-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GcX/atkJFYLgaSWA8byBlg6Mna3fmBmlL8CtjdZ7PFm7uvUBxlniJ9HWs+1jB0e/ uT8D772QAyOM7J9JPa6CCg== 0000898430-01-000639.txt : 20010223 0000898430-01-000639.hdr.sgml : 20010223 ACCESSION NUMBER: 0000898430-01-000639 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED MICRO CIRCUITS CORP CENTRAL INDEX KEY: 0000711065 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942586591 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23193 FILM NUMBER: 1544039 BUSINESS ADDRESS: STREET 1: 6290 SEQUENCE DR CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6194509333 MAIL ADDRESS: STREET 1: 6290 SEQUENCE DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92121 10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL QUARTER ENDED DEEMBER 31, 2000, OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO. COMMISSION FILE NUMBER: 000-23193 APPLIED MICRO CIRCUITS CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 94-2586591 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6290 SEQUENCE DRIVE SAN DIEGO, CA 92121 (Address of principal executive offices) Registrant's telephone number, including area code: (858) 450-9333 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, as amended (the "Exchange Act"), during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] As of February 5, 2001, 298,475,800 shares of the Registrant's Common Stock were issued and outstanding. APPLIED MICRO CIRCUITS CORPORATION INDEX
PAGE ---- Part I. FINANCIAL INFORMATION Item 1. Financial Statements............................................ 3 a) Condensed Consolidated Balance Sheets at December 31, 2000 (unaudited) and March 31, 2000............................... 3 b) Condensed Consolidated Statements of Operations (unaudited) for the three and nine months ended December 31, 2000 and 1999..................................................... 4 c) Consolidated Statements of Cash Flows (unaudited) for the nine months ended December 31, 2000 and 1999......... 5 d) Notes to Condensed Consolidated Financial Statements (unaudited).................................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................. 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................................... 25 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K................................ 26 Signatures............................................................... 26
================================================================================ PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements APPLIED MICRO CIRCUITS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except par value)
December 31, March 31, 2000 2000 ------------ --------- (unaudited) Assets ------ Current assets: Cash and cash equivalents.............................................................. $ 88,747 $ 170,102 Short-term investments - available-for-sale............................................ 1,040,058 784,449 Accounts receivable, net of allowance for doubtful accounts of $2,828 and $314 at December 31, 2000 (unaudited) and March 31, 2000, respectively.............. 87,030 25,459 Inventories (see Note 3)............................................................... 33,546 10,925 Deferred income taxes.................................................................. -- 4,148 Other current assets................................................................... 21,103 10,321 ---------- ---------- Total current assets................................................................ 1,270,484 1,005,404 Property and equipment, net.............................................................. 79,069 37,842 Purchased intangibles, net of $149,118 of accumulated amortization at December 31, 2000.. 4,209,378 -- Other assets............................................................................. 2,948 3,636 ---------- ---------- Total assets........................................................................ $5,561,879 $1,046,882 ========== ========== Liabilities And Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable....................................................................... $ 35,100 $ 8,818 Accrued payroll and related expenses................................................... 17,040 7,618 Other accrued liabilities.............................................................. 18,850 6,448 Deferred revenue....................................................................... 4,425 2,776 Deferred income taxes, current......................................................... 87,105 -- Current portion of long-term debt...................................................... 657 1,394 Current portion of capital lease obligations........................................... 662 729 ---------- ---------- Total current liabilities........................................................... 163,839 27,783 Deferred income taxes, long-term......................................................... 68,775 -- Long-term debt, less current portion..................................................... 1,387 3,599 Long-term capital lease obligations, less current portion................................ 1,184 1,695 Stockholders' equity: Preferred Stock, $0.01 par value: 2,000 shares authorized, none issued and outstanding................................. -- -- Common Stock, $0.01 par value: Authorized shares - 630,000; issued and outstanding shares - 296,424 at.............. 2,964 2,436 December 31, 2000 (unaudited) and 243,684 at March 31, 2000 Additional paid-in capital............................................................. 5,897,299 943,294 Deferred compensation, net............................................................. (402,313) (1,443) Accumulated other comprehensive income (loss).......................................... 1,129 (166) Retained earnings (deficit)............................................................ (172,338) 70,139 Notes receivable from stockholders..................................................... (47) (455) ---------- ---------- Total stockholders' equity.......................................................... 5,326,694 1,013,805 ---------- ---------- Total liabilities and stockholders' equity.......................................... $5,561,879 $1,046,882 ========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements. 3 APPLIED MICRO CIRCUITS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share data)
THREE MONTHS NINE MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, -------------------- ---------------------- 2000 1999 2000 1999 --------- -------- --------- -------- Net revenues.................................................... $ 143,269 $ 45,762 $ 314,464 $115,303 Cost of revenues (1) and (see Note 3)........................... 61,196 13,209 105,042 34,818 --------- -------- --------- -------- Gross profit.................................................... 82,073 32,553 209,422 80,485 Operating expenses: Research and development (1).................................. 31,285 8,281 65,342 21,829 Selling, general and administrative (1)....................... 20,498 7,061 45,731 19,178 Stock-based compensation...................................... 35,954 -- 36,698 -- Amortization of goodwill and purchased intangibles............ 127,574 -- 138,421 -- Acquired in-process research and development.................. 176,700 -- 202,100 -- --------- -------- --------- -------- Total operating expenses................................... 392,011 15,342 488,292 41,007 --------- -------- --------- -------- Operating income (loss)......................................... (309,938) 17,211 (278,870) 39,478 Interest income, net............................................ 14,771 1,225 40,513 3,114 --------- -------- --------- -------- Income (loss) before income taxes............................... (295,167) 18,436 (238,357) 42,592 Income tax expense (benefit).................................... (25,680) 6,324 4,120 14,597 --------- -------- --------- -------- Net income (loss)............................................... $(269,487) $ 12,112 $(242,477) $ 27,995 ========= ======== ========= ======== Basic earnings (loss) per share: Earnings (loss) per share..................................... $ (0.95) $ 0.06 $ (0.94) $ 0.13 ========= ======== ========= ======== Shares used in calculating basic earnings (loss) per share.... 282,313 212,476 257,688 209,456 ========= ======== ========= ======== Diluted earnings (loss) per share: Earnings (loss) per share..................................... $ (0.95) $ 0.05 $ (0.94) $ 0.12 ========= ======== ========= ======== Shares used in calculating diluted earnings (loss) per share.. 282,313 235,216 257,688 231,720 ========= ======== ========= ======== (1) For presentation purposes, the functional line items exclude stock-based compensation charges related to acquired companies as follows (in thousands): Cost of revenues................................................ $ 1,203 $ -- $ 1,203 $ -- Research and development........................................ 18,122 -- 18,708 -- Selling, general and administrative............................. 16,629 -- 16,787 -- -------- -------- -------- ------- $ 35,954 $ -- $ 36,698 $ -- ======== ======== ======== =======
See accompanying Notes to Condensed Consolidated Financial Statements. 4 APPLIED MICRO CIRCUITS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
NINE MONTHS ENDED DECEMBER 31, ------------ 2000 1999 ----------- --------- Operating Activities Net income (loss)......................................................................... $ (242,477) $ 27,995 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization............................................................ 9,589 5,802 Amortization of purchased intangibles.................................................... 149,118 -- Acquired in-process research and development............................................. 202,100 -- Amortization of deferred compensation.................................................... 36,807 462 Tax benefit of disqualifying dispositions................................................ 140,620 4,838 Changes in assets and liabilities: Accounts receivable.................................................................... (45,411) (1,579) Inventories............................................................................ 14,669 (709) Other assets........................................................................... (6,166) (956) Accounts payable....................................................................... 13,447 3,108 Accrued payroll and other accrued liabilities.......................................... 20,225 1,482 Deferred income taxes.................................................................. (136,973) 300 Deferred revenue....................................................................... 741 877 ----------- --------- Net cash provided by operating activities............................................ 156,289 41,620 Investing Activities Proceeds from sales and maturities of short-term investments.............................. 1,496,588 92,870 Purchase of short-term investments........................................................ (1,750,830) (112,595) Notes receivable from officers and employees.............................................. 16 815 Cash received from purchase acquisitions, net of cash paid and merger expenses............ 13,970 -- Purchase of property and equipment........................................................ (38,149) (16,673) ----------- --------- Net cash used for investing activities............................................... (278,405) (35,583) Financing Activities Proceeds from issuance of common stock.................................................... 43,909 5,737 Repurchase of restricted stock............................................................ (56) (11) Payments on capital lease obligations..................................................... (579) (989) Payments on stockholder's notes........................................................... 455 -- Payments on long-term debt................................................................ (2,948) (1,530) Other..................................................................................... (20) -- ----------- --------- Net cash provided by financing activities............................................ 40,761 3,207 ----------- --------- Net increase (decrease) in cash and cash equivalents........................................ (81,355) 9,244 Cash and cash equivalents at beginning of period............................................ 170,102 13,530 ----------- --------- Cash and cash equivalents at end of period.................................................. $ 88,747 $ 22,774 =========== ========= Supplemental disclosure of cash flow information: Cash paid for: Interest............................................................................... $ 340 $ 495 =========== ========= Income taxes........................................................................... $ 3,796 $ 9,620 =========== =========
See accompanying Notes to Condensed Consolidated Financial Statements. 5 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION - INTERIM FINANCIAL INFORMATION (UNAUDITED) The accompanying unaudited interim condensed financial statements of Applied Micro Circuits Corporation (the "Company" or "AMCC") have been prepared in accordance with generally accepted accounting principles for interim financial information. Therefore, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying financial statements reflect all adjustments (consisting of normal recurring accruals), which are, in the opinion of management, considered necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of results for a full year. The Company has experienced significant quarterly fluctuations in operating results and it expects that these fluctuations in sales, expenses and net income or losses will continue. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. These estimates include assessing the collectibility of accounts receivable, the use and recoverability of inventory, estimates to complete engineering contracts, costs of future product returns under warranty and provisions for contingencies expected to be incurred. Actual results could differ from those estimates. On each of October 30, 2000, March 24, 2000 and September 10, 1999, the Company effected two-for-one stock splits in the form of 100% stock dividends. Accordingly, all prior share, per share, common stock, and stock option amounts in this Quarterly Report on Form 10-Q have been restated to reflect the stock splits. The financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these accompanying financial statements should be read in conjunction with the audited financial statements and the related notes thereto contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended March 31, 2000. Certain prior period amounts have been reclassified to conform to the current period presentation. 2. EARNINGS (LOSS) PER SHARE The reconciliation of shares used to calculate basic and diluted earnings (loss) per share, restated to reflect the two-for-one stock splits, consists of the following (in thousands):
THREE MONTHS NINE MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, ---------------- ---------------- 2000 1999 2000 1999 ------- ------- ------- ------- Shares used in basic earnings (loss) per share computations.... 282,313 212,476 257,688 209,456 Net effect of dilutive common share equivalents................ -- 22,740 -- 22,264 ------- ------- ------- ------- Shares used in diluted earnings (loss) per share computations.. 282,313 235,216 257,688 231,720 ======= ======= ======= =======
Because the Company incurred losses in the three and nine months ended December 31, 2000, the effect of dilutive securities totaling 23,478 and 23,229 equivalent shares, respectively, have been excluded from the loss per share computation as their impact would be antidilutive. 6 3. CERTAIN FINANCIAL STATEMENT INFORMATION
DECEMBER 31, MARCH 31, 2000 2000 ------------ --------- Inventories (in thousands): Finished goods.................................................................. $ 8,024 $ 2,666 Work in process................................................................. 11,152 6,966 Raw materials................................................................... 3,607 1,293 ------- ------- 22,783 10,925 Purchased inventory fair value adjustment (Note 5).............................. 10,763 -- ------- ------- $33,546 $10,925 ======= ======= DECEMBER 31, MARCH 31, 2000 2000 ------------ -------- Property and equipment (in thousands): Machinery and equipment......................................................... $ 62,736 $ 46,375 Leasehold improvements.......................................................... 14,541 8,352 Computers, office furniture and equipment....................................... 61,262 20,743 Land............................................................................ 4,881 4,808 -------- -------- 143,420 80,278 Less accumulated depreciation and amortization.................................... (64,351) (42,436) -------- -------- $ 79,069 $ 37,842 ======== ========
Cost of sales includes certain amortization of purchased intangibles and other acquisition-related charges as follows (in thousands):
THREE MONTHS NINE MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, -------------------- -------------------- 2000 1999 2000 1999 --------- ------- --------- ------- Amortization of developed core technology....... $ 10,696 $ -- $ 10,696 $ -- Amortization of purchased inventory fair value adjustment (see Note 4)........................ 16,144 -- 16,144 -- -------- -------- -------- ------- $ 26,840 $ -- $ 26,840 $ -- ======== ======== ======== =======
Payroll taxes paid in association with an employee's exercise of stock options on the difference between the exercise price and the fair value of acquired stock are treated as operating expenses. Payroll taxes on stock option exercises were $1.0 million and $3.5 million for the three and nine months ended December 31, 2000, respectively. Comparative charges were not significant in the nine months ended December 31, 1999. 4. COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss), net of tax, are as follows (in thousands):
THREE MONTHS NINE MONTHS ENDED ENDED DECEMBER 31, DECEMBER 31, -------------------- -------------------- 2000 1999 2000 1999 --------- ------- --------- ------- Net income (loss)........................................... $(269,487) $12,112 $(242,477) $27,995 Change in market value of available-for-sale investments.... 645 (67) 1,316 (241) Foreign currency translation adjustment..................... (3) -- (21) -- --------- ------- --------- ------- Comprehensive income (loss)................................. $(268,845) $12,045 $(241,182) $27,754 ========= ======= ========= =======
5. BUSINESS COMBINATIONS In the nine months ended December 31, 2000, the Company completed a number of purchase acquisitions. The accompanying consolidated financial statements include the results of operations from the date of acquisition. The acquired companies are as follows: MMC Networks, Inc. - On October 25, 2000, the Company acquired MMC Networks, Inc. ("MMC"), a fabless semiconductor company that provides network processors, traffic management and switch fabric technology. Under the terms of the merger agreement, in exchange for all of the outstanding stock of MMC, the Company issued 41,392,404 shares of its common stock and assumed options to purchase 7,981,595 shares of its common stock. YuniNetworks, Inc. - On June 8, 2000, the Company completed the acquisition of YuniNetworks, Inc. ("YuniNetworks"), a developer of scalable switch fabric silicon solutions for communication equipment. Under the terms of the merger agreement, in exchange for all YuniNetworks' shares of common and preferred stock, the Company issued 4,048,646 shares of its common stock and assumed options to purchase 225,776 shares of its common stock. Pursuant to a separate agreement, AMCC 7 purchased 10% of the YuniNetworks' shares held by the majority stockholder of YuniNetworks for $8.9 million in cash. Other - In the nine months ended December 31, 2000, the Company also completed the acquisitions of pBaud Logic, Inc., Chameleon Technologies and SiLUTIA, Inc. ("SiLUTIA") for a total purchase price of $67.4 million. In connection with each of these transactions, the Company conducted independent valuations of the intangible assets acquired in order to allocate the purchase price in accordance with Accounting Principles Board Opinion No. 16. The Company has allocated the excess purchase price over the fair value of net tangible assets acquired to the following identifiable intangible assets: developed core and existing technology, assembled workforce, acquired in-process research and development ("IPR&D"), and trademarks/tradenames. The total purchase price was allocated as follows (in thousands):
MMC YuniNetworks Other Total ----------- ------------ -------- ---------- Net tangible assets (liabilities)............ $ 126,866 $ 2,118 $ (165) $ 128,819 In-process research & development............ 176,700 21,800 3,600 202,100 Goodwill and other intangibles............... 4,128,686 192,365 37,445 4,358,496 Deferred tax liabilities..................... (301,129) -- (16,849) (317,978) Deferred compensation........................ 391,821 2,488 43,368 437,677 Purchased inventory fair value adjustment.... 26,907 -- -- 26,907 ---------- -------- -------- ---------- Total consideration.......................... $4,549,851 $218,771 $ 67,399 $4,836,021 ========== ======== ======== ==========
Total consideration issued in the purchase acquisitions is as follows (in thousands):
MMC YuniNetworks Other Total ---------- ------------ ------- ---------- Value of securities issued.................. $3,919,085 $197,545 $58,099 $4,174,729 Assumption of options....................... 578,093 11,467 6,246 595,806 ---------- -------- ------- ---------- 4,497,178 209,012 64,345 4,770,535 Cash paid and merger fees................... 52,673 9,759 3,054 65,486 ---------- -------- ------- ---------- $4,549,851 $218,771 $67,399 $4,836,021 ========== ======== ======= ==========
The purchased inventory fair value adjustment represents the difference between the carrying value of work in process and finished goods inventory and the estimated selling price of the related inventory at the date of acquisition. This accounting adjustment will be charged to cost of sales as the related inventory is sold. In the three months ended December 31, 2000, $16.1 million of the total adjustment was charged to cost of sales. The Company expects that the remaining $10.8 million will be charged to cost of sales in the fourth quarter of fiscal 2001. The related purchased IPR&D for each of the above acquisitions represents the present value of the estimated after-tax cash flows expected to be generated by the purchased technology, which, at the acquisition dates, had not yet reached technological feasibility. The cash flow projections for revenues were based on estimates of relevant market sizes and growth factors, expected industry trends, the anticipated nature and timing of new product introductions by the Company and its competitors, individual product sales cycles and the estimated life of each product's underlying technology. Estimated operating expenses and income taxes were deducted from estimated revenue projections to arrive at estimated after-tax cash flows. Projected operating expenses include cost of goods sold, marketing and selling expenses, general and administrative expenses, and research and development, including estimated costs to maintain the products once they have been introduced into the market and are generating revenue. The remaining identified intangibles, including goodwill, will be amortized on a straight-line basis over lives ranging from three to six years. The following unaudited pro forma summary presents the consolidated results of operations of the Company, excluding acquired IPR&D charges above, as if the acquisitions had occurred at the beginning of each period presented and does not purport to be indicative of what would have occurred had the acquisition been made as of that date or of the results which may occur in the future (in thousands).
NINE MONTHS ENDED DECEMBER 31, --------------------------- 2000 1999 --------- --------- Net sales................................ $ 361,051 $ 169,530 ========= ========= Net loss................................. $(653,275) $(618,942) ========= ========= Basic loss per share..................... $ (2.54) $ (2.95) ========= =========
8 6. CONTINGENCIES The Company is party to various claims and legal actions arising in the normal course of business, including notification of possible infringement on the intellectual property rights of third parties. In addition, since 1993 the Company has been named as a potentially responsible party ("PRP") along with a large number of other companies that used Omega Chemical Corporation ("Omega") in Whittier, California to handle and dispose of certain hazardous waste material. The Company is a member of a large group of PRPs that has agreed to fund certain remediation efforts at the Omega site for which the Company has accrued approximately $100,000. On September 14, 2000, the Company entered into a consent decree with the Environmental Protection Agency, pursuant to which the Company agreed to fund its proportionate share of the initial remediation efforts at the Whittier site. Although the ultimate outcome of these matters is not presently determinable, management believes that the resolution of all such pending matters, net of amounts accrued, will not have a material adverse affect on the Company's financial position or liquidity; however, there can be no assurance that the ultimate resolution of these matters will not have a material impact on the Company's results of operations in any period. 7. NEW ACCOUNTING PRONOUNCEMENTS In March 2000, the FASB issued FASB Interpretation No. 44 ("Interpretation"), "Accounting for Certain Transactions Involving Stock Compensation - An Interpretation of Accounting Principles Board Opinion No. 25", clarifying the guidance for certain stock compensation issues, including the treatment of unvested stock and stock options issued in purchase business combinations. The Interpretation requires that unvested stock and stock options granted by the acquiring Company in exchange for unvested stock and stock options held by employees of the target company be accounted for at intrinsic value and such amount be recorded as deferred compensation by the acquiring company. Accordingly, the Company recorded approximately $43.4 million and $391.8 million in deferred compensation in conjunction with the acquisitions of SiLUTIA and MMC, respectively (Note 5). Additionally, the Interpretation requires companies to value vested options at fair value and include such value in the determination of the total value of consideration issued in a transaction. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements," which provides guidance on the recognition, presentation and disclosure of revenue in financial statements filed with the SEC. The Company is required to adopt SAB 101 in the quarter ending March 31, 2001. The Company believes its current revenue recognition policies comply with SAB 101. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognizes all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. The Company does not believe this will have a material effect on the Company's operations. Implementation of this standard has recently been delayed by the FASB for a 12-month period. The Company will adopt SFAS 133 as required for its first quarterly filing of fiscal year 2002. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements and the notes thereto and with Management's Discussion and Analysis of Financial Condition and Results of Operations that are included in the Annual Report on Form 10-K for the year ended March 31, 2000 for Applied Micro Circuits Corporation. This Quarterly Report on Form 10-Q, and in particular this Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements regarding future events or the future financial performance of the Company that involve certain risks and uncertainties including, but not limited to, those set forth in the "Risk Factors" discussed below. Actual events or the actual future results of the Company may differ materially from any forward-looking statements due to such risks and uncertainties. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company assumes no obligation to update these forward- looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking assumptions. OVERVIEW We design, develop, manufacture and market high-performance, high-bandwidth silicon solutions for the world's optical networks. We utilize a combination of high-frequency analog, mixed-signal and digital design expertise coupled with system-level knowledge and multiple silicon process technologies to offer integrated circuit, or IC, products that enable the transport of voice and data over fiber optic networks. Our products target the SONET/SDH, ATM, Gigabit Ethernet and Fibre Channel semiconductor markets. We recently introduced silicon ICs targeted for DWDM systems. We provide our customers with complete silicon IC solutions including physical media dependent devices such as laser drivers, physical layer products such as transceivers, overhead processor products such as framers and mappers, and network processor and switch fabrics. Our products span data rates from OC-3, or 155 megabits per second, to OC-192, or 10 gigabits per second. We also supply silicon ICs for the automated test equipment, or ATE, high-speed computing and military markets. RESULTS OF OPERATIONS The following table sets forth certain consolidated statement of operations data as a percentage of revenues for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED --------------------------- --------------------------- DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 2000 1999 2000 1999 ------ ----- ------ ----- Net revenues...................................... 100.0% 100.0% 100.0% 100.0% Cost of revenues.................................. 42.7% 28.9% 33.4% 30.2% ------ ----- ------ ----- Gross profit...................................... 57.3% 71.1% 66.6% 69.8% Operating expenses: Research and development........................ 21.8% 18.1% 20.8% 18.9% Selling, general and administrative............. 14.3% 15.4% 14.5% 16.6% Stock-based compensation........................ 25.1% -- 11.7% -- Amortization of goodwill and purchased intangibles.................................... 89.0% -- 44.0% -- Acquired in-process research and development.... 123.3% -- 64.3% -- ------ ----- ------ ----- Total operating expenses..................... 273.6% 33.5% 155.3% 35.6% ------ ----- ------ ----- Operating income (loss)........................... (216.3)% 37.6% (88.7)% 34.2% Interest income, net.............................. 10.3% 2.7% 12.9% 2.7% ------- ----- ------ ----- Income (loss) before income taxes................. (206.0)% 40.3% (75.8)% 36.9% Income tax expense (benefit)...................... (17.9)% 13.8% 1.3% 12.7% ------- ----- ------ ----- Net income (loss)................................. (188.1)% 26.5% (77.1)% 24.3% ======= ===== ====== =====
Net Revenues. Net revenues for the three and nine months ended December 31, 2000 were $143.3 million and $314.5 million, respectively, representing increases of 213% and 173%, respectively, over net revenues of $45.8 million and $115.3 million for the three and nine months ended December 31, 1999, respectively. Revenues from sales of communications products increased to 91% and 87% of net revenues for the three and nine months ended December 31, 2000, respectively, from 83% and 79% of net revenues for the three and nine months ended December 31, 1999, respectively. Of this increase, $20.6 million is directly attributable to the acquisition of MMC. The remaining increase reflects both unit growth in shipments of existing products, as well as the introduction of new products for these markets. Revenues from sales of non- 10 communication products, consisting of the ATE, high-speed computing and military products, decreased to 9% and 13% of net revenues during the three and nine months ended December 31, 2000, respectively, from 17% and 21% of net revenues for the three and nine months ended December 31, 1999, respectively. Sales to Nortel and their contract manufacturers accounted for 18% and 23% of net revenues for the three and nine months ended December 31, 2000, respectively, as compared to 40% and 36% for the three and nine months ended December 31, 1999, respectively. Sales to Insight Electronics, Inc., the Company's domestic distributor, accounted for 21% and 19% of net revenues in the three and nine months ended December 31, 2000, respectively, compared to 16% and 15% for the three and nine months ended December 31, 1999, respectively. Sales to Cisco and their contract manufacturers accounted for 10% and 7% of net revenues for the three and nine months ended December 31, 2000, respectively, compared to less than 1% in both the three and nine months ended December 31, 1999. Sales outside of North America accounted for 19% and 18% of net revenues for the three and nine months ended December 31, 2000, respectively, compared to 27% and 25% for the three and nine months ended December 31, 1999. Gross Margin. Gross margin was 57.3% and 66.6% for the three and nine months ended December 31, 2000, respectively, as compared to 71.1% and 69.8% for the three and nine months ended December 31, 1999, respectively. Gross margin was adversely affected by a $16.1 million purchase accounting charge to cost of revenues based on an increase in the value of the MMC inventory as of the acquisition date, as well as $10.7 million of developed core technology amortization. Excluding the effect of these purchase accounting adjustments, gross margin actually increased to 76.0% and 75.1% for the three and nine months ended December 31, 2000, respectively. This increase in gross margin was driven principally by the increasing mix of our communications standard products which have higher average selling prices. Research and Development. Research and development ("R&D") expenses increased to approximately $31.3 million for the three months ended December 31, 2000, from approximately $8.3 million for the three months ended December 31, 1999, and increased to $65.3 million for the nine months ended December 31, 2000 from $21.8 million for the nine months ended December 31, 1999. The increase is a result of new product and process development efforts, investments made in new design tools for the development of new products, an increase in personnel costs as a result of acquisitions and internal hiring of R&D personnel. We believe that a continued commitment to R&D is vital to maintain a leadership position with innovative communications products. Accordingly, we expect R&D expenses to increase in the future. Currently, R&D expenses are focused on the development of products and processes for the communications markets, and we expect to continue this focus. Selling, General and Administrative. Selling, general and administrative ("SG&A") expenses were approximately $20.5 million and $45.7 million for the three and nine months ended December 31, 2000, as compared to approximately $7.1 million and $19.2 million for the three and nine months ended December 31, 1999. The increase in SG&A expenses for the three and nine months ended December 31, 2000 was primarily attributable to investments made in our corporate infrastructure, an increase in the size of our sales force and related commissions, additional marketing and advertising investments associated with the introduction of new products, general corporate branding and increases in our reserves for bad debt. The remaining increase is the result of our acquisition of MMC which had similar expenses not included in the comparison period as a result of purchase accounting. We expect SG&A expenses to increase in the future due principally to additional staffing in our sales and marketing departments, as well as increased spending on information technology and product promotion. Stock-based Compensation. During the three and nine months ended December 31, 2000, deferred compensation of $391.8 million and $437.7 million was recorded, respectively, related to restricted stock and options granted to employees of acquired companies. Stock-based compensation charges were $36.0 million and $36.7 million for the three and nine months ended December 31, 2000, respectively. There were no stock-based compensation charges arising from purchase acquisitions in the nine months ended December 31, 1999. We currently expect to record amortization of deferred compensation with respect to these option grants of approximately $79.8 million, $151.6 million, $137.8 million, $65.8 million, and $4.2 million during the fiscal years ended March 31, 2001, 2002, 2003, 2004 and 2005, respectively. Future acquisitions of businesses may result in additional substantial charges. Such charges may cause fluctuations in our interim or annual operating results. Amortization of Goodwill and Purchased Intangibles. Amortization of goodwill and purchased intangible assets was $138.3 million and $149.1 million for the three and nine months ended December 31, 2000, respectively. These charges are related to the purchases of MMC, SiLUTIA, YuniNetworks, pBaud Logic, Inc. and Chameleon Technologies. At December 31, 2000, we expect amortization expense to be $334.1 million, $739.2 million, $739.1 million, $737.1 million and $734.4 million for the years ended March 31, 2001, 2002, 2003, 2004 and 2005, respectively. There can be no assurance that acquisitions of businesses by us in the future will not result in substantial changes to the expected amortization, which may cause fluctuations in our interim or annual operating results. 11 Acquired In-process Research and Development. For the three and nine months ended December 31, 2000, we recorded $176.7 million and $202.1 million, respectively, of acquired in-process research and development resulting from the acquisition of YuniNetworks, SiLUTIA and MMC. This amount was expensed on the acquisition date because the acquired technology had not yet reached technological feasibility and had no future alternative uses. There can be no assurance that acquisitions of businesses, products or technologies by us in the future will not result in substantial charges for acquired in-process research and development that may cause fluctuations in our interim or annual operating results. Net Interest Income. Net interest income increased to $14.8 million for the three months ended December 31, 2000 from $1.2 million for the three months ended December 31, 1999 and increased to $40.5 million for the nine months ended December 31, 2000 from $3.1 million for the nine months ended December 31, 1999. This increase was due principally to increased funds available for investment generated by our operations, public stock offerings and employee stock option exercises. Income Tax Expense (Benefit). The provision for income taxes for the three and nine months ended December 31, 2000 differed from statutory rates primarily due to the nondeductibility of in-process research and development and the amortization of purchased intangibles. Backlog. Our sales are made primarily pursuant to standard purchase orders for delivery of products. Quantities of our products to be delivered and delivery schedules are frequently revised to reflect changes in customer needs, and customer orders can be canceled or rescheduled without significant penalty to the customer. For these reasons, our backlog as of any particular date is not representative of actual sales for any succeeding period, and we therefore believe that backlog is not a good indicator of future revenue. Our backlog for products requested to be shipped and nonrecurring engineering services to be completed in the next six months was $195.4 million on December 31, 2000, compared to $62.1 million on December 31, 1999. LIQUIDITY AND CAPITAL RESOURCES Our principal source of liquidity as of December 31, 2000 consists of $1.1 billion in cash, cash equivalents and short-term investments. Working capital as of December 31, 2000 was $1.1 billion, compared to $1.0 billion as of March 31, 2000. The increase in cash, cash equivalents and short-term investments was primarily due to net cash provided by operating activities and net cash obtained through acquired businesses, offset by the purchase of property and equipment. For the nine months ended December 31, 2000 and 1999, net cash provided by operating activities was $156.3 million and $41.6 million, respectively. Net cash provided by operating activities for the nine months ended December 31, 2000 primarily reflected our operating results before depreciation, amortization and other non-cash charges plus net decreases in liabilities, less increased accounts receivable. Capital expenditures totaled $38.1 million for the nine months ended December 31, 2000, which included approximately $15.3 million for engineering hardware and design software and $18.7 million for test and manufacturing equipment, compared to capital expenditures of $16.7 million for the nine months ended December 31, 1999. As we continue to expand our operations and as we integrate and upgrade the capital equipment, software and facilities of our acquired companies, we intend to increase our capital expenditures for engineering hardware/software and manufacturing and test equipment. We are exploring alternatives for the expansion of our manufacturing capacity, including entering into strategic relationships to obtain additional capacity, qualifying second source manufacturers of our products, building a new wafer fabrication facility, and purchasing a wafer fabrication facility. Any of these alternatives could require a significant investment by us, and there can be no assurance that any of the alternatives for the expansion of our manufacturing capacity will be available on a timely basis. We believe that our available cash, cash equivalents and short-term investments, and cash generated from operations will be sufficient to meet our capital requirements for the next 12 months, although we could elect or could be required to raise additional capital during such period. There can be no assurance that such additional debt or equity financing will be available on commercially reasonable terms or at all. 12 RISK FACTORS Our operating results may fluctuate because of a number of factors, many of which are beyond our control. If our operating results are below the expectations of public market analysts or investors, then the market price of our common stock could decline. Some of the factors that affect our quarterly and annual results, but which are difficult to control or predict are: . the reduction, rescheduling or cancellation of orders by customers, whether as a result of stockpiling of our products or otherwise; . fluctuations in the timing and amount of customer requests for product shipments; . the availability of external foundry capacity, purchased parts and raw materials; . increases in the costs of products or discontinuance of products by suppliers; . discontinuance of products by suppliers; . fluctuations in product life cycles; . fluctuations in manufacturing output, yields and inventory levels or other potential problems or delays in the fabrication, assembly, testing or delivery of our products; . changes in the mix of products that our customers buy; . our ability to introduce new products and technologies on a timely basis; . the announcement or introduction of products and technologies by our competitors; . competitive pressures on selling prices; . market acceptance of our products and our customers' products; . the amounts and timing of costs associated with warranties and product returns; . the amounts and timing of investments in research and development; . the amount and timing of the costs associated with payroll taxes related to stock option exercises; . the timing of depreciation and other expenses that we expect to incur in connection with any expansion of our manufacturing capacity; . costs associated with acquisitions and the integration of acquired companies, including MMC; . costs associated with compliance with applicable environmental regulations or remediation; . costs associated with litigation, including without limitation, litigation or settlements relating to the use or ownership of intellectual property; . the ability of our customers to obtain components from their other suppliers; . general communications systems industry and semiconductor industry conditions; and . general economic conditions. Our expense levels are relatively fixed and are based, in part, on our expectations of future revenues. We are continuing 13 to increase our operating expenses for additional manufacturing capacity, personnel and new product development. We have limited ability to reduce expenses quickly in response to any revenue shortfalls. Our business, financial condition and operating results would be harmed if we do not achieve anticipated revenues. We can have revenue shortfalls for a variety of reasons, including: . the reduction, rescheduling or cancellation of customer orders; . sudden decrease in end customer demand caused by a general slowdown in the communication systems industry; . customers stockpiling inventory causing a reduction in their order patterns as they work through the excess inventory; . significant pricing pressures that occur because of declines in average selling prices over the life of a product; . sudden shortages of raw materials or production capacity constraints that lead our suppliers to allocate available supplies or capacity to customers with resources greater than us and, in turn, interrupt our ability to meet our production obligations; and . fabrication, test or assembly capacity constraints for internally manufactured devices which interrupt our ability to meet our production obligations. Our business is characterized by short-term orders and shipment schedules, and customer orders typically can be canceled or rescheduled without significant penalty to the customer. Because we do not have substantial noncancellable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand which are highly unpredictable and can fluctuate substantially. From time to time, in response to anticipated long lead times to obtain inventory and materials from our outside suppliers and foundries, we may order materials in advance of anticipated customer demand. This advance ordering might result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize, or other factors render the customers' products less marketable. We currently anticipate that an increasing portion of our revenues in future periods will be derived from sales of application- specific standard products, or ASSPs, as compared to application specific integrated circuits, or ASICs. Customer orders for ASSPs typically have shorter lead times than orders for ASICs, which may make it increasingly difficult for us to predict revenues and inventory levels and adjust production appropriately. If we are unable to plan inventory and production levels effectively, our business, financial condition and operating results could be materially harmed. A disruption in the manufacturing capabilities of our outside foundries would negatively impact the production of certain of our products. We rely on outside foundries for the manufacture of the majority of our products, including all of our products designed on CMOS processes and silicon germanium processes. These outside foundries manufacture our products on a purchase order basis. Currently, a majority of our products are only qualified for production at a single foundry. These suppliers can allocate, and in the past have allocated, capacity to the production of other companies' products while reducing deliveries to us on a short notice. Because establishing relationships and ramping production with new outside foundries may take over a year, there is no readily available alternative source of supply for these products. A manufacturing disruption experienced by one or more of our outside foundries or a disruption of our relationship with an outside foundry would negatively impact the production of certain of our products for a substantial period of time. The transition to the next generation of manufacturing technologies at one or more of our outside foundries could be unsuccessful or delayed. If we do not successfully expand our manufacturing capacity on time, we may face serious capacity constraints. We are exploring alternatives for the further expansion of our manufacturing capacity, including: . entering into strategic relationships to obtain additional capacity; . qualifying second source manufacturers of our products; . building a new fabrication facility; or . purchasing a fabrication facility. 14 Any of these alternatives, either singly or in combination, could require a significant investment by us. We cannot assure you that any of the alternatives for expansion of our manufacturing capacity will be available on a timely basis or that we will be able to manage our growth and effectively integrate the expansion into our current operations. The cost of any investment we may have to make to expand our manufacturing capacity is expected to be funded through a combination of available cash, cash equivalents and short-term investments, cash from operations and additional debt, lease or equity financing. We may not be able to obtain the additional financing necessary to fund the construction and completion of the expanded manufacturing facility. Building a new fabrication facility or purchasing a fabrication facility entails significant risks, including: . shortages of materials and skilled labor; . unforeseen environmental or engineering problems; . inability to obtain building permits or necessary approvals; . work stoppages; . weather interferences; and . unanticipated cost increases. Any one of these risks could have a material adverse effect on the building, equipping and production start-up of a new facility. Unexpected changes or concessions required by local, state or federal regulatory agencies with respect to necessary licenses, land use permits, site approvals and building permits could involve significant additional costs and delay the scheduled opening of a new facility and could reduce our anticipated revenues. Also, the timing of commencement of operation of a new facility will depend upon the availability, timely delivery, successful installation and testing of the necessary process equipment. As a result of the foregoing and other factors, a new facility may not be completed and production volume may not be within budget or within the necessary timeframe. In addition, we may be unable to achieve adequate manufacturing yields in a new facility in a timely manner, and our revenues may not increase commensurate with the increase in manufacturing capacity associated with a facility. We currently manufacture a significant portion of our IC products at our fabrication facility in San Diego, California. We believe that we will be able to satisfy our production needs of the products built in the San Diego facility through the end of fiscal 2001, although this date may vary depending on, among other things, our rate of growth. We have in the past and may in the future make acquisitions where advisable, which will involve numerous risks. We may not be able to address these risks successfully without substantial expense, delay or other operational or financial problems. The risks involved with acquisitions include: . diversion of management's attention; . failure to retain key personnel; . amortization of acquired intangible assets and deferred compensation; . client dissatisfaction or performance problems with an acquired firm; . the cost associated with acquisitions and the integration of acquired operations; . ability of the acquired companies to meet their financial projections; and . assumption of unknown liabilities, or other unanticipated events or circumstances. A future acquisition could adversely affect operating results. In particular, if we were to acquire a company or assets and record the acquisition as a purchase, we may capitalize a significant amount of goodwill and purchased intangibles. These assets would be amortized over their expected period of benefit. The resulting amortization expense could seriously impact operating results for many years. In addition, acquisitions accounted for using the pooling of interest methods of accounting are subject to rules established by the Financial Accounting Standards Board and the Securities and Exchange Commission. These rules are complex and the interpretation of them is subject to change. The availability of pooling of interests accounting treatment for a business combination depends in part upon circumstances and events occurring after the effective time. The failure of a past business combination or a future potential business combination that has been accounted for under the pooling of interests 15 accounting method to qualify for this accounting treatment would materially harm our reported and future earnings and likely, the price of our common stock. Any of these risks could materially harm our business, financial condition and results of operations. Any business that we acquire may not achieve anticipated revenues or operating results. The merger with MMC may not realize the anticipated benefits. On October 25, 2000, we completed a merger with MMC. We entered the merger agreement with MMC with the expectation that the merger would result in benefits to us including: . combining complementary technologies to permit us to provide products with more complete solutions than we can now provide on our own; . a combined company with greater financial, technological and human resources for developing new products and providing greater sales and marketing resources to promote and sell our products; and . providing us with access to the MMC customer base to increase distribution of our products. We must minimize the risk that the merger will result in the loss of key employees or the continued diversion of our management's attention. The integration of sales of MMC products into our business model may jeopardize our success. MMC technology and products address the network processor market, which is a new market for us. As a result of the merger, we recorded a significant amount of intangible assets, goodwill and deferred compensation. These items will be amortized over the period of expected benefit and have, and will continue to, materially adversely affect our operating results reported under generally accepted accounting principles ("GAAP"). In addition, we recorded a charge of $176.7 million for acquired in-process research and development which further decreased our GAAP basis operating results for the third quarter of fiscal 2001. Our integration with MMC may not realize any of the anticipated benefits. Failure to successfully integrate the two companies could have a material adverse effect on our business, financial condition and operating results. Our operating results substantially depend on manufacturing output and yields, which may not meet expectations. We manufacture a significant portion of our ICs at our San Diego fabrication facility. Manufacturing ICs requires manufacturing tools which are unique to each product being produced. If one of these unique manufacturing tools was damaged or destroyed, then our ability to manufacture the related product would be impaired and our business would suffer until the tools were repaired or replaced. Our yields decline whenever a substantial percentage of wafers must be rejected or a significant number of die on each wafer are nonfunctional. Such declines can be caused by many factors, including minute levels of contaminants in the manufacturing environment, design issues, defects in masks used to print circuits on a wafer and difficulties in the fabrication process. Design iterations and process changes by our suppliers can cause a risk of contamination. Many of these problems are difficult to diagnose, and are time consuming and expensive to remedy and can result in shipment delays. We estimate yields per wafer in order to estimate the value of inventory. If yields are materially different than projected, work-in-process inventory may need to be revalued. We have in the past, and may in the future from time to time, take inventory write-downs as a result of decreases in manufacturing yields. We may suffer periodic yield problems in connection with new or existing products or in connection with the commencement of production at a new or expanded manufacturing facility. In addition, our manufacturing output or yields may decline as a result of power outages, supply shortages, accidents, natural disasters or other disruptions to the manufacturing process. Because the majority of our costs of manufacturing are relatively fixed, yield decreases can result in substantially higher unit costs and may result in reduced gross profit and net income. Yield decreases could force us to allocate available product supply among customers, which could potentially harm customer relationships. 16 Our dependence on third-party manufacturing and supply relationships increases the risk that we will not have an adequate supply of products to meet demand or that our cost of materials will be higher than expected. The risks associated with our dependence upon third parties which manufacture, assemble or package certain of our products, include: . the potential lack of adequate capacity during periods of excess demand; . reduced control over delivery schedules and quality; . risks of inadequate manufacturing yields and excessive costs; . difficulties selecting and integrating new subcontractors; . limited warranties on products supplied to us; . potential increases in prices; and . potential misappropriation of our intellectual property. Difficulties associated with adapting our technology and product design to the proprietary process technology and design rules of outside foundries can lead to reduced yields. The process technology of an outside foundry is typically proprietary to the manufacturer. Since low yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested to identify process sensitivities relating to the design rules that are used. As a result, yield problems may not be identified until well into the production process, and resolution of yield problems may require cooperation between ourselves and our manufacturer. This risk could be compounded by the offshore location of certain of our manufacturers, increasing the effort and time required to identify, communicate and resolve manufacturing yield problems. Manufacturing defects that we do not discover during the manufacturing or testing process may lead to costly product recalls. These risks may lead to increased costs or delay product delivery, which would harm our profitability and customer relationships. If the subcontractors we use to manufacture our products discontinue the manufacturing processes needed to meet our demands, or fail to upgrade their technologies needed to manufacture our products, we may face production delays. Our requirements typically represent a very small portion of the total production of the third-party foundries. As a result, we are subject to the risk that a producer will cease production on an older or lower-volume process that it uses to produce our parts. We cannot be certain our external foundries will continue to devote resources to the production of our products or continue to advance the process design technologies on which the manufacturing of our products are based. Each of these events could increase our costs and harm our ability to deliver our products on time. Due to an industry transition to six-inch, eight-inch and twelve-inch wafer fabrication facilities, there is a limited number of suppliers of the four-inch wafers that we use to build products in our existing manufacturing facility, and we rely on a single supplier for these wafers. Although we believe that we will have sufficient access to four-inch wafers to support production in our existing fabrication facility for the foreseeable future, we cannot be certain that our current supplier will continue to supply us with four-inch wafers on a long-term basis. The availability of manufacturing equipment needed for a four-inch process is limited, and certain new equipment required for more advanced processes may not be available for a four-inch process. We must develop or otherwise gain access to improved process technologies. Our future success will depend upon our ability to continue to improve existing process technologies, to develop or acquire new process technologies including silicon germanium processes, and to adapt our process technologies to emerging industry standards. In the future, we may be required to transition one or more of our products to process technologies with smaller geometries, other materials or higher speeds in order to reduce costs and/or improve product performance. We may not be able to improve our process technologies and develop or otherwise gain access to new process technologies, including but not limited to silicon germanium process technologies, in a timely or affordable manner. In addition, products based on these 17 technologies may not achieve market acceptance. Our customers are concentrated, so the loss of one or more key customers could significantly reduce our revenues and profits. A relatively small number of customers has accounted for a significant portion of our revenues in any particular period. We have no long-term volume purchase commitments from any of our major customers. We anticipate that sales of products to relatively few customers will continue to account for a significant portion of our revenues. If a significant customer overstocked our products, additional orders for our products could be harmed. A reduction, delay or cancellation of orders from one or more significant customers or the loss of one or more key customers could significantly reduce our revenues and profits. We cannot assure you that our current customers will continue to place orders with us, that orders by existing customers will continue at current or historical levels or that we will be able to obtain orders from new customers. Our ability to maintain or increase sales to key customers and attract new significant customers is subject to a variety of factors, including: . customers may stop incorporating our products into their own products with limited notice to us and suffer little or no penalty; . design wins with customers may not result in significant sales to such customers; . the introduction of a customer's new products may be late or less successful in the market than planned; . a significant customer's product line using our products may rapidly decline or be phased out; . significant customers may not incorporate our products in their future product designs; . agreements with customers typically do not require them to purchase a minimum amount of our products; . many of our customers have pre-existing relationships with current or potential competitors that may cause them to switch from our products to competing products; . we may not be able to successfully develop relationships with additional significant network equipment vendors; and . our relationship with some of our larger customers may deter other potential customers (who compete with these customers) from buying our products. Any one of the factors above could have a material adverse effect on our business, financial condition and results of operation. Our future success depends in part on the continued service of our key design engineering, sales, marketing and executive personnel and our ability to identify, hire and retain additional personnel. There is intense competition for qualified personnel in the semiconductor industry, in particular design engineers, and we may not be able to continue to attract and train engineers or other qualified personnel necessary for the development of our business or to replace engineers or other qualified personnel who may leave our employ in the future. Our anticipated growth is expected to place increased demands on our resources and will likely require the addition of new management personnel and the development of additional expertise by existing management personnel. Loss of the services of, or failure to recruit, key design engineers or other technical and management personnel could be significantly detrimental to our product and process development programs. Periods of rapid growth and expansion could continue to place a significant strain on our limited personnel and other resources. To manage expanded operations effectively, we will be required to continue to improve our operational, financial and management systems and to successfully hire, train, motivate and manage our employees. The integration of past and future potential acquisitions and the expansion of our manufacturing capacity will require significant additional management, 18 technical and administrative resources. We cannot be certain that we will be able to manage our growth or effectively integrate a new or expanded wafer fabrication facility into our current operations. An important part of our strategy is to continue our focus on the markets for high-speed communications ICs and to begin focus on the market for network processors. If we are unable to expand our share of these markets further, our revenues could stop growing and may decline. Our markets frequently undergo transitions in which products rapidly incorporate new features and performance standards on an industry-wide basis. If our products are unable to support the new features or performance levels required by OEMs in these markets, we would be likely to lose business from an existing or potential customer and, moreover, would not have the opportunity to compete for new design wins until the next product transition occurs. If we fail to develop products with required features or performance standards, or if we experience a delay as short as a few months in bringing a new product to market, or if our customers fail to achieve market acceptance of their products, our revenues could be significantly reduced for a substantial period. A significant portion of our revenues in recent periods has been, and is expected to continue to be, derived from sales of products based on SONET, SDH and ATM transmission standards. If the communications market evolves to new standards, we may not be able to successfully design and manufacture new products that address the needs of our customers or gain substantial market acceptance. Although we have developed products for the Gigabit Ethernet and Fibre Channel communications standards, volume sales of these products are modest, and we may not be successful in addressing the market opportunities for products based on these standards. Customers for network processors have substantial technological capabilities and financial resources. They traditionally use these resources to internally develop the ASIC components and develop programs for the general-purpose processors utilized in our network processor products. Our future prospects are dependent upon our customers' acceptance of network processors as an alternative to ASIC components and general-purpose processors. Future prospects also are dependent upon acceptance of third-party sourcing for network processors as an alternative to in-house development. Network equipment vendors may in the future continue to use internally-developed ASIC components and general-purpose processors. They also may decide to develop or acquire components, technologies or network processors that are similar to, or that may be substituted for, our network processor products. If our network equipment vendor customers fail to accept network processors as an alternative, if they develop or acquire the technology to develop such components internally rather than purchase our network processor products, or if we are otherwise unable to develop strong relationships with network equipment vendors, our business, financial condition and results of operations would be materially and adversely affected. Our markets are subject to rapid technological change, so our success depends heavily on our ability to develop and introduce new products. The markets for our products are characterized by: . rapidly changing technologies; . evolving and competing industry standards; . short product life cycles; . changing customer needs; . emerging competition; . frequent new product introductions and enhancements; . increased integration with other functions; and . rapid product obsolescence. 19 To develop new products for the communications markets, we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to develop technical and design expertise. In addition, we must have our products designed into our customers' future products and maintain close working relationships with key customers in order to develop new products that meet customers' changing needs. We must respond to changing industry standards, trends towards increased integration and other technological changes on a timely and cost-effective basis. If we fail to achieve design wins with key customers, our business will significantly suffer because once a customer has designed a supplier's product into its system, the customer typically is extremely reluctant to change its supply source due to significant costs associated with qualifying a new supplier. Products for communications applications, as well as for high-speed computing applications, are based on industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards. The emergence of new industry standards could render our products incompatible with products developed by major systems manufacturers. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design wins. We may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense. The markets in which we compete are highly competitive and subject to rapid technological change, price erosion and heightened international competition. The communications IC market is highly competitive and we expect that competition will increase in these markets. Our ability to compete successfully in our markets depends on a number of factors, including: . success in designing and subcontracting the manufacture of new products that implement new technologies; . product quality, reliability and performance; . customer support; . time-to-market; . price; . the efficiency of production; . design wins; . expansion of production of our products for particular systems manufacturers; . end-user acceptance of the systems manufacturers' products; . market acceptance of competitors' products; and . general economic conditions. In addition, our competitors or customers may offer enhancements to our existing products or offer new products based on new technologies, industry standards or customer requirements including, but not limited to, all optical networking systems that are available to customers on a more timely basis than comparable products from us or that have the potential to replace or provide lower-cost or higher performance alternatives to our products. The introduction of enhancements or new products by our competitors could render our existing and future products obsolete or unmarketable. We expect that certain of our competitors and other semiconductor companies may seek to develop and introduce products that integrate the functions performed by our IC products on a single chip, thus eliminating the need for our products. In the communications markets, we compete primarily against Broadcom, Conexant, Galileo Technology, 20 Infineon, Intel, Lucent, Maxim, Philips, PMC-Sierra, TriQuint and Vitesse. Some of these companies have significantly greater financial and other resources than us, and some of these companies use other process technologies such as gallium arsenide which may have certain advantages over technology we currently use. In certain circumstances, most notably with respect to ASICs supplied to Nortel, our customers or potential customers have internal IC manufacturing capabilities. Revenues that are currently derived from non-communications markets have been declining and we expect them to continue to decline in future periods. We have derived significant revenues from product sales to customers in the automated test equipment, or ATE, high-speed computing and military markets and currently anticipate that we will continue to derive revenues from sales to customers in these markets in the near term. We are not currently funding product development efforts in these markets, and revenues from products in these markets have been declining and we expect them to continue to decline in future periods. The market for ATE and high-speed computing IC products is subject to extreme price competition, and we may not be able to reduce the costs of manufacturing high-speed computing IC products in response to declining average selling prices. We expect that certain competitors will seek to develop and introduce products that integrate the functions performed by our ATE and high speed computing IC products on single chips. One or more of our customers may choose to utilize discrete components to perform the functions served by our high-speed computing IC products or may use their own design and fabrication facilities to create a similar product. In either case, the need for ATE and high-speed computing customers to purchase our IC products could be eliminated. The complexity of our network processor products frequently leads to errors, defects and bugs when they are first introduced, which could negatively impact our reputation with customers. Products as complex as network processors frequently contain errors, defects and bugs when first introduced or as new versions are released. Our network processors have in the past experienced such errors, defects and bugs. Delivery of products with production defects or reliability, quality or compatibility problems could significantly delay or hinder market acceptance of the network processor products. This, in turn, could damage our reputation and adversely affect our ability to retain existing customers and to attract new customers. Errors, defects or bugs could cause problems, interruptions, delays or cessation of sales to our network processor customers. We may be required to make significant expenditures of capital and resources to resolve such problems. There can be no assurance that problems will not be found in new products after commencement of commercial production, despite testing by us, our suppliers or our customers. This could result in: . additional development costs; . loss of, or delays in, market acceptance; . diversion of technical and other resources from our combined company's other development efforts; . claims by our customers or others against it; and . loss of credibility with our current and prospective customers. Any such event could have a material adverse effect on our business, financial condition and results of operations. We may not be able to protect our intellectual property adequately. We rely in part on patents to protect our intellectual property. We cannot assure you that our pending patent applications or any future applications will be approved, or that any issued patents will provide us with competitive advantages or will not be challenged by third parties, or that if challenged, will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on our ability to do business. Furthermore, others may independently develop similar products or processes, duplicate our products or processes or design around any patents that may be issued to us. To protect our intellectual property, we also rely on the combination of mask work protection under the Federal Semiconductor Chip Protection Act of 1984, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure 21 agreements and licensing arrangements. Despite these efforts, we cannot be certain that others will not independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property, or disclose such intellectual property or trade secrets, or that we can meaningfully protect our intellectual property. We could be harmed by litigation involving patents and proprietary rights. Litigation may be necessary to enforce our intellectual property rights, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or misappropriation. The semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights. Such litigation could result in substantial costs and diversion of resources, including the attention of our management and technical personnel and could have a material adverse effect on our business, financial condition and results of operations. We may be accused of infringing the intellectual property rights of third parties. We have certain indemnification obligations to customers with respect to the infringement of third-party intellectual property rights by our products. We cannot be certain that infringement claims by third parties or claims for indemnification by customers or end users resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not harm our business. Any litigation relating to the intellectual property rights of third parties, whether or not determined in our favor or settled by us, would at a minimum be costly and could divert the efforts and attention of our management and technical personnel. In the event of any adverse ruling in any such litigation, we could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the intellectual property rights of the third party claiming infringement. A license might not be available on reasonable terms, or at all. Our operating results are subject to fluctuations because we rely substantially on international sales. International sales account for a significant part of our revenues and may account for an increasing portion of our future revenues. As a result, an increasing portion of our revenues may be subject to certain risks, including: . foreign currency exchange fluctuations; . changes in regulatory requirements; . tariffs and other barriers; . timing and availability of export licenses; . political and economic instability; . difficulties in accounts receivable collections; . natural disasters; . difficulties in staffing and managing foreign subsidiary operations; . difficulties in managing distributors; . difficulties in obtaining governmental approvals for communications and other products; . the burden of complying with a wide variety of complex foreign laws and treaties; and . potentially adverse tax consequences. We are subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. We cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products will be implemented by the United States or other countries. Because sales of our products have been denominated to date primarily in United States dollars, increases in the value of the United States dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to United States dollars of accounts receivable, 22 accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in our results of operations. Some of our customer purchase orders and agreements are governed by foreign laws, which may differ significantly from United States laws. Therefore, we may be limited in our ability to enforce our rights under such agreements and to collect damages, if awarded. We could incur substantial fines or litigation costs associated with our storage, use and disposal of hazardous materials. We are subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process. Any failure to comply with present or future regulations could result in the imposition of fines, the suspension of production or a cessation of operations. These regulations could restrict our ability to expand our facilities at the present location or construct or operate a new fabrication facility or could require us to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean up prior discharges. Since 1993, we have been named as a potentially responsible party, along with a large number of other companies that used Omega Chemical Corporation in Whittier, California to handle and dispose of certain hazardous waste material. We are a member of a large group of potentially responsible parties that has agreed to fund certain remediation efforts at the Omega site, which efforts are ongoing. To date, our payment obligations with respect to these funding efforts have not been material, and we believe that our future obligations to fund these efforts will not have a material adverse effect on our business, financial condition or operating results. Although we believe that we are currently in material compliance with applicable environmental laws and regulations, we cannot assure you that we are or will be in material compliance with these laws or regulations or that our future obligations to fund any remediation efforts, including those at the Omega site, will not have a material adverse effect on our business. Our ability to manufacture a sufficient number of products to meet demand could be severely hampered by a shortage of water, electricity or other supplies, or by natural disasters. We use significant amounts of water throughout our manufacturing process. Previous droughts in California have resulted in restrictions being placed on water use by manufacturers and residents in California. In the event of future drought, reductions in water use may be mandated generally, and it is unclear how such reductions will be allocated among California's different users. California has experienced shortages in the available power supply. We are currently exploring alternatives to insure continuous and reliable sources of power in the event of blackouts. Such alternatives may not be implemented in a timely manner. Shortages may also affect our vendors and customers. Our existing fabrication facility is located in San Diego, California and is subject to natural disasters such as earthquakes or floods. We do not have earthquake insurance for these facilities, because adequate coverage is not offered at economically justifiable rates. A significant natural disaster could have a material adverse impact on our business, financial condition and operating results. Our stock price is volatile. The market price of our common stock has fluctuated significantly. In the future, the market price of our common stock could be subject to significant fluctuations due to general economic and market conditions and in response to quarter-to-quarter variations in: . our anticipated or actual operating results; . announcements or introductions of new products; . technological innovations or setbacks by us or our competitors; . conditions in the semiconductor, telecommunications, data communications or high-speed computing markets; 23 . the commencement of litigation; . changes in estimates of our performance by securities analysts; . announcements of merger or acquisition transactions; and . other events or factors. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, particularly semiconductor companies, and that have often been unrelated or disproportionate to the operating performance of companies. These fluctuations may harm the market price of our common stock. The anti-takeover provisions of our certificate of incorporation and of the Delaware general corporation law may delay, defer or prevent a change of control. Our board of directors has the authority to issue up to 2,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control, as the terms of the preferred stock that might be issued could potentially prohibit our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction without the approval of the holders of the outstanding shares of preferred stock. The issuance of preferred stock could have a dilutive effect on our stockholders. If we issue additional shares of stock in the future, it may have a dilutive effect on our stockholders. We have a significant number of authorized and unissued shares of our common stock available. These shares will provide us with the flexibility to issue our common stock for proper corporate purposes, which may include making acquisitions through the use of stock, adopting additional equity incentive plans and raising equity capital. Any subsequent issuance of our common stock may result in immediate dilution of our then current stockholders. 24 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At December 31, 2000, our investment portfolio included fixed-income securities of $1,040.1 million. These securities are subject to interest rate risk and will decline in value if interest rates increase. Because the average maturity date of the investment portfolio is relatively short, an immediate 100 basis point increase in interest rates would have no material impact on our financial condition or results of operations. We generally conduct business, including sales to foreign customers, in U.S. dollars and as a result, have limited foreign currency exchange rate risk. The effect of an immediate 10 percent change in foreign exchange rates would not have a material impact on our financial condition or results of operations. 25 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (A) EXHIBITS 10.36 Agreement to Acquire Land in Poway, California by and between Tech Business Center LLC and Registrant dated September 29, 2000. (B) REPORTS ON FORM 8-K We filed the following current reports on Form 8-K with the Commission during the three months ended December 31, 2000: 1) On October 12, 2000, we filed a Current Report on Form 8-K to announce the approval of a two-for-one stock split, implemented as a 100% stock dividend, to shareholders on record at October 16, 2000. 2) On November 9, 2000, we filed a Current Report on Form 8-K to announce the acquisition of MMC Networks, Inc., effective October 25, 2000. 3) On December 18, 2000, we filed an Amended Current Report on Form 8-K/A to amend the Current Report on Form 8-K filed on November 9, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 14, 2001 Applied Micro Circuits Corporation By: /s/ William Bendush ----------------------- William Bendush Vice President And Chief Financial Officer (Duly Authorized Signatory and Principal Financial and Accounting Officer) 26 EX-10.36 2 0002.txt AGREEMENT TO ACQUIRE LAND EXHIBIT 10.36 PURCHASE AND SALE AGREEMENT AND ESCROW INSTRUCTIONS This PURCHASE AND SALE AGREEMENT AND ESCROW INSTRUCTIONS ("Agreement"), effective as of September 29, 2000 ("Effective Date"), by and between TECH BUSINESS CENTER, LLC, a California limited liability company ("Seller"), and APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation ("Buyer"), constitutes (1) an agreement of purchase and sale between the parties and (2) joint escrow instructions to the Escrow Agent identified herein. NOW, THEREFORE, in consideration of the mutual covenants set forth herein, and for other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer agree as follows: ARTICLE 1 AGREEMENT OF PURCHASE AND SALE ------------------------------ 1.1 Description of Property. Seller owns real property ("Property") ----------------------- located in the City of Poway, County of San Diego, California, more particularly described on Exhibit A attached hereto. The Property consists of approximately --------- 31.66 gross acres. The Property is located within a business and industrial park known as Poway Corporate Center, Phase IV ("Corporate Center") and is commonly described as "Phase IV" of the Corporate Center. 1.2 Purchase and Sale; Effective Date. Execution of this Agreement by --------------------------------- both parties creates a binding agreement, whereby Seller agrees to sell the Property to Buyer and Buyer agrees to purchase the Property from Seller, on the terms and conditions stated herein. This Agreement shall be effective on the Effective Date set forth above, which shall be the date of execution by the last party to sign. 1.3 Deposit. ------- (a) Payment by Buyer. Buyer shall deliver to Escrow, concurrently ---------------- with delivery of this Agreement, a deposit ("Deposit") of One Hundred Thousand Dollars ($100,000.00), in the form of a cashier's or certified check drawn on a California bank account or funds by federal wire ("Good Funds"), payable to Escrow Agent. (b) Return/Release of Deposit. The Deposit, together with all ------------------------- interest earned thereon prior to release of the Deposit to Seller as described below, shall be returned to Buyer if the Agreement and the Escrow are terminated for nonsatisfaction of any Due Diligence Condition or Closing Condition pursuant to Section 5.5. If this Agreement and the Escrow are not terminated for nonsatisfaction of a Due Diligence Condition prior to expiration of the Due Diligence Period defined in Section 5.2(a), then Escrow Agent shall release the Deposit of One Hundred Thousand Dollars ($100,000.00) to Seller, without further instructions from the parties. The Deposit shall be nonrefundable to Buyer after such release unless the Escrow fails to close due to nonsatisfaction of the Closing Condition described in Section 5.3 or a default by Seller. (c) Credit of Deposit. The Deposit shall be credited to Buyer and ----------------- applied against the Purchase Price at the Closing. (d) Interest on Deposit. Escrow Agent shall invest the Deposit in a ------------------- federally-insured, interest-bearing account approved by Buyer, provided that such investment shall not delay release of the Deposit to Seller as provided above. All interest earned on the Deposit prior to release to Seller shall be Buyer's. No interest for the period commencing upon release of the Deposit to Seller shall be payable to Buyer or credited against the Purchase Price. 1.4 LIQUIDATED DAMAGES. THE PARTIES ACKNOWLEDGE AND AGREE THAT SELLER WILL ------------------ SUFFER SUBSTANTIAL DAMAGES IF BUYER FAILS TO COMPLETE THE PURCHASE OF THE PROPERTY BY THE CLOSING DATE IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT FOR ANY REASON, OTHER THAN NONSATISFACTION OF THE CONDITIONS SET FORTH IN SECTIONS 5.2 AND 5.3 (TIMELY RAISED) OR A DEFAULT BY SELLER. GIVEN FLUCTUATIONS IN LAND VALUES, THE UNPREDICTABLE STATE OF THE ECONOMY AND OF GOVERNMENTAL REGULATIONS, THE FLUCTUATING MONEY MARKET FOR REAL ESTATE LOANS AND OTHER FACTORS WHICH DIRECTLY AFFECT THE VALUE AND MARKETABILITY OF THE PROPERTY, THE PARTIES REALIZE THAT IT WILL BE EXTREMELY DIFFICULT AND IMPRACTICAL, IF NOT IMPOSSIBLE, TO ASCERTAIN WITH ANY DEGREE OF CERTAINTY THE ACTUAL AMOUNT OF SELLER'S DAMAGES IN THE EVENT OF SUCH FAILURE TO PERFORM BY BUYER. THEREFORE, THE PARTIES HEREBY AGREE THAT THE $100,000.00 DEPOSIT PLUS INTEREST EARNED THEREON REPRESENTS A REASONABLE ESTIMATE OF SUCH DAMAGES, CONSIDERING ALL THE CIRCUMSTANCES EXISTING ON THE DATE OF EXECUTION OF THIS AGREEMENT, AND THAT SELLER SHALL HAVE THE RIGHT TO RETAIN THE FULL AMOUNT OF THE DEPOSIT [PLUS INTEREST EARNED THEREON] AS LIQUIDATED DAMAGES PURSUANT TO CALIFORNIA CIVIL CODE SECTION 1671, AS SELLER'S SOLE RIGHT TO DAMAGES AS A RESULT OF BUYER'S DEFAULT. SELLER WAIVES ALL RIGHTS SELLER OTHERWISE MAY HAVE PURSUANT TO CALIFORNIA CIVIL CODE SECTION 3389 TO SPECIFICALLY ENFORCE THIS AGREEMENT. NOTWITHSTANDING THE FOREGOING, THIS SECTION SHALL NOT LIMIT OR LIQUIDATE ANY OBLIGATIONS OR LIABILITIES OF BUYER PURSUANT TO SECTION 7.1. BY SIGNING THEIR INITIALS BELOW, EACH PARTY CONFIRMS ITS CONSENT TO AND AGREEMENT WITH THE PROVISIONS OF THIS PARAGRAPH: ______________________ ______________________ Seller's Initials Buyer's Initials ARTICLE 2 PURCHASE PRICE -------------- 2.1 Purchase Price. The total purchase price ("Purchase Price") which -------------- Buyer agrees to pay and Seller agrees to accept for the Property is the sum of Seventeen Million Two Hundred Fifty Thousand Dollars ($17,250,000.00), payable through Escrow as follows: -2- (a) The Deposit of One Hundred Thousand Dollars ($100,000.00) shall be delivered to Escrow Agent, as provided in Section 1.3; and (b) The balance of Seventeen Million One Hundred Fifty Thousand Dollars ($17,150,000.00) shall be delivered to Escrow Agent in cash, in the form of Good Funds, a sufficient time in advance of the Closing to permit disbursement of such funds to Seller on the Closing Date under applicable law and Escrow Agent's standard practice. ARTICLE 3 ESCROW ------ 3.1 Escrow Agent. First American Title Insurance Company, Attn: Lynn ------------ Graham, Escrow Officer, 411 Ivy Street, San Diego, California 92101 ("Escrow Agent"), Tel. 619/231-4687, Fax 619/238-1029 is designated, authorized and instructed to act as Escrow Agent pursuant to the terms of this Agreement. The escrow for this transaction ("Escrow") is identified as Escrow No. 00-1887LG. Escrow Agent shall acknowledge the Opening of Escrow and its agreement to act as the escrow agent hereunder by: (a) executing the Consent of Escrow Agent attached hereto; and (b) promptly delivering a copy of the executed Consent to Seller and Buyer. 3.2 Escrow Instructions. This Agreement shall constitute initial escrow ------------------- instructions to Escrow Agent. Escrow Agent's general conditions are attached hereto as Exhibit B and made a part hereof, to the extent they are consistent --------- with the provisions of this Agreement. The parties shall execute any additional escrow instructions reasonably required by Escrow Agent to consummate the transaction provided for herein; provided, however, such additional escrow instructions shall not modify the provisions of this Agreement, unless such instructions (a) state the modification in full, and (b) are signed by both parties. 3.3 Opening of Escrow. Within two (2) business days after execution by ----------------- both parties, the parties shall deliver a fully executed copy of this Agreement and Buyer shall deliver the Deposit to Escrow Agent. Opening of Escrow shall be the date Escrow Agent executes the Consent described in Section 3.1. 3.4 Close of Escrow. --------------- (a) Closing Date. "Close of Escrow" or "Closing" means the date ------------ Escrow Agent records the Grant Deed in favor of Buyer and delivers the Purchase Price to Seller. The "Closing Date" means the date the Closing actually occurs. Provided the Conditions described in Article 5 have been satisfied or waived as provided therein, the Closing shall occur on a date designated by Buyer and reasonably approved by Seller but in no event later than the Closing Deadline. The "Closing Deadline" means the date that is the later of: (1) one hundred twenty (120) days after the date of the Opening of Escrow, or (2) the City's approval of the Tentative Map revisions described in Section 5.3 as long as such approval remains a condition to the Closing pursuant to Section 5.3; provided, however, in no event shall the Closing occur prior to January 1, 2001. (b) Material Term. BUYER ACKNOWLEDGES THAT A TIMELY CLOSING ON OR ------------- BEFORE THE SPECIFIED CLOSING DATE IS A MATERIAL TERM OF -------- -3- THIS AGREEMENT, AND THE CLOSING DATE MAY NOT BE EXTENDED EXCEPT BY A WRITTEN ESCROW INSTRUCTION SIGNED BY BUYER AND SELLER. If the Closing does not occur on or before the Closing Deadline, for any reason other than nonsatisfaction of a Condition or a default by Seller, and if the Closing Deadline has not been extended by written instructions signed by Buyer and Seller, then Buyer shall be in material default hereunder and Seller shall have the unilateral right to terminate this Agreement and the Escrow by delivering written notice to Escrow Agent (with a copy to Buyer). In the event of termination pursuant to this Section, Seller shall have no further obligations hereunder. Such termination: (1) shall not release Buyer's liability for such default; (2) shall not release any other liabilities or obligations of Buyer hereunder which arise prior to the termination date or pursuant to those provisions which survive termination of this Agreement under the express terms of this Agreement; and (3) shall not affect Seller's rights and remedies as a result of such default, subject to the limitation on Seller's remedies set forth in Section 1.4. If Seller does not elect to exercise its right to terminate this Agreement and the Escrow as set forth above, Escrow Agent shall proceed to complete the Closing as soon as possible. 3.5 Deliveries to Escrow. Prior to the Closing Date, each party shall -------------------- timely deliver to Escrow all funds and documents required to complete the Closing under the terms of this Agreement, including, but not limited to, prorated amounts and other payments required under Section 3.7. Failure to make any such delivery shall constitute a material default hereunder. 3.6 Completion of Documents. Escrow Agent is authorized to collate ----------------------- counterparts of documents deposited in Escrow, to insert the Closing Date as the effective date where appropriate, and to otherwise complete such documents in accordance with instructions received by both parties, where appropriate and consistent with this Agreement. 3.7 Prorations, Escrow Fees and Costs. --------------------------------- (a) Prorations. The following items shall be prorated in Escrow, as ---------- of the date of Close of Escrow: (1) County, City and special district (if any) taxes and assessments, based upon the most recent official information available in the office of the taxing entity; and (2) assessments payable pursuant to the CC&Rs defined in Section 4.1(b)(4). All prorations shall be made on the basis of a 30-day month and a 360-day year, unless the parties otherwise agree in writing. If the latest tax information applies to a tax parcel which includes other property in addition to the Property, Escrow Agent shall prorate the amount applicable to the Property based upon gross acreage figures verified by Seller's engineer. If any taxes or assessments for the Property have been bonded or prepaid by Seller as a condition to recordation of any subdivision map, parcel map or lot line adjustment, Buyer shall pay the amount of such taxes and assessments to Seller through Escrow. If either party receives, after Close of Escrow, a supplemental tax assessment based upon new construction or a change in ownership occurring prior to the Closing Date, then, within thirty (30) days after receipt, the parties shall prorate said supplemental assessment outside of Escrow (but as of the Closing Date) and make any appropriate payments. (b) Seller's Payments. Seller will pay: (1) the County Documentary ----------------- Transfer Tax, in the amount Escrow Agent determines to be required by law; (2) the cost of the CLTA Title Policy described in Section 4.2; (3) one-half of Escrow Agent's escrow fee or escrow -4- cancellation charge; and (4) other Seller's charges and expenses, in accordance with the customary practices of Escrow Agent. (c) Buyer's Payments. Buyer will pay: (1) one-half of Escrow Agent's ---------------- escrow fee or escrow cancellation charge; (2) the additional cost of ALTA extended title insurance coverage, if requested by Buyer as described in Section 4.3; (3) the cost of recording the Grant Deed; (4) all costs, fees and expenses incidental to Buyer's financing; and (5) other Buyer's charges and expenses, in accordance with the customary practices of Escrow Agent. (d) Default. Notwithstanding the foregoing, in the event of a default ------- by Buyer or Seller hereunder, all cancellation and other escrow charges shall be paid by the defaulting party. 3.8 Closing Statement. Escrow Agent shall prepare a preliminary Closing ----------------- Statement for review and approval by Seller and Buyer prior to the Closing. As soon as reasonably possible after the Closing, Escrow Agent shall prepare a final accounting and Closing Statement and send a copy to Seller and Buyer. 3.9 Existing Encumbrances. Escrow Agent is authorized to obtain --------------------- beneficiary demands and requests for reconveyance (in a form approved by Seller) for any existing Deeds of Trust affecting the Property, which shall be partially reconveyed at Close of Escrow. Seller has the right to approve all demands and requests for reconveyance described in this Section, but each party's approval shall not be unreasonably withheld or delayed. 3.10 Distribution of Funds and Documents. At the Close of Escrow, Escrow ----------------------------------- Agent shall do each of the following: (a) Payment of Encumbrances. Pay the amount of those monetary liens ----------------------- described in Section 3.9 to the obligees thereof, in accordance with the demands approved by Seller, utilizing funds to which Seller shall be entitled upon Close of Escrow and funds (if any) deposited in Escrow by Seller. (b) Recordation of Documents. Submit to the County Recorder of San ------------------------ Diego County the Grant Deed for the Property and each other document to be recorded in the Official Records under the terms of this Agreement or by general usage, and, after recordation, cause the County Recorder to mail the Grant Deed to Buyer and each other such document to the grantee, beneficiary or person acquiring rights thereunder or for whose benefit said document was recorded. At Seller's request, the County Documentary Transfer Tax shall be set forth in a statement separate from the Grant Deed and shall not be reflected in any recorded document. (c) Non-Recorded Documents. Deliver by United States mail (or hold ---------------------- for personal pickup, if requested): (1) the Title Policy to Buyer; and (2) each other non-recorded document received hereunder to the payee or person acquiring rights thereunder or for whose benefit said document was acquired. (d) Distribution of Funds. Deliver by United States mail (or comply --------------------- with other unilateral instructions given by the applicable party): (1) to Seller, or order, the cash portion of the Purchase Price, adjusted for prorations, charges and other credits and debits provided for -5- herein, including the funds to be withheld pursuant to Section 7.2(d) below; and (2) to Buyer, or order, any excess funds delivered to Escrow Agent by Buyer. (e) Conformed Copies. Upon Close of Escrow, Escrow Agent shall ---------------- deliver to Seller copies of all fully executed documents and escrow instructions. Each recorded document shall be conformed to show the recording date and file number. ARTICLE 4 TITLE MATTERS ------------- 4.1 Preliminary Title Report. ------------------------ (a) Delivery to Buyer. As soon as reasonably possible after Opening ----------------- of Escrow, Escrow Agent shall provide to Buyer, at Seller's expense, a preliminary report ("PR") issued by First American Title Insurance Company ("Title Insurer"), identified as Order No. 1249556-11, reflecting the status of title to the Property, together with copies of all recorded documents referred to therein. The PR will be deemed received by Buyer on the date of personal delivery or three (3) days after mailing by Escrow Agent. (b) Permitted Exceptions. The following matters shall be deemed -------------------- permitted exceptions to title to the Property ("Permitted Exceptions"), and Buyer shall take title to the Property subject thereto: (1) The lien of current, non-delinquent real estate taxes and assessments; (2) The lien of any supplemental taxes assessed pursuant to Chapter 3.5 commencing with Section 75 of the California Revenue and Taxation Code; (3) The exceptions set forth in the PR or any supplement thereto (including any supplement resulting from a survey or inspection required to issue ALTA coverage, if Buyer elects such coverage as described in Section 4.3), to the extent they are either approved by Buyer or disapproved by Buyer but cured by Seller pursuant to Sections 4.1(c) through (f) below; (4) Exceptions reasonably necessary to develop the Property or required under the terms of any governmental conditions of approval for the Corporate Center, provided they do not materially impair development and use of the Property and do not include monetary liens against the Property; and (5) Any other matters requested, solely caused or approved in writing by Buyer. (c) Approval of PR. Buyer shall have until the date which is fifteen -------------- (15) days prior to expiration of the Due Diligence Period ("PR Approval Deadline") to notify Escrow Agent (with a copy to Seller), in writing, of its objection to any exceptions identified in the PR. If the Title Insurer issues any supplement to the PR which identifies any additional exceptions which are not Permitted Exceptions, Buyer shall have the right to deliver written notice of its -6- objection to the same, in writing, to Escrow Agent (with a copy to Seller): (1) prior to the PR Approval Deadline, with respect to any new exceptions resulting from the ALTA survey and inspection (if Buyer elects ALTA coverage, as further described in Section 4.3); or (2) prior to the PR Approval Deadline, with respect to any exceptions identified in a supplement received by Buyer at least three (3) business days prior to the PR Approval Deadline; or (3) five (5) business days after receipt, with respect to exceptions identified in any all other supplements. All exceptions which are approved by Buyer shall be deemed Permitted Exceptions. (d) No Objection. If Buyer's written objection is not received by ------------ Escrow Agent within the applicable time period set forth in (c) above, Buyer shall be deemed to have disapproved the PR or supplement thereto. (e) Cure of Disapproved Exceptions. If Buyer timely disapproves one ------------------------------ or more exceptions indicated in the PR pursuant to (c) above or is deemed to have disapproved the PR or supplement thereto pursuant to (d) above, Seller may, at its option, cure such disapproval by delivering written notice to Escrow Agent (with a copy to Buyer) within ten (10) days after Seller's receipt of Buyer's objection, or, if Buyer has failed to respond, within ten (10) days after expiration of the applicable time period given Buyer to respond in (c) above, indicating that Seller will either eliminate or cause the Title Insurer to insure over such exception(s) by the Closing Date. If Seller delivers such written election to cure disapproved exceptions, Seller shall have until the Closing Date to complete the cure. If Seller fails to deliver such written notice, Seller shall be deemed to have elected not to cure the disapproved exceptions. All disapproved exceptions which are cured by Seller pursuant to this Section shall be deemed Permitted Exceptions. (f) Right to Cancel or Perform. If Seller does not elect to cure each -------------------------- exception to which Buyer has objected, Buyer shall elect one of the following, by delivering written notice to Escrow Agent (with a copy to Seller) within five (5) days after receipt of notice of Seller's election or expiration of the 10- day period described in (d) above (whichever occurs first): (1) to waive its objections, take title subject to such exceptions, which shall be deemed Permitted Exceptions, and proceed with Close of Escrow; or (2) to terminate this Agreement and the Escrow, in which event neither party shall have any further obligation hereunder (except for any liabilities or obligations which survive termination under the express provisions of this Agreement) and Buyer's Deposit shall be returned. If Buyer fails to deliver notice of its election within said 5-day period, Buyer will be deemed to have waived its objection and to have agreed to take title subject to such exception(s). 4.2 Title Policy. As of the Closing, Title Insurer shall issue, or be ------------ committed to issue, a standard form CLTA Owner's Title Insurance Policy ("Title Policy") insuring Buyer's title to the Property in the amount of the Purchase Price. The Title Policy shall be subject only to: (a) the Permitted Exceptions; and (b) matters excepted or excluded from coverage by the printed terms of the Title Policy's standard form. 4.3 ALTA Title Coverage. Buyer may obtain ALTA title insurance coverage, ------------------- rather than the CLTA Title Policy described in Section 4.2, subject to the following conditions: (a) Provision of such coverage shall not delay the Close of Escrow; -7- (b) Buyer shall pay all additional costs of obtaining such coverage, including the costs of any required survey; (c) Buyer shall obtain and deliver to the Title Insurer any required survey and order the Title Insurer's inspection of the Property a sufficient time in advance so that any additional exceptions resulting from the Title Insurer's review of the survey and inspection will be reviewed and approved or disapproved by Buyer in the manner and prior to the PR Approval Deadline set forth in Section 4.1(c); and (d) Seller shall have the option (but not the obligation) to cure any such disapproved exceptions as described in Section 4.1(e) and (f). 4.4 Grant Deed. Prior to Close of Escrow, Seller and Buyer shall each ---------- execute, acknowledge and deliver to Escrow a counterpart original of the Grant Deed, in the form attached hereto as Exhibit C, conveying the Property to Buyer --------- subject to covenants, conditions and restrictions and other exceptions set forth therein. ARTICLE 5 CONDITIONS TO CLOSE OF ESCROW ----------------------------- 5.1 Property Documents. Buyer acknowledges receipt of copies of the ------------------ documents relating to the Property identified on Exhibit D attached hereto --------- ("Property Documents"). 5.2 Due Diligence Period; Conditions. -------------------------------- (a) Due Diligence Period. The "Due Diligence Period" means a period -------------------- beginning on the Effective Date of this Agreement and terminating ninety (90) days thereafter on December 28, 2000. (b) Due Diligence Conditions. Close of Escrow shall be contingent ------------------------ upon satisfaction or waiver of each of the following conditions ("Due Diligence Conditions") prior to expiration of the Due Diligence Period: (1) Title Matters. Pursuant to and within the time deadlines ------------- specified in Sections 4.1 and 4.3, as applicable: (A) Buyer's approval of the PR and any supplements thereto which are required to be approved or disapproved prior to the PR Approval Deadline, and the survey and inspection (if ALTA title insurance coverage is requested by Buyer pursuant to Section 4.3); or (B) Seller's election to cure all exceptions disapproved by Buyer; or (C) Buyer's waiver of any remaining disapproved exception(s). (2) Due Diligence Review. Buyer's approval, in its sole -------------------- discretion, of all aspects of the Property and the feasibility of Buyer developing the Property for Buyer's use, after such examination, inspection, investigation and review during the Due Diligence Period as Buyer considers it appropriate to undertake, including, but not limited to, review of the following: (A) The Property Documents described in Section 5.1 and Exhibit D; - --------- -8- (B) All applicable zoning, subdivision, development, land use, environmental, building and other governmental laws, ordinances, rules, regulations and requirements, the terms and conditions of all governmental permits and approvals affecting the Property, and the Property's compliance with the foregoing; (C) The physical conditions of the Property, including soils, subsurface, geotechnical, seismic, hydrological and environmental conditions; (D) All other matters relating to the condition, value, fitness, suitability, development, improvement or use of the Property, including all matters described in Section 6.2, and all matters Buyer may deem necessary or appropriate. All costs incurred by Buyer in conducting the due diligence review described above shall be paid by Buyer. 5.3 Closing Condition. Close of Escrow shall be contingent upon approval ----------------- by the City of Poway ("City"), prior to the Closing Date, of certain revisions to the existing Tentative Map (TM 97-01) for the Property, as outlined in Exhibit F attached hereto or as otherwise approved in writing by Buyer and - ---------- Seller ("Closing Condition"). Seller shall use commercially reasonable efforts and diligence to apply for and process such approval, at Seller's cost. Provided, however, that if Buyer's development plans result in a delay in the processing or approval of such revisions, then Seller shall have the right and obligation to complete the same after Close of Escrow and satisfaction of this Section 5.3 shall not be a condition to the Closing. 5.4 Satisfaction, Waiver of Due Diligence Conditions. If Buyer fails to ------------------------------------------------ deliver written approval or notice of satisfaction of the Due Diligence Condition set forth in Section 5.2(b)(2) above to Escrow Agent prior to expiration of the Due Diligence Period, the condition shall be deemed not satisfied. Buyer may unilaterally waive any of the Due Diligence Conditions described in Section 5.2(a) and (b), which are for the benefit of Buyer. Both parties may agree to waive the Closing Condition described in Section 5.3. All waivers shall be delivered in writing to Escrow Agent prior to the date for satisfying the applicable condition. 5.5 Failure of Conditions. If any Due Diligence Condition or Closing --------------------- Condition is neither satisfied nor waived by the specified time deadline, either party (provided such party is not in default hereunder) may unilaterally terminate this Agreement and the Escrow by giving written notice of termination to the other party and Escrow Agent. In the event of such termination, Buyer's Deposit (plus any interest earned thereon) shall immediately be returned and neither party shall have any further obligation hereunder, except for any liabilities or obligations which survive termination under the express terms of this Agreement. 5.6 Delivery of Documents. If this Agreement is terminated for --------------------- nonsatisfaction of a Condition or as a result of Buyer's default, Buyer shall deliver to Seller, within ten (10) days after such termination, all Property Documents and documents and information relating to the Property which were prepared by or on behalf of Buyer during the Escrow period. -9- ARTICLE 6 REPRESENTATIONS AND WARRANTIES ------------------------------ 6.1 Definitions. For purposes of this Article 6, the following terms ----------- shall have the meanings set forth below. (a) Laws. "Laws" means all governmental laws, statutes, ordinances, ---- resolutions, rules, regulations, restrictions and requirements applicable to the Property, whether now or hereafter in effect, and as amended or supplemented from time to time. (b) Environmental Laws. "Environmental Laws" means all Laws ------------------ applicable to the physical condition of the Property or the presence of any substance thereon, including without limitation the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Sections 9601 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Sections 6901 et seq.), the Clean Water Act (33 U.S.C. Sections 466 et seq.), the Safe Drinking Water Act (14 U.S.C. Sections 300f et seq.), the Hazardous Materials Transportation Act (49 U.S.C. Sections 5101 et seq.), the Toxic Substances Control Act (15 U.S.C. Sections 2601 et seq.), the California Hazardous Waste Control Act (California Health and Safety Code Sections 25100 et seq.), the California Hazardous Substances Account Act (California Health and Safety Code Sections 25300 et seq.), the Safe Drinking Water and Toxic Enforcement Act ("Proposition 65n) (California Health and Safety Code Sections 25249.5 et seq.), and the Porter- Cologne Water Quality Control Act (California Health and Safety Code Sections 13000 et seq.), and any similar federal, state or local Laws, all regulations and publications implementing or promulgated pursuant to the foregoing, as any of the foregoing may be amended or supplemented from time to time. (c) Hazardous Materials. "Hazardous Materials" shall include, but are ------------------- not limited to, substances which are flammable; explosive; corrosive; radioactive; toxic; asbestos or those asbestos-containing materials; and any substances defined or regulated as hazardous substances, hazardous materials, toxic substances or hazardous wastes in any of the Environmental Laws. (d) Seller's Knowledge. References to "Seller's knowledge," matters ------------------ "known to Seller", or words of like import shall mean, and be limited to, the actual, current knowledge of Theodore Tchang and Neville Bothwell, or such employees of Seller as may be reasonably expected to have knowledge of the matter at issue, and shall not include any imputed or constructive knowledge, and no duty of inquiry or investigation by Seller is implied or required. 6.2 Condition of Property. --------------------- (a) Disclaimer. Buyer acknowledges that: (1) except for the Seller's ---------- Improvements described in Section 7.2, Seller has no obligation to complete any improvements located on or relating to the Property, either before or after the Closing; (2) except as expressly provided in Section 6.4, Seller makes no representations or warranties, express or implied, an to the physical conditions of the Property or in connection with any matter relating to its condition, economic value, marketability, merchantability, feasibility, fitness, suitability or use; (3) Seller makes no representation or warranty as to any operative or proposed Laws or Environmental -10- Laws which may now or hereafter apply to the Property; and (4) except as expressly provided in Section 6.4, no representations or warranties of any kind have been made by Seller or its representatives. (b) Buyer's Investigation. Buyer acknowledges that the purchase of --------------------- the Property will be on the basis of Buyer's own investigation of: (1) the physical conditions of the Property, including the soils, subsurface, geotechnical, seismic and environmental conditions thereof; (2) the Property Documents; (3) the operative or proposed governmental laws, ordinances, rules, regulations and requirements affecting or applicable to the Property and the terms and conditions of all applicable governmental permits and approvals; (4) the costs and fees associated with development and improvement of, or construction on, the Property; and (5) the economic value, marketability, merchantability, feasibility, suitability or use of the Property. (c) "AS-IS" Purchase. Except for (1) the Seller's Improvements to be ----- completed by Seller as described in Section 7.2 and (2) matters arising from or attributable to a breach by Seller of the representations and warranties set forth in Section 6.4, and subject to satisfaction or waiver of the conditions to Close of Escrow, Buyer will acquire the Property in an "AS IS" condition, based upon its own investigation as described above. Buyer expressly waives and negates the right to any express or implied warranties from Seller, including, but not limited to, all implied warranties of merchantability, condition, suitability or fitness for any particular purpose, and all warranties with respect to quality, capacity, workmanship and latent defects. Buyer assumes the risk that adverse physical conditions or the applicability and effect of governmental laws, ordinances, rules, regulations and requirements may not have been revealed by Buyer's investigation. Seller shall have no obligation to correct any conditions or alleged defects discovered by Buyer during the course of its investigation or thereafter. (d) Waiver and Release. Buyer waives any and all rights to recover ------------------ from Seller and its partners and affiliates, and their respective shareholders, directors, officers, employees, agents, successors and assigns, for any and all liabilities, liens, claims, damages, costs, expenses, suits or judgments (including attorneys' fees and court costs), whether direct or indirect, known or unknown, foreseen or unforeseen (collectively, "Claims"), which may arise from or are in any way connected with [the physical conditions of the Property or any Laws or] Environmental Laws now or hereafter applicable thereto, including, but not limited to, Claims arising from or related to soils, subsurface, geotechnical, seismic, hydrological or environmental conditions of the Property or defects in the design, engineering or construction of improvements now or hereafter located on the Property; provided, however, that the foregoing shall not limit Buyer's remedies in the event of (1) Seller's failure to complete Seller's Improvements pursuant to Section 7.2, or (2) Seller's breach of any express representation or warranty set forth in Section 6.4. Buyer expressly waives the benefits of Section 1542 of the California Civil Code, which provides as follows: "A general release does not extend to claims which the creditor does not know or expect to exist in his favor at the time of executing the release, which if known to him must have materially affected the settlement with the debtor." -11- (e) Hazardous Materials. If Buyer should discover during its ------------------- investigation of the Property any Hazardous Material or other environmental condition subject to legal requirements for corrective or remedial action, Buyer shall, within a reasonable time, notify Seller in writing of the same. If such discovery is made after the Close of Escrow, Seller shall have no liability to Buyer arising out of such discovery except to the extent that Buyer can establish that Seller has breached the representation set forth in Section 6.4(c). (f) Indemnification. Subject to and effective upon Close of Escrow, --------------- Buyer shall indemnify, protect, hold harmless and defend (by counsel reasonably acceptable to Seller) Seller and its partners and affiliates, and their respective shareholders, directors, officers, employees, agents, successors and assigns, from and against any and all Claims as defined in Section 6.2(d) above, including, but not limited to, Claims by third parties arising from or in any way connected with: (1) the deposit, disposal, use, release or other generation of Hazardous Materials on the Property on or after the Closing Date, including but not limited to investigatory expenses, clean-up and other remedial costs, of whatever kind or nature, or (2) other physical conditions of the Property, including but not limited to Claims relating to soils, subsurface, geotechnical, seismic, hydrological or environmental conditions of the Property or defects in the design, engineering or construction of improvements now or hereafter located on the Property; provided, however, that the foregoing shall not limit Seller's liability in the event of (A) Seller's failure to complete Seller's Improvements pursuant to Section 7.2, or (B) Seller's breach of any express representation or warranty set forth in Section 6.4. The obligations set forth in this Section 6.2(f) shall survive the Close of Escrow and shall not be merged with the Grant Deed. (g) Property Documents. Buyer acknowledges that all engineering ------------------ studies and reports, surveys, soils/geotechnical reports, maps and other information which Buyer may receive from Seller or its agents in connection with this sale transaction, including, but not limited to, the Property Documents described in Section 5.1, are provided without any warranty (whether oral or written, express or implied) by Seller as to their accuracy, sufficiency or lack of defects; and the foregoing are provided on the express condition that Buyer shall make its own independent verification of such information. Buyer agrees not to assert any liability of Seller arising out of Seller's providing of such information. (h) No Rights to Owner Participation Agreement. Seller has previously ------------------------------------------ entered into an Owner Participation Agreement ("OPA") with the redevelopment agency for the City of Poway, pursuant to which Seller has constructed certain improvements and is entitled to certain reimbursements. Buyer acknowledges and agrees that the Property specifically excludes, and this Agreement is not intended to transfer, any rights and obligations of Seller under the OPA which are retained by Seller. 6.3 Buyer's Representations. Buyer agrees, represents and warrants, as of ----------------------- the date of execution of this Agreement and as of Close of Escrow, as follows: (a) Buyer is a corporation, duly formed, existing and in good standing under the laws of the State of Delaware; (b) Buyer has full legal right, power and authority to execute and fully perform its obligations under this Agreement pursuant to its governing instruments, without the need for any further corporate action; and (c) the persons executing this Agreement and other documents required hereunder on behalf of Buyer are the duly designated agents of Buyer and are authorized to do so. -12- 6.4 Seller's Representations and Warranties. Seller agrees, represents --------------------------------------- and warrants, as of the date of execution of this Agreement and as of Close of Escrow, as follows: (a) Authority. Seller is a limited liability company, duly formed, --------- existing and in good standing under the laws of the State of California; Seller has full legal right, power and authority to execute and fully perform its obligations under this Agreement pursuant to its governing instruments, without the need for any further corporate action; and the persons executing this Agreement and other documents required hereunder on behalf of Seller are the duly designated agents of Seller and are authorized to do so. (b) Non-Foreign Affidavit. Seller represents and warrants to Buyer --------------------- that it is not a foreign person and is a United States person as defined in Section 7701(a)(30) of the Internal Revenue Code, as amended ("Code"). Prior to Close of Escrow, Seller shall deliver to Escrow (with a copy to Buyer) an affidavit, executed and sworn to under penalty of perjury, substantially in the form attached hereto as Exhibit E. --------- (c) Hazardous Materials. Seller has no knowledge, except as otherwise ------------------- disclosed to Buyer in the Property Documents or in a writing delivered prior to expiration of the Due Diligence Period, of the existence or prior existence on the Property of any Hazardous Material. To Seller's knowledge, no summons, citation, directive, order or other communication has been issued to Seller arising out of or relating to the presence of Hazardous Material on the Property. Buyer shall have the right to perform an independent environmental assessment of the physical conditions of the Property, including the soils and subsurface thereof, pursuant to Section 7.1. (d) Actions; Proceedings. Seller has not received written notice of, -------------------- and has no knowledge of, any pending or threatened action or proceeding against Seller and relating to the Property. (e) Condemnation; Rezoning. Seller has not received written notice of ---------------------- any pending or threatened proceeding to condemn all or any portion of the Property or to rezone the Property. (f) Notice of Violation. Seller has not received written notice of ------------------- any uncured violation of law or governmental regulation affecting the Property. (g) True Copies. The Property Documents delivered to Buyer pursuant ----------- to this Agreement are complete and true copies of such documents in Seller's possession. (h) Change in Representation. The representations of Seller set forth ------------------------ above in this Section 6.4 are made as of the date of execution of this Agreement by Seller and are intended to be true and correct as of the Close of Escrow. If, subsequent to the date of execution of this Agreement and prior to the Close of Escrow, Seller determines that, as a result of facts or subsequent events discovered or arising after execution of this Agreement, any of such representations are no longer true and correct as of such subsequent date, Seller shall not be in breach of this Agreement, provided that Seller shall promptly notify Buyer in writing ("Change Notice") of such facts or subsequent events and the effect on the applicable representation. Seller shall have the option, but not the obligation, to take steps to cure or correct the situation so -13- that the affected representation will be true and correct as of the Close of Escrow, and, if Seller exercises such option, Seller shall identify the corrective action in the Change Notice. If Seller elects to undertake corrective action such that the affected representation will be true and correct as of the Close of Escrow, the parties shall proceed with performance under this Agreement and the Closing, provided Seller completes such corrective action, and the Closing Date shall be extended for the time reasonably required by Seller to complete such cure, but not to exceed a maximum extension of thirty (30) days. If Seller does not elect to undertake such corrective action, then, within ten (10) days after Buyer's receipt of the Change Notice, but in no event later than the Closing Date, Buyer shall elect, by delivering written notice to Escrow Agent (with a copy to Seller) either to: (1) proceed with performance of this Agreement and the Closing; or (2) terminate this Agreement and the Escrow for non-satisfaction of a condition. In the event of termination pursuant to this Section, Buyer's Deposit shall be returned to Buyer and neither party shall have any further obligations hereunder, except for any liability or obligation of Buyer pursuant to those provisions which survive termination of this Agreement under the express terms of this Agreement. 6.5 Real Estate Commissions. Subject to and upon Close of Escrow, Seller ----------------------- shall pay a real estate commission of $597,977.47 (i.e., $690,000.00 less $92,022.53 for reimbursement of pre-paid sewer fees, as provided in Section 7.6 below), which shall be divided equally between CB Richard Ellis of San Diego, California and The Irving Hughes Group also of San Diego, California. Escrow Agent is directed to pay said commission upon Close of Escrow out of funds deposited in Escrow and credited to Seller. Each party represents and warrants to the other party that no other brokers or finders have been employed or are entitled to a commission or compensation in connection with this transaction as a result of the action or agreement of the indemnifying party. Each party shall indemnify, protect, hold harmless and defend the other party (and its officers, directors, shareholders, employees, agents, successors and assigns) from and against any obligation or liability to pay any such commission or compensation arising from the act or agreement of the indemnifying party. 6.6 Interstate Land Sales Full Disclosure Act. Seller and Buyer intend ----------------------------------------- that the sale of the Property will comply with the exception requirements of the Interstate Land Sales Full Disclosure Act, as stated in 15 U.S. Code Section 1702(a)(8), and Seller and Buyer confirm that the conditions set forth in such Section are met. 6.7 Survival of Warranties and Obligations. The representations and -------------------------------------- warranties given by Buyer and Seller in this Article 6, and all obligations under this Agreement to be performed after Close of Escrow, shall survive the Close of Escrow and delivery of the Grant Deed to Buyer; provided, however, that all representations and warranties by Seller shall terminate two (2) years after the Closing Date, except for any representation or warranty which Buyer claims to have been breached, as long as: (a) Buyer has notified Seller in writing of a claim of breach (identifying such breach in reasonable detail) within such two (2)-year period, and (b) Buyer files a lawsuit for breach of such representation or warranty and gives written notice thereof to Seller within two (2) years after the expiration of such one-year period. -14- ARTICLE 7 ADDITIONAL OBLIGATIONS ---------------------- 7.1 Access to Property. Between the date of Opening of Escrow and the ------------------ Close or earlier termination of Escrow, Seller shall allow Buyer and its agents reasonable access to the Property during normal business hours, upon reasonable notice to Seller, for the purpose of inspecting, surveying and testing the same, at Buyer's sole expense. Provided, however, in connection with any such entry, Buyer: (a) shall perform all work in a safe manner; (b) shall not permit any hazardous condition to remain on the Property; (c) shall repair any damage or disturbance to the Property; and (d) shall procure (or have all work performed by contractors who maintain) general liability and property damage insurance, evidence of which shall be delivered to Seller prior to Buyer's first entry. Buyer further agrees to indemnify, hold harmless, protect and defend Seller (and its officers, directors, shareholders, employees, agents, successors and assigns) and Seller's property from and against any and all liabilities, liens, claims, damages, costs, expenses, suits or judgments (including attorneys' fees and court costs) for labor or services performed or materials furnished to or for Buyer, or for personal injury or death or property damage, arising out of entry upon the Property or any adjacent land of Seller by Buyer or its employees, agents or independent contractors. Seller's damages as a result of Buyer's breach of its obligations under this Section shall not be limited or liquidated by the provisions of Section 1.4. Notwithstanding any provision of this Agreement to the contrary, Buyer's obligations under this Section shall survive termination of this Agreement and Close of Escrow. 7.2 Seller's Improvements. --------------------- (a) Description. Seller shall complete or cause to be completed, at ----------- Seller's sole cost and free from all liens and claims, the following work (collectively, "Seller's Improvements"): completion of Kirkham Way, construction of a storm drain outfall for the Property, signalization and median reconstruction at the intersection of Scripps Poway Parkway and Tech Center Drive, and, only if required by the City, construction of a sidewalk along Scripps Poway Parkway. (b) Time for Completion. Subject to extension, to the extent ------------------- reasonably required, as a result of delays described in Section 8.7, Seller shall cause Seller's Improvements to be completed within a commercially reasonable period after the Close of Escrow, subject to extension to accommodate any actions required to be taken by the City and/or any delays caused by the City. For purposes of this Section, Seller's Improvements shall be deemed completed upon Seller's delivery of a written verification executed by Seller's engineer indicating that Seller's Improvements have been substantially completed in accordance with the Plans. Seller shall also be responsible for obtaining formal acceptance of all public improvements by the City of Poway or other applicable government agencies. (c) Seller's Access. After the Closing Date, Seller shall have the --------------- right to enter upon the Property to the extent necessary to complete Seller's Improvements described in Section 7.2(a). Seller shall repair any damage or disturbance to the Property resulting from such entry. Seller further agrees to indemnify, hold harmless and defend Buyer and Buyer's property from and against all liabilities, liens, claims, damages, costs, expenses, suits or judgments (including attorneys' fees and court costs) for labor or services performed or materials furnished -15- to or for Buyer, or for personal injury or property damage arising out of entry upon the Property by Seller or its employees, agents or independent contractors. (d) At Closing, Escrow Agent shall withhold, from proceeds otherwise payable to Seller, Two Hundred Fifty Thousand Dollars ($250,000) ("Withheld Funds"). Escrow Agent shall invest the Withheld Funds in an account approved by Seller, and all interest earned thereon shall be Seller's. Escrow Agent shall disburse the Withheld Funds to Seller upon completion of the Seller's Improvements as provided in Section 7.2(b) above. 7.3 Government Approvals. Nothing in this Agreement shall be construed as -------------------- authorizing Buyer, prior to the Closing, to apply for any zone change, variance, waiver, exception or other governmental act, approval or permit with respect to the Property, and Buyer shall not submit any such application without Seller's prior written approval. Seller's approval may be withheld if, in Seller's judgment, approval of the matter proposed by Buyer would have an adverse impact on the Property or any other portion of the Corporate Center. After Close of Escrow, Buyer's right to process governmental permits and approvals shall be subject to the provisions of the CC&Rs. 7.4 Damage or Destruction. If any part of the Property is damaged or --------------------- destroyed by fire or other casualty prior to the Closing, Seller shall promptly give notice thereof to Buyer. Buyer may elect, by delivering written notice to Seller within five (5) days after receipt of Seller's notice, to terminate this Agreement and the Escrow; and, in such event, unless Seller agrees within five (5) days after receipt of such notice to cure the damage on or before the Closing, this Agreement and the Escrow shall terminate and neither party shall have any further rights or obligations hereunder (except for any liability or obligation of Buyer pursuant to provisions which survive termination of this Agreement under the express terms of this Agreement). If Buyer does not deliver written notice of termination within said 5-day period, then: (a) the parties shall continue performance under this Agreement and the Escrow, without modification of any of its terms and without any reduction in the Purchase Price; and (b) Seller shall have no obligation to repair or restore the Property and no liabilities or obligations to Buyer, and Buyer shall have no claims for damages or other remedies against Seller, as a result of such damage or destruction of the Property. 7.5 Condemnation. If Seller receives actual notice that a condemnation or ------------ eminent domain action is filed against the Property or any part thereof (or that a taking is pending or contemplated) prior to the Closing, Seller shall promptly give notice thereof to Buyer. Buyer may elect, by delivering written notice to Seller within five (5) days after receipt of Seller's notice, to terminate this Agreement and the Escrow. In the event of such termination, neither party shall have any further rights or obligations hereunder (except for any liability or obligation of Buyer pursuant to provisions which survive termination of this Agreement under the express terms of this Agreement). If Buyer does not deliver written notice of termination within said 5-day period, then: (a) the parties shall continue performance under this Agreement and the Escrow, without modification of any of its terms and without any reduction in the Purchase Price; and (b) Seller shall assign and deliver to Buyer, subject to and effective upon the Closing for the affected Lot, all of Seller's interest in the award for such taking. Buyer shall have no other remedies against Seller as a result of such condemnation except as set forth in this Section. -16- 7.6 Reimbursement of Pre-Paid Sewer Fees. Seller has pre-paid one-half of ------------------------------------ the sewer fees (which one-half portion equals $92,022.53), in order to reserve the availability of sewer service for 78.1 EDUs for the Property. The real estate brokers specified in Section 6.5 above shall reimburse Seller, pursuant to a separate agreement, for the amount of such prepaid sewer fees. 7.7 Possession. Possession of the Property shall be delivered by Seller ---------- to Buyer on the Closing Date after recordation of the Grant Deed. All risk of loss and damage to the Property from whatever source shall be the sole responsibility of Buyer after the Close of Escrow. ARTICLE 8 GENERAL PROVISIONS ------------------ 8.1 Assignment. ---------- (a) By Seller. Seller shall have the right to convey the Property and --------- to assign its rights hereunder with the prior written consent of Buyer, which consent shall not be unreasonably withheld or delayed, provided that the assignee concurrently acquires real property included in the Corporate Center (consisting of all or any portion of the real property currently owned by Seller). To the extent Seller is permitted to assign its obligations hereunder, the assignee shall assume such obligations in writing, in a form reasonably approved by Buyer. In no event shall Seller be released from its obligations under this Agreement as a result of such assignment. (b) By Buyer. -------- (1) Buyer shall have the right, without Seller's consent, to assign this Agreement, or any of its rights or obligations hereunder, to: (i) any affiliated entity which controls, is controlled by, or is under common control with Buyer; or (ii) an entity in which Buyer owns a substantial ownership interest and in which Buyer is the managing general partner (if a partnership) or the managing member (if a limited liability company). Notwithstanding the foregoing, no assignment by Buyer pursuant to this Section 8.1(b)(1) shall be binding on Seller unless and until written notice of such assignment, evidencing satisfaction of the circumstances described in (i) or (ii) above, has been delivered by Buyer to Seller and Escrow Agent. Except as permitted above in this Section 8.1(b)(1), Buyer's rights and obligations hereunder shall be assignable only with the prior written consent of Seller, which consent shall not be unreasonably withheld. (2) The following conditions shall apply to any permitted assignment, whether or not Seller's consent is required: (i) no such assignment shall release Buyer from its obligations hereunder; (ii) for the benefit of Seller, the assignee shall specifically assume the obligations, representations and warranties of Buyer under this Agreement and under any additional escrow instructions executed pursuant hereto, shall be bound by all approvals previously given (or deemed given) by Buyer hereunder, and shall provide a warranty of authority comparable to Section 6.3; and (iii) such assignment shall not be binding on Seller unless and until written notice of such assignment and a copy of the assumption agreement described above have been delivered by Buyer to Seller and Escrow Agent. -17- 8.2 Attorneys' Fees. If either party commences legal proceedings for any --------------- relief against the other party arising out of this Agreement, the losing party shall pay the prevailing party's legal costs and expenses, including, but not limited to, reasonable attorneys' fees and costs as determined by the court. The prevailing party shall be that party receiving substantially the relief sought in the proceeding, whether brought to final judgment or not. 8.3 Confidentiality. The terms and conditions of the purchase and sale --------------- Transaction described in this Agreement shall remain confidential between the parties unless and until the Due Diligence Conditions have been satisfied or waived and the Due Diligence Period has expired without termination of this Agreement and the Escrow. 8.4 Counterparts. This Agreement or any escrow instructions pursuant to ------------ this Agreement may be executed in multiple copies, each of which shall be deemed an original, but all of which shall constitute one Agreement after each party has signed such a counterpart. 8.5 Entire Agreement. This Agreement, together with all exhibits attached ---------------- hereto and other agreements expressly referred to herein, constitutes the entire agreement between the parties with respect to the purchase and sale of the Property. All prior or contemporaneous agreements, understandings, representations, warranties and statements, oral or written, are superseded. 8.6 Exhibits. All exhibits referred to herein are attached hereto and -------- incorporated herein by reference. 8.7 Force Majeure. Except as otherwise specifically provided herein, if ------------- either party is delayed, hindered in or prevented from performing any act required hereunder by reason of strikes, lock-outs, labor problems, inability to procure materials, failure of power or other utilities, restrictive governmental laws or regulations, prolonged rain or other unusual or unseasonable weather conditions, riots, insurrection, war or other reason of a like nature (excluding economic conditions or financial inability), not the fault of the party so affected, then performance of such act shall be excused to the extent necessary as a result of such event. Provided, however, this Section shall not excuse Buyer's obligation to pay each portion of the Purchase Price or any other amounts payable hereunder in the manner and by the time deadlines specified herein. 8.8 Further Assurances. The parties agree to perform such further acts ------------------ and to execute and deliver such additional documents and instruments as may be reasonably required in order to carry out the provisions of this Agreement and the intentions of the parties. 8.9 Gender, Number. As used herein, the singular shall include the plural -------------- and the masculine shall include the feminine, wherever the context so requires. 8.10 Governing Law. This Agreement shall be governed, interpreted, ------------- construed and enforced in accordance with the laws of the State of California. 8.11 Headings. The captions and paragraph headings used in this Agreement -------- are inserted for convenience of reference only and are not intended to define, limit or affect the construction or interpretation of any term or provision hereof. -18- 8.12 Joint and Several Liability. If Buyer consists of more than one --------------------------- person or entity, the liability of each such person or entity signing this Agreement as Buyer shall be joint and several. 8.13 Modification, Waiver. No modification, waiver, amendment or discharge -------------------- of this Agreement shall be valid unless the same is in writing and signed by both Buyer and Seller. The escrow instructions shall be considered a part of this Agreement, and no provision in said escrow instructions shall supersede or contradict the provisions of this Agreement, unless the parties agree in writing to such change. 8.14 No Other Inducement. The making, execution and delivery of this ------------------- Agreement by the parties hereto has been induced by no representations, statements, warranties or agreements other than those expressed herein. 8.15 Notice. Notice to either party shall be in writing and either ------ personally delivered or sent by certified mail, postage prepaid, return receipt requested, addressed to the party to be notified at the address specified herein. Any such notice shall be deemed received on the date of personal delivery to the party (or such party's authorized representative) or three (3) business days after deposit in the U.S. Mail, as the case may be. Seller's Address for Notice: TECH BUSINESS CENTER Attn: Paul Tchang or Neville Bothwell 3575 Kenyon Street San Diego, California 92110 Tel.: 619/223-1663 Fax: 619/223-2865 With a copy to: Ellen B. Spellman, Esq. Allen Matkins Leck Gamble & Mallory LLP 501 West Broadway, 9th Floor San Diego, California 92101 Tel.: 619/235-1533 Fax: 619/233-1158 Buyer's Address for Notice: APPLIED MICRO CIRCUITS CORPORATION Attn: David Mersten, Esq. 6290 Sequence Drive San Diego, California 92121 Tel.: 858/597-7311 Fax: 858/535-6800 With a copy to: David E. Watson, Esq. Gray Cary Ware & Freidenrich LLP 401 B Street, Suite 1700 San Diego, California 92101-4297 Tel.: 619/699-3608 Fax: 619/699-1048 -19- Either party may change its address for notice by delivering written notice to the other party as provided herein. 8.16 Severability. If any term, provision, covenant or condition of this ------------ Agreement is held to be invalid, void or otherwise unenforceable, to any extent, by any court of competent jurisdiction, the remainder of this Agreement shall not be affected thereby, and each term, provision, covenant or condition of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 8.17 Successors. Subject to the restriction on assignment contained ---------- herein, all terms of this Agreement shall be binding upon, inure to the benefit of, and be enforceable by the parties hereto and their respective heirs, legal representatives, successors, and assigns. 8.18 Survival. Notwithstanding any provision of this Agreement to the -------- contrary, Sections 1.4, 3.4(b), 5.6, 6.5, 7.1, 8.2 and 8.3 shall survive termination of this Agreement and Close of Escrow. In addition, Sections 3.7(a), 6.2, 6.3, 6.4 (to the extent provided in Section 6.7), 6.5, 6.6, 7.1, 7.2, 7.6 and 8.2 shall survive the Closing and conveyance of the Property to Buyer. 8.19 Time. Time is of the essence of each provision of this Agreement, ---- including without limitation all time deadlines for satisfying conditions and Close of Escrow. 8.20 Time Period Computation. All periods of time referred to in this ----------------------- Agreement shall include all Saturdays, Sundays and state or national holidays, unless the period of time specifies business days, provided that if the date or last date to perform any act or give any notice or approval shall fall on a Saturday, Sunday or state or national holiday, such act or notice may be timely performed or given on the next succeeding day which is not a Saturday, Sunday or state or national holiday. THE SUBMISSION OF THIS AGREEMENT FOR EXAMINATION OR THE NEGOTIATION OF THE TRANSACTION DESCRIBED HEREIN DOES NOT CONSTITUTE AN OFFER TO SELL BY SELLER, AND THIS AGREEMENT DOES NOT CONSTITUTE A BINDING CONTRACT UNTIL EXECUTED BY SELLER. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -20- [Signature Page of Seller to Purchase and Sale Agreement and Escrow Instructions] IN WITNESS WHEREOF, the parties have entered into this Agreement as of the date first written above. "BUYER" APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation By:________________________________ Title:_____________________________ By:________________________________ Title:_____________________________ -21- [Signature Page of Seller to Purchase and Sale Agreement and Escrow Instructions] "SELLER" TECH BUSINESS CENTER, LLC, a California limited liability company By: TECHBILT CONSTRUCTION CORP., a California corporation, as Managing Member By:_____________________________________ Paul K. Tchang, President -22- CONSENT OF ESCROW AGENT ----------------------- SELLER: TECH BUSINESS CENTER, LLC BUYER: APPLIED MICRO CIRCUITS CORPORATION PROPERTY: 31.66 Acres at Phase IV of Poway Corporate Center ESCROW NO.: 00-1887LG ================================================================================ The undersigned ("Escrow Agent") hereby: (1) acknowledges delivery of a Purchase and Sale Agreement and Escrow Instructions ("Agreement") dated September 29, 2000 between the Seller and Buyer identified above, and delivery of Buyer's $100,000.00 Deposit described in Section 1.3(a) of the Agreement; and (2) agrees to act as the Escrow Agent in accordance with the provisions of the Agreement. This Consent is executed on _____________ __, 2000 which shall constitute the "Opening of Escrow" pursuant to Section 3.3 of the Agreement. "ESCROW AGENT" FIRST AMERICAN TITLE INSURANCE COMPANY By:____________________________________ Lynn Graham CONSENT OF ESCROW AGENT -1- ACKNOWLEDGMENT OF BROKERS ------------------------- Each of the undersigned (each, a "Broker") acknowledges and agrees as follows: (1) It has read and reviewed the foregoing Purchase and Sale Agreement and Escrow Instructions ("Agreement") dated September 29, 2000, by and between TECH BUSINESS CENTER, LLC, a California limited liability company (as "Seller"), and APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation (as "Buyer"). (2) Payment, subject to and upon Close of Escrow, of a real estate commission of $597,977.47 ($690,000.00 less $92,022.53 for reimbursement by Brokers to Seller of pre-paid sewer fees, as provided in Section 7.6 of the Agreement), divided equally between the two Brokers in accordance with Section 6.5 of the Agreement, shall discharge in full its right to receive a commission or other compensation in connection with the transaction described therein. (3) If the Close of Escrow does not occur, for any reason (including as a result of a default by either Buyer or Seller, termination of this Agreement as permitted therein, or a rescission or termination by mutual agreement of Buyer and Seller), then, in any such event: (a) no commission shall be paid to or deemed earned by Broker, (b) Broker shall have no interest in any liquidated damages recovered by Seller, if any, (c) Broker shall have no claim or action against Seller or Buyer, and (d) neither Seller nor Buyer shall have any liability to Broker. "BROKER" CB RICHARD ELLIS By:________________________________ Title:_____________________________ Date:______________________________ "BROKER" THE IRVING HUGHES GROUP By:________________________________ Title:_____________________________ Date:______________________________ ACKNOWLEDGMENT OF BROKERS -1- LIST OF EXHIBITS ---------------- A Legal Description of Property B General Escrow Instructions C Form of Grant Deed D Property Documents E Non-Foreign Affidavit F Tentative Map Revisions LIST OF EXHIBITS -1- EXHIBIT A --------- LEGAL DESCRIPTION OF PROPERTY THE LAND REFERRED TO HEREIN IS SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF SAN DIEGO, AND IS DESCRIBED AS FOLLOWS: ALL OF PARCEL 2 OF PARCEL MAP NO. 17607, FILED IN THE OFFICE OF THE COUNTY RECORDER, OCTOBER 20, 1995 AS FILE NO. 1995-0473968 OF OFFICIAL RECORDS, THAT PORTION OF LOT 4 OF SECTION 19, TOWNSHIP 14 SOUTH, RANGE 1 WEST, SAN BERNARDINO MERIDIAN AND THAT PORTION OF THE SOUTHEAST QUARTER OF THE SOUTHEAST QUARTER OF SECTION 24, TOWNSHIP 14 SOUTH, RANGE 2 WEST, SAN BERNARDINO MERIDIAN, TN THE CITY OF POWAY, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA, MORE PARTICULARLY DESCRLBED AS FOLLOWS: BEGINNING AT THE SOUTHWESTERLY CORNER OF SAID SECTION 19; THENCE ALONG THE MOST SOUTHERLY LINE OF SAID PARCEL 2, NORTH 87"21'18" WEST, 6.01 FEET; THENCE NORTH OO"28'46" WEST, 32.55 FEET TO A POINT ON THE NORTHERLY RIGHT-OF-WAY LINE OF KJRKHAM WAY AS DEDICATED PER SAID PARCEL MAP NO. 17607; THENCE WESTERLY ALONG SAID RIGHT-OF-WAY LINE, NORTH 87"21'18" WEST, 653.83 FEET; THENCE NORTH 02"38'42" EAST, 385.00 FEET; THENCE NORTH 87"21'18" WEST 688.64 FEET TO A POINT ON THE EASTERLY RIGHT-OF-WAY LINE OF TECH CENTER DRIVE AS DEDICATED PER DEED RECORDED MARCH 22, 1993 AS DOC. NO. 1993-0174230 OF OFFICIAL, RECORDS; THENCE NORTHERLY ALONG SAID RIGHT-OF-WAY LINE, NORTH OO"O8'03" WEST (RECORD NORTH OO"O7'57" WEST PER SAID DEED) 792.99 FEET TO THE BEGINNING A TANGENT 34.50 FOOT RADIUS CURVE CONCAVE SOUTHEASTERLY; THENCE NORTHEASTERLY ALONG THE ARC OF SAID CURVE THROUGH A CENTRAL ANGLE OF 86"37'17" (RECORD 86"38'18" PER SAID DEED) A DISTANCE OF 52.16 FEET (RECORD 52.17' PER SAID DEED) TO A POINT ON THE SOUTHERLY RIGHT-OF-WAY LINE OF SCRIPPS POWAY PARKWAY AS DEDICATED PER DEED RECORDED AUGUST 25, 1993 AS DOC. NO. 1993-0554187 OF OFFICIAL RECORDS; THENCE EASTERLY ALONG SAID RIGHT-OF-WAY LINE AND TANGENT TO SAID CURVE, NORTH 86"29'14" EAST 84.33 FEET (RECORD 84.36' PER SALD DEED) TO THE BEGINNING OF A TANGENT 299.50 FOOT RADIUS CURVE CONCAVE SOUTHERLY; THENCE EASTERLY ALONG THE ARC OF SAID CURVE THROUGH A CENTRAL ANGLE OF 05"51'45" A DISTANCE OF 30.64 FEET (RECORD 30.65' PER DEED); THENCE TANGENT TO SAID CURVE AND CONTINUTNG ALONG SAID RIGHT-OF-WAY LINE, SOUTH 87"39'01" EAST; TO THE NORTHEAST CORNER OF PARCEL 2 OF SAID PARCEL MAP NO. 17607; THENCE LEAVING SAID RIGHT-OF-WAY LINE NORTH OO"28'46" EAST TO THE SOUTHERLY LINE OF CITY OF POWAY TRACT 87-13 UNIT 1, ACCORDING TO MAP THEREOF NO. 12556; THENCE ALONG SAID SOUTHERLY LINE SOUTH 87"39'01" EAST TO A POINT ON THE EAST LINE OF SAID SECTION 24; THENCE SOUTH 88"19'17" EAST 8.33 FEET; THENCE LEAVING SAID SOUTHERLY LINE SOUTH OO"28'46" EAST TO A POINT ON THE SOUTHERLY LINE OF SAID SECTION 19, DISTANT THEREON SOUTH 88"15'43" EAST 6.00 FEET FROM THE SOUTHWEST CORNER THEREOF; THENCE NORTH 88"15'43" WEST 6.00 FEET TO THE POINT OF BEGINNING. NOTE: SAID LAND IS ALSO DESCRIBED AS PARCEL A IN CERTIFICATE OF COMPLIANCE RECORDED SEPTEMBER 20, 1996 AS FILE NO. 1996-0480626 OF OFFICIAL RECORDS. EXHIBIT A -1- EXHIBIT B --------- GENERAL ESCROW INSTRUCTIONS ESCROW GENERAL PROVISIONS 1. Deposit of Funds & Disbursements All funds shall be deposited in general escrow accounts in a federally insured financial institution including those affiliated with Escrow Holder ("depositories") . All disbursements shall be made by Escrow Holder's check or by wire transfer unless otherwise instructed in writing. The Good Funds Law requires that Escrow Holder have confirmation of receipt of funds prior to disbursement. Escrow Holder may receive certain financial benefits from the depository institutions as a result of maintaining the general escrow accounts and its on-going banking relationship with that institution and such benefits will belong solely to Escrow Holder. 2. Disclosure of Possible Benefits to Escrow Holder The parties acknowledge that as a result of Escrow Holder maintaining its general escrow accounts with the depositories, Escrow Holder may receive certain financial benefits such as an array of bank services, accommodations, loans or other business transactions from the depositories ("collateral benefits"). All collateral benefits shall accrue to the sole benefit of Escrow Holder and Escrow Holder shall have no obligation to account to the parties to this escrow for the value of any such collateral benefits. 3. Prorations & Adjustments The term "close of escrow" means the date on which documents are recorded. All prorations and/or adjustments shall be made to the close of escrow based on a 30-day month, unless otherwise instructed in writing. 4. Recordation of Documents Escrow Holder is authorized to record documents delivered through this escrow which are necessary or proper for the issuance of the requested title insurance policy(ies). 5. Authorization to Furnish Copies Escrow Holder may furnish copies of any and all documents to the lender(s), real estate broker(s), attorney(s) and/or accountant(s) involved in this transaction upon their request. 6. Personal Property Taxes No examination, UCC search, insurance as to personal property and/or the payment of personal property taxes is required unless otherwise instructed in writing. 7. Cancellation of Escrow Any party desiring to cancel this escrow shall deliver written notice of cancellation to Escrow Holder. Within a reasonable time after receipt of such notice, Escrow Holder shall send by regular mail to the address on the escrow instructions, one copy of said notice to the other party(ies). Unless written objection to cancellation is delivered to Escrow Holder by a party within 10 days after date of mailing, Escrow Holder is authorized at its option to comply with the notice and terminate the escrow. If a written objection is received by Escrow Holder, Escrow Holder is authorized at its option to hold all funds and documents in escrow (subject to the funds held fee) and to take no other action until otherwise directed by either the parties' mutual written instructions or a final order of a court of competent jurisdiction. If no action is taken on this escrow within 6 months after the closing date specified in the escrow instructions, Escrow Holder's obligations shall, at its option, terminate. Upon termination of this escrow, the parties shall pay all fees, charges and reimbursements due to Escrow Holder and all documents and funds held in escrow shall be returned to the parties depositing same. 8. Conflicting Instructions & Disputes If Escrow Holder becomes aware of any conflicting demands or claims concerning this escrow, Escrow Holder shall have the right to discontinue all further acts on Escrow Holder's part until the conflict is resolved to Escrow Holder's satisfaction. Escrow Holder has the right at its option to file an action in interpleader requiring the parties to litigate their claims/rights. If such an action is filed, the parties jointly and severally agree (a) to pay Escrow Holder's cancellation charges, costs (including the funds held fees) and reasonable attorney's fees, and (b) that Escrow Holder is fully released and discharged from all further obligations under the escrow. If an action is brought involving this escrow and/or Escrow Holder, the parties agree to indemnify and hold the Escrow Holder harmless against liabilities, damages and costs incurred by Escrow Holder (including reasonable attorney's fees and costs) except to the extent that such liabilities, damages and costs were caused by the gross negligence or willful misconduct of Escrow Holder. 9. Usury Escrow Holder is not to be concerned with usury as to any loans or encumbrances in this escrow and is hereby released of any responsibility and/or liability therefor. 10. Amendments to Escrow Instructions Any amendment to the escrow instructions must be in writing, executed by all parties and accepted by Escrow Holder. Escrow Holder may, at its sole option, elect to accept and act upon oral instructions from the parties. If requested by Escrow Holder the parties covenant to confirm said instructions in writing as soon as practicable. The escrow instructions as may be amended shall constitute the entire escrow agreement between the Escrow Holder and the parties hereto with respect to the subject matter of the escrow and shall supersede all prior agreements with respect thereto. 11. Supplemental Real Property Taxes Supplemental taxes may be assessed as a result of a change in ownership or completion of construction. Adjustments due either party based on a supplemental tax bill will be made by the parties outside of escrow and Escrow Holder is released of any liability in connection with same. 12. Change of Ownership Forms Buyer will provide a completed Preliminary Change of Ownership Report form ("PCOR"). If Buyer fails to provide the PCOR, Escrow Holder shall close escrow and charge Buyer any additional fee incurred for recording the documents without the PCOR. Escrow Holder is released from any liability in connection with same. 13. Insurance Policies In all matters relating to insurance, Escrow Holder may assume that each policy is in force and that the necessary premium has been paid. Escrow Holder is not responsible for obtaining fire, hazard or liability insurance, unless Escrow Holder has received specific written instructions to obtain such insurance prior to close of escrow from the parties or their respective lenders. 14. Facsimile Instructions The parties agree to accept and instruct the Escrow Holder to rely upon facsimile transmitted documents as if they had original signatures. Within 72 hours of transmission, the party transmitting documents by facsimile shall deliver the originals of such documents to Escrow Holder. Escrow Holder may withhold documents and/or funds due to the party until such originals are delivered. Documents to be recorded MUST contain original signatures. 15. Execution in Counterpart The escrow instructions and any amendments may be executed in one or more counterparts, each of which shall be deemed an original, and all of which taken together shall constitute the same instruction. 16. Tax Reporting, Withholding & Disclosure The parties are advised to seek independent advice concerning the tax consequences of this transaction, including but not limited to, their withholding, reporting and disclosure obligations. Escrow Holder does not provide tax or legal advice and the parties agree to hold Escrow Holder harmless from any loss or damage that the parties may incur as a result of their failure to comply with federal and/or state tax laws. WITHHOLDING OBLIGATIONS ARE THE EXCLUSIVE OBLIGATIONS OF THE PARTIES. ESCROW HOLDER IS NOT RESPONSIBLE TO PERFORM THESE OBLIGATIONS UNLESS ESCROW HOLDER AGREES IN WRITING. A. Taxpayer Identification Number Reporting Federal law requires Escrow Holder to report Seller's social security number and/or tax identification number, forwarding address, and the gross sales price to the Internal Revenue Service ("IRS"). Escrow can not be closed nor any documents recorded until the information is provided and Seller certifies its accuracy to Escrow Holder. B. State & Federal Withholding & Reporting A buyer may be required to withhold and deliver to the Franchise Tax Board an amount equal to 3.33% of the sales price of a California real property interest by either: 1) a seller who is an individual with either a last known street address outside of California or when the seller's disbursement instructions direct the proceeds to be sent to a financial intermediary of the seller; OR 2) a corporate seller which has no permanent place of business in California. The buyer may become subject to a penalty in an amount equal to the greater of 10% of the amount required to be withheld or $500. However, the buyer is not required to withhold any amount and will not be subject to penalty for failure to withhold if: a) the sales price of the California real property interest conveyed does not exceed $100,000; b) the seller executes a written certificate, under the penalty of perjury, certifying that the seller is a resident of California, or if a corporation, has a permanent place of business in California; OR c) the seller, who is an individual, executes a written certificate, under the penalty of perjury, that the California real property being conveyed is the seller's principal residence. The California Franchise Tax Board may grant reduced withholding or waivers. To obtain additional information regarding California withholding, contact the Franchise Tax Board, Withhold at Source Unit, P. O. Box 651, Sacramento, CA 95812-0651 (916/845- 4900). Certain federal reporting and withholding requirements exist for real estate transactions where the seller (transferor) is a non-resident alien, a non- domestic corporation or partnership, a domestic corporation or partnership controlled by non-residents or non-resident corporations or partnerships. C. Taxpayer Identification Disclosure Parties to a residential real estate transaction involving seller-provided financing are required to furnish, disclose, and include taxpayer identification numbers in their tax returns. Escrow Holder is not obligated to transmit the taxpayer identification numbers to the IRS or to the parties. Escrow Holder is authorized to release any party's taxpayer identification numbers to any other party upon receipt of a written request. The parties hereto waive all rights of confidentiality regarding their respective taxpayer identification numbers and agree to hold Escrow Holder harmless against any fees, costs, or judgments incurred and/or awarded because of the release of taxpayer identification numbers. THIS COMPANY CONDUCTS ESCROW BUSINESS UNDER CERTIFICATE OF AUTHORITY ISSUED BY THE STATE OF CALIFORNIA DEPARTMENT OF INSURANCE. DEPARTMENT OF INSURANCE -3- EXHIBIT C --------- FORM OF GRANT DEED RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: __________________________ __________________________ __________________________ __________________________ MAIL TAX STATEMENTS TO: SAME AS ABOVE ================================================================================ (Space Above For Recorder's Use) A Portion of Tax Assessor's Parcel No. ___________________ Amount of Documentary Transfer Tax shown on attached paper -- not for public record. GRANT DEED FOR A VALUABLE CONSIDERATION, receipt of which is hereby acknowledged, TECH BUSINESS CENTER, LLC, a California limited liability company ("Grantor"), hereby grants to APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation ("Grantee"), the real property located in the City of Poway, County of San Diego, State of California, described as follows and hereinafter referred to as the "Property": [Insert legal description of Property] SUBJECT TO: (1) All general and special real property taxes and assessments, not delinquent; (2) Easements, liens, charges, covenants, restrictions, reservations and other terms and provisions set forth in that certain Declaration of Covenants, Conditions and Restrictions for Poway Corporate Center, executed by Grantor (as "Declarant") and recorded on March 24, 2000 as Document No. 2000-0149044 of the Official Records of San Diego County, California, as amended as of the date hereof ("Declaration"), which Declaration is by this reference incorporated herein and made a part hereof. The Property is conveyed to Grantee together with all easements set forth in the Declaration which are appurtenant to the Property. By acceptance of this Grant Deed, Grantee accepts and agrees to be bound by the covenants, conditions, restrictions, rights and liabilities set forth in the Declaration, which shall bind successor owners of the Property conveyed to Grantee as covenants running with the land. EXHIBIT C -1- (3) All other conditions, covenants, liens, restrictions and other encumbrances and matters of record in the Official Records of San Diego County, California. (4) Matters that can be ascertained by a reasonable inspection and/or survey of the Property. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] EXHIBIT C -2- [Signature Page to Grant Deed] IN WITNESS WHEREOF, Grantor has executed this Grant Deed on _____________ __, 20__ . "GRANTOR" TECH BUSINESS CENTER, LLC, a California limited liability company By: TECHBILT CONSTRUCTION CORP., a California corporation, as Managing Member By:______________________________________ Paul K. Tchang, President By: BOTHWELL INTERNATIONAL, LTD., a California limited partnership, Member By:_______________________________________ Neville F. Bothwell, General Partner STATE OF CALIFORNIA ) ) ss. COUNTY OF SAN DIEGO ) On ______________________, before me, ______________________, a Notary Public in and for said state, personally appeared______________________________ personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument, the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. __________________________________ Notary Public in and for said State (SEAL) EXHIBIT C -3- STATE OF CALIFORNIA ) ) ss. COUNTY OF SAN DIEGO ) On ______________________, before me, ______________________, a Notary Public in and for said state, personally appeared______________________________ __________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument, the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. ____________________________________ Notary Public in and for said State (SEAL) EXHIBIT C -4- [Signature Page to Grant Deed] IN WITNESS WHEREOF, Grantor has executed this Grant Deed on _____________ __, 20__ . "GRANTEE" APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation By:_____________________________________ Title:__________________________________ STATE OF CALIFORNIA ) ) ss. COUNTY OF SAN DIEGO ) On ______________________, before me, ______________________, a Notary Public in and for said state, personally appeared ____________________________ ____________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument, the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. _______________________________________ Notary Public in and for said State (SEAL) EXHIBIT C -5- EXHIBIT D --------- PROPERTY DOCUMENTS 1. Preliminary Report for the Property [Order No. 1249556-11, dated as of August 10, 2000,] prepared by First American Title Insurance Company, with underlying documents. 2. Tech Center West Tentative Map No. 97-01. 3. Tech Center West Cut - Fill Map dated January 7, 1999, and Tech Center West Grading and Erosion Control Plans consisting of six sheets, W.O. #97-017 4. Improvement Plans for Offsite Sewer Main for Parkway Business Center III Sheets 1 through 4 5. Amended and Restated Owner Participation Agreement By and Between the Poway Redevelopment Agency and Tech Business Center LLC dated June 22, 1999. 6. City of Poway letter dated November 17, 1998, acknowledging Planning Resolution No. P-98-65 approving Tentative Tract Map 97-01, together with related acceptance documents by Tech Business Center 7. Preliminary Geotechnical Investigation for the Proposed Tech Business Center dated April 10, 1990, prepared by Woodward-Clyde Consultants 8. Final Report of Testing and Observation Services During Site Grading, Watkins Trucking Depot Site, Tech Business Center, dated October 27, 1995, prepared by Geocon Incorporated 9. Final Report of Testing and Observation Services during Site Grading, Tech Business Center West, dated February 11, 1999, prepared by Geocon Incorporated EXHIBIT D -1- EXHIBIT E --------- NON-FOREIGN AFFIDAVIT Non-Foreign Affidavit Pursuant to FIRPTA SELLER: TECH BUSINESS CENTER, LLC, a California limited liability company BUYER: APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation PROPERTY: 31.66 Acres at Phase IV of Poway Corporate Center ESCROW NO: 00-1887 LG ================================================================================ TECH BUSINESS CENTER, LLC, a California limited liability company ("Seller"), hereby certifies the following: 1. Seller is the owner of the Property identified above. No other person or entity has an ownership interest in the Property. 2. Seller is not a foreign person and is a "United States Person" as such term is defined in Section 7701(a)(30) of the Internal Revenue Code, as amended (the "Code"). 3. Seller's U.S. Tax Identification Number is: 33-0443611. Seller's business address is: 3575 Kenyon Street, San Diego, CA 92110. 4. This Affidavit is provided pursuant to Section 1445 of the Code which requires a transferor of a U.S. real property interest to withhold tax if the transferee is a foreign person. Seller understands that the purchaser of the Property intends to rely on this Affidavit in connection with the United States Foreign Investment and Real Property Tax Act (FIRPTA). The undersigned, the general partners of Seller, hereby declare under penalty of perjury that the foregoing is true and correct. Dated: ______________, 20__ SELLER: TECH BUSINESS CENTER, LLC, a California limited liability company By: TECHBILT CONSTRUCTION CORP., a California corporation, as Managing Member By:__________________________________ Theodore Tchang, Vice-President EXHIBIT E -1- EXHIBIT F --------- TENTATIVE MAP REVISIONS ----------------------- 1. Eliminate planned Lot 6 (mini-park) and the detention basin thereon, resulting in increases in sizes of lots 5 and 7. 2. Add note on lots 5 and 7 that reads: "driveway access may be provided across lot 5 or lot 7 from Kirkham Way to provide secondary access to consolidated Lots 4, 8, 9, and 10." 3. Add note on westerly end of Gregg Street that reads: "Gregg Street may be located within the region shown to provide access to consolidated lots 3, 4, 8, 9, 10 and 11 or combinations thereof, the location to be subject to the approval of the City Engineer having regarding to turning movements on Tech Center Drive." 4. Change zoning notes to include South Poway Commercial Zone on Lots 12, 13, and 14. 5. Revise table of gross acres to include all of land owned by Seller. 6. Add 36" diameter storm drain on Kirkham Way. 7. Add note that site can be regraded to eliminate the grade differentials of Lots 5, 7, 12, 13 and 14 from adjoining lots. 8. Adjust corner lot lines at South Poway Place and Tech Center Drive to reflect traffic signal plans. EXHBIT F -1- PURCHASE AND SALE AGREEMENT AND ESCROW INSTRUCTIONS SELLER: TECH BUSINESS CENTER, LLC, a California limited liability company BUYER: APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation PROPERTY: Phase IV of Poway Corporate Center ESCROW: First American Title Insurance Company Attn: Lynn Graham ESCROW NO.: 00-1887LG POWAY CORPORATE CENTER PHASE IV Page ---- ARTICLE 1 AGREEMENT OF PURCHASE AND SALE 1 1.1 Description of Property........................... 1 1.2 Purchase and Sale; Effective Date................. 1 1.3 Deposit........................................... 1 1.4 LIQUIDATED DAMAGES................................ 2 ARTICLE 2 PURCHASE PRICE.................................... 2 2.1 Purchase Price.................................... 2 ARTICLE 3 ESCROW............................................ 3 3.1 Escrow Agent...................................... 3 3.2 Escrow Instructions............................... 3 3.3 Opening of Escrow................................. 3 3.4 Close of Escrow................................... 3 3.5 Deliveries to Escrow.............................. 4 3.6 Completion of Documents........................... 4 3.7 Prorations, Escrow Fees and Costs................. 4 3.8 Closing Statement................................. 5 3.9 Existing Encumbrances............................. 5 3.10 Distribution of Funds and Documents............... 5 ARTICLE 4 TITLE MATTERS..................................... 6 4.1 Preliminary Title Report.......................... 6 4.2 Title Policy...................................... 7 4.3 ALTA Title Coverage............................... 7 4.4 Grant Deed........................................ 8 ARTICLE 5 CONDITIONS TO CLOSE OF ESCROW..................... 8 5.1 Property Documents................................ 8 5.2 Due Diligence Period; Conditions.................. 8 5.3 Closing Condition................................. 9 5.4 Satisfaction, Waiver of Due Diligence Conditions.. 9 5.5 Failure of Conditions............................. 9 5.6 Delivery of Documents............................. 9 ARTICLE 6 REPRESENTATIONS AND WARRANTIES.................... 10 6.1 Definitions....................................... 10 6.2 Condition of Property............................. 10 6.3 Buyer's Representations........................... 12 6.4 Seller's Representations and Warranties........... 13 6.5 Real Estate Commissions........................... 14 6.6 Interstate Land Sales Full Disclosure Act......... 14 6.7 Survival of Warranties and Obligations............ 14
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Page ---- ARTICLE 7 ADDITIONAL OBLIGATIONS............................ 15 7.1 Access to Property................................ 15 7.2 Seller's Improvements............................. 15 7.3 Government Approvals.............................. 16 7.4 Damage or Destruction............................. 16 7.5 Condemnation...................................... 16 7.6 Reimbursement of Pre-Paid Sewer Fees.............. 17 7.7 Possession........................................ 17 ARTICLE 8 GENERAL PROVISIONS................................ 17 8.1 Assignment........................................ 17 8.2 Attorneys' Fees................................... 18 8.3 Confidentiality................................... 18 8.4 Counterparts...................................... 18 8.5 Entire Agreement.................................. 18 8.6 Exhibits.......................................... 18 8.7 Force Majeure..................................... 18 8.8 Further Assurances................................ 18 8.9 Gender, Number.................................... 18 8.10 Governing Law..................................... 18 8.11 Headings.......................................... 18 8.12 Joint and Several Liability....................... 19 8.13 Modification, Waiver.............................. 19 8.14 No Other Inducement............................... 19 8.15 Notice............................................ 19 8.16 Severability...................................... 20 8.17 Successors........................................ 20 8.18 Survival.......................................... 20 8.19 Time 20 8.20 Time Period Computation........................... 20
LIST OF EXHIBITS ---------------- EXHIBIT A - Legal Description of Property EXHIBIT B - General Escrow Instructions EXHIBIT C - Form of Grant Deed EXHIBIT D - Property Documents EXHIBIT E - Non-Foreign Affidavit EXHIBIT F - Tentative Map Revisions (ii) SECOND AMENDMENT TO ESCROW INSTRUCTIONS --------------------------------------- TO ESCROW OFFICER: First American Title Insurance Company Attn: Lynn Graham, Escrow Officer ESCROW NO: 00-1887 LG SELLER: TECH BUSINESS CENTER, LLC, a California limited liability company BUYER: APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation DATE: January 10, 2001 ________________________________________________________________________________ This Second Amendment to Escrow Instructions ("Amendment") effective upon Escrow Agent's receipt of a copy or copies executed by Seller and Buyer, constitutes part of, amends and supersedes any contrary provisions in the Purchase and Sale Agreement and Escrow Instructions between Seller and Buyer effective as of September 29, 2000, as modified by the [First] Amended Escrow Instructions dated December 26, 2000 (collectively, "Agreement") as follows: 1. Seller's Improvements. Section 7.2(b) of the Agreement is revised to --------------------- delete the first sentence and to substitute therefor the following: "Seller shall cause Seller's Improvements to be completed within one (1) year after the Close of Escrow, which completion date shall be subject to extension, to the extent reasonably required, (a) to accommodate any actions required to be taken by the City, and/or (b) as a result of delays described in Section 8.7 of the Agreement or delays caused by the City or Buyer." The following new provisions are added at the end of Section 7.2(b): "If Seller fails to complete any of Seller's Improvements within the time specified above, and if such failure is not cured within thirty (30) days after Seller's receipt of written notice from Buyer that Buyer intends to assume responsibility for completion of such improvements, Buyer shall have the right to complete the improvements in accordance with the Plans and all other applicable requirements of the City and other governmental agencies. In such event, Buyer shall have the right to recover from Seller the reasonable, actual costs of completing such improvements." 2. Development Obligations. New Section 7.8 is added to the Agreement, ----------------------- as follows: "7.8 Development Obligations. A copy of pages 13-14 of Resolution ----------------------- P98-65, which sets forth the conditions of approval of the Tentative Map (TM 97-01), is attached to this Amendment and incorporated into the Agreement as Exhibit G. Buyer shall be responsible for paying, when due, --------- all development fees described in Item No. 1 set forth on page 13 attached as Exhibit G. Seller shall pay, prior to approval of the Final Map based on --------- the Tentative Map (TM 97-01), the fees described in Item No. 2 set forth on page 13 attached as Exhibit G, to the extent that such fees are normal and --------- customary fees calculated based upon the grading and improvement plans prepared by Seller, including any modifications which are required to make such plans consistent with the revisions to the Tentative Map outlined on Exhibit F to the Agreement. Buyer shall pay any amounts charged pursuant --------- to Item No. 2 which are not allocated to Seller as set forth above or which result from Buyer's site development plan or the City's development review process. Seller shall also pay the assessments described in Item No. 3.A and B on pages 13-14 attached as Exhibit G and the prorata share payment --------- described in Item No. 4 on the top of page 14 attached as Exhibit G. --------- Seller shall promptly deliver to Buyer copies of all Construction Covenants delivered by the City to Seller pursuant to the Amended and Restated Owner Participation Agreement. Seller represents that no such Construction Covenants have been delivered as of the date of this Amendment." 3. Satisfaction of Due Diligence Conditions. Seller and Buyer ---------------------------------------- acknowledge that the Due Diligence Conditions described in Section 5.2(b) of the Agreement have been satisfied and the Due Diligence Period has expired. Escrow Agent is authorized to immediately release the Buyer's $100,000 Deposit to Seller upon receipt of a copy of this Amendment executed by Seller and Buyer, pursuant to Section 1.3(b) of the Agreement. 4. Closing Date. Section 3.4(a) is amended to delete the last sentence ------------ and substitute therefor the following: "The 'Closing Deadline' means the date that is the later of: (1) February 2, 2001, or (2) two (2) business days after the City's approval of the Tentative Map revisions described in Section 5.3 as long as such approval remains a condition to the Closing pursuant to Section 5.3." 5. No Further Changes. In all other respects, the Agreement shall remain ------------------ unchanged and in full force and effect. [Buyer's Signature Appears on Following Page] -2- [Buyer's Signature Page to Second Amendment to Escrow Instructions] ------------------------------------------------------------------- BUYER: APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation By: _____________________________________ Title: ______________________________ By: _____________________________________ Title: ______________________________ [Seller's Signature Appears on Following Page] -3- [Seller's Signature Page to Second Amendment to Escrow Instructions] -------------------------------------------------------------------- SELLER: TECH BUSINESS CENTER, LLC, a California limited liability company By: TECHBILT CONSTRUCTION CORP., a California corporation, as Managing Member By: _______________________________________ Paul K. Tchang, President [End of Signatures] -4- EXHIBIT G --------- CERTAIN TENTATIVE MAP CONDITIONS -------------------------------- EXHIBIT G -1- -----END PRIVACY-ENHANCED MESSAGE-----