senior management personnel and attract additional key employees, which could seriously harm our business.


Our future success depends in significant part on strategic relationships with certain of our customers. If we cannot maintain these relationships or if these customers develop their own solutions or adopt a competitor’s solutions instead of buying our products, our operating results would be adversely affected.


	*DSL Products*


	*Carrier Access Products*


	*Broadband Processors*


	*Security Processors and Adapters*


We may not be able to adequately protect or enforce our intellectual property rights, which could harm our competitive position.


Infringement or other claims against us could adversely affect our ability to market our products, require us to redesign our products or seek licenses from third parties and seriously harm our operating results.


		Current			Long-term			Total			Fair Value


		(In thousands, except interest rates)
December 31, 2001
Cash equivalents		$	37,230		$	—		$	37,230		$	37,225
	Weighted average rate		2.34	%		—			2.34	%
Marketable securities		$	136,028		$	109,767		$	245,795		$	249,033
	Weighted average rate		4.00	%		4.67	%		4.30	%
Total portfolio (held-to-maturity)		$	173,258		$	109,767		$	283,025		$	286,258
	Weighted average rate		3.65	%		4.67	%		4.04	%
Credit facility		$	90,000		$	—		$	90,000		$	90,000
	December 31, 2001 interest rate		2.90	%		—			2.90	%
Capital leases		$	2,989		$	4,006		$	6,995		$	6,995
	December 31, 2001 interest rate		7.86	%		7.86	%		7.86	%
Note payable		$	21,051		$	—		$	21,051		$	21,051
	December 31, 2001 interest rate		3.59	%		—			3.59	%
December 31, 2000
Cash equivalents		$	60,750		$	—		$	60,750		$	60,721
	Weighted average rate		6.62	%		—			6.62	%
Marketable securities		$	77,682		$	1,984		$	79,666		$	79,668
	Weighted average rate		6.19	%		7.33	%		6.22	%
Total portfolio (held-to-maturity)		$	138,432		$	1,984		$	140,416		$	140,389
	Weighted average rate		6.38	%		7.33	%		6.39	%
Capital leases		$	2,598		$	—		$	2,598		$	2,598
	December 31, 2000 interest rate		11.25	%		—			11.25	%
Note payable		$	21,051		$	—		$	21,051		$	21,051
	December 31, 2000 interest rate		7.40	%		—			7.40	%


Item 12.	*Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*


	Page

Report of Independent Auditors		F-1
Consolidated Balance Sheets as of December 31, 2001 and 2000		F-2
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999		F-3
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2001, 2000 and 1999		F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999		F-5
Notes to Consolidated Financial Statements		F-6


	Page

Report of Independent Auditors on Financial Statement Schedule		S-1
Schedule II — Consolidated Valuation and Qualifying Accounts		S-2


									Notes						Retained			Accumulated
			Common Stock				Additional		Receivable						Earnings			Other			Total
							Paid-In		From			Deferred			(Accumulated			Comprehensive			Shareholders’
			Shares		Amount		Capital		Employees			Compensation			Deficit)			Income (Loss)			Equity

Balance at December 31, 1998				199,909,859	$	20	$	221,347	$	(2,743	)	$	(8,078	)	$	13,995		$	(117	)	$	224,424
	Pooling-of-interest transactions			3,406,871		—		37,642		—			—			(6,435	)		—			31,207
	Exercise of stock options, net			8,945,672		1		23,909		(394	)		—			—			—			23,516
	Employee stock purchase plan			737,088		—		5,016		—			—			—			—			5,016
	Repayment of notes receivable			—		—		—		1,316			—			—			—			1,316
	Tax benefit from stock plans			—		—		154,103		—			—			—			—			154,103
	Deferred compensation, net			—		—		9,267		—			(9,267	)		—			—			—
	Stock-based compensation expense			—		—		—		—			4,713			—			—			4,713
	Components of comprehensive income:
		Translation adjustments		—		—		—		—			—			—			106			106
		Net income		—		—		—		—			—			72,471			—			72,471

	Comprehensive income			—		—		—		—			—			—			—			72,577

Balance at December 31, 1999				212,999,490		21		451,284		(1,821	)		(12,632	)		80,031			(11	)		516,872
	Purchase transactions			20,899,073		2		3,893,441		(13,668	)		—			—			—			3,879,775
	Pooling-of-interest transactions			176,049		—		1,061		—			—			—			—			1,061
	Exercise of stock options, net			9,767,556		1		131,786		—			—			—			—			131,787
	Employee stock purchase plan			479,715		—		11,774		—			—			—			—			11,774
	Repayment of notes receivable			—		—		—		914			—			—			—			914
	Tax benefit from stock plans			—		—		465,887		—			—			—			—			465,887
	Deferred compensation, net			—		—		1,236,013		—			(1,236,013	)		—			—			—
	Stock-based compensation expense			—		—		7,119		—			113,090			—			—			120,209
	Fair value of warrants earned by customers			—		—		38,603		—			—			—			—			38,603
	Components of comprehensive loss:
		Change in net unrealized loss on investments		—		—		—		—			—			—			(3,799	)		(3,799	)
		Translation adjustments		—		—		—		—			—			—			(1	)		(1	)
		Net loss		—		—		—		—			—			(687,822	)		—			(687,822	)

	Comprehensive loss			—		—		—		—			—			—			—			(691,622	)

Balance at December 31, 2000				244,321,883		24		6,236,968		(14,575	)		(1,135,555	)		(607,791	)		(3,811	)		4,475,260
	Purchase transactions			13,948,095		2		867,034		(756	)		—			—			—			866,280
	Exercise of stock options, net			5,650,034		—		40,893		—			—			—			—			40,893
	Employee stock purchase plan			584,484		—		18,922		—			—			—			—			18,922
	Repayment of notes receivable			—		—		—		879			—			—			—			879
	Deferred compensation, net			—		—		293,310		—			(293,310	)		—			—			—
	Stock-based compensation expense			—		—		47,061		—			463,949			—			—			511,010
	Fair value of warrants earned by customers			—		—		25,497		—			—			—			—			25,497
	Components of comprehensive loss:
		Change in net unrealized gain on investments		—		—		—		—			—			—			6,972			6,972
		Reclassification adjustment for realized loss included in net income (loss)		—		—		—		—			—			—			3,799			3,799
		Translation adjustments		—		—		—		—			—			—			(54	)		(54	)
		Net loss		—		—		—		—			—			(2,742,048	)		—			(2,742,048	)

	Comprehensive loss			—		—		—		—			—			—			—			(2,731,331	)

Balance at December 31, 2001				264,504,496	$	26	$	7,529,685	$	(14,452	)	$	(964,916	)	$	(3,349,839	)	$	6,906		$	3,207,410



			December 31,

	Useful Life		2001			2000


	(In years)		(In thousands)
Leasehold improvements		1 to 7	$	41,650		$	34,477
Office furniture and equipment		3 to 7		27,825			22,354
Machinery and equipment		5		58,402			35,408
Computer software and equipment		2 to 4		126,267			70,218
Construction in progress		N/A		5,056			17,369

				259,200			179,826
Less accumulated depreciation and amortization				(101,864	)		(46,956	)

			$	157,336		$	132,870


	Assets			Goodwill and				Deferred			In-Process
	(Liabilities)			Purchased		Deferred		Tax Assets			Research &		Total
	Assumed			Intangibles		Compensation		(Liabilities)			Development		Consideration


	(In thousands)
2001 Acquisitions
Visiontech	$	(14,826	)	$	105,404	$	100,530	$	—		$	30,400	$	221,508
ServerWorks		(171,252	)		802,591		244,971		(147,860	)		79,310		807,760
KimaLink; PortaTec		(625	)		3,567		7,563		—			—		10,505

	$	(186,703	)	$	911,562	$	353,064	$	(147,860	)	$	109,710	$	1,039,773

2000 Acquisitions
Innovent	$	7,297		$	267,636	$	273,740	$	(67,996	)	$	41,690	$	522,367
Puyallup		(460	)		37,982		35,934		(8,767	)		—		64,689
Altima		1,955			393,047		159,490		(27,954	)		3,970		530,508
NewPort		11,977			894,535		261,002		(80,396	)		198,460		1,285,578
Silicon Spice		26,346			635,941		258,274		(14,796	)		219,300		1,125,065
Element 14.		(18,805	)		383,819		70,646		4,835			64,630		505,125
Allayer		9,808			170,326		8,451		(6,013	)		11,620		194,192
SiByte		23,447			617,683		174,106		(81,054	)		173,380		907,562

Total	$	61,565		$	3,400,969	$	1,241,643	$	(282,141	)	$	713,050	$	5,135,086



				Per Warrant

						Weighted		Weighted
						Average		Average
	Number of			Exercise		Exercise		Fair
	Warrants			Price Range		Price		Value

Performance-based warrants assumed in 2000		5,527,847		$	.004 – $.033	$	.013	$	186.91
Performance-based warrants exercised in 2000		(9,901	)		.011		.011		227.31

Balance at December 31, 2000.		5,517,946			.004 – .033		.013		186.84
Performance-based warrants assumed in 2001		1,557,480			.002		.002		106.94
Performance-based warrants cancelled in 2001		(3,507,082	)		.014 – .033		.018		217.90
Performance-based warrants exercised in 2001		(139,482	)		.014		.014		238.56

Balance at December 31, 2001.		3,428,862		$	.002 – $.011	$	.003	$	86.87



				Warrants Outstanding

						Weighted				Warrants
				Number of		Average				Exercisable (Earned)
				Shares		Remaining		Per Share
	Per Share			Underlying		Contractual		Exercise		Shares		Price Per
	Fair Value			Warrants		Life (Years)		Price		Exercisable		Share
Acquisition
Silicon Spice	$	227.31			29,703		.58	$	.011		—	$	.011
SiByte		123.13			1,841,679		2.79		.004		—		.004
Visiontech		40.87	(1)		1,557,480		3.00		.002		696,852		.002


			Year Ended
			December 31, 1999

			(In thousands, except
			per share data)
Net revenue
	Broadcom (as originally reported on Form 10-K)		$	518,183
	Pooling-of-interests transactions			3,042

		Total	$	521,225

Net income (loss)
	Broadcom (as originally reported on Form 10-K)		$	83,287
	Pooling-of-interests transactions			(10,816	)

		Total	$	72,471

Diluted earnings (loss) per share
	Broadcom (as originally reported on Form 10-K)		$	.36
	Pooling-of-interests transactions			(.05	)

		Total	$	.31


				Gross		Gross
				Unrealized		Unrealized			Fair
		Cost		Gains		Losses			Value


		(In thousands)
December 31, 2001
Cash equivalents		$	37,230	$	—	$	(5	)	$	37,225
Short-term marketable securities			136,028		1,899		(7	)		137,920
Long-term marketable securities			109,767		1,629		(284	)		111,112

	Total	$	283,025	$	3,528	$	(296	)	$	286,257

December 31, 2000
Cash equivalents		$	60,750	$	—	$	(29	)	$	60,721
Short-term marketable securities			77,682		25		(34	)		77,673
Long-term marketable securities			1,984		11		—			1,995

	Total	$	140,416	$	36	$	(63	)	$	140,389


	Operating Leases		Capital Leases


	(In thousands)
2002	$	82,111	$	2,989
2003		78,192		2,794
2004		65,044		1,212
2005		36,819		—
2006		27,751		—
Thereafter		89,699		—

	$	379,616	$	6,995



					Options Outstanding

										Weighted
		Shares								Average
		Available for			Number of			Price Range		Exercise Price
		Grant			Shares			Per Share		Per Share

Balance at December 31, 1998			16,665,244			46,030,237		$	.02 - $ 30.19	$	7.03
	Additional shares reserved		22,619,168			—			—		—
	Options granted under Broadcom Plans		(23,015,952	)		23,015,952			2.80 - 122.84		52.31
	Options assumed under pooling-of-interest plans		—			1,432,387			.02 - 56.33		5.69
	Options canceled		504,086			(552,827	)		.02 - 89.53		24.42
	Option shares repurchased		2,750			—			—		—
	Options exercised		—			(9,917,307	)		.02 - 54.50		2.53

Balance at December 31, 1999			16,775,296			60,008,442			.02 - 122.84		24.94
	Additional shares reserved		24,416,902			—			—		—
	Options granted under Broadcom Plans		(25,957,719	)		25,957,719			77.50 - 213.06		133.57
	Options assumed under pooling-of-interest plans		—			139,404			4.13 - 140.60		70.96
	Options assumed in purchase transactions		—			5,078,672			.02 - 219.48		49.25
	Options canceled		1,542,472			(1,629,274	)		.02 - 213.06		63.54
	Options exercised		—			(10,014,617	)		.02 - 155.50		13.00

Balance at December 31, 2000.			16,776,951			79,540,346			.02 - 219.48		62.70
	Additional shares reserved		35,987,421			—			—		—
	Options granted under Broadcom Plans		(51,802,614	)(1)		51,802,614	(1)		18.77 - 39.75		34.41
	Options assumed in purchase transactions		—			6,199,038			.02 - - 71.56		6.27
	Options canceled		23,756,248	(2)		(24,788,587	)(2)		.02 - 213.06		112.30
	Options exercised		—			(5,843,011	)		.02 - 112.66		7.26

Balance at December 31, 2001			24,718,006			106,910,400		$	.02 - $213.06	$	36.74


(1)	Includes 18,616,372 replacement options and 3,878,073 supplemental options issued pursuant to the Company’s 2001 stock option exchange offer to employees.

(2)	Includes 18,716,811 options cancelled pursuant to the Company’s 2001 stock option exchange offer to employees.



	Outstanding

			Weighted				Exercisable
			Average
			Remaining		Weighted				Weighted
Range of	Number of		Contractual Life		Average				Average
Exercise Prices	Shares		(Years)		Exercise Price		Shares		Exercise Price

$ .02 to $ 2.50		15,184,442		6.24	$	1.06		11,569,241	$	.95
2.53 to 18.77		11,391,053		8.73		13.80		3,342,318		10.30
18.86 to 23.58		11,922,569		7.48		21.35		2,592,322		20.79
24.47 to 33.68		18,771,021		9.17		32.89		3,987,297		31.80
34.38 to 39.75		26,844,469		9.89		39.59		8,006,948		39.50
41.84 to 56.63		12,691,277		7.66		50.45		6,606,816		50.33
63.91 to 118.38		6,874,602		8.56		99.74		1,804,394		85.58
120.26 to 219.48		3,230,967		8.30		154.25		1,469,692		155.43



	Employee Stock Options									Employee Stock Purchase Rights

	2001			2000			1999			2001			2000			1999

Expected life (in years)		3.00			3.00			3.50			1.17			1.75			1.42
Volatility		0.90			0.90			0.80			0.90			0.90			0.80
Risk-free interest rate		4.09	%		6.20	%		6.00	%		4.09	%		6.20	%		6.00	%
Dividend yield		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Weighted average fair value	$	27.13		$	93.31		$	30.25		$	21.48		$	37.36		$	4.60


									Restructuring
									Liabilities at
	Total Costs		Non-Cash Costs			Cash Payments			December 31, 2001


	(In thousands)
Workforce reductions	$	16,100	$	(11,070	)	$	(4,906	)	$	124
Consolidation of excess facilities		18,181		(1,638	)		(6,073	)		10,470

Total	$	34,281	$	(12,708	)	$	(10,979	)	$	10,594


(1)	One complaint was originally filed in the United States District Court for the Southern District of California and was subsequently transferred to the Central District of California.