-----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, ByMouZovg3KUEvMY1CLzL/9qjS900I4FMK+1APHG36AoNGnuzSzvV5Vg+0Z1U1iB FKZS7Gh3XkSonfM/Swzowg== 0000898430-99-002596.txt : 19990625 0000898430-99-002596.hdr.sgml : 19990625 ACCESSION NUMBER: 0000898430-99-002596 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990624 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-K SEC ACT: SEC FILE NUMBER: 000-23193 FILM NUMBER: 99651209 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-K 1 FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- Form 10-K (Mark One) [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1999 OR [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 000-23193 APPLIED MICRO CIRCUITS CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-2586591 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
6290 Sequence Drive San Diego, California 92121 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (619) 450-9333 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period than the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $846,000,000 as of March 31, 1999, based upon the closing sale price on the Nasdaq National Market reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 5% of more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. There were 26,612,069 shares of the registrant's Common Stock issued and outstanding as of March 31, 1999. DOCUMENTS INCORPORATED BY REFERENCE Part III incorporates information by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held on August 3, 1999. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART I Item 1. Business. Applied Micro Circuits Corporation ("AMCC" or the "Company") was incorporated and commenced operations in California in 1979. AMCC was reincorporated in Delaware in 1987. Certain statements in this Annual Report on Form 10-K, including certain statements contained in the "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. See "Factors That May Affect Future Results" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Overview AMCC designs, develops, manufactures and markets high-performance, high- bandwidth silicon solutions for the world's communications infrastructure. The Company utilizes a combination of high-frequency analog, mixed-signal and digital design expertise coupled with system-level knowledge and multiple silicon process technologies to offer IC products for the wide area network markets that address the SONET/SDH and ATM transmission standards and for the fiber optic based portions of the local area network markets that address the Gigabit Ethernet and Fibre Channel transmission standards. In these markets, the Company provides physical layer products such as transceivers, crosspoint switches and Clock Recovery and Synthesis Units, physical media dependent products such as transimpedance amplifiers and laser drivers, and overhead processor products such as framers and mappers. The Company currently supplies products for the Sonet OC-3, OC-12 and OC-48 transmission standards, and is currently developing an OC-192 chip set. The Company also leverages its technology to provide solutions for the ATE, broadcast HDTV, high-speed computing and military markets. Customers of the Company include 3Com, Alcatel, Cisco Systems, Marconi Communications, Lucent, Nortel, Raytheon Systems, Seimens and Teradyne. Industry Background The Communications Industry Communications technology has evolved from simple analog voice signals transmitted over networks of copper telephone lines to complex analog and digital voice and data transmitted over hybrid networks of media such as copper, coaxial and fiber optic cables. This evolution has been driven by enormous increases in the number of users and the complexity of the data types transmitted over networks. In addition, the substantial growth in the Internet, the World Wide Web, cellular and facsimile communications; the emergence of new applications such as video conferencing; and the increase in demand for remote network access and higher speed, higher bandwidth communication between local area networks and local and wide area networks have increased network bandwidth requirements. This increase has made many systems architectures inadequate. In the wide area network ("WAN") market, service providers and equipment suppliers in particular have been impacted by the inadequacy of systems architectures caused by the current public network infrastructure. This infrastructure was designed to optimize voice communications and is not well suited for the high-throughput requirements of data transmission that is transmitted in "bursts." The volume and complexity of this data has led to the increasing deployment of fiber optic technology for use in wide area networks ("WANs"). This technology has substantially greater transmission capacity and is less error prone and easier to maintain than copper networks. The Synchronous Optical Network ("SONET") standard in North America and Japan, and the Synchronous Digital Hierarchy ("SDH") standard in the rest of the world, have emerged as the standards for the transmission of signals over optical fiber. The SONET/SDH standards facilitate high data integrity and 1 improved network reliability, while reducing maintenance and other operation costs by standardizing interoperability among equipment from different vendors. A transmission protocol complementary to SONET/SDH, Asynchronous Transfer Mode ("ATM"), has emerged to optimize bandwidth utilization. ATM is a network transmission protocol that packages data into fixed sized cells enabling the support of not only data traffic, but delay-sensitive voice, video and imaging applications. In the local area network ("LAN") market, similar bandwidth issues have arisen as the greater computational power of PCs have enabled powerful network applications such as video conferencing and Web communications. However, these new applications and the increasing number of computers on networks have significantly increased the volume of data traffic and, as a result, the network has now become the bottleneck in the delivery of integrated video, audio and data. Ethernet is currently the most widespread LAN standard, operating at 10 to 100 megabits per second. However, LAN backbones are rapidly being upgraded to Gigabit Ethernet and ATM in order to increase available bandwidth. These network protocols, which enable expanded bandwidth in excess of one gigabit per second, are emerging as the new standards for LAN backbones. In addition, the Fibre Channel standard, which also facilitates data transmission at rates exceeding one gigabit per second, has emerged as a practical, cost-effective and expandable method for achieving high-speed, high-volume data transfer among workstations, mainframes, data storage devices and other peripherals. Fibre Channel and Gigabit Ethernet are complementary and compatible transmission standards, and the emergence of Gigabit Ethernet has accelerated the growth of the Fibre Channel standard. The Communications IC Opportunity In order to address the growing requirements of communications networks, equipment suppliers are having to develop and introduce increasingly sophisticated systems at a rapid rate. To achieve the performance and functionality required by such systems, these OEMs must utilize increasingly complex integrated circuits ("ICs"), which now account for a larger portion of the value-added proprietary content of such systems. As a result of the rapid pace of new product introductions, the proliferation of standards to be accommodated and the difficulty of designing and producing requisite ICs, equipment suppliers increasingly outsource these ICs to semiconductor firms with specialized expertise. These trends have created a significant opportunity for IC suppliers that can design cost-effective solutions for the transmission of high-frequency data. Dataquest estimates that the worldwide SONET/SDH/ATM markets for ICs were approximately $670 million in 1998 and will increase to approximately $1.7 billion in 2002. The Fibre Channel and Gigabit Ethernet markets combined were approximately $70 million in 1998 and Dataquest estimates that such combined markets will be approximately $190 million in 2002. IC suppliers must utilize a variety of skills and technologies to satisfy the requirements of communications equipment OEMs. These OEMs require IC suppliers that possess system-level expertise and can quickly bring to market high-performance, highly reliable, power-efficient ICs. Additionally, these OEMs seek suppliers with both analog and digital expertise to provide a more complete solution that enables faster integration into the system design and higher performance. In particular, WAN OEMs require IC suppliers to provide solutions that minimize jitter (a measure of the stability and noisiness of a signal), which degrades transmission quality over distance. LAN products typically have substantially shorter life cycles than WAN products, and the rate of new product introductions is very high. Therefore, LAN OEMs specifically require IC suppliers that can provide IC solutions that accommodate these increased time-to-market demands. Furthermore, the LAN market is highly cost driven and generally involves large volumes. Therefore, OEMs in this market require IC suppliers that can provide increasingly lower cost IC solutions that can quickly be ramped into high-volume production. In the high-performance IC market, a number of process technologies are used to produce ICs. Traditionally, designers have relied on silicon-based manufacturing process technologies for the development of high-speed, mixed- signal, analog and digital circuits with precision timing. In some cases, OEMs utilize discrete components or IC solutions based on non-silicon processes such as gallium arsenide ("GaAs") to meet the high-frequency requirements of certain communications products. However, non-silicon processes tend to be more expensive, less predictable with respect to yields and less able to ramp to high-volume production than silicon processes. 2 AMCC Strategy AMCC's objective is to be the leading supplier of high-performance, high- bandwidth connectivity IC solutions for the world's communications infrastructure. To achieve this objective, the Company employs the following strategies: Focus on High-Growth Wide Area Network Markets AMCC targets key high-growth WAN markets, including those for SONET/SDH and ATM products. The Company has built substantial competencies focused on the specific requirements of these markets in the areas of process technology and mixed-signal design and substantial expertise in systems architecture and applications support. The Company believes that the integration of these capabilities enables it to optimize solutions addressing the high-bandwidth connectivity requirements of WAN systems OEMs. Additionally, AMCC leverages its design expertise, process technologies and systems capabilities in WAN markets to address specific customer requirements in the fiber optic portion of the LAN markets. Provide Complete System Solutions to the Customer and Aggressively Integrate Products AMCC's strategy in the WAN market is two fold; 1) provide fiber to switch silicon solutions and; 2) continue to optimize these solutions through integration. To this end, in April 1998, AMCC acquired Ten Mountains Design which develops analog designs for physical media dependent ("PMD") devices. In March 1999, AMCC acquired Cimaron Communications Corporation providing the Company with expertise in the development of overhead processor products ("OHP") and system level design. The Company believes that these acquisitions, together with AMCC's established competence in the high-speed mixed-signal (or physical layer) development, now allow AMCC to offer comprehensive solutions for communications equipment OEMs from the fiber to the switch. This provides our customers with guaranteed interoperability, pre-designed subsystems, better-cost economics, and system level expertise. The result is faster time to market, better performance and lower cost. To continue these customer benefits in future generations of products, AMCC is pursuing an aggressive integration strategy to provide greater functionality in fewer IC's. Capitalize on Multiple Silicon-Process Technologies to Provide Optimized Solutions The Company is dedicated to utilizing the best silicon process technology available to offer solutions optimized for specific applications and customer requirements. The Company has successfully developed multiple generations of its processes and believes that it will be able to continue the evolution of its processes to deliver the performance required of future communications ICs. AMCC believes its current and future bipolar and BiCMOS processes and design expertise, complemented by advanced CMOS and silicon germanium ("SiGe") BiCMOS processes from external foundries, provide the Company with the flexibility to design and manufacture products that are tailored to its customers' individual needs. Through this flexible approach, AMCC is better able to transition products over time to new manufacturing processes as product performance requirements and process technologies evolve. Capitalize on Established Silicon-Process Technologies to Provide Cost- Effective Solutions The Company applies its systems expertise and its analog, mixed-signal and digital design techniques to architect high-performance products based on established silicon process technologies. The Company believes that these silicon-based processes are proven, stable and predictable relative to non- silicon processes and benefit from the extensive semiconductor industry infrastructure devoted to the support of silicon processes. Products and Customers AMCC designs, develops, manufactures and markets high-performance, high- bandwidth silicon solutions for the world's communications infrastructure. The Company's current IC products primarily address the needs 3 of the fiber optic based WAN and LAN markets. The Company's products for this market are designed to respond to the growing demand for high-speed networking applications for established WAN standards such as SONET/SDH and ATM and LAN standards such as Gigabit Ethernet, ATM and Fibre Channel. The Company also markets and sells IC products that address the needs of the ATE, broadcast HDTV, high-speed computing and military markets. The Company utilizes its high-performance design expertise and systems knowledge, together with its internal bipolar and BiCMOS processes and CMOS and SiGe processes from outside foundries, to design and manufacture products that are tailored to its customers' individual needs. The Company uses its design methodologies to develop a platform product and leverage that product into multiple derivative products that are highly optimized for specific applications. For example, the Company recently developed the S3019, a SONET/SDH OC-12 transceiver, as a platform for 5 products in its S303X family. By reusing significant portions of the platform design, the Company can reduce develop time, risk and costs. This is especially important in analog intensive circuitry such as very low jitter phase locked loops ("PLLs"). The following table summarizes the product types AMCC offers in the communication markets:
Product Category --------------------------------------------- Market Digital Layer Mixed Signal Layer Analog Layer - -------------------------------------------------------------------------------- WAN--SONET/SDH/ATM: - -------------------------------------------------------------------------------- OC-3............................. X X - -------------------------------------------------------------------------------- OC-12............................ X X - -------------------------------------------------------------------------------- OC-48............................ X X X - -------------------------------------------------------------------------------- OC-192........................... Z Z Z - -------------------------------------------------------------------------------- LAN: - -------------------------------------------------------------------------------- Fibre Channel.................... X X - -------------------------------------------------------------------------------- Gigabit Ethernet................. X X - --------------------------------------------------------------------------------
- -------- X = AMCC currently produces or has sampled products in this market. Z = AMCC is actively developing products in this market. Analog Layer (or PMD): AMCC's analog layer products interface directly to the lasers or photo diodes that provide the electrical to optical and optical to electrical conversions. These products include various amplifiers that take very weak electrical signals (e.g. a few millivolts) and amplify into more traditional digital level signals (e.g. hundreds of millivolts). AMCC's efforts in these areas are focused at the high end ranging from 1 to 10 Gbps. Mixed Signal Layer (or physical layer): AMCC's mixed signal products transmit and receive data from the PMD layer in a very high-speed serial format (up to 10Gbps). They are one of the most key elements in the control of overall system jitter, a measure of the "noisiness" of the signal. Low noise enables transmission of data over greater distances with fewer errors. The system clock is also generated or recovered in these devices. Data is converted from a high-speed serial format to a lower-speed parallel interface that can be handled by the digital layer. Data is also received on the lower- speed parallel interface (digital layer) and serialized into a high-speed format and handed to the PMD layer. Digital Layer (or overhead processors ("OHP")): AMCC's digital layer products receive and transmit data from the physical (or mixed signal) layer in a parallel format. These products then perform a number of functions including framing, terminating the overhead, performance monitoring, and mapping the data payload to/from the transmission format. The data is then available to be sent to a switch core or handed off for additional processing (grooming, traffic shaping, policing, etc). AMCC's digital layer products are found predominately in systems such as very high-speed add-drop multiplexers, digital cross-connects, terabit routers and dense wave division multiplexers ("DWDM"). 4 WAN Products WAN Analog Products: Over the past year AMCC introduced its first generation of PMD products for the OC-48 (2.488 Gbps) market. The S3049 (laser driver) and S3051 (post amplifier) were developed on AMCC's internal bipolar technology. Additional OC-48 and OC-192 PMD products are currently under development in a SiGe process. WAN Mixed Signal Products: AMCC introduced its first generation of SONET OC- 12 (622 Mbps) products in 1993. The Company has since developed 3 additional generations of these products, each integrating greater functionality on each chip while improving jitter performance. For example, the Company's first generation of these products consisted of transmitter/receiver pairs with dual voltage. The second generation consisted of products that are compatible with single +5 volt optical modules. The Company's third generation physical layer product was a single chip transceiver operating at a single +3.3 volt power supply. This product offers systems OEMs selectable reference frequencies, a 4 or 8-bit data path, a PECL or TTL level interface, a diagnostic mode and special failure indicators. The Company's fourth generation, the S3038, incorporated 4 transceivers and utilized 5 PLL's in a single device. The S3038 was the Company's first SONET/SDH physical layer device implemented in CMOS from an external foundry. Over the past year the Company completed a first generation of OC-48 (2.5 Gbps) mixed signal devices. The S3043 and S3044 chipset operating off a single +3.3 volt supply offered the industry's lowest power solution for CSU, mux and demux functions. Additionally the Company introduced the S3050, a multi-rate CDR, which performs clock and data recovery on OC-3 (155Mbps), OC-12 (622Mbps), gigabit ethernet (1.25 Gbps) or OC-48 (2.488 Gbps) data rates. The Company is currently developing its second generation of these products as well as solutions for OC-192. WAN Digital Layer Products: In the past year AMCC introduced its first generation of digital layer products for the OC-48 market. The first of these products, the S3045, performs the mux/demux functions for an OC-48 payload into four OC-12 payloads. With the acquisition of Cimaron Communications in March 1999, the Company has subsequently introduced 3 additional digital layer products, the Congo with OC-12 packet-over-SONET, the Nile with integrated OC- 12 to DS-3 mapping, and the Amazon with fully functional packet-over-SONET for OC-48. All of these devices can be utilized with the Company's mixed signal and analog layer products providing a very comprehensive solution set. The Company is currently developing second generations and OC-192 digital layer products. Serial Backplane Products. In addition to the WAN and LAN network equipment and standards developed to address the issue of network bandwidth, network equipment OEMs must also ensure that once high-frequency signals exit the transmission network, they can be switched efficiently, while taking full advantage of the available bandwidth. Backplanes (the boards that distribute signals to various ports of a switching system) are currently emerging as a serious constraint for systems OEMs because redesigning the traditional architecture of parallel channels to accommodate higher frequency signals is prohibitively expensive. Therefore, serial channels, which can accommodate much higher frequencies, are being increasingly employed. The Company believes that this transition has created a significant opportunity for suppliers that can design IC solutions enabling the transmission of high-frequency data through a serial backplane. In May 1998, the Company introduced the S2064, a quad transceiver implemented in 0.35 micron CMOS. The S2064 is a platform product that the company has used to develop and introduce 7 other products. The Company is currently developing higher bandwidth serial backplane products. Current customers in the WAN market which the Company ships production products and/or has commenced development programs with include 3Com, Alcatel, Ciena, Cisco, ECI, Ericson, FORE, Fujitsu, Hitachi, Lucent, Marconi, Monterey, NEC, Nokia, Nortel, Pirelli, Siemens, Sycamore, Tellabs, and Tellium. All of the Company's communications devices are supported with evaluation boards and design aids to facilitate easy integration into system architectures. 5 LAN Products LAN Analog Products: Over the past year AMCC introduced its first PMD products for the gigabit ethernet and fibre channel standards. The S7011 vertical cavity surface emitting laser driver offers digital programmability for laser trimming, which greatly reduces the number of external components and system integration time. LAN Mixed Signal Products: AMCC introduced its first physical layer products in the gigabit ethernet and fibre channel markets in 1995. The Company has since developed 3 generations of products that support both +5 and +3.3 volt and today range from a single channel transceiver to quad channel transceivers. Current customers in the LAN market which the company ships production products and/or has commenced development programs with include 3Com, Cabletron Systems, Cisco, Compaq, Digital Equipment Corporation, FORE, Fujikura, Fujitsu, Hewlett-Packard, IBM, Lucent, Newbridge Networks, Nortel, Siemens, Sun Microsystems, Tellabs and Vixel. ATE AMCC introduced its current generation gate array Q20000 family of products in 1991 and its Micropower-based standard cell products in 1993. Micropower, one of the first products to offer +3.3V operation for high performance ASICs, uses AMCC's proprietary bipolar process. The high-performance and low-power characteristics of this family of products make it particularly suitable for high performance semiconductor ATE applications that require approximately 4,000 equivalent gates, low jitter and precision circuits. Current customers for the Company's products for the ATE market include Hewlett-Packard, LTX, Schlumberger, Teradyne and Texas Instruments. High-Speed Computing Products AMCC offers a PCI product line that address the high-speed computing market. The S5933 is a standard master/slave PCI controller chip. The S5920 is a standard target-only PCI controller chip. These devices are supported with comprehensive development kits and third-party driver software. The Company sells these products to a very large and diverse customer base. Current customers of the Company's products include Cisco Systems, Ericsson, IBM and SAT. The Company's S5933 PCI controller chip is also used in reference designs with C-Cube Microsystems for digital video disk products. Military The Company's Q20000 gate array family of ASIC products are well suited for military applications and as replacements for ECLinPS(TM) logic from Motorola. The Company sells ASICs to military customers such as Northrop Grumman, Raytheon Systems Co. and Rockwell International. Technology The Company utilizes its technological and design expertise to solve the unique problems of high-speed analog, digital and mixed-signal circuit designs for the world's communications infrastructure. The Company's competencies include the design and manufacture of high-performance digital and mixed signal ICs, in-depth knowledge of the architecture and functioning of high- bandwidth fiber optic communications systems, proven ASIC design methodologies and libraries, and high-performance semiconductor manufacturing and packaging expertise. 6 Design of High-Performance Digital and Mixed-Signal ICs AMCC has developed multiple generations of products that integrate both analog and digital elements on the same chip, while balancing the difficult trade-offs of speed, power and timing inherent in high-speed applications. AMCC was one of the first companies to embed analog PLLs in bipolar chips with digital logic for high-speed data transmission and receiver applications. Since the introduction of AMCC's first on-chip clock recovery and clock synthesis products in 1993 (the S3005/S3006 chip set), the Company has refined these key circuits and has successfully integrated multiple analog functions and multiple channels on the same chip. For example, the Company has developed a quad transceiver with a PLL clock recovery and PLL clock multiplier. The mixing of digital and analog signals poses difficult challenges for IC designers, particularly at high frequencies. The Company has built significant expertise in mixed-signal IC designs through the development of multiple generations of products. Through the acquisition of Cimaron Communications, the Company added VLSI digital design and systems expertise. AMCC will continue to apply these competencies in the development of increasingly complex digital layer products. AMCC believes it can leverage these skills into the development of high gate count digital chips with integrated complex analog and high frequency logic. Systems and Architecture Expertise AMCC believes that its systems architects, design engineers and technical marketing and applications engineers have a thorough understanding of the fiber optic communications systems for which the Company designs and builds ASSPs. The Company substantially expanded this expertise into higher layers of communication systems with the acquisition of Cimaron. Using this systems expertise, AMCC develops semiconductor devices to meet OEMs' high-bandwidth systems requirements. By understanding the systems into which its products are designed, the Company believes that it is better able to anticipate and develop optimal solutions for the various cost, power and performance trade- offs faced by its customers. AMCC believes that its systems knowledge also enables the Company to develop more comprehensive, interoperable solutions. This allows AMCC to develop boards with multiple products that are a more substantial part of the customers system, enabling faster time to integration into their products. Process Technology AMCC utilizes its own internal wafer fabrication facility and has developed and produced multiple generations of cost-effective, high-performance bipolar and BiCMOS processes. The proven internal silicon-based process technologies employed by the Company have not required the highly capital-intensive facilities needed by certain advanced microprocessor, memory or CMOS ASIC suppliers. Additionally, the Company has obtained access to advanced CMOS and SiGe BiCMOS processes through foundry relationships. The Company believes that through the use of internal and external process technologies, the Company is able to provide an optimal mix of cost and performance for the targeted application. Packaging AMCC has substantial experience in the development and use of plastic and ceramic packages for high-performance applications. The selection of the optimal package solution is a vital element of the delivery of high- performance products, and involves balancing cost, size, thermal management and technical performance. AMCC's products are designed to reduce power dissipation and die size to enable the use of industry standard packages. AMCC employs a wide variety of package types, and is currently designing products using ball grid arrays, tape ball grid arrays and multi-chip modules with pin counts in excess of 200 pins. The Company's experience with a variety of packages is one of the factors that enables it to provide optimal high- performance IC solutions to its customers. 7 Research and Development AMCC's research and development expertise and efforts are focused on the development of high-performance analog, digital and mixed-signal ASSPs for fiber optic communications applications. The Company also develops silicon wafer fabrication processes and design methodologies that are optimized for these applications. Product Development The Company's product development is focused on building high-performance high gate count digital design expertise and analog-intensive design expertise that is incorporated into well-documented blocks that can be reused for multiple products. The Company has, and continues to make, significant investments in advanced CAD tools to leverage its design engineering staff, reduce design cycle time and increase first-time design correctness. The Company's product development is driven by the imperatives of reducing design cycle time, increasing first-time design correctness, adhering to disciplined, well documented design processes and continuing to be responsive to customer needs. The Company is also developing high-performance packages for its products in collaboration with its packaging suppliers and its customers. Process Development The Company's process development is focused on enhancing its current bipolar processes and developing new processes optimized for high-performance digital and mixed-signal communications applications. AMCC's process engineers are also involved with the selection and management of the Company's relationships with outside foundries to provide the advanced CMOS and SiGe BiCMOS processes required by certain of AMCC's products. A failure by the Company to improve its existing process technologies or obtain access to new process technologies from external foundries in a timely or affordable manner could adversely affect the Company's business, financial condition and operating results. The Company's research and development expenses in fiscal years 1997, 1998, 1999 were $7.9, $13.3 and $22.5 million, respectively, which were 13.7%, 17.3% and 21.4%, respectively, of revenues for such periods. The Company has 119 employees engaged in engineering and product development related activities. Manufacturing Wafer Fabrication AMCC manufactures certain of its products at its four-inch wafer fabrication facility in San Diego, California in an 8,200 square foot clean room. The Company believes that its wafer fabrication facility has competitive yields, cycle times and costs, produces large die at acceptable yields and operates on a flexible basis of multiple products and variable lot sizes. However, there can be no assurance that the Company will achieve or obtain acceptable manufacturing yield levels in the future. The Company is currently running several different bipolar and BiCMOS processes in this facility. The Company is exploring alternatives for the expansion of its manufacturing capacity which would likely occur after fiscal year 2000, including expanding its current 49 wafer fabrication facility, building a new wafer fabrication facility, purchasing a wafer fabrication facility and entering into strategic relationships to obtain additional capacity. Any of these alternatives could require a significant investment by the Company including an investment in excess of $80.0 million if the Company chose to or was required to build a new wafer fabrication facility. There can be no assurance that any of the alternatives for expansion of its manufacturing capacity will be available on a timely basis, or that the Company will be able to manage its growth and effectively integrate its proposed expansion into its current operations. AMCC currently utilizes four outside foundries, AMI Semiconductor, IBM, Kawasaki CSI Japan and Taiwan Semiconductor Manufacturing Corporation for the production of products designed on CMOS processes. 8 Additionally, AMCC is developing new products on IBM's SiGe BiCMOS processes. The Company does not plan to fabricate its own CMOS wafers. The Company generally does not have long-term wafer supply agreements with its other outside foundries that guarantee wafer or product quantities, prices or delivery lead times. There are certain risks associated with the Company's dependence upon external foundries for certain of its products, including reduced control over delivery schedules, quality assurance, manufacturing yields and costs, the potential lack of adequate capacity during periods of excess demand, limited warranties on wafers or products supplied to the Company, increases in prices and potential misappropriation of the Company's intellectual property. Components and Raw Materials AMCC purchases all of its "raw" silicon wafers from Wacker Siltronic Corporation. While most silicon wafers now being supplied to the semiconductor industry are larger than four inches, AMCC believes that Wacker Siltronic will continue to supply AMCC's needs for the foreseeable future. AMCC also carries a significant inventory of raw wafers to cushion any interruption in supply. AMCC purchases its ceramic packages from Kyocera America and NTK Ceramics and its plastic packaging from Amkor and ASAT. Assembly and Test The Company assembles prototypes and modest production volumes of specific products in its internal assembly facility in San Diego, California. Most of the Company's production assembly, however, is performed by multiple assembly subcontractors located in the Far East, Europe and the United States. Following assembly, the packaged units are returned to the Company for burn-in (in some cases), final testing and marking prior to shipment to customers. From time to time, some testing is performed by subcontractors. Sales and Marketing The Company sells its products principally through a direct sales organization consisting of a network of independent manufacturers' representatives in specified territories that work under the direction of the Company's direct sales force and distributors. The Company has a total of 17 direct sales personnel and field applications engineers. The direct sales force is technically trained and is supported by applications engineers in the field as well as applications and design engineers at the Company's headquarters. The Company believes that this "engineering-intensive" relationship with its customers results in strong, long-term customer relationships beneficial to both the Company and its customers. The Company augments this strategic account sales approach with domestic and foreign distributors, which service primarily smaller accounts purchasing ASSPs. In North America, the Company's direct sales effort is supported by 18 independent manufacturers' representatives and one distributor. The Company sells its products through 11 distributors and 2 independent manufacturers' representatives in Europe and 8 distributors throughout the rest of the world. During the years ended March 31, 1997, 1998, and 1999, 20%, 21% and 20%, respectively, of net revenues were from Nortel. In 1998 and 1999, Insight Electronics, the Company's domestic distributor, accounted for 11% and 13% of net revenues. Additionally, in 1999, Raytheon Systems Co. accounted for 16% of net revenues. No other customer accounted for more than 10% of revenues in any period. In fiscal 1997, 1998 and 1999, approximately 21%, 23% and 24% of the Company's revenues were derived from sales to customers located outside of North America. The Company's sales headquarters is located in San Diego, California. The Company maintains sales offices in Burlington and Andover, Massachusetts; Raleigh, North Carolina; Plano, Texas; San Jose, California; Munich, Germany; Milan, Italy, Tokyo, Japan; and Cheshire, United Kingdom. 9 Backlog The Company's sales are made primarily pursuant to standard purchase orders for delivery of products. Quantities of the Company's products to be delivered and delivery schedules are frequently revised to reflect changes in customer needs, and customer orders can be canceled or rescheduled without significant penalty to the customer. For these reasons, the Company's backlog as of any particular date is not representative of actual sales for any succeeding period, and the Company therefore believes that backlog is not a good indicator of future revenue. The Company's backlog for products requested to be shipped and non-recurring engineering services to be completed in the next six months was $38.2 million on March 31, 1999, compared to $30.1 million on March 31, 1998. Included in backlog at March 31, 1999 is the $9.3 million balance of an order received from Raytheon Systems Co. related to an end-of- life buy for integrated circuits used in its high speed radar systems. Proprietary Rights The Company relies in part on patents to protect its intellectual property. The Company has been issued 14 patents in the United States and one patent in Canada, which patents principally cover certain aspects of the design and architecture of the Company's IC products and have expiration dates ranging from 2004 to 2015. In addition, the Company has 19 patent applications pending in the United States Patent and Trademark Office (the "PTO"). There can be no assurance that the Company's pending patent applications or any future applications will be approved, or that any issued patents will provide the Company with competitive advantages or will not be challenged by third parties or that if challenged, will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on the Company's ability to do business. Furthermore, there can be no assurance that others will not independently develop similar products or processes, duplicate the Company's products or processes or design around any patents that may be issued to the Company. To protect its intellectual property, the Company also relies on a combination of mask work protection under the Federal Semiconductor Chip Protection Act of 1984, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements. A mask work refers to the intangible information content of the set of masks or mask databases used to make a semiconductor chip product. Despite these efforts, there can be no assurance that others will not independently develop substantially equivalent intellectual property or otherwise gain access to the Company's trade secrets or intellectual property, or disclose such intellectual property or trade secrets, or that the Company can meaningfully protect its intellectual property. A failure by the Company to meaningfully protect its intellectual property could have a material adverse effect on the Company's business, financial condition and operating results. As a general matter, the semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights. The Company in the past has been and in the future may be notified that it may be infringing the intellectual property rights of third parties. The Company has certain indemnification obligations to customers with respect to the infringement of third party intellectual property rights by its products. There can be no assurance that infringement claims by third parties or claims for indemnification by customers or end users of the Company's products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not materially adversely affect the Company's business, financial condition or operating results. On July 31, 1998, the Lemelson Medical, Education & Research Foundation Limited Partnership filed a lawsuit in the U.S. District Court for the District of Arizona against 26 companies, including AMCC, engaged in the manufacture and/or sale of IC products. The complaint alleges infringement by the defendants of certain U.S. patents held by the Lemelson Partnership relating to certain semiconductor manufacturing processes. On November 25, 1998, the Company was served a summons pursuant to this lawsuit. The complaint seeks, among other things, injunctive relief and unspecified treble damages. Previously, the Lemelson Partnership has offered the Company a license under the Lemelson patents. Management is monitoring this matter and, although the ultimate outcome of this matter is not currently determinable, The Company believes, based in part on the licensing terms previously offered by the Lemelson Partnership, that the resolution of this matter will not have a material adverse effect on the financial position or liquidity; however, there can be 10 no assurance that the ultimate resolution of this matter will not have a material adverse effect on the results of operations for any quarter. Furthermore, there can be no assurance that the Company would prevail in any such litigation. In the event of any adverse ruling in any such matter, the Company could be required to pay substantial damages, which could include treble damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the intellectual property rights of the third-party claiming infringement. There can be no assurance, however, that a license would be available on reasonable terms or at all. Any limitations on the Company's ability to market its products, any delays and costs associated with redesigning its products or payments of license fees to third parties or any failure by the Company to develop or license a substitute technology on commercially reasonable terms could have a material adverse effect on the Company's business, financial condition and operating results. Competition The semiconductor market, particularly the high-performance semiconductor market, is highly competitive and subject to rapid technological change, price erosion and heightened international competition. The communications, ATE and high-speed computing industries are also becoming intensely competitive due in part to deregulation and heightened international competition. The ability of the Company to compete successfully in its markets depends on a number of factors, including product performance, success in designing and subcontracting the manufacture of new products that implement new technologies, product quality, reliability, price, the efficiency of production, design wins for its IC products, ramp up of production of the Company's products for particular system manufacturers, end-user acceptance of the system manufacturers' products, market acceptance of competitors' products and general economic conditions. In addition, the Company's competitors may offer enhancements to existing products, or offer new products based on new technologies, industry standards or customer requirements, that are available to customers on a more timely basis than comparable products from the Company or that have the potential to replace or provide lower cost alternatives to the Company's products. The introduction of such enhancements or new products by the Company's competitors could render the Company's existing and future products obsolete or unmarketable. Furthermore, once a customer has designed a supplier's product into its system, the customer is extremely reluctant to change its supply source due to the significant costs associated with qualifying a new supplier. Finally, the Company expects that certain of its competitors and other semiconductor companies may seek to develop and introduce products that integrate the functions performed by the Company's IC products on a single chip, thus eliminating the need for the Company's products. Each of these factors could have a material adverse effect on the Company's business, financial condition and results of operations. In the communications markets, the Company competes primarily against companies such as Analog Devices, Conextant, Giga, Hewlett-Packard, Lucent, Maxim, PMC-Sierra, Philips, Sony, Texas Instruments, TriQuint and Vitesse. In certain circumstances, most notably with respect to ASICs supplied to Nortel, AMCC's customers or potential customers have internal IC manufacturing capability, and this internal source is an alternative available to the customer. In the ATE market, the Company competes primarily against Vitesse and silicon ECL and BiCMOS products offered principally by semiconductor manufacturers such as Analog Devices, Lucent Technologies and Maxim. In the high-speed computing market, the Company competes primarily against companies such as Chrontel, Cypress, ICS, PLX and Tundra. Many of these companies and potential new competitors have significantly greater financial, technical, manufacturing and marketing resources than the Company. In addition, in lower- frequency applications, the Company faces increasing competition from other CMOS-based products, particularly as the performance of such products continues to improve. There can be no assurance that the Company will be able to develop new products to compete with new technologies on a timely basis or in a cost-effective manner. Any failure by the Company to compete successfully in its target markets, particularly in the communications markets, would have a material adverse effect on the Company's business, financial condition and results of operations. 11 Environmental Matters The Company is subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in its manufacturing process. Any failure to comply with present or future regulations could result in the imposition of fines on the Company, the suspension of production or a cessation of operations. In addition, such regulations could restrict the Company's ability to expand its facilities at its present location or construct or operate its planned wafer fabrication facility or could require the Company to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean up prior discharges. In this regard, since 1993 the Company has been named as a potentially responsible party ("PRP") along with a large number of other companies that used Omega Chemical Corporation ("Omega") in Whittier, California to handle and dispose of certain hazardous waste material. The Company is a member of a large group of PRPs that has agreed to fund certain remediation efforts at the Omega site, which efforts are ongoing. To date, the Company's payment obligations with respect to such funding efforts have not been material, and the Company believes that its future obligations to fund such efforts will not have a material adverse effect on its business, financial condition or operating results. Although the Company believes that it is currently in material compliance with applicable environmental laws and regulations, there can be no assurance that the Company is or will be in material compliance with such laws or regulations or that the Company's future obligations to fund any remediation efforts, including those at the Omega site, will not have a material adverse effect on the Company's business, financial condition or operating results. Employees As of March 31, 1999, the Company had 361 full-time employees: 29 in administration, 119 in engineering and product development, 155 in operations and 58 in marketing and sales. The Company's ability to attract and retain qualified personnel is essential to its continued success. None of the Company's employees is represented by a collective bargaining agreement, nor has the Company ever experienced any work stoppage. The Company believes its employee relations are good. Loss of the services of, or failure to recruit, key design engineers or other technical and management personnel could be significantly detrimental to the Company's product and process development programs or otherwise have a material adverse effect on the Company's business, financial condition, and operating results. Executive Officers of the Registrant The executive officers of the Company, and their ages as of May 31, 1999, are as follows:
Name Age Position ---- --- -------- President, Chief Executive Officer David M. Rickey..................... 43 and Director Roger A. Smullen, Sr................ 63 Chairman of the Board of Directors William E. Bendush.................. 50 Vice President, Finance and Administration, and Chief Financial Officer Kenneth L. Clark.................... 51 Vice President, Operations Joel O. Holliday.................... 60 Vice President Brent E. Little..................... 35 Vice President, Marketing Gary Martin......................... 48 Vice President and Chief Technical Officer, Cimaron Communications Vice President, Cimaron Ram Sudireddy....................... 32 Communications Thomas L. Tullie.................... 34 Vice President, Sales
David M. Rickey has served as President, Chief Executive Officer and Director since February 1996. From August 1993 to May 1995, Mr. Rickey served as the Company's Vice President of Operations. From May 1995 to February 1996, Mr. Rickey served as Vice President of Operations at NexGen, a semiconductor company. Previously, Mr. Rickey spent more than eight years with Nortel, a telecommunications manufacturer, where he 12 led the wafer fab engineering and manufacturing operations in both Ottawa, Canada and San Diego, California. Mr. Rickey also worked in various engineering positions with IBM from 1981 to 1985. Mr. Rickey has earned B.S. degrees from both Marietta College (summa cum laude) and Columbia University. In addition, Mr. Rickey received an M.S. in Materials Science and Engineering from Stanford University. Roger A. Smullen, Sr. has served as the Chairman of the Company's Board of Directors since October 1982. From April 1983 until April 1987, Mr. Smullen served as the Company's Chief Executive Officer. Previously, he was senior vice president of operations of Intersil, Inc.'s semiconductor division. In 1967, Mr. Smullen co-founded National Semiconductor. Prior to that, he was director of integrated circuits at Fairchild Semiconductor. Mr. Smullen is currently a director of Micro Linear Corporation, a manufacturer of integrated circuits. He holds a B.S. in Mechanical Engineering from the University of Minnesota. William E. Bendush joined the company in April 1999 as Vice President, Finance and Administration, Treasurer, Chief Financial Officer and Secretary replacing Mr. Holliday who resigned these posts in April 1999. With more than 28 years of leadership experience in financial management and financing, Mr. Bendush came to AMCC from Silicon Systems Inc., where the past 14 years he served as Senior Vice President and Chief Financial Officer. Prior to joining Silicon Systems Inc., Mr. Bendush held various financial management positions at Setac Inc., AM International, Gulf + Western Industries and Gould Inc. Mr. Bendush is a Certified Public Accountant and holds a bachelor's degree from Northern Illinois University. In addition, Mr. Bendush currently serves as a member of the board of directors and Chairman of the Audit committee of Smartflex Systems Inc. Kenneth L. Clark has served as Vice President, Operations since November 1997. Prior to joining the Company, Mr. Clark worked at Integrated Device Technologies, Inc., a semiconductor company, from February 1995 to October 1997, where he served as Director, Fab Operations. From 1990 to 1995, Mr. Clark served in various senior management positions including Director, Fab Operations at Silicon Systems, Inc., a semiconductor company. From 1987 to 1990, Mr. Clark served as Director, Fab Operations at National Semiconductor Corp. Mr. Clark has also held manufacturing and engineering management positions at Cypress Semiconductor Corp., Zymos, Inc., Micron Technology and American Microsystems, Inc. Mr. Clark holds a B.S. in Physics from the University of Washington. Joel O. Holliday served as the Vice President, Finance and Administration, Treasurer, Chief Financial Officer and Secretary of the Company from November 1981 to April 1999. Mr. Holliday currently serves as a Vice President of AMCC. He has previously served as the Director of Finance during the reorganization of Westgate-California Corporation and as Vice President, Finance of Spin Physics, Inc., an electronics company. Mr. Holliday received a B.A. from Claremont McKenna College and an M.B.A. from Harvard Business School. Brent E. Little joined the Company in 1991. Prior to his current position as Vice President of Marketing, he held several marketing management positions with AMCC as the Director or Strategic Marketing, and Director of Marketing for ASIC products. Prior to joining the Company, Mr. Little worked as Business Development Manager for Analysis and Technology, Inc, and worked with the U.S. Navy as a Project Engineer. Mr. Little earned his B.S in Electrical Engineering from University of California, Santa Barbara. Gary Martin joined the Company on March 17, 1999 with the acquisition of Cimaron Communications Corporation, as Vice President and Chief Technical Officer, Cimaron Communications. Prior to joining the Company, Dr. Martin, co- founded Cimaron Communications Corporation, and served as its Chief Technical Officer since its inception on January 2, 1998. From 1995 to 1997, he served as Vice President of Engineering and Chief Technical Officer at ATI. From 1978 to 1995, Dr. Martin held various management and technical positions at AT&T Bell Laboratories. Dr. Martin holds a master's degree and doctorate in Electrical Engineering from Stanford University and a B.S. and M.S. in Mechanical Engineering from Oklahoma State University. 13 Ram Sudireddy joined the Company on March 17, 1999, with the acquisition of Cimaron Communications Corporation, as Vice President, Cimaron Communications. Prior to joining the Company, Mr. Sudireddy co-founded Cimaron Communications Corporation, and served as its President and CEO from its inception in January 1998. From 1996 to 1997, he founded Siltek Corporation, an ATM and Sonet design company, and served as its Vice President of Research and Development. From 1991 to 1996, Mr. Sudireddy was a member of technical staff at AT&T Bell Laboratories, where he held positions as chief architect and lead designer for a number of highly complex ASICs. Mr. Sudireddy has a master's degree in Computer Engineering from the University of Massachusetts at Lowell, and a bachelor's degree in Electrical Engineering from Nagarjuna University in Guntur, India. Thomas L. Tullie has served as Vice President, Sales since August 1996. Prior to joining the Company, from 1989 to 1996 Mr. Tullie held several strategic sales management positions, most recently as Director of East Coast Sales, at S-MOS Systems, a semiconductor company. Prior to joining S-MOS Systems, Mr. Tullie was a designer in the workstations group of Digital Equipment Corporation. Mr. Tullie earned a B.S. from the University of Massachusetts and an M.B.A. from Clark University. Factors That May Affect Future Results Our operating results may fluctuate because of many factors, many of which are beyond our control If our operating results are below the expectations of public market analysts or investors, then the market price of our common stock could be materially and adversely affected. Some of the factors that affect our quarterly and annual results, but which are difficult to control or predict are: . the rescheduling or cancellation of orders by customers; . fluctuations in the timing and amount of customer requests for product shipments; . fluctuations in manufacturing output, yields and inventory levels; . changes in the mix of products that our customers buy; . our ability to introduce new products and technologies on a timely basis; . the announcement or introduction of products and technologies by our competitors; . the availability of external foundry capacity, purchased parts and raw materials; . competitive pressures on selling prices; . the amounts and timing of costs associated with warranties and product returns; . the amounts and timing of investments in research and development; . market acceptance of our products and of our customers' products; . the timing of depreciation and other expenses that we expect to incur in connection with any required expansion of our manufacturing capacity; . costs associated with compliance with applicable environmental regulations or remediation; . costs associated with future litigation, if any, including without limitation, litigation or settlements relating to the use or ownership of intellectual property; . general semiconductor industry conditions; and . general economic conditions. Our expense levels are relatively fixed and are based, in part, on our expectations of future revenues. We are continuing to increase our operating expenses for personnel and new product development. However, we 14 have a limited ability to reduce expenses quickly in response to any revenue shortfalls. Consequently, our business, financial condition and operating results would be adversely affected if we do not achieve increased revenues. We can have revenue shortfalls for a variety of reasons, including: . significant pricing pressures that occur because of declines in average selling prices over the life of a product; . sudden shortages of raw materials or production capacity constraints that lead producers to allocate available supplies or capacity to customers with resources greater than us and, in turn, interrupt our ability to meet our production obligations; . fabrication, test or assembly capacity constraints for internally manufactured devices which interrupt our ability to meet our production obligations; and . the rescheduling or cancellation of customer orders. In addition, our business is characterized by short-term orders and shipment schedules, and customer orders typically can be canceled or rescheduled without significant penalty to the customer. Due to the absence of substantial noncancellable backlog, we typically plan our production and inventory levels based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. In addition, from time to time, in response to anticipated long lead times to obtain inventory and materials from our outside foundries, we may order materials in advance of anticipated customer demand, which might result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize, or other factors render the customer's products less marketable. Furthermore, we currently anticipate that an increasing portion of our revenues in future periods will be derived from sales of application-specific standard products ("ASSPs"), as compared to application-specific integrated circuits ("ASICs"). Customer orders for ASSPs typically have shorter lead times than orders for ASICs, which may make it increasingly difficult for us to predict revenues and inventory levels and adjust production appropriately in future periods. If we are unable to plan inventory and production levels effectively, our financial condition and operating results could be materially adversely affected. One example of the volatility of our results is that we experienced revenue fluctuations and incurred net losses in fiscal 1995 and 1996. These revenue fluctuations and net losses were caused by the termination of a relationship with a strategic foundry partner, decreased orders from two major customers, charges associated with a reduction in the company's workforce and charges for excess inventory. Accordingly, we believe that period-to-period comparisons of operating results should not be relied upon as an indication of future performance. In addition, the results of any quarterly period are not indicative of results to be expected for a full fiscal year. Our operating results depend substantially on our manufacturing yields, which may not meet expectations. AMCC Fabrication We manufacture most of our semiconductors at our San Diego 49 wafer fabrication facility. Our yields can decline whenever a substantial percentage of wafers must be rejected or a significant number of die on each wafer are nonfunctional. Such declines can be caused by many factors over which we have little or no control, including minute levels of contaminants in the manufacturing environment, design issues, defects in masks used to print circuits on a wafer and difficulties in the fabrication process. Unfortunately, the ongoing expansion of the manufacturing capacity of our existing wafer fabrication facility could increase the risk of contaminants in the facility. In addition, many of these problems are difficult to diagnose, time consuming and expensive to remedy and can result in shipment delays. Because the majority of our costs of manufacturing are relatively fixed, maintenance of the number of shippable die per wafer is critical to our results of operations. Yield decreases can result in substantially higher unit costs and may result in reduced gross profit and net income. In the past we experienced yield problems in connection with the manufacture of our products. We estimate yields per wafer in order to estimate the value of inventory. If yields are materially different than projected, work-in-process inventory may need to be revalued. 15 We have in the past and may in the future from time to time take inventory write-downs as a result of decreases in manufacturing yields. We may suffer periodic yield problems in connection with new or existing products or in connection with the commencement of production in our proposed new manufacturing facility or the transfer of our operations to this facility. Fabrication by Third Parties Semiconductor manufacturing yields are a function both of product design and process technology. When our products are manufactured by an outside foundry, the process technology is typically proprietary to the manufacturer. Since low yields may result from either design or process technology failures, yield problems may not be effectively determined or resolved until an actual product exists that can be analyzed and tested to identify process sensitivities relating to the design rules that are used. As a result, yield problems may not be identified until well into the production process, and resolution of yield problems may require cooperation between ourselves and our manufacturer. In some cases this risk could be compounded by the offshore location of certain of our manufacturers, increasing the effort and time required to identify, communicate and resolve manufacturing yield problems. If we develop relationships with additional outside foundries, yields could be adversely affected due to difficulties associated with adapting our technology and product design to the proprietary process technology and design rules of the new foundries. Because of our limited access to wafer fabrication capacity from outside foundries for certain products, any decrease in manufacturing yields of such products could result in an increase in our per unit costs for such products and force us to allocate available product supply among customers, which could potentially adversely impact customer relationships as well as revenues and gross margin. Our outside foundries may not achieve or maintain acceptable manufacturing yields in the future. Furthermore, we also face the risk of product recalls resulting from design or manufacturing defects which are not discovered during the manufacturing and testing process. Our business strategy is based on increasing dependence on the WAN and LAN communications markets. An important part of our strategy is to continue our focus on the WAN market and to leverage our technology and expertise to penetrate further the LAN market for high-speed ICs. If we are unable to penetrate these markets further, our short and long term business will suffer. In the short term, we may experience reduced revenues. In the long term, our revenues could stop growing and may decline. We anticipate that sales to our other traditional markets will grow more slowly or not at all and, in some instances, as in the case of military markets, may decrease over time. The communications markets are characterized by: . extreme price competition; . rapid technological change; . industry standards that are continually evolving; and . in many cases, short product life cycles. These markets frequently undergo transitions in which products rapidly incorporate new features and performance standards on an industry-wide basis. If our products are unable to support the new features or performance levels required by OEMs in these markets, we would be likely to lose business from an existing or potential customer and, moreover, would not have the opportunity to compete for new design wins until the next product transition occurs. If we fail to develop products with required features or performance standards for the telecommunications or data communications markets, or if we experience a delay as short as a few months in bringing a new product to market, or if our telecommunications or data communications customers fail to achieve market acceptance of their products, our revenues could be significantly reduced for a substantial period. 16 A significant portion of our revenues in recent periods has been, and is expected to continue to be, derived from sales of products based on the Synchronous Optical Network, or SONET, and Synchronous Digital Hierarchy, or SDH, transmission standards and the Asynchronous Transfer Mode, or ATM, transmission standard. If the communications market evolves to new standards, we may not be able to successfully design and manufacture new products that address the needs of our customers or gain substantial market acceptance. Although we have developed products for the Gigabit Ethernet and Fibre Channel communications standards, volume sales of these products are modest, and we may not be successful in addressing the market opportunities for products based on these standards. Our business could be adversely affected if we do not adequately address the risks associated with our recent acquisition of Cimaron Communications Corporation. In March 1999, we completed the acquisition of Cimaron Communications Corporation. This transaction is accompanied by a number of risks, including: . the difficulty of assimilating the operations and personnel of Cimaron; . the potential disruption of AMCC's and Cimaron's ongoing business and distraction of management; . possible unanticipated expenses related to technology integration; . the potential impairment of relationships with employees and customers as a result of any integration of new management personnel; and . potential unknown liabilities associated with acquired businesses. We may not be successful in addressing these risks or any other problems encountered in connection with the Cimaron acquisition. In addition, the market price of our common stock could decline as a result of the merger if: . the integration of AMCC and Cimaron is unsuccessful; . the combined company does not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial analysts; . the effect of the merger on the combined company financial results is not consistent with the expectations of financial analysts; or . the Company is unsuccessful in the management of Cimaron employees who are geographically distant from the headquarters, but engaged in developing technology and products that are vital for future revenues. We have accounted for the merger under the pooling-of-interests accounting method and financial reporting rules. To qualify the merger as a pooling-of- interests for accounting purposes, AMCC and Cimaron and their respective affiliates must meet the criteria for pooling-of-interests accounting established in opinions published by the Accounting Principles Board and interpreted by the Financial Accounting Standards Board and the Commission. These opinions are complex, and the interpretation of them is subject to change. However, the availability of pooling-of-interests accounting treatment for the merger depends in part, upon circumstances and events occurring after the effective time. For example, there must be no significant changes in the business of the combined company, including significant dispositions of assets, for a period of two years following the effective time. The failure of the merger to qualify for pooling-of-interests accounting treatment for financial reporting purposes for any reason would materially and adversely affect our reported earnings and likely, the price of our common stock. 17 Our business strategy is also based on increasing dependence on application- specific standard products. We have under development a number of ASSPs for the communications markets, from which we expect to derive an increasing portion our future revenues. However, we have a limited operating history in selling ASSPs, particularly to customers in the communications markets. In addition, our relationships with certain customers in these markets have only been established recently. Our future success in selling ASSPs, and in particular, selling ASSPs to customers in the telecommunications and data communications markets, will depend in large part on whether our ASSPs are developed on a timely basis and whether such products achieve market acceptance among new and existing customers, and on the timing of the commencement of volume production of products incorporating our ASSPs, if at all. We have in the past encountered difficulties in introducing new products in accordance with customers' delivery schedules and initial expectations. We may encounter similar difficulties in the future, and we may not be able to develop and introduce ASSPs in a timely manner so as to meet customer demands. We currently depend on the automated test equipment market, and that market has recently experienced declines in demand. We have historically derived significant revenues from product sales to customers in the Automated Test Equipment, or ATE, market and currently anticipate that we will continue to derive revenues from sales to customers in this market in the near term. During the past year, customers in the ATE market have experienced decreased demand due primarily to slower growth in the semiconductor industry and economic turmoil in Asia. Accordingly, our net revenues in the ATE market has declined for four consecutive quarters as of March 31, 1999, and it is possible that our revenue from the ATE market may decline further. We depend on the high-speed computing market, but we believe that the average selling prices of our IC products for the high-speed computing market will decline in future periods and that our gross margin on sales of such products may also decline in future periods. The market for high-speed computing IC products is subject to extreme price competition, and we may not be able to reduce the costs of manufacturing high- speed computing IC products in response to declining average selling prices. Even if we successfully utilize new processes or technologies to reduce the manufacturing costs of our high-speed computing products in a timely manner, our customers in the high-speed computing market may not purchase these products. Furthermore, we expect that certain competitors may seek to develop and introduce products that integrate the functions performed by our high-speed computing IC products on a single chip. In addition, one or more of our customers may choose to utilize discrete components to perform the functions served by our high-speed computing IC products or may use their own design and fabrication facilities to create a similar product. In either case, the need for high-speed computing customers to purchase our IC products could be eliminated. Our markets are subject to rapid technological change, so our success depends heavily on our ability to develop and introduce new products. The markets for our products are characterized by: . rapidly changing technologies; . evolving and competing industry standards; . short product life cycles; . changing customer needs; . emerging competition; . frequent new product introductions and enhancements; 18 . increased integration with other functions; and . rapid product obsolescence. To develop new products for the communications markets, we must develop, gain access to and use leading technologies in a cost-effective and timely manner and continue to develop technical and design expertise. In addition, we must have our products designed into our customers' future products and maintain close working relationships with key customers in order to develop new products, particularly ASSPs, that meet customers' changing needs. We also must respond to changing industry standards, trends towards increased integration and other technological changes on a timely and cost-effective basis. Furthermore, if we fail to achieve design wins with key customers our business will be significantly hurt because once a customer has designed a supplier's product into its system, the customer typically is extremely reluctant to change its supply source due to significant costs associated with qualifying a new supplier. Products for communications applications, as well as for high-speed computing applications, are based on industry standards that are continually evolving. Our ability to compete in the future will depend on our ability to identify and ensure compliance with these evolving industry standards. The emergence of new industry standards could render our products incompatible with products developed by major systems manufacturers. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant standards. If our products are not in compliance with prevailing industry standards for a significant period of time, we could miss opportunities to achieve crucial design wins. We may not be successful in developing or using new technologies or in developing new products or product enhancements that achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense. The markets in which we compete are highly competitive and subject to rapid technological change, price erosion and heightened international competition. The communications, ATE and high-speed computing industries are intensely competitive. We believe that the principal factors of competition in our markets are price, product performance, product quality and time-to-market. Our ability to compete successfully in our markets depends on a number of factors, including: . success in designing and subcontracting the manufacture of new products that implement new technologies; . product quality; . reliability; . price; . the efficiency of production; . design wins for our IC products; . expansion of production of our products for particular systems manufacturers; . end-user acceptance of the systems manufacturers' products; . market acceptance of competitors' products; and . general economic conditions. In addition, our competitors may offer enhancements to existing products or offer new products based on new technologies, industry standards or customer requirements that are available to customers on a more timely basis than comparable products from us or that have the potential to replace or provide lower-cost alternatives to our products. The introduction of enhancements or new products by our competitors could render our existing and future products obsolete or unmarketable. In addition, we expect that certain of our competitors and other semiconductor companies may seek to develop and introduce products that integrate the functions performed by our IC products on a single chip, thus eliminating the need for our products. 19 In the communications markets, we compete primarily against Giga, Hewlett- Packard, Lucent, Maxim, Philips, Sony, Texas Instruments, Conexant, TriQuint and Vitesse. Some of these companies use gallium arsenide ("GaAs") process technologies for certain products. In certain circumstances, most notably with respect to ASICs supplied to Nortel, our customers or potential customers have internal IC manufacturing capabilities. In the ATE market, our products compete primarily against GaAs based products offered by Vitesse and silicon ECL and BiCMOS products offered principally by semiconductor manufacturers such as Analog Devices, Lucent Technologies and Maxim. In the high-speed computing market, we compete primarily against Chrontel, Cypress, ICS, PLX and Tundra. Many of these companies and potential new competitors have significantly greater financial, technical, manufacturing and marketing resources than we do. If we are not successful in expanding our manufacturing capacity, on time, we may face serious capacity constraints. We currently manufacture a majority of our IC products at our four-inch wafer fabrication facility located in San Diego, California. We believe that we will be able to satisfy our production needs from this fabrication facility through fiscal 2001, although this date may vary depending on, among other things, our rate of growth. However, if we cannot expand our capacity on a timely basis, we could experience significant capacity constraints that could render us unable to meet customer demand or force us to spend more to make wafers to meet demand. We will be required to hire, train and manage additional production personnel in order to increase production capacity as scheduled. The Company is exploring alternatives for the expansion of its manufacturing capacity which would likely occur after fiscal year 2000, including expanding its current 4" wafer fabrication facility, building a new wafer fabrication facility, purchasing a wafer fabrication facility and entering into strategic relationships to obtain additional capacity. Any of these alternatives could require a significant investment by the Company including an investment in excess of $80.0 million if the Company chose to or was required to build a new wafer fabrication facility. There can be no assurance that any of the alternatives for expansion of its manufacturing capacity will be available on a timely basis, the Company will be able to manage its growth or effectively integrate its proposed expansion into its current operations. The cost of any investment the Company may have to make in expanding its manufacturing capacity is expected to be funded through a combination of available cash, cash equivalents and short-term investments, cash from operations and additional debt, lease or equity financing. We may not be able to obtain the additional financing necessary to fund the expansion of our manufacturing capacity. Our existing wafer fabrication facility is, and the potential new wafer fabrication facility may be, located in California and these facilities may be subject to natural disasters such as earthquakes or floods. In addition, the depreciation and other expenses that we will incur in connection with the expansion of our manufacturing capacity may adversely affect our gross margin in any future fiscal period. Expanding our current 4" wafer fabrication facility, building a new wafer fabrication facility or purchasing a wafer fabrication facility entails significant risks, including: . shortages of materials and skilled labor; . unforeseen environmental or engineering problems; . work stoppages; . weather interferences; and . unanticipated cost increases. Any one of these risks could have a material adverse effect on the building, equipping and production start-up of the new facility or the expansion of the existing facility. In addition, unexpected changes or concessions required by local, state or federal regulatory agencies with respect to necessary licenses, land use permits, site 20 approvals and building permits could involve significant additional costs and delay the scheduled opening of the expansion or new facility and could reduce our anticipated revenues. Also, the timing of commencement of operation of expansion or new facility will depend upon the availability, timely delivery and successful installation and testing of the necessary process equipment. As a result of the foregoing and other factors, the expansion or new facility may not be completed and in volume production within its current budget or within the period currently scheduled. Furthermore, we may be unable to achieve adequate manufacturing yields in expansion or new facility in a timely manner, and our revenues may not increase commensurate with the anticipated increase in manufacturing capacity associated with the expansion or new facility. In addition, in the future, we may be required for competitive reasons to make capital investments in the existing wafer fabrication facility or to accelerate the timing of the construction of a new wafer fabrication facility in order to expedite the manufacture of products based on more advanced manufacturing processes. The successful operation of a potential new 6" wafer fabrication facility, if completed, as well as our overall production operations, will also be subject to numerous risks. We have no prior experience with the operation of the equipment or the processes involved in producing finished six-inch wafers, which differ significantly from those involved in the production of four-inch wafers. We will be required to hire, train and manage production personnel in order to effectively operate the new facility. We do not have sufficient excess production capacity at our existing San Diego facility to fully offset any failure of the proposed new wafer fabrication facility to meet planned production goals. We may transfer current San Diego manufacturing operations into the proposed new wafer fabrication facility subsequent to its completion. Should this transfer occur, we may experience delays in completing product testing and documentation required by customers to qualify or requalify our products from this facility. We will also have to effectively coordinate and manage two manufacturing facilities to successfully meet overall production goals. We have no experience in coordinating and managing production facilities that are located at different sites or in the transfer of manufacturing operations from one facility to another. As a result of these and other factors, our failure to successfully operate the proposed new wafer fabrication facility, to successfully coordinate and manage the two sites or to transfer our manufacturing operations could adversely affect our overall production. The markets for our products are characterized by rapid changes in manufacturing process technologies; therefore, to provide competitive products to our target markets, we must develop or otherwise gain access to improved process technologies. Our future success will depend, in large part, upon our ability to continue to improve existing process technologies, to develop new process technologies including silicon germanium, or SiGe, processes, and to adapt our process technologies to emerging industry standards. In the future, we may be required to transition one or more of our products to process technologies with smaller geometries, other materials or higher speeds in order to reduce costs and/or improve product performance. We may not be able to improve our process technologies and develop or otherwise gain access to new process technologies, including, but not limited to SiGe process technologies, in a timely or affordable manner. In addition, products based on these technologies may not achieve market acceptance. Our dependence on third-party manufacturing and supply relationships increases the risk that we will not have an adequate supply of products to meet demand or that our cost of goods will be higher than expected. We rely on outside foundries for the manufacture of certain products, including all of our products designed on CMOS processes and all products that we anticipate will be designed on silicon germanium processes. We generally do not have long-term wafer supply agreements with our outside foundries that guarantee wafer or product quantities, prices or delivery lead times. Instead, our products that are manufactured by outside foundries are manufactured on a purchase order basis. We expect that, for the foreseeable future, certain products will be manufactured by a single outside foundry. Because establishing relationships with new outside foundries takes several months, there is no readily available alternative source of supply for these products. A manufacturing disruption experienced by one or more of our outside foundries would impact the production of certain of our 21 products for a substantial period of time. Furthermore, the transition to the next generation of manufacturing technologies at one or more of our outside foundries could be unsuccessful or delayed. There are additional risks associated with our dependence upon third-party manufacturers for certain products. These include, but are not limited to: . reduced control over delivery schedules and quality; . risks of inadequate manufacturing yields and excessive costs; . the potential lack of adequate capacity during periods of excess demand; . limited warranties on wafers or products supplied to us; . potential increases in prices; and . potential misappropriation of our intellectual property. With respect to certain of our products, we depend upon external foundries to produce wafers and, in some cases, finished products of acceptable quality, to deliver those wafers and products to us on a timely basis and to allocate to us a portion of their manufacturing capacity sufficient to meet our needs. On occasion, we have experienced difficulties with our suppliers failing to produce goods of sufficient quality or quantity or failing to meet delivery deadlines. Our wafer and product requirements typically represent a very small portion of the total production of these external foundries. As a result, we are subject to the risk that a producer will cease production on an older or lower-volume process that is used to produce our parts. Additionally, we cannot be certain our external foundries will continue to devote resources to the production of our products or continue to advance the process design technologies on which the manufacturing of our products are based. Certain of our products are assembled and packaged by third-party subcontractors. We do not have long-term agreements with any of these subcontractors. Assembly and packaging is conducted on a purchase order basis. As a result, we cannot directly control product delivery schedules. This could lead to product shortages or quality assurance problems that could increase the costs of manufacturing, assembly or packaging of our products. In addition, we may, from time to time, be required to accept price increases for assembly or packaging services. Due to the amount of time normally required to qualify assembly and packaging subcontractors, product shipments could be delayed significantly if we are required to find alternative subcontractors. In the future, we may contract with third parties for the testing of our products. Any problems associated with the delivery, quality or cost of the assembly, testing or packaging of our products could have a material adverse effect on our business. Due to an industry transition to six-inch and eight-inch wafer fabrication facilities, there is a limited number of suppliers of the four-inch wafers that we use to build products in our existing manufacturing facility, and we rely on a single supplier for these wafers. Although we believe that we will have sufficient access to four-inch wafers to support production in our existing fabrication facility for the foreseeable future, we cannot be certain that our current supplier will continue to supply us with four-inch wafers on a long-term basis. Additionally, the availability of manufacturing equipment needed for a four-inch process is limited, and certain new equipment required for more advanced processes may not be available for a four-inch process. Our customers are concentrated, so the loss of one or more key customers could significantly reduce our revenues and profits. Historically, a relatively small number of customers has accounted for a significant portion of our revenues in any particular period. For example, our five largest customers accounted for approximately 44%, 46%, and 59% of our revenues in fiscal 1997, 1998, and 1999, respectively, and sales to Nortel accounted for approximately 20%, 21%, and 20% of our revenues in each of these periods. However, we have no long-term volume purchase commitments from any of our major customers. We anticipate that sales of products to relatively few customers will continue to account for a significant portion of our revenues. A reduction, delay or cancellation of orders from one or more significant customers or the loss of one or more key customers could 22 significantly reduce our revenues and profits. We cannot assure you that our current customers will continue to place orders with us, that orders by existing customers will continue at current or historical levels or that we will be able to obtain orders from new customers. Our strategy is based on growth, and periods of rapid growth and expansion have placed, and could continue to place, a significant strain on our limited personnel and other resources To manage expanded operations effectively, we will be required to continue to improve our operational, financial and management systems and to successfully hire, train, motivate and manage our employees. In addition, the integration of past and future potential acquisitions, the expansion of our manufacturing capacity will require significant management, technical and administrative resources. We cannot be certain that we will be able to manage our growth or effectively integrate our planned wafer fabrication facility into our current operations. Our future success depends in part on the continued service of our key design engineering, sales, marketing and executive personnel and our ability to identify, hire and retain additional personnel. There is intense competition for qualified personnel in the semiconductor industry, in particular design engineers, and we may not be able to continue to attract and train engineers or other qualified personnel necessary for the development of our business or to replace engineers or other qualified personnel who may leave our employ in the future. Our anticipated growth is expected to place increased demands on our resources and will likely require the addition of new management personnel and the development of additional expertise by existing management personnel. Although we have entered into an "at-will" employment agreement with David M. Rickey, the President and Chief Executive Officer, we have not entered into fixed term employment agreements with any of our executive officers except for one-year employment agreements with Ram Sudireddy, Vice President, Cimaron, and Gary Martin, Vice President and Chief Technical Officer, Cimaron. In addition, we have not obtained key- person life insurance on any of our executive officers or key employees. Loss of the services of, or failure to recruit, key design engineers or other technical and management personnel could be significantly detrimental to our product and process development programs. We anticipate that we will need to raise additional capital in the future, and we cannot be certain that additional debt, lease or equity financing will be available on commercially reasonable terms or at all. We require substantial working capital to fund our business, particularly to finance inventories and accounts receivable and for capital expenditures. We believe that our available cash, cash equivalents and short-term investments and cash generated from operations, will be sufficient to meet our capital requirements through the next 12 months, although we could be required, or could elect, to seek to raise additional financing during this period. Our future capital requirements will depend on many factors, including: . the costs associated with the expansion of manufacturing operations; . the rate of revenue growth; . the timing and extent of spending to support research and development programs and expansion of sales and marketing; . the timing of introductions of new products and enhancements to existing products; and . market acceptance of our products. Additionally, we may elect to acquire other businesses, which would entail the issuance of stock and the payment of cash. We may elect to raise additional cash to finance such transactions. We may need to raise additional debt or equity financing in the future, primarily for purposes of financing the acquisition of property for our proposed new wafer fabrication facility, the construction of the proposed new wafer fabrication facility and the purchase of equipment for the proposed new wafer fabrication facility. 23 We may not be able to protect our intellectual property adequately. We rely in part on patents to protect our intellectual property. There can be no assurance that our pending patent applications or any future applications will be approved, or that any issued patents will provide us with competitive advantages or will not be challenged by third parties, or that if challenged, will be found to be valid or enforceable, or that the patents of others will not have an adverse effect on our ability to do business. Furthermore, others may independently develop similar products or processes, duplicate our products or processes or design around any patents that may be issued to us. To protect our intellectual property, we also rely on the combination of mask work protection under the Federal Semiconductor Chip Protection Act of 1984, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements. Despite these efforts, we cannot be certain that others will not independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property, or disclose such intellectual property or trade secrets, or that we can meaningfully protect our intellectual property. Our business, operating results and financial condition could be materially adversely affected by litigation involving patents and proprietary rights. As a general matter, the semiconductor industry is characterized by substantial litigation regarding patent and other intellectual property rights. We have, in the past and may, in the future be notified that we may be infringing the intellectual property rights of third parties. We have certain indemnification obligations to customers with respect to the infringement of third-party intellectual property rights by our products. We cannot be certain that infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not materially adversely affect our business. On July 31, 1998, the Lemelson Medical, Education & Research Foundation Limited Partnership filed a lawsuit in the U.S. District Court for the District of Arizona against 26 companies, including us, engaged in the manufacture and/or sale of IC products. The complaint alleges infringement by the defendants of certain U.S. patents held by the Lemelson Partnership relating to certain semiconductor manufacturing processes. On November 25, 1998, we were served a summons pursuant to this lawsuit. The complaint seeks, among other things, injunctive relief and unspecified treble damages. Previously, the Lemelson Partnership has offered us a license under the Lemelson patents. We are monitoring this matter and, although the ultimate outcome of this matter is not currently determinable, we believe, based in part on the licensing terms previously offered by the Lemelson Partnership, that the resolution of this matter will not have a material adverse effect on our financial position or liquidity; however, there can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on our results of operations for any quarter. Furthermore, there can be no assurance that we would prevail in any such litigation. Any litigation relating to the intellectual property rights of third parties, including the Lemelson Patents, whether or not determined in our favor or settled by us, would at a minimum be costly and could divert the efforts and attention of our management and technical personnel. In the event of any adverse ruling in any such litigation, we could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the intellectual property rights of the third party claiming infringement. A license might not be available on reasonable terms or at all. Our operating results are subject to fluctuations because we rely substantially on foreign customers. International sales (including sales to Canada) accounted for 40%, 42% and 41% of revenues in fiscal 1997, fiscal 1998 and fiscal 1999, respectively. International sales may increase in future periods and may account for an increasing portion of our revenues. As a result, an increasing portion of our revenues may be subject to certain risks, including: . changes in regulatory requirements; 24 . tariffs and other barriers; . timing and availability of export licenses; . political and economic instability; . difficulties in accounts receivable collections; . natural disasters; . difficulties in staffing and managing foreign subsidiary and branch operations; . difficulties in managing distributors; . difficulties in obtaining governmental approvals for communications and other products; . foreign currency exchange fluctuations; . the burden of complying with a wide variety of complex foreign laws and treaties; and . potentially adverse tax consequences. Although less than seven percent of our revenues were attributable to sales in Asia during the year ended March 31, 1999, the recent economic instability in certain Asian countries could adversely affect our business, financial condition and operating results, particularly to the extent that this instability impacts the sales of products manufactured by our customers. We are also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. We cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products will be implemented by the United States or other countries. Because sales of our products have been denominated to date primarily in United States dollars, increases in the value of the United States dollar could increase the price of our products so that they become relatively more expensive to customers in the local currency of a particular country, leading to a reduction in sales and profitability in that country. Future international activity may result in increased foreign currency denominated sales. Gains and losses on the conversion to United States dollars of accounts receivable, accounts payable and other monetary assets and liabilities arising from international operations may contribute to fluctuations in our results of operations. Some of our customer purchase orders and agreements are governed by foreign laws, which may differ significantly from United States laws. Therefore, we may be limited in our ability to enforce our rights under such agreements and to collect damages, if awarded. We could incur substantial fines or litigation costs associated with our storage, use and disposal of hazardous materials. We are subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing process. Any failure to comply with present or future regulations could result in the imposition of fines, the suspension of production or a cessation of operations. In addition, these regulations could restrict our ability to expand our facilities at the present location or construct or operate our planned wafer fabrication facility or could require us to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean up prior discharges. Since 1993 we have been named as a potentially responsible party, or PRP, along with a large number of other companies that used Omega Chemical Corporation in Whittier, California to handle and dispose of certain hazardous waste material. We are a member of a large group of PRPs that has agreed to fund certain remediation efforts at the Omega site, which efforts are ongoing. To date, our payment obligations with respect to these funding efforts have not been material, and we believe that our future obligations to fund these efforts will not have a material adverse effect on our business, financial condition or operating results. Although we believe that we are currently in material compliance with applicable environmental laws and regulations, we cannot assure you that we are or will be in material compliance with these laws or regulations or that our future obligations to fund any remediation efforts, including those at the Omega site, will not have a material adverse effect on our business. 25 Our ability to manufacture sufficient wafers to meet demand could be severely hampered by a shortage of water. We use significant amounts of water throughout our manufacturing process. Previous droughts in California have resulted in restrictions being placed on water use by manufacturers and residents in California. In the event of future drought, reductions in water use may be mandated generally, and it is unclear how such reductions will be allocated among California's different users. We cannot be certain that near term reductions in water allocations to manufacturers will not occur. Our stock price is volatile. The market price of our common stock has fluctuated significantly to date. In addition, the market price of the common stock could be subject to significant fluctuations due to general market conditions and in response to quarter-to-quarter variations in: . our anticipated or actual operating results; . announcements or introductions of new products; . technological innovations or setbacks by us or our competitors; . conditions in the semiconductor, telecommunications, data communications, ATE, high-speed computing or military markets; . the commencement of litigation; . changes in estimates of the Company's performance by securities analysts; . announcements of merger or acquisition transactions; and . other events or factors. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, particularly semiconductor companies, and that have often been unrelated or disproportionate to the operating performance of companies. These fluctuations, as well as general economic and market conditions, may affect adversely the market price of our common stock. If we are not adequately prepared for the transition to Year 2000, our business, operating results and financial condition could suffer. As a semiconductor manufacturer with our own wafer fabrication facility, we are dependent on computer systems and manufacturing equipment with embedded hardware or software to conduct our business. We have developed and are currently executing a plan designed to make our computer systems, applications, computer and manufacturing equipment and facilities Year 2000 ready. The plan covers five stages including: (i) inventory; (ii) assessment; (iii) remediation; (iv) testing; and (v) contingency planning. The inventory and assessment stages were completed in March 1999. The remediation, testing and contingency planning stages are targeted to be completed in October 1999. We will primarily utilize internal resources to reprogram, or replace where necessary, and test the software for Year 2000 modifications. We have initiated communications with our critical external suppliers to determine the extent to which we may be vulnerable to their failure to resolve their own Year 2000 issues. Where practicable, we will assess and 26 attempt to mitigate our risks with respect to the failure of these entities to be Year 2000 ready. The effect, if any, on our results of operations from the failure of such parties to be Year 2000 ready, is not reasonably estimable. As of March 31, 1999, we have incurred and expensed approximately $200,000 related to the Year 2000 project and expect to incur an additional $700,000 on completing the Year 2000 project. Approximately one-half the costs associated with the Year 2000 project will be internal resources that have been reallocated from other projects, with the balance of costs reflecting incremental spending for equipment and software upgrades. The costs of the Year 2000 Project will be funded through operating cash flows, with the cost of internal resources expensed as incurred and the cost of equipment and software upgrades capitalized or expensed in accordance with our policy on property and equipment. The costs of the project and the date on which we plan to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those plans. Among the factors that might cause such material differences are: . the availability and cost of personnel trained in this area; . the ability to locate and correct all relevant computer codes; and . the ability to identify and correct equipment with embedded hardware or software and similar uncertainties. The anti-takeover provisions of our certificate of incorporation and of the Delaware General Corporation Law may delay, defer or prevent a change of control. Our board of directors has the authority to issue up to 2,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights, of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control of AMCC, as the terms of the preferred stock that might be issued could potentially prohibit our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction without the approval of the holders of the outstanding shares of preferred stock. In addition, the issuance of preferred stock could have a dilutive effect on stockholders of AMCC. Section 203 of the Delaware General Corporation Law, to which we are subject, restricts certain business combinations with any "interested stockholder" as defined by this statute. The statute may also delay, alter or prevent a change of control. Item 2. Properties. The Company's executive offices, marketing and engineering functions are located in San Diego, California in a 90,000 square foot building that is leased by the Company under a lease that expires in 2007. In addition, the Company occupies a 21,000 square foot building in San Diego, which houses the Company's manufacturing facilities under a lease that expires in 2003, but provides the Company with an option to extend the lease for one additional five year period. In July 1998 the Company acquired the right to purchase, in the form of a ground lease, a parcel of land as a site for a potential new wafer fabrication facility. This parcel of land is located approximately one quarter mile from the Company's headquarters in San Diego, California. The Company has made payments of $1.0 million related to this transaction. In December 1998, the Company exercised this right to acquire the land and made additional payments of approximately $3.7 million in May 1999 to acquire the land. The Company leases additional space for sales offices and design centers in Burlington and Andover, Massachusetts; Raleigh, North Carolina; Plano, Texas; San Jose, California; Edina, Minnesota; Munich, Germany and Milan, Italy. 27 Item 3. Legal Proceedings. From time to time, the Company may be involved in litigation relating to claims arising out of its operations on the normal course of business. As of the date of this Annual Report on Form 10-K, the Company is not engaged in any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on the Company's business, financial condition or operating results. Item 4. Submission of Matters to a Vote of Security Holders. No matters were submitted to a vote of the Company's stockholders during the fourth quarter of the fiscal year ended March 31, 1999. 28 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. (a) The Company's Common Stock has been traded on the Nasdaq National Market under the symbol "AMCC" since the Company's initial public offering on November 25, 1997. The following table sets forth the high and low sales prices of the Company's Common Stock as reported by the Nasdaq National Market for the periods indicated.
Fiscal year ended March 31, 1998 High Low -------------------------------- ------ ------ Third Quarter............................................... $13.50 $ 8.00 Fourth Quarter.............................................. $24.38 $12.25 Fiscal year ended March 31, 1999 High Low -------------------------------- ------ ------ First Quarter............................................... $30.00 $17.63 Second Quarter.............................................. $30.00 $12.88 Third Quarter............................................... $40.63 $12.25 Fourth Quarter.............................................. $46.75 $32.94
At March 31, 1999, there were approximately 394 holders of record of the Company's Common Stock. The Company has not paid cash dividends on its Common Stock and presently intends to continue this policy. (b) Recent Sales of Unregistered Securities (1) From December 31, 1997 until March 2, 1998, 26,997 shares of Common Stock were issued upon exercise of options with an average exercise price of $.45 per share, all of which were paid in cash, and 56,645 shares of Common Stock were issuable upon exercise of outstanding options with an average exercise price of $.46 per share pursuant to grants to certain employees and Directors of the Company under the Company's 1982 Incentive Stock Option Plan (the "1982 Plan"). On March 2, 1998, the Company filed a Registration Statement on Form S-8 to cover the shares of Common Stock issuable upon exercise of options under the 1992 Plan. (2) From December 31, 1997 until March 2, 1998, 120,719 shares of Common Stock were issued upon exercise of options with an average exercise price of $.53 per share, all of which were paid in cash, and 1,978,922 shares of Common Stock were issuable upon exercise of outstanding options with an average exercise price of $1.87 per share pursuant to grants to certain employees and Directors of the Company under the Company's 1992 Incentive Stock Option Plan (the "1992 Plan"). On March 2, 1998, the Company filed a Registration Statement on Form S-8 to cover the shares of Common Stock issuable upon exercise of options under the 1982 Plan. (3) On March 17, 1999, AMCC acquired all the outstanding stock of Cimaron Communications, pursuant to a merger of AMCC and Cimaron Communications Corporation ("Cimaron"). Under the terms of the related merger agreement, all of the outstanding stock and stock equivalents of Cimaron were exchanged for approximately three million shares of the Company's Common Stock. At the time of the transaction, the shares of the Company's Common Stock issued to the former Cimaron stockholders were not registered under the Securities Act because the transaction involved a non-public offering exempt from registration under Section 4(2) of the Securities Act and Regulation D promulgated thereunder. On April 13, 1999, the Company filed a registration statement on Form S-3 to cover the shares of Common Stock issued pursuant to the merger agreement. There were no underwritten offerings in connection with any of the transactions set forth in Items 5(b)(1) through 5(b)(3) above. The issuances described in Items 5(b)(1) and 5(b)(2) above were deemed to be exempt from registration under the Securities Act in reliance upon Rule 701 promulgated thereunder in that they were 29 offered and sold pursuant to a written compensation plan. In addition, such issuances were deemed to be exempt from registration under the Securities Act under Section 4(2) of the Securities Act as transactions not involving any public offering. The recipients of securities in each of the transactions described in Items 5(b)(1) and 5(b)(2) above represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the securities issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Company. (c) Use of Proceeds (1) Initial Public Offering The Company filed a Registration Statement on Form S-1 (the "Registration Statement"), File No. 333-37609, which was declared effective by the Securities and Exchange Commission on November 24, 1997, relating to the initial public offering (IPO) of the Company's Common Stock. The managing underwriters of the offering were BankAmerica Robertson Stephens, NationsBanc Montgomery Securities LLC, and Cowen & Company. The Registration Statement registered an aggregate 5,553,000 shares of Common Stock and the price to the public was $8.00 per share. Of such shares, 3,538,448 were sold by The Company (which includes the underwriter's over-allotment of 832,950 shares) and 2,847,502 were sold by certain shareholders of the Company. The Company incurred $3,196,718 of total expenses in connection with the IPO consisting of $1,981,531 in underwriting discounts and commissions and $1,215,187 in other expenses. All such expenses were direct or indirect payments to others. The net offering proceeds to the Company after deducting the $3,196,718 of total expenses were $25,110,866. The Company has invested the net offering proceeds of $25,110,866 in short- term investments consisting of United States Treasury Notes, obligations of United States government agencies and corporate bonds with maturities ranging from April 1, 1999 to March 31, 2001. The use of proceeds described herein does not represent a material change in the use of proceeds described in the prospectus of the Registration Statement. (2) Secondary Public Offering The Company filed a Registration Statement on Form S-1, File No. 333-46071 (the "Secondary Registration Statement"), which was declared effective by the Securities and Exchange Commission on March 12, 1998, relating to the secondary public offering of the Company's Common Stock. The managing underwriters for the Offering were BancAmerica Robertson Stephens, NationsBanc Montgomery Securities LLC, and Cowen & Company. The Registration Statement registered an aggregate of 3,530,000 shares of the Common Stock and the price to the public was $19.375 per share. Of such shares, 1,500,000 shares were sold by the Company, and 2,559,500 shares were sold by certain stockholders of the Company (which includes the underwriter's overallotment of 529,500 shares). The expenses incurred by the Company in connection with the Offering were approximately $2,181,000, of which $1,515,000 constituted underwriting discounts and commissions and approximately $666,000 constituted other expenses including registration and filing fees, printing, accounting and legal expenses. No direct or indirect payments were made to any directors, officers, owners of ten percent or more of any class of the Company's equity securities, or other affiliates of the Company other than for reimbursement of expense incurred on the road show. Net offering proceeds to the Company after deducting these expenses were approximately, $26,882,000. The Company has invested the net offering proceeds in short-term investments consisting of United States Treasury Notes, obligations of United States government agencies and corporate bonds with maturities ranging from April 1, 1999 to March 31, 2001. The use of proceeds described herein does not represent a material change in the use of proceeds described in the prospectus of the Secondary Registration Statement. 30 Item 6. Selected Financial Data. (in thousands, except per share data)
March 31, -------------------------------------------- 1995 1996 1997 1998 1999 ------- ------- ------- -------- -------- Consolidated Statements of Operations Data: Net revenues...................... $46,950 $50,264 $57,468 $ 76,618 $105,000 Cost of revenues.................. 27,513 34,169 30,057 34,321 37,937 ------- ------- ------- -------- -------- Gross profit...................... 19,437 16,095 27,411 42,297 67,063 Operating Expenses: Research and development........ 10,108 8,283 7,870 13,268 22,472 Selling, general and administrative................. 10,112 11,232 12,537 14,278 18,325 Merger-related costs............ -- -- -- -- 2,350 ------- ------- ------- -------- -------- Total operating expenses...... 20,220 19,515 20,407 27,546 43,147 ------- ------- ------- -------- -------- Operating income (loss)........... (783) (3,420) 7,004 14,751 23,916 Interest income (expense), net.... 358) (242) (29) 871 3,450 ------- ------- ------- -------- -------- Income (loss) before income taxes. (1,141) (3,662) 6,975 15,622 27,366 Provision (benefit) for income taxes............................ (70) 32 659 406 10,233 ------- ------- ------- -------- -------- Net income (loss)................. (1,071) $(3,694) $ 6,316 $ 15,216 $ 17,133 ======= ======= ======= ======== ======== Basic earnings (loss) per share: Earnings (loss) per share....... $ (0.25) $ (0.81) $ 1.26 $ 1.44 $ 0.70 ======= ======= ======= ======== ======== Shares used in calculating basic earnings (loss) per share...... 4,365 4,566 5,006 10,594 24,514 ======= ======= ======= ======== ======== Diluted earnings (loss) per share: Earnings (loss) per share....... $ (0.06) $ (0.21) $ 0.35 $ 0.75 $ 0.62 ======= ======= ======= ======== ======== Shares used in calculating diluted earnings (loss) per share.......................... 17,194 17,394 17,907 20,294 27,430 ======= ======= ======= ======== ======== Consolidated Balance Sheet Data: Working capital................... $16,753 $13,977 $19,364 $ 77,417 $103,617 Total assets...................... 40,180 37,836 41,814 112,834 150,655 Long-term debt and capital lease obligations...................... 10,458 8,091 5,854 6,711 10,495 Total stockholders' equity........ 24,805 21,512 27,743 91,634 121,694
31 Quarterly Comparisons The following table sets forth consolidated statements of operations for each of the Company's last eight quarters. This quarterly information is unaudited and has been prepared on the same basis as the annual consolidated financial statements. In management's opinion, this quarterly information reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period. QUARTERLY FINANCIAL INFORMATION FOR FISCAL 1999 AND FISCAL 1998
Fiscal 1998 Fiscal 1999* ------------------------------- ------------------------------- Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ------- ------- ------- ------- ------- ------- ------- ------- Net revenues............ $17,053 $18,155 $19,666 $21,744 $23,814 $25,472 $26,972 $28,742 Cost of revenues........ 8,156 8,378 8,836 8,951 9,399 9,347 9,669 9,522 ------- ------- ------- ------- ------- ------- ------- ------- Gross profit............ 8,897 9,777 10,830 12,793 14,415 16,125 17,303 19,220 Operating expenses: Research and development.......... 2,525 3,477 3,337 3,929 4,893 5,454 5,847 6,278 Selling, general and administrative....... 3,339 3,391 3,530 4,018 4,164 4,296 4,573 5,292 Merger-related costs.. -- -- -- -- -- -- -- 2,350 ------- ------- ------- ------- ------- ------- ------- ------- Total operating expenses............ 5,864 6,868 6,867 7,947 9,057 9,750 10,420 13,920 ------- ------- ------- ------- ------- ------- ------- ------- Operating income........ 3,033 2,909 3,963 4,846 5,358 6,375 6,883 5,300 Interest income, net.... 66 85 143 577 853 877 883 837 ------- ------- ------- ------- ------- ------- ------- ------- Income before income taxes.................. 3,099 2,994 4,106 5,423 6,211 7,252 7,766 6,137 Provision for income taxes.................. 81 78 103 144 2,227 2,584 2,646 2,776 ------- ------- ------- ------- ------- ------- ------- ------- Net income.............. $ 3,018 $ 2,916 $ 4,003 $ 5,279 $ 3,984 $ 4,668 $ 5,120 $ 3,361 ======= ======= ======= ======= ======= ======= ======= ======= Earnings per share (diluted).............. $ 0.16 $ 0.16 $ 0.20 $ 0.23 $ 0.15 $ 0.17 $ 0.19 $ 0.12 ======= ======= ======= ======= ======= ======= ======= ======= Shares used in calculating diluted earnings per share..... 18,941 18,594 20,383 23,257 26,665 27,296 27,619 28,140 ======= ======= ======= ======= ======= ======= ======= =======
- -------- * The quarterly information for the fiscal year ended March 31, 1999 has been restated from the information presented in the Company's Quarterly 10-Q filings for the quarters ended June 30, 1998, September 30, 1998 and December 31, 1998 to reflect the acquisition of Cimaron Communications Corporation completed on March 17, 1999 as if the companies had been combined for the full year. 32 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in the Company's Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth under "Factors That May Affect Future Results" in the Company's Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis only as of the date hereof. The Company assumes no obligation to update these forward- looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. Overview AMCC designs, develops, manufactures and markets high-performance, high- bandwidth silicon solutions for the world's communications infrastructure. The Company tailors solutions to customer and market requirements by using a combination of high-frequency analog, mixed-signal and digital design expertise coupled with system-level knowledge and multiple silicon process technologies. AMCC believes that its internal bipolar and BiCMOS processes, complemented by advanced CMOS and silicon germanium processes from external foundries, enable the Company to offer high-performance, high- speed solutions optimized for specific applications and customer requirements. The Company further believes that its products provide significant cost, power, performance and reliability advantages for system OEMs in addition to accelerating time-to-market. The Company also leverages its technology to provide products for the automated test equipment (ATE), high-speed computing and military markets. On March 17, 1999, the Company acquired Cimaron Communications Corporation ("Cimaron") in a business combination accounted for as a pooling-of-interests. Cimaron, which also designs and develops high-bandwidth silicon solutions for communications equipment manufacturers, became a wholly owned subsidiary of the Company through the exchange of approximately three million shares of the Company's Common Stock for all the outstanding stock and options of Cimaron. The financial statements for fiscal 1999 have been prepared as if the companies had been combined for the full year and the prior year financial statements did not require restatement as a result of this business combination. 33 Results of Operations The following table sets forth certain selected consolidated statements of Income data in dollars and as a percentage of revenues for the periods indicated:
Fiscal Year Ended March 31, --------------------------------------------- 1997 1998 1999 -------------- ------------- -------------- (in thousands, except per share data) $ % $ % $ % ------- ----- ------- ----- -------- ----- Net revenues.................... $57,468 100.0% $76,618 100.0% $105,000 100.0% Cost of revenues................ 30,057 52.3 34,321 44.8 37,937 36.1 ------- ----- ------- ----- -------- ----- Gross profit.................... 27,411 47.7 42,297 55.2 67,063 63.9 Operating expenses: Research and development...... 7,870 13.7 13,268 17.3 22,472 21.4 Selling, general and administrative............... 12,537 21.8 14,278 18.6 18,325 17.5 Merger-related costs.......... -- -- -- -- 2,350 2.2 ------- ----- ------- ----- -------- ----- Total operating expenses.... 20,407 35.5 27,546 35.9 43,147 41.1 ------- ----- ------- ----- -------- ----- Operating income................ 7,004 12.2 14,751 19.3 23,916 22.8 Net interest income (expense)... (29) (0.1) 871 1.1 3,450 3.3 ------- ----- ------- ----- -------- ----- Income before provision for income taxes................... 6,975 12.1 15,622 20.4 27,366 26.1 Provision for income taxes...... 659 1.1 406 0.5 10,233 9.8 ------- ----- ------- ----- -------- ----- Net income...................... $ 6,316 11.0% $15,216 19.9% $ 17,133 16.3% ======= ===== ======= ===== ======== ===== Diluted earnings per share: Earnings per share............ $ 0.35 $ 0.75 $ 0.62 ======= ======= ======== Shares used in calculating diluted earnings per share... 17,907 20,294 27,430 ======= ======= ========
Comparison of the Year Ended March 31, 1999 to the Year Ended March 31, 1998 Net Revenues. Net revenues for the year ended March 31, 1999 were approximately $105.0 million, representing an increase of 37% over net revenues of approximately $76.6 million for the year ended March 31, 1998. Revenues from sales of communications products increased 56% in the year ended March 31, 1999 from $36.6 million or 48% of net revenues for the year ended March 31, 1998 to $57.3 million or 55% of net revenues for the year ended March 31, 1999, reflecting unit growth in shipments of existing products, as well as the introduction of new products for these markets. Revenues from sales of products to other markets, consisting of the ATE, high-speed computing and military markets, decreased from 52% of net revenues for the year ended March 31, 1998, to 45% of net revenues for the year ended March 31, 1999, although revenues from sales to these other markets increased in absolute dollars. The increase in absolute dollars in revenues attributed to these other markets was primarily due to $10.0 million of shipments in the year ended March 31, 1999, relating to the partial fulfillment of an end-of- life order from Raytheon Systems Co. Total sales to Raytheon Systems Co. accounted for 16% of net revenues in the year ended March 31, 1999 and were less than 10% of net revenues in the year ended March 31, 1998. Sales to Nortel accounted for 20% and 21% of net revenues for the years ended March 31, 1999 and 1998, respectively. In the years ended March 31, 1999 and 1998, Insight Electronics, Inc., the Company's domestic distributor, accounted for 13% and 11% of net revenues, respectively. Sales outside of North America accounted for 24% and 23% of net revenues for the years ended March 31, 1999 and 1998, respectively. Although less than seven percent of the Company's revenues were attributable to sales in Asia for the year ended March 31, 1999, the recent economic instability in certain Asian countries could adversely affect the Company's business, financial condition and operating results, particularly to the extent that this instability impacts the sales of products manufactured by the Company's customers. 34 Gross Margin. Gross margin was 63.9% for the year ended March 31, 1999, as compared to 55.2% for the year ended March 31, 1998. The increase in gross margin resulted from increased utilization of the Company's wafer fabrication facility. The Company's gross margin is primarily impacted by factory utilization, manufacturing yields, product mix and the Company's timing of depreciation expense and other costs associated with expanding its manufacturing capacity. Although AMCC does not expect its gross margin to continue to increase at the rate reflected above, its strategy is to maximize factory utilization whenever possible, maintain or improve its manufacturing yields, and focus on the development and sales of high-performance products that can have higher gross margins. There can be no assurance, however, that the Company will be successful in achieving these objectives. In addition, these factors can vary significantly from quarter to quarter, which would likely result in fluctuations in quarterly gross margin and net income. Research and Development. Research and development ("R&D") expenses increased 69% to approximately $22.5 million, or 21.4% of revenues, for the year ended March 31, 1999, from approximately $13.3 million, or 17.3% of net revenues, for the year ended March 31, 1998. The substantial increase in R&D expenses was due to the Company's acquisition of Cimaron, which incurred approximately $2.5 million of R&D expenses during its fiscal year, and accelerated new product and process development efforts, including a $3.2 million increase in compensation costs, and a $3.9 million increase in prototyping and outside contractor costs. The Company believes that a continued commitment to R&D is vital to maintain a leadership position with innovative communications products. Accordingly, the Company expects R&D expenses to increase in absolute dollars and possibly as a percentage of net revenues in the future. Currently, R&D expenses are focused on the development of products and processes for the communications markets, and the Company expects to continue this focus. Selling, General and Administrative. Selling, general and administrative ("SG&A") expenses were approximately $18.3 million, or 17.5% of revenues, for the year ended March 31, 1999, as compared to approximately $14.3 million, or 18.6% of net revenues, for the year ended March 31, 1998. The increase in SG&A expenses for the year ended March 31, 1999 was primarily due to a $2.1 million increase in personnel costs, a $500,000 increase in commissions earned by third-party sales representatives, a $500,000 increase in product promotion expenses and, a $400,000 increase in legal and accounting costs. A portion of such increases was due to the Company's acquisition of Cimaron. The decrease in SG&A expenses as a percentage of net revenues for the year ended March 31, 1999 was a result of net revenues increasing more rapidly than SG&A expenses. The Company expects SG&A expenses to increase in the future due principally to additional staffing in the Company's sales and marketing departments, as well as increased spending on information technology, and increased product promotion expenses. Merger-related costs. In March 1999, the Company acquired all of the outstanding common stock and common stock equivalents of Cimaron Communications Corporation ("Cimaron") in exchange for approximately three million shares of the Company's common stock. The acquisition has been accounted for using the pooling-of-interests method of accounting. Costs associated with this merger of $2.3 million or $0.08 per diluted share were expensed in the quarter ended March 31, 1999. Operating Margin. The Company's operating margin increased to 22.8% of net revenues for the year ended March 31, 1999, compared to 19.3% for the year ended March 31, 1998, principally as a result of the increase in gross margin and decrease in SG&A expenses as a percentage of net revenues, partially offset by the increase in R&D expenses as a percentage of net revenues. Net Interest Income. Net interest income increased to $3.5 million for the year ended March 31, 1999 compared to $871,000 for the year ended March 31, 1998. This increase was due principally to higher interest income from larger cash and short-term investment balances generated from operations and the proceeds from the Company's public offerings completed during the second half of the year ended March 31, 1998. Income Taxes. The Company's annual effective tax rate for the year ended March 31, 1999, which approximated statutory rates, was 37.4%, compared to an effective tax rate of 2.6% for the year ended March 31, 35 1998. The effective tax rate for the year ended March 31, 1998 was decreased from statutory rates due to the reduction of a valuation allowance recorded against deferred tax assets for net operating loss carryforwards and credits. The Company expects the tax rate for fiscal 2000 to approximate statutory rates. Diluted Earnings per share. Diluted earnings per share decreased 17% to $0.62 in the year ended March 31, 1999, compared to $0.75 for the year ended March 31, 1998. The decrease reflects the merger related costs of 2.3 million, the increase in the effective tax rate, and the greater number of shares outstanding due in part to the Cimaron acquisition, offset in part by the increase in operating income in fiscal 1999. Deferred Compensation. In connection with the grant of certain stock options to employees during the six months ended September 30, 1997, the Company recorded aggregate deferred compensation of $599,000, representing the difference between the deemed fair value of the Common Stock at the date of grant for accounting purposes and the option exercise price of such options. Additionally, during the year ended March 31, 1999, the Company recorded deferred compensation of $2.5 million related to restricted stock and options granted to founders and employees of Cimaron. Such amounts are presented as a reduction of stockholders' equity and amortized ratably over the vesting period of the applicable options. Amortization of deferred compensation recorded for the years ended March 31, 1998 and 1999 were $127,000 and $860,000, respectively. The Company currently expects to record amortization of deferred compensation with respect to these option grants of approximately $658,000, $543,000, $414,000, $330,000 and $178,000 during the fiscal years ended March 31, 2000, 2001, 2002, 2003 and 2004, respectively. Backlog. The Company's sales are made primarily pursuant to standard purchase orders for delivery of products. Quantities of the Company's products to be delivered and delivery schedules are frequently revised to reflect changes in customer needs, and customer orders can be canceled or rescheduled without significant penalty to the customer. For these reasons, the Company's backlog as of any particular date is not representative of actual sales for any succeeding period, and the Company therefore believes that backlog is not a good indicator of future revenue. The Company's backlog for products requested to be shipped and non-recurring engineering services to be completed in the next six months was $38.2 million on March 31, 1999, compared to $30.1 million on March 31, 1998. Included in backlog at March 31, 1999 is the $9.3 million balance of an order received from Raytheon Systems Co. related to an end-of-life buy for integrated circuits used in its high speed radar systems. Year 2000 Compliance. As a semiconductor manufacturer with its own wafer fabrication facility, the Company is dependent on computer systems and manufacturing equipment with embedded hardware or software to conduct its business. The Company has developed and is currently executing a plan designed to make its computer systems, applications, computer and manufacturing equipment and facilities Year 2000 ready. The plan covers five stages including (i) inventory, (ii) assessment, (iii) remediation, (iv) testing, and (v) contingency planning. The Company has completed the inventory and assessment stages. The remediation, testing and contingency planning stages are targeted to be completed by October 1999. The Company will primarily utilize internal resources to reprogram, or replace where necessary, and test the software for Year 2000 modifications. The Company is in the process of communicating with its critical external suppliers to determine the extent to which the Company may be vulnerable to such parties' failure to resolve their own Year 2000 issues. Where practicable, the Company will assess and attempt to mitigate its risks with respect to the failure of these entities to be Year 2000 ready. The effect, if any, on the Company's results of operations from the failure of such parties to be Year 2000 ready cannot reasonably be estimated. The Company has developed contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds, and adjusting staffing strategies. The Company has incurred and expensed approximately $200,000 related to the Year 2000 project and expects to incur an additional $700,000 on completing the Year 2000 project. Approximately one-half of the costs associated with the Year 2000 project are expected to relate to internal resources that have been reallocated 36 from other projects, with the balance of costs reflecting incremental spending for equipment and software upgrades. The costs of the Year 2000 project are expected to be funded through operating cash flows, with the cost of internal resources expensed as incurred and the cost of equipment and software upgrades capitalized or expensed in accordance with the Company's policy on property and equipment. The costs of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and the ability to identify and correct equipment with embedded hardware or software and similar uncertainties. Comparison of the Year Ended March 31, 1998 to the Year Ended March 31, 1997 Net Revenues. Net revenues for the year ended March 31, 1998 were approximately $76.6 million, representing an increase of 33% over net revenues of approximately $57.5 million for the year ended March 31, 1997. Revenues from sales of communications products increased from 44% of net revenues for the year ended March 31, 1997 to 48% of net revenues for the year ended March 31, 1998, reflecting unit growth in shipments of existing products, as well as the introduction of new products for these markets. Revenues from sales of products to other markets, consisting of the ATE, high-speed computing and military markets, decreased from 56% of net revenues for the year ended March 31, 1997, to 52% of net revenues for the year ended March 31, 1998, although revenues from sales to these other markets increased in absolute dollars. The increase in absolute dollars in revenues attributed to these other markets was primarily due to an increase in shipments of PCI bus products for high-speed computing applications and to increased shipments of products to the ATE market. Sales to Nortel accounted for 21% and 20% of net revenues for the years ended March 31, 1998 and 1997, respectively. In the year ended March 31,1998, one other customer, Insight Electronics, Inc., the Company's domestic distributor, accounted for 11% of net revenues. Sales outside of North America accounted for 23% and 21% of net revenues for the years ended March 31, 1998 and 1997, respectively. Gross Margin. Gross margin was 55.2% for the year ended March 31, 1998, as compared to 47.7% for the year ended March 31, 1997. The significant increase in gross margin primarily resulted from increased utilization of the Company's wafer fabrication facility, as well as a $1.1 million improvement in manufacturing yields. Research and Development. Research and development ("R&D") expenses increased 69% to approximately $13.3 million, or 17.3% of net revenues, for the year ended March 31, 1998, from approximately $7.9 million, or 13.7% of net revenues, for the year ended March 31, 1997. The substantial increase in R&D expenses was due to accelerated new product and process development efforts including a $3.4 million increase in compensation costs, and a $1.6 million increase in prototyping and outside contractor costs. Selling, General and Administrative. Selling, general and administrative ("SG&A") expenses were approximately $14.3 million, or 18.6% of net revenues, for the year ended March 31, 1998, as compared to approximately $12.5 million, or 21.8% of net revenues, for the year ended March 31, 1997. The increase in SG&A expenses for the year ended March 31, 1998 was primarily due to a $700,000 increase in compensation costs and a $600,000 increase in commissions earned by third-party sales representatives. The decrease in SG&A expenses as a percentage of net revenues for the year ended March 31, 1998 was a result of net revenues increasing more rapidly than SG&A expenses. Operating Margin. The Company's operating margin increased to 19.3% of net revenues for the year ended March 31, 1998, compared to 12.2% for the year ended March 31, 1997, principally as a result of the increase in gross margin and decrease in SG&A expenses as a percentage of net revenues, partially offset by the increase in R&D expenses as a percentage of net revenues. 37 Net Interest Income. Net interest income increased to $871,000 for the year ended March 31, 1998 from a net interest expense of $29,000 for the year ended March 31, 1997. This increase was due principally to a $600,000 increase in interest income resulting from larger cash and short-term investment balances generated by the proceeds from the Company's public offerings completed during the year ended March 31, 1998, as well as a $300,000 decrease in interest expense associated with outstanding capital lease and debt obligations. Income Taxes. The Company's annual effective tax rate for the year ended March 31, 1998 was 2.6%. This was due primarily to the reduction of a valuation allowance recorded against deferred tax assets for net operating loss carryforwards and credits in the prior two years. This reduction results from sufficient levels of income for fiscal 1998, which made the realization of these deferred tax assets more likely than not. The effective tax rate of 9.5% for the year ended March 31, 1997 was attributable primarily to alternative minimum taxes ("AMT"). Diluted Earnings per share. Diluted earnings per share increased 114% to $0.75 in the year ended March 31, 1998, compared to $0.35 for the year ended March 31, 1997. Liquidity and Capital Resources The Company's principal source of liquidity as of March 31, 1999 consisted of $86.5 million in cash, cash equivalents and short-term investments. Working capital as of March 31, 1999 was $103.6 million, compared to $77.4 million as of March 31, 1998. This increase in working capital was primarily due to cash provided by operating activities and the proceeds from the sale of common stock, offset by the purchase of property, equipment and other assets. For the years ended March 31, 1999, 1998 and 1997, net cash provided by operating activities was $22.0 million, $16.9 million and $11.7 million, respectively. Net cash provided by operating activities in fiscal 1999 primarily reflected net income before depreciation and amortization expense plus increased accrued liabilities less increases in accounts receivable and inventories. Net cash provided by operating activities in fiscal 1998 primarily reflected net income before depreciation and amortization expense plus increases in accounts payable and accrued liabilities less increases in accounts receivable and deferred income taxes. Net cash provided by operating activities in fiscal 1997 primarily reflected net income before depreciation and amortization expense. Capital expenditures and the purchase of other assets totaled $16.5 million, $11.6 million and $4.1 million for the years ended March 31, 1999, 1998 and 1997, respectively, of which $6.7 million, $3.6 million and $1.2 million for the years ended March 31, 1999, 1998 and 1997, respectively, were financed using debt or capital leases. In fiscal year 2000, the Company expects to incur approximately $14.0 million in capital expenditures for manufacturing and test equipment, computer hardware and software and the acquisition of land as a site for a potential new wafer fabrication facility. The Company is exploring alternatives for the expansion of its manufacturing capacity which would likely occur after fiscal year 2000, including expanding its current 4" wafer fabrication facility, building a new wafer fabrication facility, purchasing a wafer fabrication facility and entering into strategic relationships to obtain additional capacity. Any of these alternatives could require a significant investment by the Company including an investment in excess of $80.0 million if the Company chose to or was required to build a new wafer fabrication facility. The Company would anticipate financing any such investment through a combination of available cash, cash equivalents and short term investments, cash from operations and debt and lease financing. Although the Company believes that it will be able to obtain financing for a significant portion of the planned capital expenditures at competitive rates and terms from its existing and new financing sources, there can be no assurance that the Company will be successful in these efforts. Furthermore, there can be no assurance that any of the alternatives for expansion of its manufacturing capacity will be available on a timely basis or at all. The Company believes that its available cash, cash equivalents and short- term investments, and cash generated from operations, will be sufficient to meet the Company's capital requirements for the next 12 months, although the Company could be required, or could elect, to seek to raise additional capital during such period. The Company expects that it will need to raise additional debt or equity financing in the future. There can be no 38 assurance that such additional debt or equity financing will be available on commercially reasonable terms or at all. Factors That May Affect Future Results The Company's results of operations have varied significantly in the past and may continue to do so in the future. These variations have been, and may in the future be, due to a number of factors, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. These factors include, but are not limited to: the rescheduling or cancellation of orders by customers; fluctuations in the timing and amount of customer requests for product shipments; fluctuations in manufacturing yields and inventory levels; changes in product mix; the Company's ability to introduce new products and technologies on a timely basis; the introduction of products and technologies by the Company's competitors; the availability of external foundry capacity, purchased parts and raw materials; competitive pressures on selling prices; the timing of investments in research and development; market acceptance of the Company's and its customers' products; the integration of operations and personnel as the result of the Company's recent acquisition of Cimaron; the timing of depreciation and other expenses to be incurred by the Company in connection with the increase of capacity for its existing manufacturing facility and in connection with its proposed new manufacturing facility; the timing and amount of recruiting and relocation expenses, prototyping costs and product promotional expenses; costs associated with future litigation, if any, including without limitation, litigation relating to the use or ownership of intellectual property; costs associated with compliance with applicable environmental regulations; general semiconductor industry conditions; and general economic conditions. Historically, average selling prices in the semiconductor industry have decreased over the life of a product, and as a result, the average selling prices of the Company's products may be subject to significant pricing pressures in the future. Because the Company is continuing to increase its operating expenses for personnel and new product development, and because the Company is limited in its availability to reduce expenses quickly in response to any revenue short falls, the Company's business, financial condition and operating results would be adversely affected if increased sales are not achieved. In addition, the Company's operating results may be below the expectations of public market analysts or investors, which could have a material adverse effect on the market price of the Common Stock. Item 7A. Quantitative and Qualitative Disclosures about Market Risk At March 31, 1999, the Company's investment portfolio includes fixed-income securities of $73 million. These securities are subject to interest rate risk and will decline in value if interest rates increase. Due to the short duration of the Company's investment portfolio, an immediate 100 basis point increase in interest rates would have no material impact on the Company's financial condition or results of operations. The Company generally conducts business, including sales to foreign customers, in U.S. dollars and as a result, has limited foreign currency exchange rate risk. The effect of an immediate 10 percent change in foreign exchange rates would not have a material impact on the Company's financial condition or results of operations. Item 8. Financial Statements and Supplementary Data. Refer to the Index on Page F-l of the Financial Report included herein. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 39 PART III Certain information required by Part III is omitted from this report because the Company will file a definitive proxy statement within 120 days after the end of its fiscal year pursuant to Regulation 14A (the "Proxy Statement") for its Annual Meeting of Stockholders to be held August 3, 1999, and the information included in the Proxy Statement is incorporated herein by reference. Item 10. Directors and Executive Officers of the Registrant. (a) Executive Officers--See the section entitled "Executive Officers of the Registrant" in Part I, Item 1 hereof. (b) Directors--the information required by this Item is incorporated by reference to the section entitled "Election of Directors" in the Registrant's Proxy Statement. Item 11. Executive Compensation. The information required by this Item is incorporated by reference to the sections entitled "Compensation of Executive Officers" and the stock benefit plan proposals in the Registrant's Proxy statement. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item is incorporated by reference to the sections entitled "Common Stock Ownership of Certain Beneficial Owners and Management" of the Registrant's Proxy Statement. Item 13. Certain Relationships and Related Transactions. The information required by this Item is incorporated by reference to the section entitled "Transactions with Management" in the Registrant's Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) The following documents are filed as part of this report: (1) Financial Statements The financial statements of the Company are included herein as required under Item 8 of this Annual Report on Form 10-K. See Index on page F-l. (2) Financial Statement Schedules: The financial statement schedules of the Company are included in Part IV of this report: For the three fiscal years ended March 31, 1999 -- II Valuation and Qualifying Accounts (3) Exhibits (numbered in accordance with Item 601 of Regulated S-K)
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. The following exhibits are filed or incorporated by reference into this report. (a) Exhibits 2.1(8) Agreement and Plan of Merger dated as of March 3, 1999 among Applied Micro Circuits Corporation, Wiley Acquisition Corporation and Cimaron Communications Corporation. 3.1(1) Restated Certificate of Incorporation of the Company. 3.2(2) Amended and Restated Bylaws of the Company. 4.1(3) Specimen Stock Certificate. 10.1(3) Form of Indemnification Agreement between the Company and each of its Officers and Directors. 10.2(3) 1982 Employee Incentive Stock Option Plan, as amended, and form of Option Agreement. 10.3(3) 1992 Stock Option Plan, as amended, and form of Option Agreement.
40 10.4(3) 1997 Employee Stock Purchase Plan and form of Subscription Agreement. 10.5(3) 1997 Directors' Stock Option Plan and form of Option Agreement. 10.6(3) 401(k) Plan, effective April 1, 1985, and form of Enrollment Agreement. 10.7(3) Convertible Preferred Stock, Series 1 and Series 2, Purchase Agreement, dated December 8, 1983. 10.8(3) Convertible Preferred Stock Series 3 Purchase Agreement, dated September 16, 1987. 10.9(3) Industrial Real Estate Lease, dated October 29, 1996, between the Registrant and ADI Mesa Partners AMCC, L.P. (the Sequence Drive Lease). 10.10(3) Industrial Real Estate Lease, dated April 8, 1992 between the Registrant and Mira Mesa Business Park (the Oberlin Drive Lease). 10.11(3) Security Agreements, dated January 30, 1992 by and between the Registrant and Roger Smullen. 10.12(3) Promissory Notes, dated January 30, 1992, as amended, by and between the Registrant and Roger Smullen. 10.13(3) Loan Agreement, dated May 1, 1996, and Exercise Notice and Restricted Stock Purchase Agreements, dated July 23, 1997 by and between Registrant and David Rickey. 10.14(3) Promissory Notes, dated February 12, 1996, May 1, 1996, April 1, 1997 and July 23, 1997 by and between the Registrant and David Rickey. 10.15(3) Patent License Agreement, dated January 1, 1998, as amended by and between Registrant and Motorola, Inc. 10.16(3) Patent License Agreement, dated March 1, 1991, as amended, by and between Registrant and International Business Machines Corporation. 10.17(3) Patent License Agreement, dated June 1, 1997 by and between Registrant and International Business Machines Corporation. 10.18(3) Letter Agreement, dated January 30, 1996 by and between the Registrant and David Rickey. 10.19(3) Patent License Agreement, dated October 19, 1992, as amended by and between Registrant and Alcatel Network Systems, Inc. 10.20(3) Amendment No. 1 to Convertible Preferred Stock, Series 1 and Series 2 Purchase Agreement, dated September 16, 1987 and Convertible Preferred Stock, Series 3 Purchase Agreement, dated September 16, 1987. 10.21(4) Loan Agreement Secured by Property, dated February 19, 1998 by and between Registrant and Laszlo Gal and Agnes Gal. 10.22(4) Note Secured by Deed of Trust, dated February 19, 1998 by and between Registrant and Laszlo Gal and Agnes Gal. 10.23(4) Loan and Pledge Agreement, dated February 19, 1998 by and between Registrant and Anil Bedi. 10.24(6) 1998 Employee Stock Purchase Plan and form of Subscription Agreement 10.25(7) Agreements related to the Company's right to acquire land: a) Ground Lease, by and between Applied Micro Circuits Corporation and Kilroy Realty L.P. b) Agreement for Consulting Services 10.26 1998 Stock Incentive Plan of Cimaron Communications Corporation adopted by Registrant in merger transaction, effective March 17, 1999. 10.27 Employment Agreement by and between Registrant and Gary Martin. 10.28 Employment Agreement by and between Registrant and Ramakrishna Sudireddy. 10.29 Agreement to Sell and Purchase and Escrow Instructions to Acquire Land by and between Kilroy Realty, L.P. and Registrant dated January 8, 1999. 10.30 Lease of Engineering Building by and between Kilroy Realty, L.P. and Registrant dated February 17, 1999.
41 10.31 *Custom Sales Agreement by and between Registrant and International Business Machines 11.1(5) Computation of Per Share Data under SFAS No. 128. 21.1 Subsidiary of the Registrant. 23.1 Consent of Ernst & Young LLP, Independent Auditors 24.1 Power of Attorney (see page 42). 27.1 Financial Data Schedules.
- -------- * Confidential treatment has been requested with respect to certain portions of this exhibit. (1) Incorporated by reference to Exhibit 3.2 filed with the Company's Registration Statement (No. 333-37609) filed October 10, 1997, or with any Amendments thereto, which registration statement became effective November 24, 1997. (2) Incorporated by reference to Exhibit 3.4 filed with the Company's Registration Statement (No. 333-37609) filed October 10, 1997, or with any Amendments thereto, which registration statement became effective November 24, 1997. (3) Incorporated by reference to identically numbered exhibits filed with the Company's Registration Statement (No. 333-37609) filed October 10, 1997, or with any Amendments thereto, which registration statement became effective November 24, 1997. (4) Incorporated by reference to identically numbered exhibits filed with the Company's Registration Statement (No. 333-46071) filed February 11, 1998, or with any Amendments thereto, which registration statement became effective March 12, 1998. (5) The Computation of Per Share Data under SFAS No. 128 is included on page F-10 of this report. (6) Incorporated by reference to Appendix I filed with the Registrant's Proxy Statement for the 1998 Annual Meeting of Stockholders filed on June 15, 1998. (7) Incorporated by reference to identically numbered exhibits filed with the Company's Quarterly Report, Form 10-Q filed November 16, 1998. (8) Incorporated by reference to identically numbered exhibit filed with the Company's Registration Statement on Form S-3 (No. 333-76185) filed April 13, 1998. The following exhibits are filed or incorporated by reference into this report. (b) Current reports on Form 8-K. The Registrant filed the following current reports on Form 8-K with the Commission during the fourth quarter of the fiscal year ended March 31, 1999: None. 42 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. APPLIED MICRO CIRCUITS CORPORATION /s/ David M. Rickey By:__________________________________ David M. Rickey President and Chief Executive Officer Date: June 21, 1999 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints David M. Rickey and William E. Bendush, jointly and severally, his or her attorneys-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys- in-fact, or his or her substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /s/ David M. Rickey President and Chief June 21, 1999 - ----------------------------------- Executive Officer David M. Rickey /s/ William E. Bendush Chief Financial June 21, 1999 - ----------------------------------- Officer William E. Bendush /s/ Roger A. Smullen, Sr. Director and June 21, 1999 - ----------------------------------- Chairman of the Roger A. Smullen, Sr. Board of Directors /s/ William K. Bowes, Jr. Director June 21, 1999 - ----------------------------------- Williams K. Bowes, Jr. /s/ R. Clive Ghest Director June 21, 1999 - ----------------------------------- R. Clive Ghest /s/ Franklin P. Johnson, Jr. Director June 21, 1999 - ----------------------------------- Franklin P. Johnson, Jr. /s/ Arthur B. Stabenow Director June 21, 1999 - ----------------------------------- Arthur B. Stabenow /s/ Harvey P. White Director June 21, 1999 - ----------------------------------- Harvey P. White 43 INDEX TO FINANCIAL STATEMENTS
Page ---- Report of Ernst & Young LLP, Independent Auditors..................... F-2 Consolidated Balance Sheets as of March 31, 1998 and 1999............. F-3 Consolidated Statements of Income for the fiscal years ended March 31, 1997, 1998 and 1999.................................................. F-4 Consolidated Statements of Stockholders' Equity for the fiscal years ended March 31, 1997, 1998 and 1999.................................. F-5 Consolidated Statements of Cash Flows for the fiscal years ended March 31, 1997, 1998 and 1999.............................................. F-6 Notes to Consolidated Financial Statements............................ F-7-F-18
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors Applied Micro Circuits Corporation We have audited the accompanying consolidated balance sheets of Applied Micro Circuits Corporation as of March 31, 1998 and 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1999. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Applied Micro Circuits Corporation at March 31, 1998 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP San Diego, California April 21, 1999 F-2 APPLIED MICRO CIRCUITS CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except par value)
March 31, ------------------ 1998 1999 -------- -------- ASSETS ------ Current assets: Cash and cash equivalents................................ $ 6,460 $ 13,530 Short-term investments--available-for-sale............... 61,436 73,010 Accounts receivable, net of allowance for doubtful accounts of $350 and $177 at March 31, 1998 and 1999, respectively............................................ 12,179 19,275 Inventories.............................................. 8,185 9,813 Deferred income taxes.................................... 3,882 4,573 Notes receivable from officer and employees.............. 87 815 Other current assets..................................... 2,297 4,004 -------- -------- Total current assets................................... 94,526 125,020 Property and equipment, net................................ 17,218 23,128 Other assets............................................... 1,090 2,507 -------- -------- Total assets............................................. $112,834 $150,655 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable......................................... $ 5,215 $ 5,131 Accrued payroll and related expenses..................... 5,057 4,689 Other accrued liabilities................................ 2,344 7,207 Deferred revenue......................................... 1,873 1,439 Current portion of long-term debt........................ 567 1,862 Current portion of capital lease obligations............. 2,053 1,075 -------- -------- Total current liabilities.............................. 17,109 21,403 Long-term debt, less current portion....................... 2,736 4,995 Long-term capital lease obligations, less current portion.. 1,355 2,563 Commitments and contingencies (Notes 7 and 11)............. Stockholders' equity: Preferred Stock, $0.01 par value: Authorized shares--2,000, none issued and outstanding... -- -- Common Stock, $0.01 par value: Authorized shares--60,000 at March 31, 1998 and 1999, respectively........................................... Issued and outstanding shares--22,536 and 26,612 at March 31, 1998 and 1999, respectively.................. 225 266 Additional paid-in capital............................... 86,660 102,525 Deferred compensation, net............................... (472) (2,123) Accumulated other comprehensive income (loss)............ -- (33) Retained earnings........................................ 5,722 21,514 Notes receivable from stockholders....................... (501) (455) -------- -------- Total stockholders' equity............................. 91,634 121,694 -------- -------- Total liabilities and stockholders' equity............... $112,834 $150,655 ======== ========
See accompanying notes F-3 APPLIED MICRO CIRCUITS CORPORATION CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
Fiscal Year ended March 31, ------------------------- 1997 1998 1999 ------- ------- -------- Net revenues......................................... $57,468 $76,618 $105,000 Cost of revenues..................................... 30,057 34,321 37,937 ------- ------- -------- Gross profit......................................... 27,411 42,297 67,063 Operating expenses: Research and development........................... 7,870 13,268 22,472 Selling, general and administrative................ 12,537 14,278 18,325 Merger-related costs............................... -- -- 2,350 ------- ------- -------- Total operating expenses......................... 20,407 27,546 43,147 ------- ------- -------- Operating income..................................... 7,004 14,751 23,916 Interest income (expense), net....................... (29) 871 3,450 ------- ------- -------- Income before income taxes........................... 6,975 15,622 27,366 Provision for income taxes........................... 659 406 10,233 ------- ------- -------- Net income........................................... $ 6,316 $15,216 $ 17,133 ======= ======= ======== Basic earnings per share: Earnings per share................................. $ 1.26 $ 1.44 $ 0.70 ======= ======= ======== Shares used in calculating basic earnings per share............................................. 5,006 10,594 24,514 ======= ======= ======== Diluted earnings per share: Earnings per share................................. $ 0.35 $ 0.75 $ 0.62 ======= ======= ======== Shares used in calculating diluted earnings per share............................................. 17,907 20,294 27,430 ======= ======= ========
See accompanying notes. F-4 APPLIED MICRO CIRCUITS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
Convertible Preferred Accumulated Notes Stock Common Stock Additional Other Retained Receivable Total -------------- -------------- Paid-In Deferred Comprehensive Earnings From Stockholders' Shares Amount Shares Amount Capital Compensation Income (Loss) (Deficit) Stockholders Equity ------ ------ ------ ------ ---------- ------------ ------------- -------- ------------ ------------- Balance, March 31, 1996.............. 1,223 $ 12 4,968 $ 49 $ 36,971 $ -- $ -- $(15,444) $ (76) $ 21,512 Issuance of stock pursuant to exercise of stock options.......... -- -- 93 1 41 -- -- -- -- 42 Repurchase of common stock..... -- -- (36) -- (38) -- -- (107) -- (145) Payments on notes............ -- -- -- -- -- -- -- -- 18 18 Net income....... -- -- -- -- -- -- -- 6,316 -- 6,316 ------ ---- ------ ---- -------- ------- ---- -------- ----- -------- Balance, March 31, 1997.............. 1,223 12 5,025 50 36,974 -- -- (9,235) (58) 27,743 Issuance of Common Stock, net of issuance costs............ -- -- 5,039 51 51,942 -- -- -- -- 51,993 Conversion of convertible preferred stock to common Stock.. (1,051) (11) 10,717 107 (96) -- -- -- -- -- Issuance of stock pursuant to exercise of stock options.......... -- -- 1,702 17 858 -- -- -- (455) 420 Net exercise of warrants......... -- -- 53 -- -- -- -- -- -- -- Payments on notes............ -- -- -- -- -- -- -- -- 12 12 Repurchase of convertible preferred stock.. (172) (1) -- -- (3,617) -- -- (259) -- (3,877) Deferred compensation related to stock options.......... -- -- -- -- 599 (599) -- -- -- -- Amortization of deferred compensation..... -- -- -- -- -- 127 -- -- -- 127 Net Income....... -- -- -- -- -- -- -- 15,216 -- 15,216 ------ ---- ------ ---- -------- ------- ---- -------- ----- -------- Balance, March 31, 1998.............. -- -- 22,536 225 86,660 (472) -- 5,722 (501) 91,634 Issuance of stock upon formation of Cimaron.......... -- -- 2,344 24 4,640 (230) -- -- -- 4,434 Issuance of common stock under employee stock purchase plans............ -- -- 417 4 3,175 -- -- -- -- 3,179 Issuance of stock pursuant to exercise of stock options.......... -- -- 1,315 13 2,524 (964) -- -- -- 1,573 Tax Benefit of disqualifying dispositions..... -- -- -- -- 4,209 -- -- -- -- 4,209 Payment on notes. -- -- -- -- -- -- -- -- 46 46 Deferred compensation related to stock options and restricted stock. -- -- -- -- 1,317 (1,317) -- -- -- -- Amortization of deferred compensation..... -- -- -- -- -- 860 -- -- -- 860 Adjustment for change in Cimaron Communications Corporation's year end......... -- -- -- -- -- -- -- (1,341) -- (1,341) Comprehensive Income: Net income...... -- -- -- -- -- -- -- 17,133 -- 17,133 Unrealized loss on short-term investments, net of tax benefit.. -- -- -- -- -- -- (33) -- -- (33) -------- Total comprehensive income........... -- -- -- -- -- -- -- -- -- 17,100 ------ ---- ------ ---- -------- ------- ---- -------- ----- -------- Balance, March 31, 1999.............. -- $ -- 26,612 $266 $102,525 $(2,123) $(33) $ 21,514 $(455) $121,694 ====== ==== ====== ==== ======== ======= ==== ======== ===== ========
See accompanying notes. F-5 APPLIED MICRO CIRCUITS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Fiscal Year ended March 31, ------------------------------ 1997 1998 1999 -------- --------- --------- Operating Activities Net income................................... $ 6,316 $ 15,216 $ 17,133 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................ 5,185 5,174 7,045 Write-offs of inventories.................... 452 600 180 Amortization of deferred compensation........ -- 127 860 Loss on disposals of property................ -- -- 221 Adjustment for change in Cimaron year end.... -- -- (1,341) Changes in operating assets and liabilities: Accounts receivables........................ 1,058 (3,761) (7,096) Inventories................................. (1,146) (1,255) (1,808) Other current assets........................ (116) (1,607) (678) Accounts payable............................ (1,553) 2,787 (84) Accrued payroll and other accrued liabilities................................ 1,562 2,418 8,704 Deferred income taxes....................... -- (3,882) (691) Deferred revenue............................ (25) 1,067 (434) -------- --------- --------- Net cash provided by operating activities.. 11,733 16,884 22,011 Investing Activities Proceeds from sales and maturities of short- term investments............................ 7,944 66,547 187,787 Purchase of short-term investments........... (11,512) (119,874) (199,394) Repayments and (advances) on notes receivable from officers and employees................. (608) (366) 262 Purchase of property, equipment and other assets...................................... (2,855) (11,342) (16,490) -------- --------- --------- Net cash used for investing activities..... (7,031) (65,035) (27,835) Financing Activities Proceeds from issuance of common stock, net.. 42 52,413 9,062 Repurchase of common stock................... (145) -- -- Repurchase of convertible preferred stock.... -- (3,877) -- Payments on notes receivable from stockholders................................ 18 12 46 Payments on capital lease obligations........ (2,824) (2,691) (2,110) Payments on long-term debt................... (582) (37) (792) Proceeds from equipment financed under capital leases.............................. -- -- 2,342 Issuance of long-term debt................... -- 3,303 4,346 -------- --------- --------- Net cash provided by (used for) financing activities................................ (3,491) 49,123 12,894 -------- --------- --------- Net increase in cash and cash equivalents.. 1,211 972 7,070 Cash and cash equivalents at beginning of year. 4,277 5,488 6,460 -------- --------- --------- Cash and cash equivalents at end of year....... $ 5,488 $ 6,460 $ 13,530 ======== ========= ========= Supplemental disclosure of cash flow information: Cash paid for: Interest..................................... $ 656 $ 380 $ 542 ======== ========= ========= Income taxes................................. $ 770 $ 3,251 $ 4,274 ======== ========= =========
Supplemental schedule of noncash investing and financing activities: Capital lease obligations of approximately $1.2 million and $282,000 were incurred during fiscal years 1997 and 1998, respectively. During the fiscal year 1998, notes were received for the exercise of stock options totaling $455,000. See accompanying notes. F-6 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Business The Company designs, develops, manufactures and markets high-performance, high-bandwidth silicon solutions for the world's communications infrastructure. Basis of Presentation The consolidated financial statements include all the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. On March 17, 1999, the Company acquired Cimaron Communications Corporation ("Cimaron") in a business combination accounted for as a pooling-of-interests. Cimaron, which also designs and develops high-bandwidth silicon solutions for communications equipment manufacturers, became a wholly owned subsidiary of the Company through the exchange of approximately three million shares of the Company's common stock for all the outstanding stock and stock options of Cimaron. The accompanying financial statements for fiscal 1999 have been prepared as if the companies had been combined for the full year, and as more fully discussed in Note 2, the prior year financial statements did not require restatement as a result of this business combination. Cash, Cash Equivalents and Short-Term Investments Cash and cash equivalents consist of money market type funds and highly liquid debt instruments with original maturities of three months or less at the date of acquisition. Short-term investments consist of United States Treasury notes, obligations of U.S. government agencies and corporate bonds. The Company maintains its excess cash in financial institutions with strong credit ratings and has not experienced any significant losses on its investments. The Company classifies its short-term investments as "Available-for-Sale" and records such assets at the estimated fair value with unrealized gains and losses excluded from earnings and reported, net of tax, in comprehensive income. The basis for computing realized gains or losses is by specific identification. The following is a summary of available-for-sale securities (in thousands):
Gross Unrealized Amortized ------------------ Estimated Cost Gains Losses Fair Value --------- -------- -------- ---------- At March 31, 1999: U.S. treasury securities and obligations of U.S. government agencies........................ $21,740 $ 22 $ 72 $21,690 U.S. corporate debt securities... 51,321 16 17 51,320 ------- -------- -------- ------- $73,061 $ 38 $ 89 $73,010 ======= ======== ======== ======= At March 31, 1998: U.S. treasury securities and obligations of U.S. government agencies........................ $15,908 U.S. corporate debt securities... 45,528 ------- $61,436 =======
The estimated fair value of the short term investments was equal to the amortized cost at March 31, 1998. F-7 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Available-for-sale securities by contractual maturity are as follows (in thousands):
March 31, 1999 --------- Due in one year or less.......................................... $48,918 Due after one year through two years............................. 16,775 Greater than two years........................................... 7,317 ------- $73,010 =======
Fair Value of Financial Instruments The carrying value of cash equivalents, short-term investments, accounts receivable, accounts payable, accrued liabilities and long term debt approximates fair value. Concentration of Credit Risk The Company believes that the concentration of credit risk in its trade receivables is mitigated by the Company's credit evaluation process, relatively short collection terms and dispersion of its customer base. The Company generally does not require collateral and has not experienced significant losses on trade receivables from any particular customer or geographic region for any period presented. The Company invests its excess cash in debt instruments of the U.S. Treasury, governmental agencies and corporations with strong credit ratings. The Company has established guidelines relative to diversification and maturities that attempt to maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates. The Company has not experienced any significant losses on its cash equivalents or short-term investments. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. These estimates include assessing the collectability of accounts receivable, the use and recoverability of inventory, estimates to complete engineering contracts, costs of future product returns under warranty and provisions for contingencies expected to be incurred. Actual results could differ from those estimates. Inventories Inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. The Company's inventory valuation process is done on a part-by-part basis. Lower of cost or market adjustments, specifically identified on a part-by-part basis, reduce the carrying value of the related inventory and take into consideration reductions in sales prices, excess inventory levels and obsolete inventory. Once established, these adjustments are considered permanent and are not reversed until the related inventory is sold or disposed. Property and Equipment Property and equipment are stated at cost and depreciated over the estimated useful lives of the assets (3 to 7 years) using the straight line method. Leasehold improvements are stated at cost and amortized over the useful life of the asset. Property and equipment under capital leases are recorded at the net present value of the minimum lease payments and are amortized over the useful life of the assets. Leased assets purchased at the expiration of the lease term are capitalized at acquisition cost. F-8 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Impairment of Long-Lived Assets In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of", the Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. Through March 31, 1999, the Company has not experienced any such impairments. Advertising Cost Advertising costs are expensed as incurred. Revenues Revenues related to product sales are generally recognized when the products are shipped to the customer. Recognition of revenues and the related cost of revenues on shipments to distributors that are subject to terms of sale allowing for price protection and right of return on products unsold by the distributor are deferred until the distributor's ability to return the products or its' rights to price protection lapse or have been limited. Revenues on engineering design contracts are recognized using the percentage- of-completion method based on actual cost incurred to date compared to total estimated costs of the project. Deferred revenue represents both the margin on shipments of products to distributors that will be recognized when the distributors ship the products to their customers or the right of return has lapsed and billings in excess and estimated earnings on uncompleted engineering design contracts. Warranty Reserves Estimated expenses for warranty obligations are accrued as revenue is recognized. Reserve estimates are adjusted periodically to reflect actual experience. Research and Development Research and development costs are expensed as incurred. Substantially all research and development expenses are related to new product development, designing significant improvements to existing products and new process development. Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations in accounting for its employee and director stock options because the alternative fair value accounting provided for under SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), requires the use of option valuation models that were not developed for use in valuing employee and director stock options. Under SFAS 123 compensation cost is determined using the fair value of stock-based compensation determined as of the grant date, and is recognized over the periods in which the related services are rendered. The statement also permits companies to elect to continue using the current implicit value accounting method specified in APB 25 to account for stock-based compensation and disclose in the footnotes to the financial statements the pro forma effect of using the fair value method for its stock based compensation. Reclassification Certain prior period amounts have been reclassified to conform to the current period presentation. F-9 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Earnings Per Share Earnings per share are computed in accordance with SFAS No. 128 "Earnings Per Share." Basic earnings per share are computed using the weighted average number of common shares outstanding during each period. Diluted earnings per share includes the dilutive effect of common shares potentially issuable upon the exercise of stock options. The reconciliation of shares used to calculate basic and diluted earnings per share consists of the following (in thousands):
March 31, -------------------- 1997 1998 1999 ------ ------ ------ Shares used in basic earnings per share computations-- weighted average common shares outstanding........... 5,006 10,594 24,514 Effect of assumed conversion of Preferred Stock from date of issuance..................................... 12,828 7,434 -- Net effect of dilutive common share equivalents based on treasury stock method............................. 73 2,266 2,916 ------ ------ ------ Shares used in diluted earnings per share computations......................................... 17,907 20,294 27,430 ====== ====== ======
New Accounting Standards Effective April 1, 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive Income" and SFAS No. 131. "Segment Information". SFAS No. 130 requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income, including unrealized gains and losses on investments is reported, net of their related tax effect, to arrive at comprehensive income. SFAS No. 131 amends the requirements for public enterprises to report financial and descriptive information about its reportable operating segments. Operating segments, as defined in SFAS No. 131, are components of an enterprise for which separate financial information is available and is evaluated regularly by the Company in deciding how to allocate resources and in assessing performance. The financial information is required to be reported on the basis that is used internally for evaluating the segment performance. The Company believes it operates in one business and operating segment. 2. ACQUISITIONS On March 17, 1999, AMCC acquired all of the outstanding Common Stock and Common Stock equivalents of Cimaron in exchange for approximately three million shares of the Company's Common Stock. The acquisition has been accounted for using the pooling-of-interests method of accounting. Prior to the combination, Cimaron, which was incorporated on January 2, 1998, had a fiscal year end of December 31, 1998. In recording the business combination, Cimaron's results of operations for the fiscal year ended December 31, 1998 were combined with AMCC's for the fiscal year ended March 31, 1999. Cimaron's net sales and net loss for the three month period ended March 31, 1999 were $110,000 and $(1,341,000), respectively. In accordance with Accounting Principles Board Opinion No. 16 ("APB No. 16"), Cimaron's results of operations and cash flows for the three month period ended March 31, 1999 have been added directly to the retained earnings and cash flows of AMCC and excluded from reported fiscal 1999 results of operations. The combined Company realized a charge in the fourth quarter of fiscal 1999 of approximately $3.1 million related to the estimated costs of the merger. Approximately $700,000 of these total merger costs were incurred F-10 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) by Cimaron and are not reflected in the Company's results of operations for the fourth quarter of fiscal 1999 because they are included in Cimaron's results of operations which are reflected as a charge directly to retained earnings. In April 1998, the Company acquired Ten Mountains Design which designs and develops high bandwidth analog devices for communications equipment suppliers and optical module manufacturers. The purchase price was approximately $330,000 and resulted in recording intangible assets of approximately $280,000 which will be amortized over three years. The financial statements include the results of operation for Ten Mountains Design from the date of acquisition. 3. CERTAIN FINANCIAL STATEMENT INFORMATION
March 31, ------------------ 1998 1999 -------- -------- Inventories (in thousands): Finished goods......................................... $ 1,817 $ 975 Work in process........................................ 5,161 7,688 Raw materials.......................................... 1,207 1,150 -------- -------- $ 8,185 $ 9,813 ======== ======== Property and equipment (in thousands): Machinery and equipment................................ $ 25,983 $ 34,413 Leasehold improvements................................. 7,476 7,641 Computers, office furniture and equipment.............. 13,219 16,654 -------- -------- 46,678 58,708 Less accumulated depreciation and amortization........... (29,460) (35,580) -------- -------- $ 17,218 $ 23,128 ======== ======== Other accrued liabilities (in thousands): Income taxes payable................................... $ 888 $ 3,329 Accrued merger-related costs........................... -- 1,893 Other.................................................. 1,456 1,985 -------- -------- $ 2,344 $ 7,207 ======== ========
The cost and accumulated amortization of machinery and equipment under capital leases at March 31, 1999 were approximately $10.5 million and $8.5 million, respectively ($10.0 million and $7.2 million, at March 31, 1998, respectively). Amortization of assets held under capital leases is included with depreciation expense. During the years ended March 31, 1997, 1998 and 1999, the Company earned interest income of $627,000, $1,252,000 and $3,992,000, respectively, and incurred interest expense of $656,000, $381,000 and $542,000, respectively. 4. LONG-TERM DEBT During Fiscal 1999, the Company had an equipment line of credit with a bank which expired on March 31, 1999. Borrowings of $7.1 million under the line of credit were converted into term notes, with payments totaling $141,000, payable over 53 to 60 months, and interest rates between 6.44% to 7.42%. At March 31, 1999, $6.3 million was outstanding on the notes. F-11 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On July 31, 1998, the Company entered into an equipment line of credit with a bank. The line of credit provided for borrowings of up to $1,000,000 at the bank's prime rate plus .5% (8.25% at March 31, 1999). The Company paid off the outstanding balance of $565,000 including accrued interest on April 1, 1999. Principal maturities of the notes payable at March 31, 1999 are as follows:
Year ending March 31, (in thousands): 2000............................................................. $1,862 2001............................................................. 1,394 2002............................................................. 1,495 2003............................................................. 1,603 2004 ............................................................ 503 ------ $6,857 ======
5. STOCKHOLDERS' EQUITY Stock Offerings In December 1997, the Company completed an initial public offering of its Common Stock. The offering raised net proceeds to the Company of approximately $25.1 million. In March 1998, the Company completed a secondary public offering of Common Stock in which the Company raised net proceeds of approximately $26.9 million. Convertible Preferred Stock On April 24, 1997 the Board authorized the Company to repurchase up to $4.0 million of Convertible Preferred Stock, with priority given to the holders of Convertible Preferred Stock that submitted bids for the sale of their shares of Convertible Preferred Stock at the lowest price per share. On June 20, 1997, the Company repurchased an aggregate of 172,300 shares of Convertible Preferred Stock for approximately $3.9 million at prices between $1.20 and $2.61 per share on an as converted to common stock basis. In connection with the initial public offering, all then outstanding shares of Convertible Preferred Stock immediately converted into 10,717,317 shares of Common Stock. Preferred Stock In November 1997, the Certificate of Incorporation was amended to allow the issuance of up to 2,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restriction thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series of the designation of such series, without further vote or action by the stockholders. Stock Options and Other Stock Awards The Company's 1992 Stock Option Plan ("1992 Plan") provides for the granting of incentive and nonqualified stock options to employees. Generally, options are granted at prices at least equal to fair value of the Company's Common Stock on the date of grant. In addition, certain officers, employees and directors have been granted nonqualified stock options. The Company's 1982 Employee Incentive Stock Option Plan expired in 1992. In connection with the Company's acquisition of Cimaron, the Company assumed options and other stock awards granted under Cimaron's 1998 Stock Incentive Plan ("The Incentive Plan") covering 657,153 shares of F-12 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Common Stock at a weighted average exercise price of $.23 per share. The terms of the plan provides for the granting of options, restricted stock, or other stock based awards ("stock awards") to employees, officers, directors, consultants and advisors. Generally, the stock awards are granted at prices at least equal to the fair value of the Company's Common Stock on the date of grant. A total of 1,016,365 shares of Common Stock were authorized for issuance under the Incentive Plan. At March 31, 1999, 564,358 restricted shares had been issued under the Incentive Plan. Options and other stock awards under the plans expire not more than ten years from the date of grant and are either immediately exercisable after the date of grant but are subject to certain repurchase rights by the Company, at the Company's option, until such ownership rights have vested or exercisable upon vesting. Vesting generally occurs over four to five years. At March 31, 1998 and 1999, 651,842 and 869,626 shares of Common Stock were subject to repurchase, respectively. Pursuant to an employment agreement entered into during January 1996, between the Company and an executive, the Company granted an option to purchase 800,000 shares of the Company's Common Stock at $0.53 per share under the 1992 Stock Option Plan. The option vests ratably over four years. In the event the Company is acquired, the agreement stipulates that under certain circumstances the executive is eligible for certain additional compensation. These options as well as 66,667 additional options issued in April 1997 were exercised in July 1997. The exercise was paid for with various notes, which aggregated $455,000 and bear interest at rates between 5.98% and 6.54%, and are due at the earlier of February 12, 2000 ($420,000) and April 9, 2001 ($35,000) or the termination of employment. Pro forma information regarding net income and net income per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value of the options was estimated at the date of grant using the minimum value method for grants prior to the initial public offering and the Black Scholes method for grants after the initial public offering using the following weighted average assumptions for fiscal year 1997 and 1998; risk free interest rate of 6%; an expected option life of four years; no annual dividends, and an expected volatility of .92 (used only for the options valued using the Black Scholes method.). For options granted in fiscal year 1999, the fair value of the options was estimated at the date of the grant using the following assumptions; risk free interest rate of 6%; an expected life of four to five years; no annual dividends and an expected volatility of .89. For purposes of pro forma disclosures, the estimated fair value of the options is amortized ratably to expenses over the vesting period of such options. The effects of applying SFAS No. 123 for pro forma disclosure purposes are not likely to be representative of the effects on pro forma net income in future years because they do not take into consideration pro forma compensation expenses related to grants made prior to 1996. The Company's pro forma information follows (in thousands):
Year Ended March 31, ---------------------- 1997 1998 1999 ------ ------- ------- Net income: As reported......................................... $6,316 $15,216 $17,133 Pro forma........................................... $6,225 $14,856 $13,202 Earnings per share: As reported: Basic............................................. $ 1.26 $ 1.44 $ 0.70 Diluted........................................... $ 0.35 $ 0.75 $ 0.62 Pro forma: Basic............................................. $ 1.24 $ 1.40 $ 0.54
F-13 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Ended March 31, ------------------ 1997 1998 1999 ----- ----- ------ Diluted.............................................. $0.35 $0.73 $ 0.48 Weighted fair value of options granted during the year... $0.15 $6.84 $21.07
A summary of the Company's stock option activity, including those issued outside of the plans, and related information are as follows:
March 31, ---------------------------------------------------------------- 1997 1998 1999 -------------------- --------------------- --------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price --------- --------- ---------- --------- ---------- --------- Outstanding at beginning of year................ 1,690,160 $0.51 2,842,293 $0.51 2,682,451 $ 6.87 Granted............... 1,457,285 0.53 1,798,873 10.00 1,520,141 18.46 Exercised............. (92,680) 0.45 (1,701,620) 0.51 (1,314,581) 1.19 Forfeited............. (212,472) 0.53 (257,095) 0.64 (214,667) 8.32 --------- ----- ---------- ----- ---------- ------ Outstanding at end of year................... 2,842,293 $0.51 2,682,451 $6.87 2,673,344 $16.13 ========= ===== ========== ===== ========== ====== Vested at end of year... 851,764 $0.51 635,050 $0.60 678,615 $ 7.25 ========= ===== ========== ===== ========== ======
The following is a further breakdown of the options outstanding at March 31, 1999:
Weighted Average Weighted Remaining Average Range of Number Contractual Exercise Exercise Price Outstanding Life Price -------------- ----------- ----------- -------- $ 0.13--$ 0.98 1,043,660 7.60 $ 0.52 $ 3.90--$ 8.25 201,926 8.51 $ 7.69 $ 8.19--$23.63 665,774 9.03 $22.57 $23.88--$43.63 761,984 9.60 $34.10 -------------- --------- ---- ------ $ 0.13--$43.63 2,673,344 8.60 $16.13 ============== ========= ==== ======
From April 1, 1997 through September 30, 1997, the Company recorded deferred compensation expense for the difference between the exercise price and the fair value for financial statement presentation purposes of the Company's Common Stock, as determined by the Board of Directors, for all options granted in the period. This deferred compensation aggregates to $599,000, which is being amortized ratably over the four year vesting period of the related options. Additionally, during the year ended March 31, 1999, the Company recorded deferred compensation related to restricted stock and stock options granted to founders and employees of Cimaron of $2.5 million. Such amount is being amortized over the related vesting period, generally five years. Amortization of deferred compensation during fiscal years 1998 and 1999 was $127,000 and $860,000, respectively. Employee Stock Purchase Plans The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan") was adopted by the Board of Directors on October 6, 1997, and was subsequently approved by the stockholders. A total of 400,000 shares of Common Stock are reserved for issuance under the 1997 Purchase Plan. At March 31, 1999, 393,874 shares had been issued under the 1997 Purchase Plan. F-14 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan") was approved by the stockholders on August 4, 1998. A total of 400,000 shares are authorized for issuance under the 1998 Purchase Plan. At March 31, 1999, 23,308 shares had been issued under the 1998 Purchase Plan. Under the terms of the plans, purchases are made semiannually on January 31 and July 31 and the purchase price of the Common Stock is equal to 85% of the fair market value of the Common Stock on the first or last day of the offering period, whichever is lower. 1997 Directors' Stock Option Plan The Company's 1997 Directors' Stock Option Plan (the "Directors' Plan") was adopted by the Board of Directors on October 6, 1997, and was subsequently approved by the stockholders. A total of 200,000 shares of Common Stock are reserved for issuance under the Directors' Plan. The Directors' Plan provides for the grant of non-statutory options to nonemployee directors of the Company. At March 31, 1999, no shares had been issued under the Directors' Plan. Common Shares Reserved for Future Issuance At March 31, 1999, the Company has the following shares of Common Stock reserved for issuance upon the exercise of equity instruments: Stock Options: Issued and outstanding........................................... 2,673,344 Authorized for future grants..................................... 1,724,785 Stock purchase plans............................................... 382,818 --------- 4,780,947 =========
6. Income Taxes The provision for income taxes consists of the following (in thousands):
Year ended March 31, --------------------- 1997 1998 1999 ---- ------- ------- Current: Federal............................................. $380 $ 3,606 $ 9,860 State............................................... 279 682 1,064 ---- ------- ------- Total current..................................... 659 4,288 10,924 Deferred: Federal............................................. -- (3,558) (362) State............................................... -- (324) (329) ---- ------- ------- Total deferred.................................... -- (3,882) (691) ---- ------- ------- $659 $ 406 $10,233 ==== ======= =======
The provision for income taxes reconciles to the amount computed by applying the federal statutory rate (35%) to income before income taxes as follows (in thousands): F-15 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year ended March 31, ---------------------------------------- 1997 1998 1999 ------------ ------------ ------------ $ % $ % $ % ------- --- ------- --- ------- --- Tax at federal statutory rate......... $ 2,441 35% $ 5,468 35% $ 9,578 35% Increase (decrease) in valuation allowance of deferred tax assets..... (2,343) (34) (5,094) (32) -- -- Foreign sales corporation............. -- -- (309) (2) (387) (1) Federal alternative minimum tax....... 380 5 -- -- -- -- State taxes, net of federal benefit... 181 3 233 1 478 1 Federal tax credits................... -- -- (281) (2) (1,216) (5) Merger costs and deferred compensation......................... -- -- -- -- 763 3 Other................................. -- -- 389 3 1,017 4 ------- --- ------- --- ------- --- $ 659 9% $ 406 3% $10,233 37% ======= === ======= === ======= ===
Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes as of March 31, 1998 and 1999 are as shown below. At March 31, 1998, the effective tax rate is computed based on a full reduction of the valuation allowance and realization of the deferred tax asset.
March 31, ------------- 1998 1999 ------ ------ Deferred tax assets (in thousands): Inventory write-downs and other reserves....................... $1,814 $1,850 Net operating loss carryforwards............................... -- 1,719 Capitalization of inventory and research and development costs. 242 313 Research and development credit carryforwards.................. 898 298 Depreciation and amortization.................................. 242 -- State income taxes............................................. 239 47 Other credit carryforwards..................................... 447 447 ------ ------ Total deferred tax assets...................................... 3,882 4,674 Deferred tax liabilities: Depreciation and amortization.................................. -- 101 ------ ------ Net deferred tax assets.......................................... $3,882 $4,573 ====== ======
At March 31, 1999, the Company has federal alternative minimum tax and federal and state research and development tax credit carryforwards of approximately $447,000, $195,000 and $103,000, respectively, which will begin to expire in 2007 unless previously utilized. The Company also has federal and state net operating loss carryforwards of approximately $4,043,000 which will expire in 2018 and 2003, respectively, unless previously utilized. These net operating loss carryforwards are the result of the operating losses generated by the Company's subsidiary, Cimaron, prior to the acquisition. Under Internal Revenue Code Section 382 and 383, the Company's use of its tax loss carryforwards and tax credit carryforwards could be limited in the event of certain cumulative changes in the Company's stock ownership. 7. COMMITMENTS In July 1998, the Company acquired the right to purchase, in the form of a ground lease, a parcel of land as a site for a potential new wafer fabrication facility. This parcel of land is located approximately one quarter mile from the Company's headquarters in San Diego, California. The Company has made payments of $1.0 million F-16 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) related to this transaction. In December 1998, the Company exercised its right to acquire the land which commits the Company to take title to the land by May 31, 1999 upon payment of an additional $3.7 million. The Company leases certain of its facilities under long-term operating leases which expire at various dates through 2011. The lease agreements frequently include renewal provisions, which require the Company to pay taxes, insurance and maintenance costs and contain escalation clauses based upon increases in the Consumer Price Index or defined rent increases. The Company also leases certain software under noncancellable operating leases expiring through 2002. Annual future minimum lease payments, including machinery and equipment under capital leases as of March 31, 1999 are as follows:
Operating Capital Year Ending March 31, Leases Leases - --------------------- --------- ------- 2000....................................................... $ 3,473 $1,332 2001....................................................... 3,713 907 2002....................................................... 4,581 765 2003....................................................... 4,052 478 2004....................................................... 1,998 835 Thereafter................................................. 6,155 -- ------- ------ Total minimum lease payments............................. $23,972 4,317 ======= Less amount representing interest............................ 679 ------ Present value of remaining minimum capital lease payments (including current portion of $1,075)....................... $3,638 ======
Rent expense (including short-term leases and net of sublease income) for the years ended March 31, 1997, 1998, and 1999 was $1.2 million, $1.2 million, and $1.4 million, respectively. Sublease income was $208,000, $119,000 and $0 for the years ended March 31, 1997, 1998 and 1999, respectively. 8. RELATED PARTY TRANSACTIONS At March 31, 1998 and 1999, the Company had outstanding notes receivables from officer(s) of $1,065,000, and $915,000, respectively. These notes bear interest at the rates of 4.62% to 5.76%, and are due at the earlier of one to three years from the date of the note or termination of employment with the Company. 9. EMPLOYEE RETIREMENT PLAN Effective January 1, 1986, the Company established a 401(k) defined contribution retirement plan (the "Retirement Plan") covering all full-time employees with greater than three months of service. The Retirement Plan provides for voluntary employee contributions from 1% to 20% of annual compensation, subject to a maximum limit allowed by Internal Revenue Service guidelines. The Company may contribute such amounts as determined by the Board of Directors. Employer contributions vest to participants at a rate of 20% per year of service, provided that after five years of service all past and subsequent employer contributions are 100% vested. The contributions charged to operations totaled $318,000, $412,000 and $573,000 for the years ended March 31, 1997, 1998 and 1999, respectively. 10. SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION During the years ended March 31, 1997, 1998, and 1999, 20%, 21% and 20%, respectively, of net revenues were from Nortel. In 1998 and 1999, Insight Electronics, the Company's domestic distributor, accounted for 11% and 13% of net revenues. Additionally, in 1999, Raytheon Systems Co. accounted for 16% of net revenues. No other customer accounted for more than 10% of revenues in any period. F-17 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Net revenues by geographic region were as follows (in thousands):
Year ended March 31, ------------------------ 1997 1998 1999 ------- ------- -------- Net revenues: United States........................................ $34,424 $44,448 $ 61,760 Canada............................................... 10,943 14,204 18,011 Europe and Israel.................................... 8,216 13,773 18,136 Asia................................................. 3,885 4,193 7,093 ------- ------- -------- $57,468 $76,618 $105,000 ======= ======= ========
11. CONTINGENCIES The Company is party to various claims and legal actions arising in the normal course of business, including notification of possible infringement on the intellectual property rights of third parties. In addition, since 1993 the Company has been named as a potentially responsible party ("PRP") along with a large number of other companies that used Omega Chemical Corporation ("Omega") in Whittier, California to handle and dispose of certain hazardous waste material. The Company is a member of a large group of PRPs that has agreed to fund certain remediation efforts at the Omega site for which the Company has accrued approximately $50,000. Although the ultimate outcome of these matters is not presently determinable, management believes that the resolution of all such pending matters, net of amounts accrued, will not have a material adverse affect on the Company's financial position or liquidity; however, there can be no assurance that the ultimate resolution of these matters will not have a material impact on the Company's results of operations in any period. On July 31, 1998, the Lemelson Medical, Education & Research Foundation Limited Partnership (the "Lemelson Partnership") filed a lawsuit in the U.S. District Court for the District of Arizona against 26 companies, including the Company, engaged in the manufacture and/or sale of IC products. On November 25, 1998 the Company was served a summons pursuant to this lawsuit. The complaint alleges infringement by the defendants of certain U.S. patents (the "Lemelson Patents") held by the Lemelson Partnership relating to certain semiconductor manufacturing processes. The complaint seeks, among other things, injunctive relief and unspecified treble damages. Previously, the Lemelson Partnership has offered the Company a license under the Lemelson patents. The Company is monitoring this matter and, although the ultimate outcome of this matter is not currently determinable, the Company believes, based in part on the licensing terms previously offered by the Lemelson Partnership, that the resolution of this matter will not have a material adverse effect on the Company's financial position or liquidity; however, there can be no assurance that the ultimate resolution of this matter will not have a material adverse effect on the Company's results of operations in any period. F-18 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (In thousands)
Additions ------------------ Charged Charged Balance at to Costs to Other Balance Beginning and Accounts- at End Description of Period Expenses Describe Deductions of Period ----------- ---------- -------- --------- ---------- --------- Year ended March 31, 1999: Allowance for doubtful accounts.................. $350 $ 50 $-- $223 $177 Year ended March 31, 1998: Allowance for doubtful accounts.................. $200 $157 $-- $ 7 $350 Year ended March 31, 1997: Allowance for doubtful accounts.................. $ 90 $198 $88 $ -- $200
F-19 EX-10.26 2 1998 STOCK INCENTIVE PLAN EXHIBIT B EXHIBIT 10.26 Cimaron Communications Corporation 1998 Stock Incentive Plan ------------------------- 1. Purpose ------- The purpose of this 1998 Stock Incentive Plan (the "Plan") of Cimaron Communications Corporation, a Delaware corporation (the "Company"), is to advance the interests of the Company's stockholders by enhancing the Company's ability to attract, retain and motivate persons who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives and thereby better aligning the interests of such persons with those of the Company's stockholders. Except where the context otherwise requires, the term "Company" shall include any present or future subsidiary corporations of Cimaron Communications Corporation as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the "Code"). 2. Eligibility ----------- All of the Company's employees, officers, directors, consultants and advisors are eligible to be granted options, restricted stock, or other stock- based awards (each, an "Award") under the Plan. Any person who has been granted an Award under the Plan shall be deemed a "Participant". 3. Administration, Delegation -------------------------- (a) Administration by Board of Directors. The Plan will be administered ------------------------------------ by the Board of Directors of the Company (the "Board"). The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable. The Board may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency. All decisions by the Board shall be made in the Board's sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Award. No director or person acting pursuant to the authority delegated by the Board shall be liable for any action or determination relating to or under the Plan made in good faith. 1 (b) Delegation to Executive Officers. To the extent permitted by -------------------------------- applicable law, the Board may delegate to one or more executive officers of the Company the power to make Awards and exercise such other powers under the Plan as the Board may determine, provided that the Board shall fix the maximum number of shares subject to Awards and the maximum number of shares for any one Participant to be made by such executive officers. (c) Appointment of Committees. To the extent permitted by applicable law, ------------------------- the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a "Committee"). If and when the common stock, $.001 par value per share, of the Company (the "Common Stock") is registered under the Securities Exchange Act of 1934 (the "Exchange Act"), the Board shall appoint one such Committee of not less than two members, each member of which shall be an "outside director" within the meaning of Section 162(m) of the Code and a "non-employee director" as defined in Rule 16b-3 promulgated under the Exchange Act." All references in the Plan to the "Board" shall mean the Board or a Committee of the Board or the executive officer referred to in Section 3(b) to the extent that the Board's powers or authority under the Plan have been delegated to such Committee or executive officer. 4. Stock Available for Awards -------------------------- (a) Number of Shares. Subject to adjustment under Section 8, Awards may ---------------- be made under the Plan for up to 2,556,250 shares of Common Stock. If any Award expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part or results in any Common Stock not being issued, the unused Common Stock covered by such Award shall again be available for the grant of Awards under the Plan, subject however, in the case of Incentive Stock Options (as hereinafter defined), to any limitation required under the Code. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. (b) Per-Participant Limit. Subject to adjustment under Section 8, for --------------------- Awards granted after the Common Stock is registered under the Exchange Act, the maximum number of shares with respect to which an Award may be granted to any Participant under the Plan shall be 500,000 per calendar year. The per- participant limit described in this Section 4(b) shall be construed and applied consistently with Section 162(m) of the Code. 2 5. Stock Options ------------- (a) General. The Board may grant options to purchase Common Stock (each, an ------- "Option") and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. An Option which is not intended to be an Incentive Stock Option (as hereinafter defined) shall be designated a "Nonstatutory Stock Option". (b) Incentive Stock Options. An Option that the Board intends to be an ----------------------- incentive stock option" as defined in Section 422 of the Code (an "Incentive Stock Option") shall only be granted to employees of the Company and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. The Company shall have no liability to a Participant, or any other party, if an Option (or any part thereto which is intended to be an Incentive Stock Option is not an Incentive Stock Option. (c) Exercise Price. The Board shall establish the exercise price at the -------------- time each Option is granted and specify it in the applicable option agreement. (d) Duration of Options. Each Option shall be exercisable at such times ------------------- and subject to such terms and conditions as the Board may specify in the applicable option agreement. (e) Exercise of Option. Options may be exercised only by delivery to the ------------------ Company of a written notice of exercise signed by the proper person together with payment in full as specified in Section 5(f) for the number of shares for which the Option is exercised. (f) Payment Upon Exercise. Common Stock purchased upon the exercise of an --------------------- Option granted under the Plan shall be paid for as follows: (1) in cash or by check, payable to the order of the Company; (2) except as the Board may otherwise provide in an Option Agreement, (i) delivery of an irrevocable and unconditional undertaking by a creditworthy broker to deliver promptly to the Company sufficient funds to pay the exercise price, (ii) delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a creditworthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price or (iii) delivery of shares of Common Stock owned by the Participant valued at their fair market value as 3 determined by the Board in good faith ("Fair Market Value"), which Common Stock was owned by the Participant at least six months prior to such delivery; (3) to the extent permitted by the Board and explicitly provided in an Option Agreement (i) by delivery of a promissory note of the Participant to the Company on terms determined by the Board, or (ii) by payment of such other lawful consideration as the Board may determine; or (4) any combination of the above permitted forms of payment. 6. Restricted Stock ---------------- (a) Grants. The Board may grant Awards entitling recipients to acquire ------ shares of Common Stock, subject to the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price (or to require forfeiture of such shares if issued at no cost) from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award (each, "Restricted Stock Award"). (b) Terms and Conditions. The Board shall determine the terms and any such -------------------- Restricted Stock Award, including the conditions for repurchase (or forfeiture) and the issue price, if any. Any stock certificates issued in respect of a Restricted Stock Award shall be registered in the name of the Participant and, unless otherwise determined by the Board, deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). At the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or if the Participant has died, to the beneficiary designated, in a manner determined by the Board, by a Participant to receive amounts due or exercise rights of the Participant in the event of the Participant's death (the "Designated Beneficiary"). In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate. 7. Other Stock-Based Awards ------------------------ The Board shall have the right to grant other Awards based upon the Common Stock having such terms and conditions as the Board may determine, including the grant of shares based upon certain conditions, the grant of securities convertible into Common Stock and the grant of stock appreciation rights. 4 8. Changes in Capitalization: Acquisition Events --------------------------------------------- (a) Changes in Capitalization. In the event of any stock split, reverse ------------------------- stock split, stock dividend, recapitalization, combination of shares, reclassification of shares, liquidation, spin-off or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a normal cash dividend, (i) the number and class of security available under this Plan, (ii) the number and class of security and exercise price per share subject to each outstanding Option, (iii) the repurchase price per share subject to each outstanding Restricted Stock Award, and (iv) the terms of each other outstanding stock-based Award shall be appropriately adjusted by the Company (or substituted Awards may be made, if applicable) to the extent the Board shall determine, in good faith, that such an adjustment (or substitution) is necessary and appropriate. If this Section 8(a) applies and Section 8(b) also applies to any event, Section 8(b) shall be applicable to such event, and this Section 8(a) shall not be applicable. (b) Acquisition Events ------------------ (1) Consequences of Acquisition Events. Upon the occurrence of an ---------------------------------- Acquisition Event (as defined below), or the execution by the Company of any agreement with respect to an Acquisition Event, the Board shall provide that outstanding Awards other than Restricted Stock Awards shall be assumed, or equivalent awards shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof), provided that any Options substituted for Incentive Stock Options shall satisfy, in the determination of the Board, the requirements of Section 424(a) of the Code; provided, however, that if the -------- ------- acquiring or succeeding corporation (or an affiliate thereof) does not agree to assume, or substitute for, such Awards, then: (i) with respect to outstanding Options, the Board shall (x) upon written notice to the Participants, provide that all then unexercised Options will become exercisable in full as of a specified time (the "Acceleration Time") prior to the Acquisition Event and will terminate immediately prior to the consummation of such Acquisition Event except to the extent exercised by the Participants before the consummation of such Acquisition Event and/or (y) in the event of an Acquisition Event under the terms of which holders of Common Stock will receive upon consummation thereof a cash payment for each share of Common Stock surrendered pursuant to such Acquisition Event (the "Acquisition Price"), provide that all outstanding Options shall terminate upon consummation of such Acquisition Event and each Participant shall receive, in exchange therefor, a cash payment equal to the amount (if any) by which (A) the Acquisition Price multiplied by the number of shares of Common Stock subject to such outstanding Options (whether or not then exercisable), exceeds (B) the aggregate exercise price of such Options; 5 (ii) with respect to outstanding Restricted Stock Awards, the repurchase and other rights of the Company under such Award shall inure to the benefit of the Company's successor and shall apply to the securities or other property which the Common Stock was converted into or exchanged for pursuant to such Acquisition Event in the same manner and to the same extent as they applied to the Common Stock subject to such Award; and (iii) with respect to other outstanding Awards, the Board shall specify the effect of an Acquisition Event on any other Award granted under the Plan at the time of the grant of such Award. (2) Definition. An "Acquisition Event" shall mean: (a) any merger or ---------- consolidation of the Company with or into another entity, other than one in which the Common Stock is not converted into or exchanged for the right to receive cash, securities or other property, (b) any sale of all or substantially all of the assets of the Company or (c) any exchange of shares of the Company for cash, securities or other property pursuant to a statutory share exchange transaction. 9. General Provisions Applicable to Awards --------------------------------------- (a) Transferability of Awards. Except as the Board may otherwise ------------------------- determine or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to a Participant, to the extent relevant in the context, shall include references to authorized transferees. (b) Documentation. Each Award under the Plan shall be evidenced by a ------------- written instrument in such form as the Board shall determine. Each Award may contain terms and conditions in addition to those set forth in the Plan. (c) Board Discretion. Except as otherwise provided by the Plan, each type ---------------- of Award may be made alone or in addition or in relation to any other type of Award. The terms of each type of Award need not be identical, and the Board need not treat Participants uniformly. (d) Termination of Status. The Board shall determine the effect on an --------------------- Award of the disability, death, retirement, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, the Participant's legal representative, conservator, guardian or Designated Beneficiary may exercise rights under the Award. 6 (e) Withholding. Each Participant shall pay to the Company, or make ----------- provision satisfactory to the Board for payment of, any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax liability. Except as the Board may otherwise provide in an Award, Participants may satisfy such tax obligations in whole or in part in shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value. The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant. (f) Amendment of Award. The Board may amend, modify or terminate any ------------------ outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant's consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant. (g) Conditions on Delivery of Stock. The Company will not be obligated to ------------------------------- deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company's counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations. (h) Acceleration. The Board may at any time provide that any Options shall ------------ become immediately exercisable in full or in part, that any Restricted Stock Awards shall be free of all restrictions or that any other stock-based Awards may become exercisable in full or in part or free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be. 10. Miscellaneous ------------- (a) No Right To Employment or Other Status. No person shall have any -------------------------------------- claim or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award. 7 (b) No Rights As Stockholder. Subject to the provisions of the applicable ------------------------ Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder of such shares. Notwithstanding the foregoing, in the event the Company effects a split of the Common Stock by means of a stock dividend and the exercise price of and the number of shares subject to such Option is adjusted as of the date of the distribution of the dividend (rather than as of the record date for such dividend), then an optionee who exercises an Option between the close of business on the record date for such stock dividend and the close of business on the distribution date for such stock dividend shall be entitled to receive, on the distribution date, the stock dividend with respect to the shares of Common Stock acquired upon such Option exercise, notwithstanding the fact that such shares were not outstanding as of the close of business on the record date for such stock dividend. (c) Effective Date and Term of Plan. The Plan shall become effective on the ------------------------------- date on which it is adopted by the Board. No Awards shall be granted under the Plan after the completion of ten years from the earlier of (i) the date on which the Plan was adopted by the Board or (ii) the date the Plan was approved by the Company's stockholders, but Awards previously granted may extend beyond that date. (d) Amendment of Plan. The Board may amend, suspend or terminate the Plan ----------------- or any portion thereof at any time. (e) Governing Law. The provisions of the Plan and all Awards made hereunder ------------- shall be governed by and interpreted in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law. 8 Cimaron Communications Corporation Restricted Stock Agreement Granted Under 1998 Stock Incentive Plan --------------------------------------- AGREEMENT made this ___ day of __________, 19__, between Cimaron Communications Corporation, a Delaware corporation (the "Company"), and ________________________ (the "Participant"). For valuable consideration, receipt of which is acknowledged, the parties hereto agree as follows: 1. Purchase of Shares. ------------------- The Company shall issue and sell to the Participant, and the Participant shall purchase from the Company, subject to the terms and conditions set forth in this Agreement and in the Company's 1998 Stock Incentive Plan (the "Plan")______ shares (the "Shares") of common stock, $.001 par value, of the Company ("Common Stock"), at a purchase price of $._______ per share. The aggregate purchase price for the Shares shall be paid by the Participant by check payable to the order of the Company or such other method as may be acceptable to the Company. Upon receipt by the Company of payment for the Shares, the Company shall issue to the Participant one or more certificates in the name of the Participant for that number of Shares purchased by the Participant. The Participant agrees that the Shares shall be subject to the Purchase Option set forth in Section 2 of this Agreement and the restrictions on transfer set forth in Section 4 of this Agreement. 2. Purchase Option. ---------------- (a) In the event that the Participant ceases to be employed by the Company for any reason or no reason, with or without cause, prior to ___________ [five years from employment or commencement], the Company shall have the right and option (the "Purchase Option") to purchase from the Participant, for a sum of $______ per share (the "Option Price"), some or all of the Unvested Shares. "Unvested Shares" means the total number of Shares multiplied by the Applicable Percentage at the time the Purchase Option becomes exercisable by the Company. The "Applicable Percentage" shall begin as 100% and shall be reduced according to the schedule on Exhibit A. --------- (b) Notwithstanding the foregoing, in the event of an Acquisition of the Company (as defined below), the Applicable Percentage shall, immediately prior to the Closing of the Acquisition, be decreased by (i) 20% of the total number of Shares, if the Participant has been employed by the Company for 12 or more months prior to the Acquisition, or (ii) 10% of the total number of Shares, if the Participant has been employed by the Company for less than 12 months prior to the Acquisition. Thereafter, the Applicable Percentage shall be reduced in accordance with the total schedule set forth in the immediately preceding paragraph, except that such schedule shall be shortened by 12 months (in the case of an Applicable Percentage reduction under clause (i) above) or six months (in the case of an Applicable Percentage reduction under clause (ii) above). (c) "Acquisition" shall mean (i) the consolidation or merger of the Company (other than a merger to reincorporate the Corporation in a different jurisdiction) into or with any other entity or entities in which the shares of the Corporation outstanding immediately prior to the closing of such event represent or are converted into shares of the surviving or resulting entity that represent less than a majority of the total number of shares of the surviving or resulting entity that are outstanding or are reserved for issuance upon the exercise or conversion of outstanding securities immediately after the closing of such event, or (ii) the sale or transfer of fifty percent (50%) or more of the capital stock of the Corporation in a single transaction or series of related transactions or (iii) the sale of all or substantially all of the assets of the Company. (d) For purposes of this Agreement, employment with the Company shall include employment with a parent or subsidiary of the Company. 3. Exercise of Purchase Option and Closing. ---------------------------------------- (a) The Company may exercise the Purchase Option by delivering or mailing to the Participant (or his estate), within 60 days after the termination of the employment of the Participant with the Company, a written notice of exercise of the Purchase Option. Such notice shall specify the number of Shares to be purchased. If and to the extent the Purchase Option is not so exercised by the giving of such a notice within such 60-day period, the Purchase Option shall automatically expire and terminate effective upon the expiration of such 60-day period. (b) Within 10 days after his receipt of the Company's notice of the exercise of the Purchase Option pursuant to subsection (a) above, the Participant (or his estate) shall tender to the Company at its principal offices the certificate or certificates representing the Shares which the Company has elected to purchase in accordance with the terms of this Agreement, duly endorsed in blank or with duly endorsed stock powers attached thereto, all in form suitable for the transfer of such Shares to the Company. Promptly following its receipt of such certificate or certificates, the Company shall deliver or mail to the Participant a check in the amount of the aggregate Option Price therefor. (c) After the time at which any Shares are required to be delivered to the Company for transfer to the Company pursuant to subsection (b) above, the Company shall not pay any dividend to the Participant on account of such Shares or permit the Participant to exercise any of the privileges or rights of a stockholder with respect to such Shares, but shall, in so far as permitted by law, treat the Company as the owner of such Shares. (d) The Option Price may be payable, at the option of the Company, in cancellation of all or a portion of any outstanding indebtedness of the Participant to the Company or in cash (by check) or both. (e) The Company shall not purchase any fraction of a Share upon exercise of the Purchase Option, and any fraction of a Share resulting from a computation made pursuant to Section 2 of this Agreement shall be rounded to the nearest whole Share (with any one-half Share being rounded upward). 4. Restrictions on Transfer. ------------------------ (a) The Participant shall not sell, assign, transfer, pledge, hypothecate or otherwise dispose of, by operation of law or otherwise (collectively "transfer"): (b) any Shares, or any interest therein, that are subject to the Purchase Option, except that the Participant may transfer such Shares to or for the benefit of any parent, spouse, child or grandchild, or to a trust for their benefit, provided that such -------- Shares shall remain subject to this Agreement (including without limitation the restrictions on transfer set forth in this Section 4, the Purchase Option and the right of first refusal set forth in Section 5) and such permitted transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Agreement; or (c) any Shares, or any interest therein, that are no longer subject to the Purchase Option, except in accordance with Section 5 below. 5. Right of First Refusal. ---------------------- (a) If the Participant proposes to transfer any Shares that are no longer subject to the Purchase Option (either because they are no longer Unvested Shares or because the Purchase Option expired unexercised), then the Participant shall first give written notice of the proposed transfer (the "Transfer Notice") to the Company. The Transfer Notice shall name the proposed transferee and state the number of such Shares he proposes to transfer the ("Offered Shares"), the price per share and all other material terms and conditions of the transfer. (b) For 30 days following its receipt of such Transfer Notice, the Company shall have the option to purchase all (but not less than all) of the Offered Shares at the price and upon the terms set forth in the Transfer Notice. In the event the Company elects to purchase all of the Offered Shares, it shall give written notice of such election to the Participant within such 30-day period. Within 10 days after his receipt of such notice, the Participant shall tender to the Company at its principal offices the certificate or certificates representing the Offered Shares, duly endorsed in blank by the Participant or with duly endorsed stock powers attached thereto, all in form suitable for transfer of the Offered Shares to the Company. Promptly following receipt of such certificate or certificates, the Company shall deliver or mail to the Participant a check in payment of the purchase price for the Offered Shares; provided that if the terms of payment set forth -------- ---- in the Transfer Notice were other than cash against delivery, the Company may pay for the Offered Shares on the same terms and conditions as were set forth in the Transfer Notice. (c) If the Company does not elect to acquire all of the Offered Shares, the Participant may, within the 30-day period following the expiration of the option granted to the Company under subsection (b) above, transfer the Offered Shares to the proposed transferee, provided that such transfer shall not be on -------- ---- terms and conditions more favorable to the transferee than those contained in the Transfer Notice. Notwithstanding any of the above, all Offered Shares transferred pursuant to this Section 5 shall remain subject to this Agreement (including without limitation the restrictions on transfer set forth in Section 4 and the right of first refusal set forth in this Section 5) and such transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Agreement. (d) After the time at which the Offered Shares are required to be delivered to the Company for transfer to the Company pursuant to subsection (b) above, the Company shall not pay any dividend to the Participant on account of such Offered Shares or permit the Participant to exercise any of the privileges or rights of a stockholder with respect to such Shares, but shall, in so far as permitted by law, treat the Company as the owner of such Offered Shares. (e) The following transactions shall be exempt from the provisions of this Section 5: (i) a transfer of Shares to or for the benefit of any parent, spouse, child or grandchild of the Participant, or to a trust for their benefit; (ii) any transfer pursuant to an effective registration statement filed by the Company under the Securities Act of 1933, as amended (the "Securities Act"); and (iii) any transfer of the shares pursuant to the sale of all or substantially all of the business of the Company; provided, however, that in the case of a transfer pursuant -------- ------- to clause (1) above, such Shares shall remain subject to this Agreement (including without limitation the restrictions on transfer set forth in Section 4 and the right of first refusal set forth in this Section 5) and such transferee shall as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Agreement. (f) The Company may assign its rights to purchase Offered Shares in any particular transaction under this Section 5 to one or more persons or entities. (g) The provisions of this Section 5 shall terminate upon the earlier of the following events: (i) the closing of the sale of shares of Common Stock in an underwritten public offering pursuant to an effective registration statement filed by the Company under the Securities Act at a price to the public of at least $5.00 per share (subject to appropriate adjustments for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares) resulting in gross proceeds to the Company of at least $10,000,000; or (ii) an Acquisition. 6. Agreement in Connection with Public Offering. -------------------------------------------- The Participant agrees, in connection with the initial underwritten public offering of the Company's securities pursuant to a registration statement under the Securities Act, (i) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock held by the Participant (other than those shares included in the offering) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for a period of 180 days from the effective date of such registration statement, and (ii) to execute any agreement reflecting clause (i) above as may be requested by the Company or the managing underwriters at the time of such initial public offering. 7. Effect of Prohibited Transfer. ------------------------------ The Company shall not be required (a) to transfer on its books any of the Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement, or (b) to treat as owner of such Shares or to pay dividends to any transferee to whom any such Shares shall have been so sold or transferred. 8. Escrow. ------- The Participant shall, upon the execution of this Agreement, execute Joint Escrow Instructions in the form attached to this Agreement as Exhibit B. The Joint Escrow Instructions shall be delivered to the - --------- Secretary of the Company, as escrow agent thereunder. The Participant shall deliver to such escrow agent a stock assignment duly endorsed in blank and hereby instructs the Company to deliver to such escrow agent, on behalf of the Participant, the certificate(s) evidencing the Shares issued hereunder. Such materials shall be held by such escrow agent pursuant to the terms of such Joint Escrow Instructions. 9. Restrictive Legend. ------------------- All certificates representing Shares shall have affixed thereto a legend in substantially the following form, in addition to any other legends that may be required under federal or state securities laws: (i) "The shares of stock represented by this certificate are subject to restrictions on transfer and an option to purchase set forth in a certain Stock Restriction Agreement between the corporation and the registered owner of these shares (or his predecessor in interest), and such Agreement is available for inspection without charge at the office of the Secretary of the corporation." available for at least one year and even then will not be available unless a public market then exists for the Common Stock, adequate information concerning the Company is then available to the public, and other terms and conditions of Rule 144 are complied with; and (iv) there is now no registration statement on file with the Securities and Exchange Commission with respect to any stock of the Company and the Company has no obligation or current intention to register the Shares under the Securities Act. 12. Withholding Taxes; Section 83(b) Election. ------------------------------------------ (a) The Participant acknowledges and agrees that the Company has the right to deduct from payments of any kind otherwise due to the Participant any federal, state or local taxes of any kind required by law to be withheld with respect to the purchase of the Shares by the Participant or the lapse of the Purchase Option. (b) The Participant acknowledges that he has been informed of the availability of making an election in accordance with Section 83(b) of the Internal Revenue Code of 1986, as amended; that such election must be filed with the Internal Revenue Service within 30 days of the transfer of shares to the Participant; and that the Participant is solely responsible for making such election. (ii) "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold, transferred or otherwise disposed of in the absence of an effective registration statement under such Act or an opinion of counsel satisfactory to the corporation to the effect that such registration is not required." 10. Provisions of the Plan. ----------------------- This Agreement is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this Agreement. 11. Investment Representations. --------------------------- The Participant represents, warrants and covenants as follows: (a) The Participant is purchasing the Shares for his own account for investment only, and not with a view to, or for sale in connection with, any distribution of the Shares in violation of the Securities Act, or any rule or regulation under the Securities Act. (b) The Participant has had such opportunity as he has deemed adequate to obtain from representatives of the Company such information as is necessary to permit him to evaluate the merits and risks of his investment in the Company. (c) The Participant has sufficient experience in business, financial and investment matters to be able to evaluate the risks involved in the purchase of the Shares and to make an informed investment decision with respect to such purchase. (d) The Participant can afford a complete loss of the value of the Shares and is able to bear the economic risk of holding such Shares for an indefinite period. (e) The Participant understands that (i) the Shares have not been registered under the Securities Act and are "restricted securities" within the meaning of Rule 144 under the Securities Act, (ii) the Shares cannot be sold, transferred or otherwise disposed of unless they are subsequently registered under the Securities Act or an exemption from registration is then available; (iii) in any event, the exemption from registration under Rule 144 will not be 13. Severability. ------------ The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, and each other provision of this Agreement shall be severable and enforceable to the extent permitted by law. 14. Waiver. ------- Any provision for the benefit of the Company contained in this Agreement may be waived, either generally or in any particular instance, by the Board of Directors of the Company. 15. Binding Effect. --------------- This Agreement shall be binding upon and inure to the benefit of the Company and the Participant and their respective heirs, executors, administrators, legal representatives, successors and assigns, subject to the restrictions on transfer set forth in Sections 4 and 5 of this Agreement. 16. Notice. ------- All notices required or permitted hereunder shall be in writing and deemed effectively given upon personal delivery or five days after deposit in the United States Post Office, by registered or certified mail, postage prepaid, addressed to the other party hereto at the address shown beneath his or its respective signature to this Agreement, or at such other address or addresses as either party shall designate to the other in accordance with this Section 16. 17. Pronouns. --------- Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa. 18. Entire Agreement. ----------------- This Agreement and the Plan constitutes the entire agreement between the parties, and supersedes all prior agreements and understandings, relating to the subject matter of this Agreement. 19. Amendment. ---------- This Agreement may be amended or modified only by a written instrument executed by both the Company and the Participant. 20. Governing Law. ------------- This Agreement shall be construed, interpreted and enforced in accordance with the internal laws of the State of Delaware without regard to any applicable conflicts of laws. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CIMARON COMMUNICATIONS CORPORATION By:____________________________ Title:_________________________ 200 Brickstone Square Andover, MA 01810 PARTICIPANT _______________________________ Name: _________________________ Address:_______________________ _______________________________ Exhibit A ---------
If Cessation of Employment Occurs: Applicable Percentage: - -------------------------------------------------------------------------------- Before [1 year from commencement] 100% On or after [1 year] but before [1.25 years] 80% On or after [1.25 years] but before [1.50 years] 75% On or after [1.50 years] but before [1.75 years] 70% On or after [1.75 years] but before [2 years] 65% On or after [2 years] but before [2.25 years] 60% On or after [2.25 years] but before [2.50 years] 55% On or after [2.50 years] but before [2.75 years] 50% On or after [2.75 years] but before [3 years] 45% On or after [3 years] but before [3.25 years] 40% On or after [3.25 years] but before [3.50 years] 35% On or after [3.50 years] but before [3.75 years] 30% On or after [3.75 years] but before [4 years] 25% On or after [4 years] but before [4.25 years] 20% On or after [4.25 years] but before [4.50 years] 15% On or after [4.50 years] but before [4.75 years] 10% On or after [4.75 years] but before [5 years] 5% On or after [5 years] -0-
Exhibit B --------- CIMARON COMMUNICATIONS CORPORATION Joint Escrow Instructions ------------------------- ________________, 199__ Secretary Cimaron Communications Corporation 200 Brickstone Square Andover, MA 01810 Dear Sir: As Escrow Agent for Cimaron Communications Corporation, a Delaware corporation (the "Company"), and the undersigned Participant ("Holder"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Agreement (the "Agreement") of even date herewith, to which a copy of these Joint Escrow Instructions is attached, in accordance with the following instructions: 1. Holder irrevocably authorizes the Company to deposit with you any certificates evidencing Shares (as defined in the Agreement) to be held by you hereunder and any additions and substitutions to said Shares. Holder does hereby irrevocably constitute and appoint you as his attorney-in-fact and agent for the term of this escrow to execute with respect to such Shares all documents necessary or appropriate to make such Shares negotiable and to complete any transaction herein contemplated. Subject to the provisions of this paragraph 1 and the terms of the Agreement, Holder shall exercise all rights and privileges of a stockholder of the Company while the Shares are held by you. 2. Upon any purchase by the Company of the Shares pursuant to the Agreement, the Company shall give to Holder and you a written notice specifying the purchase price for the Shares, as determined pursuant to the Agreement, and the time for a closing hereunder (the "Closing") at the principal office of the Company. Holder and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 3. At the Closing, you are directed (a) to date the stock assignment form or forms necessary for the transfer of the Shares, (b) to fill in on such form or forms the number of Shares being transferred, and (c) to deliver same, together with the certificate or certificates evidencing the Shares to be transferred, to the Company against the simultaneous delivery to you of the purchase price for the Shares being purchased pursuant to the Agreement. 4. The Holder shall have the right to withdraw from this escrow any Shares as to which the Purchase Option (as defined in the Agreement) has terminated or expired. 5. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 6. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact of Holder while acting in good faith and in the exercise of your own good judgment, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 7. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or Company, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree of any court, you shall not be liable to any of the parties hereto or to any other person, firm or Company by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 8. You shall not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 9. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder and may rely upon the advice of such counsel. 10. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint any officer of the Company as successor Escrow Agent. 11. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 12. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such dispute shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 13. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses, or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. COMPANY: Cimaron Communications Corporation 200 Brickstone Square Andover, MA 01810 HOLDER: Notices to Holder shall be sent to the address set forth below Holder's signature below. ESCROW AGENT: Secretary Cimaron Communications Corporation 200 Brickstone Square Andover, MA 01810 By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions, and you do not become a party to the Agreement. This instrument shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Very truly yours, CIMARON COMMUNICATIONS CORPORATION By: _____________________________ Title:_____________________________ 200 Brickstone Square Andover, MA 01810 HOLDER: ___________________________________ Name: _____________________________ ESCROW AGENT: Address: Address: __________________________ ______________________ ______________________ _____________________________ Date Signed: ______________________ Cimaron Communications Corporation Restricted Stock Agreement Granted Under 1998 Stock Incentive Plan --------------------------------------- AGREEMENT made this ___ day of___________, 199___, between Cimaron Communications Corporation, a Delaware corporation (the "Company"), and __________________________ (the "Participant"). For valuable consideration, receipt of which is acknowledged, the parties hereto agree as follows: 1. Purchase of Shares. ------------------ The Company shall issue and sell to the Participant, and the Participant shall purchase from the Company, subject to the terms and conditions set forth in this Agreement and in the Company's 1998 Stock Incentive Plan (the "Plan")______ shares (the "Shares") of common stock, $.001 par value, of the Company ("Common Stock"), at a purchase price of $.___ per share. The aggregate purchase price for the Shares shall be paid by the Participant by check payable to the order of the Company or such other method as may be acceptable to the Company. Upon receipt by the Company of payment for the Shares, the Company shall issue to the Participant one or more certificates in the name of the Participant for that number of Shares purchased by the Participant. The Participant agrees that the Shares shall be subject to the Purchase Option set forth in Section 2 of this Agreement and the restrictions on transfer set forth in Section 4 of this Agreement. 2. Purchase Option. --------------- (a) In the event that the Participant ceases to be employed by the Company for any reason or no reason, with or without cause, prior to ___________ [five years from employment or commencement], the Company shall have the right and option (the "Purchase Option") to purchase from the Participant, for a sum of $___ per share (the "Option Price"), some or all of the Unvested Shares. "Unvested Shares" means the total number of Shares multiplied by the Applicable Percentage at the time the Purchase Option becomes exercisable by the Company. The "Applicable Percentage" shall begin as 100% and shall be reduced according to the schedule on Exhibit A. --------- (b) Notwithstanding the foregoing, in the event of an Acquisition of the Company (as defined below), the Applicable Percentage shall, immediately prior to the closing of the Acquisition, be decreased by (i) 20% of the total number of Shares, if the Participant has been employed by the Company for 12 or more months prior to the Acquisition, or (ii) 30% of the total number of Shares, if the Participant has been employed by the Company for less than 12 months prior to the Acquisition. Thereafter, the Applicable Percentage shall be reduced in accordance with the total schedule set forth in the immediately preceding paragraph, except that such schedule shall be shortened by 12 months (in the case of an Applicable Percentage reduction under clause (i) above) or 18 months (in the case of an Applicable Percentage reduction under clause (ii) above), and further, if Participant's employment is terminated Without Cause (as defined below) prior to the first anniversary of the date of the Acquisition, 50% of such Participant's then remaining Unvested Shares shall become vested as of such date of termination. For the purposes of this Section 2(b) "Without Cause" shall mean (a) termination of the Participant's employment for any reason other than (1) the breach by such Participant of either the Noncompetition Agreement or the Nondisclosure and Developments Agreement entered into by such Participant in favor of the Company, (2) the commission by such Participant of an act of fraud or embezzlement, (3) the deliberate disregard by such Participant of the rules or policies of the Company, which disregard is not remedied within 30 days after written notice from the Company describing such disregard, or the commission by the Participant of any other action with the intent to injure materially the Company, (4) such Participant being found guilty or entering a plea of nolo contendre in a criminal court of a felony; or (5) such Participant's willful breach of duty or habitual neglect of duty, or refusal to comply with any reasonable or proper direction given by or on behalf of the Board of Directors which breach, neglect or refusal is not remedied within 30 days after written notice from the Company describing such breach, neglect or refusal, and (b) a material reduction of such Participant's responsibility or a reduction in such Participant's cash compensation without a correlating increase in other compensation or benefits or the required relocation of the Participant's principal place of employment to a new location more than sixty (60) miles distant from the immediately preceding principal place of employment. (c) "Acquisition" shall mean (i) the consolidation or merger of the Company (other than a merger to reincorporate the Corporation in a different jurisdiction) into or with any other entity or entities in which the shares of the Corporation outstanding immediately prior to the closing of such event represent or are converted into shares of the surviving or resulting entity that represent less than a majority of the total number of shares of the surviving or resulting entity that are outstanding or are reserved for issuance upon the exercise or conversion of outstanding securities immediately after the closing of such event, or (ii) the sale or transfer of fifty percent (50%) or more of the capital stock of the Corporation in a single transaction or series of related transactions or (iii) the sale of all or substantially all of the assets of the Company. (d) For purposes of this Agreement, employment with the Company shall include employment with a parent or subsidiary of the Company. 3. Exercise of Purchase Option and Closing. ---------------------------------------- (a) The Company may exercise the Purchase Option by delivering or mailing to the Participant (or his estate), within 60 days after the termination of the employment of the Participant with the Company, a written notice of exercise of the Purchase Option. Such notice shall specify the number of Shares to be purchased. If and to the extent the Purchase Option is not so exercised by the giving of such a notice within such 60-day period, the Purchase Option shall automatically expire and terminate effective upon the expiration of such 60-day period. (b) Within 10 days after his receipt of the Company's notice of the exercise of the Purchase Option pursuant to subsection (a) above, the Participant (or his estate) shall tender to the Company at its principal offices the certificate or certificates representing the Shares which the Company has elected to purchase in accordance with the terms of this Agreement, duly endorsed in blank or with duly endorsed stock powers attached thereto, all in form suitable for the transfer of such Shares to the Company. Promptly following its receipt of such certificate or certificates, the Company shall deliver or mail to the Participant a check in the amount of the aggregate Option Price therefor. (c) After the time at which any Shares are required to be delivered to the Company for transfer to the Company pursuant to subsection (b) above, the Company shall not pay any dividend to the Participant on account of such Shares or permit the Participant to exercise any of the privileges or rights of a stockholder with respect to such Shares, but shall, in so far as permitted by law, treat the Company as the owner of such Shares. (d) The Option Price may be payable, at the option of the Company, in cancellation of all or a portion of any outstanding indebtedness of the Participant to the Company or in cash (by check) or both. (e) The Company shall not purchase any fraction of a Share upon exercise of the Purchase Option, and any fraction of a Share resulting from a computation made pursuant to Section 2 of this Agreement shall be rounded to the nearest whole Share (with any one-half Share being rounded upward). 4. Restrictions on Transfer. ------------------------- (a) The Participant shall not sell, assign, transfer, pledge, hypothecate or otherwise dispose of, by operation of law or otherwise (collectively "transfer"): (b) any Shares, or any interest therein, that are subject to the Purchase Option, except that the Participant may transfer such Shares to or for the benefit of any parent, spouse, child or grandchild, or to a trust for their benefit, provided that such -------- Shares shall remain subject to this Agreement (including without limitation the restrictions on transfer set forth in this Section 4, the Purchase Option and the right of first refusal set forth in Section 5) and such permitted transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Agreement; or (c) any Shares, or any interest therein, that are no longer subject to the Purchase Option, except in accordance with Section 5 below. 5. Right of First Refusal. ----------------------- (a) If the Participant proposes to transfer any Shares that are no longer subject to the Purchase Option (either because they are no longer Unvested Shares or because the Purchase Option expired unexercised), then the Participant shall first give written notice of the proposed transfer (the "Transfer Notice") to the Company. The Transfer Notice shall name the proposed transferee and state the number of such Shares he proposes to transfer the ("Offered Shares"), the price per share and all other material terms and conditions of the transfer. (b) For 30 days following its receipt of such Transfer Notice, the Company shall have the option to purchase all (but not less than all) of the Offered Shares at the price and upon the terms set forth in the Transfer Notice. In the event the Company elects to purchase all of the Offered Shares, it shall give written notice of such election to the Participant within such 30-day period. Within 10 days after his receipt of such notice, the Participant shall tender to the Company at its principal offices the certificate or certificates representing the Offered Shares, duly endorsed in blank by the Participant or with duly endorsed stock powers attached thereto, all in form suitable for transfer of the Offered Shares to the Company. Promptly following receipt of such certificate or certificates, the Company shall deliver or mail to the Participant a check in payment of the purchase price for the Offered Shares; provided that if the terms of payment set -------- ---- forth in the Transfer Notice were other than cash against delivery, the Company may pay for the Offered Shares on the same terms and conditions as were set forth in the Transfer Notice. (c) If the Company does not elect to acquire all of the Offered Shares, the Participant may, within the 30-day period following the expiration of the option granted to the Company under subsection (b) above, transfer the Offered Shares to the proposed transferee, provided that such transfer shall not be on -------- ---- terms and conditions more favorable to the transferee than those contained in the Transfer Notice. Notwithstanding any of the above, all Offered Shares transferred pursuant to this Section 5 shall remain subject to this Agreement (including without limitation the restrictions on transfer set forth in Section 4 and the right of first refusal set forth in this Section 5) and such transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Agreement. (d) After the time at which the Offered Shares are required to be delivered to the Company for transfer to the Company pursuant to subsection (b) above, the Company shall not pay any dividend to the Participant on account of such Offered Shares or permit the Participant to exercise any of the privileges or rights of a stockholder with respect to such Shares, but shall, in so far as permitted by law, treat the Company as the owner of such Offered Shares. (e) The following transactions shall be exempt from the provisions of this Section 5: (i) a transfer of Shares to or for the benefit of any parent, spouse, child or grandchild of the Participant, or to a trust for theft benefit; (ii) any transfer pursuant to an effective registration statement filed by the Company under the Securities Act of 1933, as amended (the "Securities Act"); and (iii) any transfer of the shares pursuant to the sale of all or substantially all of the business of the Company; provided, however, that in the case of a transfer pursuant to clause (1) above, such Shares shall remain subject to this Agreement (including without limitation the restrictions on transfer set forth in Section 4 and the right of first refusal set forth in this Section 5) and such transferee shall as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Agreement. (f) The Company may assign its rights to purchase Offered Shares in any particular transaction under this Section 5 to one or more persons or entities. (g) The provisions of this Section 5 shall terminate upon the earlier of the following events: (i) the closing of the sale of shares of Common Stock in an underwritten public offering pursuant to an effective registration statement filed by the Company under the Securities Act at a price to the public of at least $5.00 per share (subject to appropriate adjustments for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares) resulting in gross proceeds to the Company of at least $10,000,000; or (ii) an Acquisition. 6. Agreement in Connection with Public Offering. -------------------------------------------- The Participant agrees, in connection with the initial underwritten public offering of the Company's securities pursuant to a registration statement under the Securities Act, (i) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock held by the Participant (other than those shares included in the offering) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for a period of 180 days from the effective date of such registration statement, and (ii) to execute any agreement reflecting clause (i) above as may be requested by the Company or the managing underwriters at the time of such initial public offering. 7. Effect of Prohibited Transfer. ----------------------------- The Company shall not be required (a) to transfer on its books any of the Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement, or (b) to treat as owner of such Shares or to pay dividends to any transferee to whom any such Shares shall have been so sold or transferred. 8. Escrow. ------ The Participant shall, upon the execution of this Agreement, execute Joint Escrow Instructions in the form attached to this Agreement as Exhibit B. The Joint Escrow Instructions shall be delivered to the - --------- Secretary of the Company, as escrow agent thereunder. The Participant shall deliver to such escrow agent a stock assignment duly endorsed in blank and hereby instructs the Company to deliver to such escrow agent, on behalf of the Participant, the certificate(s) evidencing the Shares issued hereunder. Such materials shall be held by such escrow agent pursuant to the terms of such Joint Escrow Instructions. 9. Restrictive Legend. ------------------ All certificates representing Shares shall have affixed thereto a legend in substantially the following form, in addition to any other legends that may be required under federal or state securities laws: (i) "The shares of stock represented by this certificate are subject to restrictions on transfer and an option to purchase set forth in a certain Stock Restriction Agreement between the corporation and the registered owner of these shares (or his predecessor in interest), and such Agreement is available for inspection without charge at the office of the Secretary of the corporation." (ii) "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, and may not be sold, transferred or otherwise disposed of in the absence of an effective registration statement under such Act or an opinion of counsel satisfactory to the corporation to the effect that such registration is not required." 10. Provisions of the Plan. ---------------------- This Agreement is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this Agreement. 11. Investment Representations. -------------------------- The Participant represents, warrants and covenants as follows: (a) The Participant is purchasing the Shares for his own account for investment only, and not with a view to, or for sale in connection with, any distribution of the Shares in violation of the Securities Act, or any rule or regulation under the Securities Act. (b) The Participant has had such opportunity as he has deemed adequate to obtain from representatives of the Company such information as is necessary to permit him to evaluate the merits and risks of his investment in the Company. (c) The Participant has sufficient experience in business, financial and investment matters to be able to evaluate the risks involved in the purchase of the Shares and to make an informed investment decision with respect to such purchase. (d) The Participant can afford a complete loss of the value of the Shares and is able to bear the economic risk of holding such Shares for an indefinite period. (e) The Participant understands that (i) the Shares have not been registered under the Securities Act and are "restricted securities" within the meaning of Rule 144 under the Securities Act, (ii) the Shares cannot be sold, transferred or otherwise disposed of unless they are subsequently registered under the Securities Act or an exemption from registration is then available; (iii) in any event, the exemption from registration under Rule 144 will not be available for at least one year and even then will not be available unless a public market then exists for the Common Stock, adequate information concerning the Company is then available to the public, and other terms and conditions of Rule 144 are complied with; and (iv) there is now no registration statement on file with the Securities and Exchange Commission with respect to any stock of the Company and the Company has no obligation or current intention to register the Shares under the Securities Act. 12. Withholding Taxes; Section 83(b) Election. ------------------------------------------ (a) The Participant acknowledges and agrees that the Company has the right to deduct from payments of any kind otherwise due to the Participant any federal, state or local taxes of any kind required by law to be withheld with respect to the purchase of the Shares by the Participant or the lapse of the Purchase Option. (b) The Participant acknowledges that he has been informed of the availability of making an election in accordance with Section 83(b) of the Internal Revenue Code of 1986, as amended; that such election must be filed with the Internal Revenue Service within 30 days of the transfer of shares to the Participant; and that the Participant is solely responsible for making such election. 13. Severability. ------------ The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, and each other provision of this Agreement shall be severable and enforceable to the extent permitted by law. 14. Waiver. ------ Any provision for the benefit of the Company contained in this Agreement may be waived, either generally or in any particular instance, by the Board of Directors of the Company. 15. Binding Effect. -------------- This Agreement shall be binding upon and inure to the benefit of the Company and the Participant and their respective heirs, executors, administrators, legal representatives, successors and assigns, subject to the restrictions on transfer set forth in Sections 4 and 5 of this Agreement. 16. Notice. ------ All notices required or permitted hereunder shall be in writing and deemed effectively given upon personal delivery or five days after deposit in the United States Post Office, by registered or certified mail, postage prepaid, addressed to the other party hereto at the address shown beneath his or its respective signature to this Agreement, or at such other address or addresses as either party shall designate to the other in accordance with this Section 16. 17. Pronouns. -------- Whenever the context may require, any pronouns used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the plural, and vice versa. 18. Entire Agreement. ---------------- This Agreement and the Plan constitutes the entire agreement between the parties, and supersedes all prior agreements and understandings, relating to the subject matter of this Agreement. 19. Amendment. --------- This Agreement may be amended or modified only by a written instrument executed by both the Company and the Participant. 20. Governing Law. -------------- This Agreement shall be construed, interpreted and enforced in accordance with the internal laws of the State of Delaware without regard to any applicable conflicts of laws. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. CIMARON COMMUNICATIONS CORPORATION By:____________________________ Title:_________________________ 200 Brickstone Square Andover, MA 01810 PARTICIPANT _______________________________ Name:__________________________ Address:_______________________ _______________________ Exhibit A --------- If Cessation of Employment Occurs: Applicable Percentage: - -------------------------------------------------------------------------------- Before [1 year from commencement] 100% On or after [1 year] but before [1.25 years] 80% On or after [1.25 years] but before [1.50 years] 75% On or after [1.50 years] but before [1.75 years] 70% On or after [1.75 years] but before [2 years] 65% On or after [2 years] but before [2.25 years] 60% On or after [2.25 years] but before [2.50 years] 55% On or after [2.50 years] but before [2.75 years] 50% On or after [2.75 years] but before [3 years] 45% On or after [3 years] but before [3.25 years] 40% On or after [3.25 years] but before [3.50 years] 35% On or after [3.50 years] but before [3.75 years] 30% On or after [3.75 years] but before [4 years] 25% On or after [4 years] but before [4.25 years] 20% On or after [4.25 years] but before [4.50 years] 15% On or after [4.50 years] but before [4.75 years] 10% On or after [4.75 years] but before [5 years] 5% On or after [5 years] -0- Exhibit B --------- CIMARON COMMUNICATIONS CORPORATION Joint Escrow Instructions ------------------------- ________________, 199__ Secretary Cimaron Communications Corporation 200 Brickstone Square Andover, MA 01810 Dear Sir: As Escrow Agent for Cimaron Communications Corporation, a Delaware corporation (the "Company"), and the undersigned Participant ("Holder"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Restricted Stock Agreement (the "Agreement") of even date herewith, to which a copy of these Joint Escrow Instructions is attached, in accordance with the following instructions: 1. Holder irrevocably authorizes the Company to deposit with you any certificates evidencing Shares (as defined in the Agreement) to be held by you hereunder and any additions and substitutions to said Shares. Holder does hereby irrevocably constitute and appoint you as his attorney-in-fact and agent for the term of this escrow to execute with respect to such Shares all documents necessary or appropriate to make such Shares negotiable and to complete any transaction herein contemplated. Subject to the provisions of this paragraph 1 and the terms of the Agreement, Holder shall exercise all rights and privileges of a stockholder of the Company while the Shares are held by you. 2. Upon any purchase by the Company of the Shares pursuant to the Agreement, the Company shall give to Holder and you a written notice specifying the purchase price for the Shares, as determined pursuant to the Agreement, and the time for a closing hereunder (the "Closing") at the principal office of the Company. Holder and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 3. At the Closing, you are directed (a) to date the stock assignment form or forms necessary for the transfer of the Shares, (b) to fill in on such form or forms the number of Shares being transferred, and (c) to deliver same, together with the certificate or certificates evidencing the Shares to be transferred, to the Company against the simultaneous delivery to you of the purchase price for the Shares being purchased pursuant to the Agreement. 4. The Holder shall have the right to withdraw from this escrow any Shares as to which the Purchase Option (as defined in the Agreement) has terminated or expired. 5. Your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 6. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact of Holder while acting in good faith and in the exercise of your own good judgment, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 7. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or Company, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree of any court, you shall not be liable to any of the parties hereto or to any other person, firm or Company by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 8. You shall not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 9. You shall be entitled to employ such legal counsel and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder and may rely upon the advice of such counsel. 10. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company shall appoint any officer of the Company as successor Escrow Agent. 11. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 12. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities held by you hereunder, you are authorized and directed to retain in your possession without liability to anyone all or any part of said securities until such dispute shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 13. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in the United States Post Office, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties thereunto entitled at the following addresses, or at such other addresses as a party may designate by ten days' advance written notice to each of the other parties hereto. COMPANY: Cimaron Communications Corporation 200 Brickstone Square Andover, MA 01810 HOLDER: Notices to Holder shall be sent to the address set forth below Holder's signature below. ESCROW AGENT: Secretary Cimaron Communications Corporation 200 Brickstone Square Andover, MA 01810 By signing these Joint Escrow Instructions, you become a party hereto only for the purpose of said Joint Escrow Instructions, and you do not become a party to the Agreement. This instrument shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Very truly yours, CIMARON COMMUNICATIONS CORPORATION By:_____________________________ Title:__________________________ 200 Brickstone Square Andover, MA 01810 HOLDER: ________________________________ Name:___________________________ ESCROW AGENT: Address:________________________ ________________________ ________________________ Date Signed: ___________________ Cimaron Communications Corporation Incentive Stock Option Agreement Granted Under 1998 Stock Incentive Plan --------------------------------------- 1. Grant of Option. --------------- This agreement evidences the grant by Cimaron Communications Corporation, a Delaware corporation (the "Company") on GRANT DATE (the "Grant Date") to NAME (the "Participant"), an employee of the Company, of an option to purchase, in whole or in part, on the terms provided herein and in the Company's 1998 Stock Incentive Plan (the "Plan"), a total of NUMBER shares of common stock (the "Shares"), $.001 par value per share, of the Company ("Common Stock") at $PRICE per Share. Unless earlier terminated, this option shall expire ten years from the Grant Date (the "Final Exercise Date"). It is intended that the option evidenced by this agreement shall be an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended and any regulations promulgated thereunder (the "Code"). Except as otherwise indicated by the context, the term "Participant", as used in this option, shall be deemed to include any person who acquires the right to exercise this option validly under its terms. 2. Vesting Schedule. ---------------- The date to be used for determining vesting of this option ("Vesting Effective Date") shall be HIRE DATE. This option will become exercisable ("vest") as to 20% of the original number of Shares on the first anniversary of the Vesting Effective Date and as to an additional 5% of the original number of Shares at the end of each successive full three-month period following the first anniversary of the Vesting Effective Date until the fifth anniversary of the Vesting Effective Date. This option shall expire upon, and will not be exercisable after, the Final Exercise Date. The right of exercise shall be cumulative so that to the extent the option is not exercised in any period to the maximum extent permissible it shall continue to be exercisable, in whole or in part, with respect to all shares for which it is vested until the earlier of the Final Exercise Date or the termination of this option under Section 3 hereof or the Plan. Notwithstanding the foregoing, in the event of an Acquisition of the Company (as defined below), the number of Shares for which the option is vested shall, immediately prior to the Closing of the Acquisition, be increased by (i) 20% of the original number of Shares covered by this option, if the Participant has been employed by the Company for 12 or more months prior to the Acquisition, or (ii) 10% of the original number of Shares covered by this option, if the Participant has been employed by the Company for less than 12 months prior to the Acquisition. The remaining unvested shares shall vest in accordance with their original vesting schedule, except that such schedule shall be shortened by 12 months (in the case of an acceleration under clause (i) above) or six months (in the case of an acceleration under clause (ii) above). "Acquisition" shall mean (i) the consolidation or merger of the Company (other than a merger to reincorporate the Corporation in a different jurisdiction) into or with any other entity or entities in which the shares of the Corporation outstanding immediately prior to the closing of such event represent or are converted into shares of the surviving or resulting entity that represent less than a majority of the total number of shares of the surviving or resulting entity that are outstanding or are reserved for issuance upon the exercise or conversion of outstanding securities immediately after the closing of such event, or (ii) the sale or transfer of fifty percent (50%) or more of the capital stock of the Corporation in a single transaction or series of related transactions or (iii) the sale of all or substantially all of the assets of the Company. 3. Exercise of Option. ------------------ (a) Form of Exercise. Each election to exercise this option shall be in ---------------- writing, signed by the Participant, and received by the Company at its principal office, accompanied by this agreement, and payment in full in the manner provided in the Plan. The Participant may purchase less than the number of shares covered hereby, provided that no partial exercise of this option may be for any fractional share or for fewer than ten whole shares. (b) Continuous Relationship with the Company Required. Except as otherwise ------------------------------------------------- provided in this Section 3, this option may not be exercised unless the Participant, at the time he or she exercises this option, is, and has been at all times since the Grant Date, an employee, officer or director of, or consultant or advisor to, the Company or any parent or subsidiary of the Company as defined in Section 424(e) or (1) of the Code (an "Eligible Participant"). (c) Termination of Relationship with the Company. If the Participant -------------------------------------------- ceases to be an Eligible Participant for any reason, then, except as provided in paragraphs (d) and (e) below, the right to exercise this option shall terminate three months after such cessation (but in no event after the Final Exercise Date), provided that this option shall -------- ---- be exercisable only to the extent that the Participant was entitled to exercise this option on the date of such cessation. Notwithstanding the foregoing, if the Participant, prior to the Final Exercise Date, violates the non-competition or confidentiality provisions of any employment contract, confidentiality and nondisclosure agreement or other agreement between the Participant and the Company, the right to exercise this option shall terminate immediately upon written notice to the Participant from the Company describing such violation. (d) Exercise Period Upon Death or Disability. If the Participant dies or ---------------------------------------- becomes disabled (within the meaning of Section 22(e)(3) of the Code) prior to the Final Exercise Date while he or she is an Eligible Participant and the Company has not terminated such relationship for "cause" as specified in paragraph (e) below, this option shall be exercisable, within the period of one year following the date of death or disability of the Participant by the Participant, provided that -------- ---- this option shall be exercisable only to the extent that this option was exercisable by the Participant on the date of his or her death or disability, and further provided that this option shall not be exercisable after the Final Exercise Date. (e) Discharge for Cause. If the Participant, prior to the Final Exercise ------------------- Date, is discharged by the Company for "cause" (as defined below), the right to exercise this option shall terminate immediately upon the effective date of such discharge. "Cause" shall mean willful misconduct by the Participant or willful failure by the Participant to perform his or her responsibilities to the Company (including, without limitation, breach by the Participant of any provision of any employment, consulting, advisory, nondisclosure, non-competition or other similar agreement between the Participant and the Company), as determined by the Company, which determination shall be conclusive. The Participant shall be considered to have been discharged for "Cause" if the Company determines, within 30 days after the Participant's resignation, that discharge for cause was warranted. 4. Right of First Refusal. ---------------------- (a) If the Participant proposes to sell, assign, transfer, pledge, hypothecate or otherwise dispose of, by operation of law or otherwise (collectively, "transfer") any Shares acquired upon exercise of this option, then the Participant shall first give written notice of the proposed transfer (the "Transfer Notice") to the Company. The Transfer Notice shall name the proposed transferee and state the number of such Shares the Participant proposes to transfer (the "Offered Shares"), the price per share and all other material terms and conditions of the transfer. (b) For 30 days following its receipt of such Transfer Notice, the Company shall have the option to purchase all (but not less than all) of the Offered Shares at the price and upon the terms set forth in the Transfer Notice. In the event the Company elects to purchase all of the Offered Shares, it shall give written notice of such election to the Participant within such 30-day period. Within 10 days after his receipt of such notice, the Participant shall tender to the Company at its principal offices the certificate or certificates representing the Offered Shares, duly endorsed in blank by the Participant or with duly endorsed stock powers attached thereto, all in a form suitable for transfer of the Offered Shares to the Company. Promptly following receipt of such certificate or certificates, the Company shall deliver or mail to the Participant a check in payment of the purchase price for the Offered Shares; provided that if the terms of payment set -------- ---- forth in the Transfer Notice were other than cash against delivery, the Company may pay for the Offered Shares on the same terms and conditions as were set forth in the Transfer Notice. (c) At and after the time at which the Offered Shares are required to be delivered to the Company for transfer to the Company pursuant to subsection (b) above, the Company shall not pay any dividend to the Participant on account of such Shares or permit the Participant to exercise any of the privileges or rights of a stockholder with respect to such Offered Shares, but shall, in so far as permitted by law, treat the Company as the owner of such Offered Shares. (d) If the Company does not elect to acquire all of the Offered Shares, the Participant may, within the 30-day period following the expiration of the option granted to the Company under subsection (b) above, transfer the Offered Shares to the proposed transferee, provided that -------- ---- such transfer shall not be on terms and conditions more favorable to the transferee than those contained in the Transfer Notice. Notwithstanding any of the above, all Offered Shares transferred pursuant to this Section 4 shall remain subject to the right of first refusal set forth in this Section 4 and such transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Section 4. (e) The following transactions shall be exempt from the provisions of this Section 4: (1) any transfer of Shares to or for the benefit of any parent, spouse, child or grandchild of the Participant, or to a trust for their benefit; (2) any transfer pursuant to an effective registration statement filed by the Company under the Securities Act of 1933, as amended (the "Securities Act"); and (3) any transfer of the Shares pursuant to the sale of all or substantially all of the business of the Company; provided, however, that in the case of a transfer pursuant to --------- ------- clause (1) above, such Shares shall remain subject to the right of first refusal set forth in this Section 4 and such transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Section 4. (f) The Company may assign its rights to purchase Offered Shares in any particular transaction under this Section 4 to one or more persons or entities. (g) The provisions of this Section 4 shall terminate upon the earlier of the following events: (1) the closing of the sale of shares of Common Stock in an underwritten public offering pursuant to an effective registration statement filed by the Company under the Securities Act at a price to the public of at least $5.00 per share (subject to appropriate adjustments for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares) resulting in gross proceeds to the Company of at least $10,000,000; or (2) an Acquisition. (h) The Company shall not be required (a) to transfer on its books any of the Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Section 4, or (b) to treat as owner of such Shares or to pay dividends to any transferee to whom any such Shares shall have been so sold or transferred. 5. Agreement in Connection with Public Offering. -------------------------------------------- The Participant agrees, in connection with the initial underwritten public offering of the Company's securities pursuant to a registration statement under the Securities Act, (i) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock held by the Participant (other than those shares included in the offering) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for a period of 180 days from the effective date of such registration statement, and (ii) to execute any agreement reflecting clause (i) above as may be requested by the Company or the managing underwriters at the time of such offering. 6. Withholding. ----------- No Shares will be issued pursuant to the exercise of this option unless and until the Participant pays to the Company, or makes provision satisfactory to the Company for payment of, any federal, state or local withholding taxes required by law to be withheld in respect of this option. The participant may provide for the payment of withholding taxes with shares of Common Stock. 7. Nontransferability of Option. ---------------------------- This option may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the lifetime of the Participant, this option shall be exercisable only by the Participant. 8. Disqualifying Disposition. ------------------------- If the Participant disposes of Shares acquired upon exercise of this option within two years from the Grant Date or one year after such Shares were acquired pursuant to exercise of this option, the Participant shall notify the Company in writing of such disposition. 9. Provisions of the Plan. ---------------------- This option is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this option. IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument. CIMARON COMMUNICATIONS CORPORATION Dated: ________________ By: _____________________ Name: Ram Sudireddy Title: President & CEO PARTICIPANTS ACCEPTANCE The undersigned hereby accepts the foregoing option and agrees to the terms and conditions thereof. The undersigned hereby acknowledges receipt of a copy of the Company's 1998 Stock Incentive Plan. PARTICIPANT: ______________________________ Address: ______________________________ ______________________________ Cimaron Communications Corporation Incentive Stock Option Agreement Granted Under 1998 Stock Incentive Plan --------------------------------------- 1. Grant of Option. --------------- This agreement evidences the grant by Cimaron Communications Corporation, a Delaware corporation (the "Company") on GRANT DATE (the "Grant Date") to NAME (the "Participant"), an employee of the Company, of an option to purchase, in whole or in part, on the terms provided herein and in the Company's 1998 Stock Incentive Plan (the "Plan"), a total of NUMBER shares of common stock (the "Shares"), $.001 par value per share, of the Company ("Common Stock") at $PRICE per Share. Unless earlier terminated, this option shall expire ten years from the Grant Date (the "Final Exercise Date"). It is intended that the option evidenced by this agreement shall be an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended and any regulations promulgated thereunder (the "Code"). Except as otherwise indicated by the context, the term "Participant", as used in this option, shall be deemed to include any person who acquires the right to exercise this option validly under its terms. 2. Vesting Schedule. ---------------- The date to be used for determining vesting of this option ("Vesting Effective Date") shall be HIRE DATE. This option will become exercisable ("vest") as to 20% of the original number of Shares on the first anniversary of the Vesting Effective Date and as to an additional 5% of the original number of Shares at the end of each successive full three-month period following the first anniversary of the Vesting Effective Date until the fifth anniversary of the Vesting Effective Date. This option shall expire upon, and will not be exercisable after, the Final Exercise Date. The right of exercise shall be cumulative so that to the extent the option is not exercised in any period to the maximum extent permissible it shall continue to be exercisable, in whole or in part, with respect to all shares for which it is vested until the earlier of the Final Exercise Date or the termination of this option under Section 3 hereof or the Plan. (a) Notwithstanding the foregoing, in the event of an Acquisition of the Company (as defined below), the number of Shares for which the option is vested shall, immediately prior to the Closing of the Acquisition, be increased by (i) 20% of the original number of Shares covered by this option, if the Participant has been employed by the Company for 12 or more months prior to the Acquisition, or (ii) 30% of the original number of Shares covered by this option, if the Participant has been employed by the Company for less than 12 months prior to the Acquisition. The remaining unvested shares shall vest in accordance with their original vesting schedule, except that such schedule shall be shortened by 12 months (in the case of an acceleration under clause (i) above) or 18 months (in the case of an acceleration under clause (ii) above), and further, if Participant's employment is terminated Without Cause (as defined below) prior to the first anniversary of the date of the Acquisition, 50% of such Participant's then remaining Unvested Shares shall become vested as of such date of termination. (b) "Acquisition" shall mean (i) the consolidation or merger of the Company (other than a merger to reincorporate the Corporation in a different jurisdiction) into or with any other entity or entities in which the shares of the Corporation outstanding immediately prior to the closing of such event represent or are converted into shares of the surviving or resulting entity that represent less than a majority of the total number of shares of the surviving or resulting entity that are outstanding or are reserved for issuance upon the exercise or conversion of outstanding securities immediately after the closing of such event, or (ii) the sale or transfer of fifty percent (50%) or more of the capital stock of the Corporation in a single transaction or series of related transactions or (iii) the sale of all or substantially all of the assets of the Company. 3. Exercise of Option. ------------------ (a) Form of Exercise. Each election to exercise this option shall be in ---------------- writing, signed by the Participant, and received by the Company at its principal office, accompanied by this agreement, and payment in full in the manner provided in the Plan. The Participant may purchase less than the number of shares covered hereby, provided that no partial exercise of this option may be for any fractional share or for fewer than ten whole shares. (b) Continuous Relationship with the Company Required. Except as otherwise ------------------------------------------------- provided in this Section 3, this option may not be exercised unless the Participant, at the time he or she exercises this option, is, and has been at all times since the Grant Date, an employee, officer or director of, or consultant or advisor to, the Company or any parent or subsidiary of the Company as defined in Section 424(e) or (f) of the Code (an "Eligible Participant"). (c) Termination of Relationship with the Company. If the Participant -------------------------------------------- ceases to be an Eligible Participant for any reason, then, except as provided in paragraphs (d) and (e) below, the right to exercise this option shall terminate three months after such cessation (but in no event after the Final Exercise Date), provided that this option shall -------- ---- be exercisable only to the extent that the Participant was entitled to exercise this option on the date of such cessation. Notwithstanding the foregoing, if the Participant, prior to the Final Exercise Date, violates the non-competition or confidentiality provisions of any employment contract, confidentiality and nondisclosure agreement or other agreement between the Participant and the Company, the right to exercise this option shall terminate immediately upon written notice to the Participant from the Company describing such violation. (d) Exercise Period Upon Death or Disability. If the Participant dies or ---------------------------------------- becomes disabled (within the meaning of Section 22(e)(3) of the Code) prior to the Final Exercise Date while he or she is an Eligible Participant and the Company has not terminated such relationship for "cause" as specified in paragraph (e) below, this option shall be exercisable, within the period of one year following the date of death or disability of the Participant by the Participant, provided that -------- ---- this option shall be exercisable only to the extent that this option was exercisable by the Participant on the date of his or her death or disability, and further provided that this option shall not be exercisable after the Final Exercise Date. (e) Discharge for Cause. If the Participant, prior to the Final Exercise ------------------- Date, is discharged by the Company for "cause" (as defined below), the right to exercise this option shall terminate immediately upon the effective date of such discharge. "Cause" shall mean willful misconduct by the Participant or willful failure by the Participant to perform his or her responsibilities to the Company (including, without limitation, breach by the Participant of any provision of any employment, consulting, advisory, nondisclosure, non-competition or other similar agreement between the Participant and the Company), as determined by the Company, which determination shall be conclusive. The Participant shall be considered to have been discharged for "Cause" if the Company determines, within 30 days after the Participant's resignation, that discharge for cause was warranted. 4. Right of First Refusal. ---------------------- (a) If the Participant proposes to sell, assign, transfer, pledge, hypothecate or otherwise dispose of, by operation of law or otherwise (collectively, "transfer") any Shares acquired upon exercise of this option, then the Participant shall first give written notice of the proposed transfer (the "Transfer Notice") to the Company. The Transfer Notice shall name the proposed transferee and state the number of such Shares the Participant proposes to transfer (the "Offered Shares"), the price per share and all other material terms and conditions of the transfer. (b) For 30 days following its receipt of such Transfer Notice, the Company shall have the option to purchase all (but not less than all) of the Offered Shares at the price and upon the terms set forth in the Transfer Notice. In the event the Company elects to purchase all of the Offered Shares, it shall give written notice of such election to the Participant within such 30-day period. Within 10 days after his receipt of such notice, the Participant shall tender to the Company at its principal offices the certificate or certificates representing the Offered Shares, duly endorsed in blank by the Participant or with duly endorsed stock powers attached thereto, all in a form suitable for transfer of the Offered Shares to the Company. Promptly following receipt of such certificate or certificates, the Company shall deliver or mail to the Participant a check in payment of the purchase price for the Offered Shares; provided that if the terms of payment set -------- ---- forth in the Transfer Notice were other than cash against delivery, the Company may pay for the Offered Shares on the same terms and conditions as were set forth in the Transfer Notice. (c) At and after the time at which the Offered Shares are required to be delivered to the Company for transfer to the Company pursuant to subsection (b) above, the Company shall not pay any dividend to the Participant on account of such Shares or permit the Participant to exercise any of the privileges or rights of a stockholder with respect to such Offered Shares, but shall, in so far as permitted by law, treat the Company as the owner of such Offered Shares. (d) If the Company does not elect to acquire all of the Offered Shares, the Participant may, within the 30-day period following the expiration of the option granted to the Company under subsection (b) above, transfer the Offered Shares to the proposed transferee, provided that -------- ---- such transfer shall not be on terms and conditions more favorable to the transferee than those contained in the Transfer Notice. Notwithstanding any of the above, all Offered Shares transferred pursuant to this Section 4 shall remain subject to the right of first refusal set forth in this Section 4 and such transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Section 4. (e) The following transactions shall be exempt from the provisions of this Section 4: (1) any transfer of Shares to or for the benefit of any parent, spouse, child or grandchild of the Participant, or to a trust for their benefit; (2) any transfer pursuant to an effective registration statement filed by the Company under the Securities Act of 1933, as amended (the "Securities Act"); and (3) any transfer of the Shares pursuant to the sale of all or substantially all of the business of the Company; provided, however, that in the case of a transfer pursuant to clause (1) --------- ------- above, such Shares shall remain subject to the right of first refusal set forth in this Section 4 and such transferee shall, as a condition to such transfer, deliver to the Company a written instrument confirming that such transferee shall be bound by all of the terms and conditions of this Section 4. (f) The Company may assign its rights to purchase Offered Shares in any particular transaction under this Section 4 to one or more persons or entities. (g) The provisions of this Section 4 shall terminate upon the earlier of the following events: (1) the closing of the sale of shares of Common Stock in an underwritten public offering pursuant to an effective registration statement filed by the Company under the Securities Act at a price to the public of at least $5.00 per share (subject to appropriate adjustments for stock splits, stock dividends, combinations and other similar recapitalizations affecting such shares) resulting in gross proceeds to the Company of at least $10,000,000; or (2) an Acquisition. (h) The Company shall not be required (a) to transfer on its books any of the Shares which shall have been sold or transferred in violation of any of the provisions set forth in this Section 4, or (b) to treat as owner of such Shares or to pay dividends to any transferee to whom any such Shares shall have been so sold or transferred. 5. Agreement in Connection with Public Offering. -------------------------------------------- The Participant agrees, in connection with the initial underwritten public offering of the Company's securities pursuant to a registration statement under the Securities Act, (i) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock held by the Participant (other than those shares included in the offering) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for a period of 180 days from the effective date of such registration statement, and (ii) to execute any agreement reflecting clause (i) above as may be requested by the Company or the managing underwriters at the time of such offering. 6. Withholding. ----------- No Shares will be issued pursuant to the exercise of this option unless and until the Participant pays to the Company, or makes provision satisfactory to the Company for payment of, any federal, state or local withholding taxes required by law to be withheld in respect of this option. The participant may provide for the payment of withholding taxes with shares of Common Stock. 7. Nontransferability of Option. ---------------------------- This option may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the lifetime of the Participant, this option shall be exercisable only by the Participant. 8. Disqualifying Disposition. ------------------------- If the Participant disposes of Shares acquired upon exercise of this option within two years from the Grant Date or one year after such Shares were acquired pursuant to exercise of this option, the Participant shall notify the Company in writing of such disposition. 9. Provisions of the Plan. ---------------------- This option is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this option. IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument. CIMARON COMMUNICATIONS CORPORATION Dated: ________________ By: _____________________ Name: Ram Sudireddy Title: President & CEO PARTICIPANTS ACCEPTANCE The undersigned hereby accepts the foregoing option and agrees to the terms and conditions thereof. The undersigned hereby acknowledges receipt of a copy of the Company's 1998 Stock Incentive Plan. PARTICIPANT: ______________________________ Address: ______________________________ ______________________________ EX-10.27 3 EMPLOYMENT AGREEMENT Exhibit 10.27 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (this "Agreement") is made as of the Effective --------- Date indicated below by and between, Applied Micro Circuits Corporation, a Delaware corporation ("Acquiror"), and Gary Martin ("Employee"). -------- -------- BACKGROUND This Agreement is entered into in connection with and is ancillary to an Agreement and Plan of Merger (the "Merger Agreement") dated as March 3, 1999 ---------------- among Acquiror, Cimaron Communications Corporation, a Delaware corporation ("Target") and Wiley Acquisition Corporation, a Delaware corporation and a ------ wholly owned subsidiary of Acquiror ("Sub"), pursuant to which Sub will merge --- with and into Acquiror (the "Merger"). The date on which the Merger becomes ------ effective will be the effective date of this Agreement (the "Effective Date"). ---------------- Employee is a founder, principal stockholder and Chief Technical Officer of Target. Acquiror intends to continue the business of Target after the Merger and integrate such business into Acquiror's ongoing business. To preserve and protect the assets of Target, including Target's goodwill, customers and trade secrets of which Employee has and will have knowledge in Employee's role as an employee of Acquiror and to preserve and protect Acquiror's goodwill and business interests going forward, and in consideration for Acquiror's entering into and performing under the Merger Agreement, Employee has agreed to enter into this Agreement. In addition, as required by Section 7 below, Employee is concurrently herewith entering into an Inventions, Confidentiality and Trade Secrets Agreement in favor of Acquiror designed to protect Acquiror's proprietary rights. NOW, THEREFORE. in consideration of the foregoing and the mutual agreements of the parties contained herein, Acquiror and Employee hereby agree as follows: 1. Employment. Acquiror will employ Employee, and Employee accepts ---------- employment with Acquiror, for a period of one year from the Effective Date (the "Initial Period"), unless Employee's employment is sooner terminated in -------------- accordance with this Agreement. Employee's employment may continue after this Initial Period but will then be terminable by either party at will, with or without cause. 2. Duties. Employee will be employed as a full-time employee of Acquiror ------ and initially will serve as Vice President and Chief Technical Officer, reporting to Dave Rickey. Employee agrees that, to the best of Employee's ability and experience, Employee will at all times conscientiously perform all of the duties and obligations assigned to Employee under this Agreement. Acquiror agrees that it will not relocate Employee outside of a twenty-five mile radius of Andover. Massachusetts, without Employee's consent. 3. Full-time Employment. Employee's employment will be on a full-time -------------------- basis, in accordance with standard employee policies for Acquiror. Employee will not engage in any other business or render any commercial or professional services, directly or indirectly, to any other person or organization, whether for compensation or otherwise, provided that Employee may (i) provide incidental assistance to family members on matters of family business; and (ii) sit on the boards of charitable and nonprofit organizations which do not, at the time of Employee's appointment or election, to Employee's knowledge, compete with Acquiror; provided in each case that such activities do not conflict with or interfere with Employee's obligations to Acquiror. 4. Compensation ------------ (a) Salary. Employee's initial salary for the term of this Agreement ------ will be no less than $160,000 per year, payable on Acquiror's regular payroll dates, less required withholdings. (b) Bonus. Employee will be eligible for an Executive bonus of up to ----- 30 percent of Employee's initial salary, based on targets to be established by the Company's Board of Directors. (c) Stock Options. Employee will be granted stock options, under ------------- Acquiror's 1992 Stock Option Plan, as amended, to purchase up to 100,000 shares of Acquiror's Common Stock at a price equal to the per share market value of such Common Stock on the last trading day prior to the closing date of the Merger, as quoted on the Nasdaq National Market and as reported in the Wall Street Journal. The stock options will be granted as nonqualified stock options. If and when the Employee sells any shares issued upon exercise of any stock options, the Employee will promptly notify Acquiror of such sale in writing. The stock options will vest 25% on the first anniversary of the Effective Date and the remainder will vest as to 1/48th of the option grant per month thereafter, so that they will be fully vested on the fourth anniversary of the Effective Date. The stock options will have a term of ten years and will be subject to the terms and conditions set forth on the form of Stock Option Grant attached hereto as Attachment A (to be completed at the closing of the Merger). Employee will ------------ also be eligible to participate in the Company's "refresh" stock option grant programs consistent with other employees of similar responsibility and compensation levels. 5. Employee Benefits. Employee will be entitled to insurance, vacation ----------------- and other benefits commensurate with Employee's position in accordance with Acquiror's standard employee policies in effect from time to time. For purposes of satisfying the terms and conditions of such benefit plans, Acquiror shall give full credit for eligibility, vesting or benefit accrual for each participant's period of service with Target prior to the Effective Date. Employee has received a summary of Acquiror's standard employee benefits policies in effect as of the date hereof. Employee shall receive credit for a maximum of 105 vacation hours accrued at Target through the Effective Date, in accordance with Acquiror's standard employee policies. This credit shall be adjusted for any vacation hours used during the period commencing on January 1, 1999 and ending on the Effective Date. 6. Reimbursement of Business Expenses. Acquiror will, in accordance with ----------------------------------- Acquiror's policies in effect from time to time, reimburse Employee for all reasonable business expenses incurred by Employee in connection with the performance of Employee's duties under this Agreement including, without limitation, reasonable expenditures for office space, supplies, -2- equipment and expenses and for business entertainment and travel, upon submission of the required documentation required pursuant to Acquiror's standard policies and record keeping procedures. 7. Confidentiality. Simultaneously with the execution of this Agreement. --------------- Employee is executing and delivering and hereby adopts and agrees to be bound by Acquiror's standard Proprietary Information and Inventions Agreement, a copy of which is attached to this Agreement as Attachment B (the "Inventions, ------------ ----------- Confidentiality and Trade Secrets Agreement"). - --------------------------------------------- 8. Termination. ----------- (a) Acquiror may terminate Employee's employment at will, at any time with or without Cause (as defined in Section 8(e) below) upon written notice to Employee. (b) Employee may terminate Employee's employment upon written notice to Acquiror in the event that Acquiror is in material breach of this Agreement, provided that such termination will become effective only upon the expiration of 30 days following such notice and then only if the alleged breach remains uncured (provided that Acquiror shall not have more than one opportunity to cure such breach). Such termination shall be deemed a termination by Acquiror of Employee's employment under Section 8(a) for which Employee shall have the remedy set forth in Section 8(c). (c) Upon termination of Employee's employment pursuant to Section 8(a) or (b) for any reason other than Cause: (1) Acquiror will pay to Employee an amount equal to the product of employee's monthly salary (at the monthly rate paid to Employee immediately prior to such termination) and the number of months (including fractions thereof) that remain from the date of employee's termination through the end of the Initial Period plus the target bonus specified in Section 4(b) (the "Termination Payment") immediately upon such ------------------- termination and (ii) the vesting of any options to purchase Acquiror Common Stock granted to Employee subsequent to the consummation of the Merger shall be accelerated by the number of months (including fractions thereof) that remain from the date of employee's termination through the end of the Initial Period. Acquiror's obligation to make the Termination Payment and accelerate vesting of stock options pursuant to this Section 8(c) is in lieu of any damages or any other payment or benefits, including without limitation stock benefits (except that with regard to the vesting and termination of stock options, such stock options will vest and terminate according to the terms of specific stock option grant agreements), which Acquiror might otherwise be obligated to pay Employee as a result of Employee's termination of employment. Acquiror and Employee agree that, in view of the nature of the issues likely to arise in the event of such a termination, it would be impracticable or extremely difficult to fix the actual damages resulting from such termination and proving actual damages, causation and foreseeability in the case of such termination would be costly, inconvenient and difficult. In requiring Acquiror to make the Termination Payment and to accelerate the vesting of stock options as set forth herein, it is the intent of the parties to provide, as of the date of this Agreement, for a liquidated amount of damages to be paid by Acquiror to Employee. Such liquidated amount shall be deemed full and adequate damages for such termination and is not intended by either party to be a penalty. -3- (d) Upon Death. If Employee dies during the term of this Agreement, ----------- Acquiror will pay Employee's estate an amount equal to all salary, bonuses and benefits accrued as of the date of Employee's death. (e) Definition of Cause. For purposes of this Agreement, "Cause" for ------------------- ----- Employee's termination will exist at any time after the happening of one or more of the following events: (i) an act of personal dishonesty constituting willful and material misconduct. (ii) a violation of employment obligations (including confidentiality or noncompetition obligations) which is demonstrably willful and material misconduct which has not been cured within 30 days after written notice of such violation has been given to Employee. (iii) the willful engaging in illegal conduct that is materially and demonstrably injurious to the Company, (iv) Employee's continued failure to substantially perform his or her duties for a period of 90 days after written notice thereof setting forth in reasonable detail the respects in which the Company believes Employee has so failed, or (v) Employee being convicted of a felony or misappropriating property of the Company. (f) Survival. Employee's and Acquiror's obligations under Sections 5, -------- 6, 7, 8 and 9 (h) of this Agreement will survive the termination of Employee's employment by Acquiror. 9. Miscellaneous. ------------- (a) Notices. Any and all notices permitted or required to be given -------- under this Agreement must be in writing. Notices will be deemed given (i) when personally received or when sent by facsimile transmission (to the receiving party's facsimile number), (ii) on the first business day after having been sent by commercial overnight courier with written verification of receipt, or (iii) on the third business day after having been sent by registered or certified mail from a location on the United States mainland, return receipt requested, postage prepaid, whichever occurs first, at the address set forth below or at any new address, notice of which will have been given in accordance with this Section 9(a): If to Acquiror. Applied Micro Circuits Corporation Attn: President 6290 Sequence Drive San Diego, CA 92121 -4- with a copy to: Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Attn: Mark A. Medearis If to Employee: Gary Martin 15 Kittredge Road No. Andover, MA 01845 with a copy to: Hale and Dorr LLP 60 State Street Boston, MA 02109 Attention: Patrick Rondeau (b) Amendments. This Agreement, including the Exhibits hereto, ---------- contains the entire agreement and supersedes and replaces all prior agreements between Acquiror and Employee or Target and Employee concerning Employee's employment. This Agreement may not be changed or modified in whole or in part except by a writing signed by the party against whom enforcement of the change or modification is sought. (c) Successors and Assigns. This Agreement will not be assignable by ---------------------- either Employee or Acquiror, except that the rights and obligations of Acquiror under this Agreement may be assigned to a corporation which becomes the successor to Acquiror as the result of a merger or other corporate reorganization and which continues the business of Acquiror, or any other subsidiary of Acquiror, provided that Acquiror guarantees the performance by such assignee of Acquiror's obligations hereunder. (d) Governing Law. This Agreement will be governed by and interpreted ------------- according to the substantive laws of the Commonwealth of Massachusetts without regard to such state's conflicts law. (e) No Waiver. The failure of either party to insist on strict --------- compliance with any of the terms of this Agreement in any instance or instances will not be deemed to be a waiver of any term of this Agreement or of that party's right to require strict compliance with the terms of this Agreement in any other instance. (f) Severability. Employee and Acquiror recognize that the limitations ------------ contained herein are reasonably and properly required for the adequate protection of the interests of Acquiror. If for any reason a court of competent jurisdiction or binding arbitration proceeding finds any provision of this Agreement, or the application thereof, to be unenforceable, the remaining provisions of this Agreement will be interpreted so as best to reasonably effect the intent of the parties. The parties further agree that the court or arbitrator shall replace any such invalid or unenforceable provisions with valid and enforceable provisions designed to achieve, to the extent possible, the business purposes and intent of such unenforceable provisions. -5- (g) Counterparts. This Agreement may be executed in counterparts which ------------- when taken together will constitute one instrument. Any copy of this Agreement with the original signatures of all parties appended will constitute an original. (h) Expenses. The reasonable fees and expenses of either party which -------- may be reasonably incurred by such party as the result of any claim or contest by the Employee to enforce his or her rights under this Agreement shall be paid promptly, to the full extent permitted by law, by the party prevailing in such claim or contest. (i) Dispute Resolution. ------------------ (i) Arbitration of Disputes. Any dispute under this Agreement ----------------------- shall be resolved by arbitration in Boston, Massachusetts, and, except as herein specifically stated, in accordance with the commercial arbitration rules of the American Arbitration Association ("AAA Rules") then in effect. However, in all --------- events, these arbitration provisions shall govern over any conflicting rules which may now or hereafter be contained in the AAA Rules. Any judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction over the subject matter thereof. The arbitrator shall have the authority to grant any equitable and legal remedies that would be available in any judicial proceeding instituted to resolve such dispute. (ii) Compensation of Arbitrator. Any such arbitration will be -------------------------- conducted before a single arbitrator who will be compensated for his or her services at a rate to be determined by the parties or by the American Arbitration Association, but based upon reasonable hourly or daily consulting rates for the arbitrator in the event the parties are not able to agree upon his or her rate of compensation. (iii) Selection of Arbitrator. The American Arbitration ---------------------- Association will have the authority to select an arbitrator from a list of arbitrators who are partners in a nationally recognized firm of independent certified public accountants from the management advisory services department (or comparable department or group) of such firm: provided, however, that such firm cannot be the firm of certified public accountants then auditing the books and records of either party or providing management or advisory services for either party, that each party will have the opportunity to make such reasonable objection to any of the arbitrators listed as such party may wish and that the American Arbitration Association will select the arbitrator from the list of arbitrators as to whom neither party makes any such objection. In the event that the foregoing procedure is not followed, each party will choose one person from the list of arbitrators provided by the American Arbitration Association (provided that such person does not have a conflict of interest), and the two persons so selected will select from the list provided by the American Arbitration Association the person who will act as the arbitrator. (iv) Payment of Costs. Acquiror and Employee will bear the ------------------ expense of deposits and advances required by the arbitrator in equal proportions, but either party may advance such amounts, subject to recovery as an addition or offset to any award. The arbitrator will award to the prevailing party, as determined by the arbitrator, all costs, fees and expenses -6- related to the arbitration, including reasonable fees and expenses of attorneys, accountants and other professionals incurred by the prevailing party. (v) Burden of Proof. For any dispute submitted to --------------- arbitration, the burden of proof will be as it would be if the claim were litigated in a judicial proceeding. (vi) Award. Upon the conclusion of any arbitration proceedings ------ hereunder, the arbitrator will render findings of fact and conclusions of law and a written opinion setting forth the basis and reasons for any decision reached and will deliver such documents to each party to this Agreement along with a signed copy of the award. (vii) Terms of Arbitration. The arbitrator chosen in accordance -------------------- with these provisions will not have the power to alter, amend or otherwise affect the terms of these arbitration provisions or the provisions of this Agreement. (viii) Exclusive Remedy. Except as specifically otherwise ---------------- provided in this Agreement, arbitration will be the sole and exclusive remedy of the parties for any dispute arising out of this Agreement. -7- IN WITNESS WHEREOF, this Agreement is made and effective as of the Effective Date. APPLIED MICRO CIRCUITS EMPLOYEE CORPORATION By: /s/ [SIGNATURE ILLEGIBLE] /s/ Gary Martin ----------------------------- -------------------------- Title: Pres./CEO Gary Martin -------------------------- Signature Page to Employment Agreement List of Exhibits: - ---------------- Attachment A Stock Option Grant Attachment B Inventions, Confidentiality and Trade Secrets Agreement Applied Micro Circuits Corporation Notice of Grant of Stock Options ID: 94-2586591 and Option Agreement 6290 Sequence Drive San Diego, CA 92121 Gary D. Martin Option Number: 99030010 15 Kittredge Road Plan: 92 No. Andover, MA 01845 Id: ###-##-#### Effective 3/17/99, you have been granted a(n) Incentive Stock Option to buy 10,239 Shares of Applied Micro Circuits Corporation (the Company) stock at $39.06250 per share. The total option price of the shares granted is $399,960.94. Shares in each period will become fully vested on the date shown.
Shares Vest Type Full Vest Expiration -------------------- ------------ --------- ---------- 1,462 On Vest Date 3/17/00 3/17/09 1,097 Monthly 12/17/00 3/17/09 2,560 Monthly 12/17/01 3/17/09 2,560 Monthly 12/17/02 3/17/09 2,560 Monthly 3/17/03 3/17/09
- -------------------------------------------------------------------------------- By your signature and the Company's signature below, you and the Company agree that these options are granted under and governed by the terms and conditions of the Company's Stock Option Plan as amended and the Option Agreement, all of which are attached and made a part of this document. - -------------------------------------------------------------------------------- /s/ [SIGNATURE ILLEGIBLE] 3/18/99 - ----------------------------------------- ------------------------------ Applied Micro Circuits Corporation Date /s/ Gary D. Martin 3/24/99 - ----------------------------------------- ------------------------------ Gary D. Martin Date Date: 3/18/99 Time: 2:00:01 PM No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 4. Optionee's Representations. In the event this Option and the Shares -------------------------- purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company an investment representation statement in the customary form, a copy of which is available for Optionee's review from the Company upon request. 5. Method of Payment. Payment of the exercise price shall be by any of ----------------- the following, or a combination thereof, at the election of the Board, in its sole discretion: (i) cash; (ii) check; (iii) surrender of other shares of Common Stock of the Company at a value equal to the exercise price of the Shares as to which the Option is being exercised; or (iv) delivery of a property executed Exercise Notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price. 6. Restrictions on Exercise. This Option may not be exercised until such ------------------------- time as the Plan has been approved by the stockholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 7. Termination of Status as an Employee. In the event of termination of ------------------------------------ Optionee's Continuous Status as an Employee, the Optionee may, but only within thirty (30) days after the date of such termination (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), exercise this Option to the extent exercisable at the date of such termination. Optionee's employment shall be deemed terminated on such date, if any, as Optionee becomes a part-time employee, as defined in the Company's then current employment guidelines. To the extent this Option was not exercisable at the date of such termination, or if the Optionee does not exercise this Option within the time specified herein, the Option shall terminate. -2- OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE NOTICE OF GRANT AND SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH SUCH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE SUCH OPTIONEE'S EMPLOYMENT AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan and certain related information and represents that Optionee is familiar with the terms and provisions of these documents, and hereby accepts this Option subject to all of those terms and provisions. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Plan. Optionee further agrees to notify the Company upon any change in the residence address indicated below. Dated: 3-24-99 -------------- /s/ Gary Martin ----------------------------------- (Optionee) Gary Martin Residence Address: 15 Kittredge Road No. Andover, MA 01845 -4- EXHIBIT B --------- NOTICE OF DISQUALIFYING DISPOSITION To: Applied Micro Circuits Corporation Attn: Stock Option Administrator Subject: Notice of Disqualifying Disposition ----------------------------------- This is official notice that the undersigned disposed of Shares of Applied Micro Circuits Corporation Common Stock acquired by exercise of an incentive stock option, under and pursuant to the Company's 1992 Stock Option Plan, as follows:
Option Market Total Shares Option Date of Exercise Price (Per Transfer Value (Per Transferred/ Number Grant Date Share) Date Share) Sold - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
I understand that for Federal Income Tax Purposes, AMCC is required to report on a Form W-2 the compensation of employees who dispose of Incentive Stock Options shares within one year from the Date of Exercise, or within two years from the date of grant. Optionee's Signature:________________________________________ Print Name:__________________________________________________ Home Address:________________________________________________ City, State, Zip Code:_______________________________________ Daytime Phone:_______________________________________________ Social Security Number:______________________________________ You must use this form if you have disposed of ISO shares within two years of the grant date or one year of the exercise date. -6- ================================================================================ Applied Micro Circuits Corporation Notice of Grant of Stock Options ID: 94-2588591 and Option Agreement 6290 Sequence Drive San Diego, CA 92121 ================================================================================ Gary D. Martin Option Number: 99030010 15 Kittredge Road Plan: 92 No. Andover, MA 01845 ID: ###-##-#### ================================================================================ Effective 3/17/99, you have been granted a(n) Non-Qualified Stock Option to buy 89,761 shares of Applied Micro Circuits Corporation (the Company) stock at $39.06250 per share. The total option price of the shares granted is $3,506,289.06. Shares in each period will become fully vested on the date shown. Shares Vest Type Full Vest Expiration ---------- ------------- ------------- ------------ 23,539 On Vest Date 3/17/00 3/17/09 17,652 Monthly 12/17/00 3/17/09 22,440 Monthly 12/17/01 3/17/09 22,440 Monthly 12/17/02 3/17/09 3,690 Monthly 3/17/03 3/17/09 =============================================================================== By Your signature and the Company's signature below, you and the Company agree that these options are granted under and governed by the terms and conditions of the Company's Stock Option Plan as amended and the Option Agreement, all of which are attached and made a part of this document. ================================================================================ /s/ [SIGNATURE ILLEGIBLE] 3/18/79 - ---------------------------------- --------------------------------------- Applied Micro Circuits Corporation Date /s/ Gary D. Martin 3-24-99 - ---------------------------------- -------------------------------------- Gary D. Martin Date Date: 3/18/99 Time: 2:00:01 PM holder's investment intent with respect to such Shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company or the Secretary's designee. The Exercise Notice shall be accompanied by payment of the exercise price. This Option shall be deemed to be exercised upon receipt by the company of such Exercise Notice accompanied by the exercise price. No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income Tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 4. Optionee's Representations. In the event this Option and the Shares -------------------------- purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, if required by the Company concurrently with the exercise of all or any portion of this Option, deliver to the Company an investment representation statement in the customary form, a copy of which is available for Optionee's review from the Company upon request. 5. Method of Payment. Payment of the exercise price shall be by any of ----------------- the following, or a combination thereof, at the election of the Board, in its sole discretion: (i) cash; (ii) check; (iii) surrender of other shares of Common Stock of the Company at a value equal to the exercise price of the Shares as to which the Option is being exercised; or (iv) delivery of a property executed Exercise Notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price. 6. Restrictions of Exercise. This Option may not be exercised until such ------------------------ time as the Plan has been approved by the stockholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 7. Termination of Status as an Employee or Consultant. In the event of -------------------------------------------------- termination of Optionee's Continuous Status as an Employee or Consultant, the Optionee may, but only within thirty (30) days after the date of such termination (but in no event later than the date of expiration of 2 to be withheld by the Company as a result of any exercise of the Option from amounts payable to such person, subject to the following limitations: (i) such election shall be irrevocable; (ii) such election shall be subject to the disapproval of the Board at any time; (iii) such election may not be made within six months of the grant date of the Option (except that this limitation shall not apply in the event of death or disability of such person occurring prior to the expiration of the six- month period); and (iv) such election must be made either (A) six months prior to the date that the amount of tax to be withheld upon such exercise is determined or (B) in any ten-day period beginning on the third business day following the date of release by the Company for publication of quarterly or annual summary statements of sales or earnings of the Company. Any securities so withheld or tendered will be valued by the Company as of the date of exercise. APPLIED MICRO CIRCUITS CORPORATION a Delaware corporation By: /s/ Joel O. Holliday --------------------- Joel O. Holliday Title: Vice President Finance & Administration THIS SPACE INTENTIONALLY LEFT BALNK - SIGNATURE OF OPTIONEE ON FOLLOWING PAGE 4 EXHIBIT A --------- STOCK OPTION NOTICE OF EXERCISE To: Applied Micro Circuits Corporation Attn: Stock Option Administrator Subject: Notice of Intention to Exercise Stock Option -------------------------------------------- This is official notice that the undersigned ("Optionee") intends to exercise Optionee's option to purchase Shares of Applied Micro Circuits Corporation Common Stock, all of which are vested, under and pursuant to the Company's 1992 Stock option Plan, as follows:
Type of Number of Option Option Option Option Shares Being Price Tax Due * Total Amount Number Date ISO/NSO Purchased, (Per Share) (if applicable) Due AMCC - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------
*AMCC is required to withhold taxes when employees exercise an NSO. Under current tax law, U.S. income tax withholding is not required when exercising an ISO. I am paying the cost to exercise as specified below by method a, b or c (circle one below) a. Cash Payment: Enclosed is my check # ______ in the amount of _______. b. Cashless Exercise and Same-Day Sale: I will call my stock broker (check one below) to authorize them to issue a check payable to AMCC from my account # __________. _______ BancBoston Robertson Stephens - Corporate Services, Ron Smolokoff, 555 California Street, Suite 2600, San Francisco, CA 94104, TEL: (415)693-3510, FAX: (415)956-5265, E-MAIL: ron_smolokoff@rsco.com _______ SG Cowen & Company - Private Client Group, Matthew O. Casey, Four Embarcadero Center, Suite 1200, San Francisco, CA 94111, TEL: (415)646-7394 or (800)858-9316, FAX: (415)646-7316, E-MAIL: caseym@co wen.com c. Surrender of AMCC Shares: (Shares acquired from AMCC must have been held for at least six months.) I certify that the stock purchased through the exercise of these options will not be sold in a manner that would violate the Company's policy on Insider Trading. Optionee's Signature:_________________________________________ Print Name:___________________________________________________ Home Address:_________________________________________________ City, State, Zip Code:________________________________________ Daytime Phone:________________________________________________ Social Security Number:_______________________________________ 6 APPLIED MICRO CIRCUITS CORPORATION INVENTIONS,CONFIDENTIALITY AND TRADE SECRETS AGREEMENT AGREEMENT between APPLIED MICRO CIRCUITS CORPORATION, a California Corporation ("AMCC"), and ________________________________ ("Employee"). In consideration of the employment of the Employee by AMCC and the salary or wages to be paid him/her during the period of employment it is agreed as follows: 1. OWNERSHIP OF INVENTIONS. Every invention, discovery, improvement, device, design, apparatus, practice, process, method, concept, original work of authorship, trade secret or product (each of which is called an "invention"), whether patentable or not, made, developed, perfected, devised, conceived or first reduced to practice by the Employee, either solely or in collaboration with others, during the period of employment by AMCC, whether or not during regular working hours, shall be the sole and exclusive property of AMCC except as may otherwise be required as provided in paragraph 4 below. The Employee shall hold each and every such invention in fiduciary capacity for the sole benefit of AMCC and shall promptly disclose in writing full information concerning each and every such invention to AMCC, which shall receive employee's disclosure in confidence. Nothing in this Agreement shall obligate AMCC to apply for any patent. If AMCC in its sole discretion chooses, it will seek patent protection where appropriate. THE PROVISIONS OF THIS ARTICLE DO NOT APPLY TO AN INVENTION WHICH QUALIFIES FULLY UNDER THE PROVISIONS OF SECTION 2870 of the LABOR CODE OF THE STATE OF CALIFORNIA, a copy of this section and associated Sections 2871 and 2872 are attached to this Agreement. The provisions of this paragraph 1 are subordinate to paragraph 4 of this Agreement. 2. OWNERSHIP OF OTHER WORKS. All works of authorship, developments, concepts, know-how, improvements or trade secrets which an Employee shall create during employment that relate to AMCC's business, products or research or that relate to any work performed by Employee for AMCC, including without limitation all writings, programs and art produced by Employee, such works of authorship shall constitute a "work for hire" pursuant to title 17, United States Code, Sections 101 and 201 (b.), a copy of which is attached to this Agreement. 3. WORK OUTSIDE THE COMPANY. At the time of execution of this Agreement and from time to time thereafter during employment as necessary, Employee agrees to notify AMCC, in advance, of his intent and/or plan to engage in research, development and/or inventive work at any time not within regular working hours, and from time to time to advise AMCC of the results thereof. Such notification shall be in writing and shall identify the area(s) of activity contemplated. 4. ASSISTANCE IN OBTAINING AND DISPOSING OF PATENTS. At the request of AMCC at any time after submittal of the invention disclosure form pertaining to an invention and without further compensation (except that the Employee shall be reimbursed for expenses necessary and related to the invention not covered by his salary) the Employee shall: (a) assist AMCC, its attorneys and nominees in preparing and prosecuting in the United States and all foreign countries applications for patents covering all inventions, (b) execute, acknowledge and deliver any and all instruments deemed necessary or proper by AMCC, its attorneys or nominees to make, file, or prosecute all applications or in connection with their continuation, renewal or reissuance or in the conduct of all proceedings or litigation regarding them, (c) execute any and all documents deemed necessary or proper by AMCC, its attorneys or nominees to transfer title in and to the applications or title in and to all patents, copyrights, trademarks, maskwork rights, moral rights or other intellectual property rights covering the inventions to AMCC or its nominees, and (d) execute any other documents AMCC may request so it may transfer or dispose of the invention. If AMCC is unable because of mental or physical incapacity, unavailability or for any other reason, to secure Employee's signature to apply for or to pursue any application for any United States or foreign patents or copyright registrations covering inventions or original works of authorship assigned to AMCC as above, then Employee hereby irrevocably designates and appoints AMCC and its duly authorized officers and agents as agent and attorney in fact, to act for and in Employee's behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the application for, prosecution, issuance, maintenance or transfer of letters patent or copyright registrations thereon with the same legal force and effect as if originally executed by Employee. The Employee hereby waives and irrevocably quitclaims to AMCC any and all claims, of any nature whatsoever, which Employee now or hereafter has for infringement of any and all proprietary rights assigned to AMCC. 5. RIGHTS OF THE UNTIED STATES GOVERNMENT. The Employee understands that AMCC has entered into, or from time to time in the future may enter into, agreements or arrangements with agencies of the United States Government and that AMCC may be subject to laws and regulations which impose obligations, restrictions and limitations on it wit respect to inventions and patents acquired by it or conceived or developed by employees, consultants and other agents rendering services to AMCC. The Employee shall be bound by all such obligations, restrictions and limitations applicable to any invention conceived or developed by the Employee during the period of employment and shall take any obligations and to comply with the restrictions and limitations. 6. RECORDS. The Employee will keep complete, accurate and authentic accounts, notes, data and records of all inventions in the manner and form requested by AMCC. The Employee acknowledges That California Labor Code Section 2860 provides that everything that an employee acquires by virtue of his/her employment belongs to the employer. Upon termination of Employee's employment, Employee agrees to promptly surrender to the company documents and materials Employee acquired, received or developed during his/her employment, including, but not limited to, all correspondence, drawings, blueprints, manuals, letters, notes, reports, flow charts, diagrams, programs, proposals, or any other physical items or documents relating to the Company's Trade Secrets, and agrees that he/she will not make or retain any unauthorized copies or other reproductions of such materials. The Employee recognizes that the unauthorized taking of any of the Company's Trade Secrets is a crime under California penal Code Section 499(c) and is punishable by imprisonment for a period not exceeding one year, or by a fine not exceeding five thousand dollars ($5,000.00), or both. The Employee further -2- acknowledges that such unauthorized misappropriation of the company's Trade Secrets could also result in civil liability under California Civil Code Section 3426, and that willful misappropriation may result in an award against employee for double the amount of the Company's damages and the Company's fees in collecting such damages. 7. CONFIDENTIAL DISCLOSURE. The Company intends to and has expended substantial sums of money and devoted a great deal of time, labor and effort to the development, creation and acquisition of a large body of confidential information that is used by it in its business and is not generally known or available to the public. Such confidential information gives the Company a valuable advantage over its competitors and prospective competitors and is proprietary to the Company. Such confidential and proprietary information includes, but is not limited to, lists of actual or potential customers, clients or candidates; techniques and formulas; marketing and sales plans; materials relating to other employees; financial information; cost rate and pricing information; business plans; diagrams; sources of supplies; drawings; plans; processes; proposals; codes; notebooks; and the content of any contracts or proposals involving the Company which are made, developed, perfected, devised, conceived or first reduced to practice by Employee, the company or its employees, agents, consultants, affiliates or assistants, either alone or jointly with others (collectively "Secrets" Employee agrees that he/she will, both during and after the period of employment, treat any information of the company which is not readily publicly available as a Trade Secret of the Company unless the company advises Employee otherwise in writing. Employee acknowledges that Trade Secrets include not only technical information, but any business information that the Company treats as confidential. Employee recognizes that AMCC has received and in the future will receive confidential or proprietary information from third parties subject to a duty on AMCC's part to maintain the confidentiality of such information and to use it only for certain limited purposes. Employee agrees to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation or to use it except as necessary in carrying out work for AMCC consistent with AMCC's agreement with such third party. 8. PRE-EXISTING INVENTIONS. Except as to reserved inventions, if any, identified in Exhibit A, attached, (a) Employee has no inventions previously made or conceived by the Employee which the Employee wants to be excluded from the scope of this Agreement and (b) the Employee releases AMCC from any and all claims, known or unknown, by the Employee by reasons of any use by AMCC of any innovation previously made or conceived by the Employee. If, in the course of employment with AMCC, Employee incorporates into an AMCC product, process or machine a pre-existing invention owned by the Employee or in which Employee has an interest, AMCC is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with the rights to sublicense) to make, have made, copy, modify, make derivative works of, use, sell and otherwise distribute such pre-existing invention as part of or in connection with such product, process or machine. 9. NO CONFLICTING AGREEMENT. The Employee represents that performance of all terms of this Agreement as an Employee or consultant of AMCC has not breached and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by the Employee in confidence or trust prior or subsequent to the commencement of -3- employment with AMCC, and Employee will not disclose to AMCC, or induce AMCC to use, any inventions, confidential proprietary information or material belonging to any previous employer or any other party. 10. EMPLOYMENT WITH AFFILIATED COMPANY. If Employee's employment is with an affiliated company of AMCC, then apart from this paragraph 10, whenever the term AMCC or Applied Micro Circuits Corporation appears in this Agreement, the name of the affiliated company is to be substituted. Employee agrees that AMCC may exercise any right conferred on, or perform any duty under this Agreement for, the affiliated company. An affiliated company is an entity at least 50% owned by AMCC. 11. SOLICITATION OF EMPLOYEES. Employee will be called upon to work closely with employees of AMCC in performing services for AMCC. Employee expressly agrees that he/she will not, during his/her employment with AMCC and for one year thereafter, solicit or take away or assist any other individual or business in soliciting any employee of AMCC. In addition, all information about such employees which becomes known to Employee during the course of his/her employment with AMCC, and which is not otherwise known to the public, is a trade secret of AMCC and shall not be used by Employee in soliciting or taking away employees of AMCC at any time during or after termination of his/her employment with AMCC. 12. AT-WILL EMPLOYMENT. Employee understands and expressly agrees that his/her employment is not for a specified term and that his/her employment may be terminated by AMCC at anytime, with or without cause and with or without notice. Employee expressly acknowledges that this provision is included in the employee handbook, was reviewed during new hire orientation, and is to be the complete and final expression of AMCC's and employee's understanding regarding the terms and conditions under which his/her employment may be terminated. Employee further understands and agrees that no representations contrary to this provision are valid, and that this provision may not be augmented, contradicted or modified in any way, except by a writing signed by the employee and the President of AMCC. This employment at-will relationship may not be modified by any oral or implied agreement. 13. TERM. This Agreement shall become effective as of the date of the commencement of the Employee's employment by AMCC, and except as provided in paragraph 14, shall terminate as of the termination of employment. 14. NOTIFICATION OF OTHER PARTIES. In the event that the Employee leaves the employ of AMCC, the Employee hereby consents to notification by AMCC to his/her new employer about the Employee's rights and obligations under this Agreement. 15. SURVIVAL OF OBLIGATIONS. The obligations of the parties shall survive the termination of this Agreement and of the Employee's employment by AMCC. 16. SUCCESSORS, ASSIGNS, ETC. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of AMCC, but not assignable to the heirs, executors and administrators of the Employee. -4- 17. AMENDMENT. This Agreement may be amended only by a written amendment executed by the Employee and the President of AMCC acting on behalf of AMCC. 18. ENTITLEMENT OF INJUNCTIVE RELIEF. Employee agrees and acknowledges that violation of any of the provisions in this Agreement would cause irreparable injury to AMCC, that the remedy at law for any violation or threatened violation of this Agreement would be inadequate, and that AMCC shall be entitled to temporary and permanent injunctive or other equitable relief without the necessity of proving actual damages. In any proceeding by AMCC to enforce any of the provisions contained in this Agreement, the prevailing party shall be entitled to reimbursement of all costs and reasonable attorneys' fees incurred in such litigation. 19. GOVERNING LAW. This Agreement shall be interpreted, construed, governed and enforced in accordance with the laws of the State of California. 20. SEPARATE TERMS. Each term, condition, covenant or provision of this Agreement shall be viewed as separate and distinct, and in the event that any such term, covenant or provision shall be held by a court of competent jurisdiction to be invalid, the remaining provisions shall continue to be in full force and effect. 21. WAIVER. A waiver by either party of a breach of provision or provisions of this Agreement shall not constitute a general waiver, or prejudice the other party's right otherwise to demand strict compliance with that provision or any other provision in this Agreement. 22. ENTIRE AGREEMENT. Employee acknowledges receipt of this Agreement and agrees that this Agreement and attached exhibits represent the entire agreement with AMCC concerning the subject matter hereof, and supersedes any previous oral or written communications, representations, understandings or agreements with AMCC or any officer or agent thereof. Employee understands that no representative of AMCC has been authorized to enter into any agreement or commitment with employee that this inconsistent in any way with the terms of this Agreement. 23. CONSTRUCTION. This Agreement shall not be construed against any party on the grounds that such party drafted the Agreement or caused it to be drafted. -5- 24. ACKNOWLEDGMENT. Employee acknowledges that he/she has been advised by AMCC to consult with independent counsel of his/her own choice, at his/her own expense, concerning this agreement, that he/she has had the opportunity to do so, and that he/she has taken advantage of that opportunity to the extent that he/she desires. Employee further acknowledges that he/she has read and understands this agreement, is fully aware of its legal effect, and has entered into it freely based on his/her own judgment. EXECUTED by the parties hereto as of ___________________, 19 ___ APPLIED MICRO CIRCUITS CORPORATION BY: /s/ [SIGNATURE ILLEGIBLE] ------------------------------- Witness: /s/ [SIGNATURE ILLEGIBLE] /s/ Gary Martin - ------------------------------- ------------------------------- Employee's Signature Gary Martin ------------------------------- Employee'Name (Printed) EXHIBIT A RESERVED INVENTIONS MADE OR CONCEIVED PRIOR TO EMPLOYMENT AND BRIEF DESCRIPTION THEREOF 4 EX-10.28 4 EMPLOYMENT AGREEMENT Exhibit 10.28 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (this "Agreement") is made as of the Effective --------- Date indicated below by and between, Applied Micro Circuits Corporation, a Delaware corporation ("Acquiror"), and Ramakrishna Sudireddy ("Employee"). -------- -------- BACKGROUND This Agreement is entered into in connection with and is ancillary to an Agreement and Plan of Merger (the "Merger Agreement") dated as March 3, 1999 ---------------- among Acquiror, Cimaron Communications Corporation, a Delaware corporation ("Target") and Wiley Acquisition Corporation, a Delaware corporation and a ------ wholly owned subsidiary of Acquiror ("Sub"), pursuant to which Sub will merge with and into Acquiror (the "Merger") The date on which the Merger becomes ------ effective will be the effective date of this Agreement (the "Effective Date"). -------------- Employee is a founder, principal stockholder and President and CEO of Target. Acquiror intends to continue the business of Target after the Merger and integrate such business into Acquiror's ongoing business. To preserve and protect the assets of Target, including Target's goodwill, customers and trade secrets of which Employee has and will have knowledge in Employee's role as an employee of Acquiror and to preserve and protect Acquiror's goodwill and business interests going forward, and in consideration for Acquiror's entering into and performing under the Merger Agreement. Employee has agreed to enter into this Agreement. In addition, as required by Section 7 below, Employee is concurrently herewith entering into an Inventions, Confidentiality and Trade Secrets Agreement in favor of Acquiror designed to protect Acquiror's proprietary rights. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements of the parties contained herein, Acquiror and Employee hereby agree as follows: 1. Employment. Acquiror will employ Employee, and Employee accepts ---------- employment with Acquiror, for a period of one year from the Effective Date (the "Initial Period"), unless Employee's employment is sooner terminated in accordance with this Agreement. Employee's employment may continue after this Initial Period but will then be terminable by either party at will, with or without cause. 2. Duties. Employee will be employed as a full-time employee of Acquiror ------ and initially will serve as Vice President Cimaron, reporting to Dave Rickey. Employee agrees that, to the best of Employee's ability and experience. Employee will at all times conscientiously perform all of the duties and obligations assigned to Employee under this Agreement. Acquiror agrees that it will not relocate Employee outside of a twenty-five mile radius of Andover. Massachusetts, without Employee's consent. 3. Full-time Employment. Employee's employment will be on a full-time -------------------- basis, in accordance with standard employee policies for Acquiror. Employee will not engage in any other business or render any commercial or professional services, directly or indirectly, to any other person or organization, whether for compensation or otherwise, provided that Employee may (i) provide incidental assistance to family members on matters of family business; and (ii) sit on the boards of charitable and nonprofit organizations which do not, at the time of Employee's appointment or election, to Employee's knowledge, compete with Acquiror; provided in each case that such activities do not conflict with or interfere with Employee's obligations to Acquiror. 4. Compensation ------------ (a) Salary. Employee's initial salary for the term of this Agreement ------ will be no less than S 160,000 per year, payable on Acquiror's regular payroll dates, less required withholdings. (b) Bonus. Employee will be eligible for an Executive bonus of up to ----- 40 percent of Employee's initial salary, based on targets to be established by the Company's Board of Directors. (c) Stock Options. Employee will be granted stock options, under ------------- Acquiror's 1992 Stock Option Plan, as amended, to purchase up to 100,000 shares of Acquiror's Common Stock at a price equal to the per share market value of such Common Stock on the last trading day prior to the closing date of the Merger, as quoted on the Nasdaq National Market and as reported in the Wall Street Journal. The stock options will be granted as nonqualified stock options. If and when the Employee sells any shares issued upon exercise of any stock options, the Employee will promptly notify Acquiror of such sale in writing. The stock options will vest 25% on the first anniversary of the Effective Date and the remainder will vest as to 1/48th of the option grant per month thereafter, so that they will be fully vested on the fourth anniversary of the Effective Date. The stock options will have a term of ten years and will be subject to the terms and conditions set forth on the form of Stock Option Grant attached hereto as Attachment A (to be completed at the closing of the Merger). Employee will ------------ also be eligible to participate in the Company's "refresh" stock option grant programs consistent with other employees of similar responsibility and compensation levels. 5. Employee Benefits. Employee will be entitled to insurance, vacation ----------------- and other benefits commensurate with Employee's position in accordance with Acquiror's standard employee policies in effect from time to time. For purposes of satisfying the terms and conditions of such benefit plans, Acquiror shall give full credit for eligibility, vesting or benefit accrual for each participant's period of service with Target prior to the Effective Date. Employee has received a summary of Acquiror's standard employee benefits policies in effect as of the date hereof. Employee shall receive credit for a maximum of 105 vacation hours accrued at Target through the Effective Date, in accordance with Acquiror's standard employee policies. This credit shall be adjusted for any vacation hours used during the period commencing on January 1, 1999 and ending on the Effective Date. 6. Reimbursement of Business Expenses. Acquiror will, in accordance with ----------------------------------- Acquiror's policies in effect from time to time, reimburse Employee for all reasonable business expenses incurred by Employee in connection with the performance of Employee's duties under this Agreement. including, without limitation, reasonable expenditures for office space, supplies, -2- equipment and expenses and for business entertainment and travel, upon submission of the required documentation required pursuant to Acquiror's standard policies and record keeping procedures. 7. Confidentiality. Simultaneously with the execution of this Agreement. --------------- Employee is executing and delivering and hereby adopts and agrees to be bound by Acquiror's standard Proprietary Information and Inventions Agreement, a copy of which is attached to this Agreement as Attachment B (the "Inventions, ------------ ---------- Confidentiality and Trade Secrets Agreement"). - ------------------------------------------- 8. Termination. ----------- (a) Acquiror may terminate Employee's employment at will, at any time with or without Cause (as defined in Section 8(e) below) upon written notice to Employee. (b) Employee may terminate Employee's employment upon written notice to Acquiror in the event that Acquiror is in material breach of this Agreement, provided that such termination will become effective only upon the expiration of 30 days following such notice and then only if the alleged breach remains uncured (provided that Acquiror shall not have more than one opportunity to cure such breach). Such termination shall be deemed a termination by Acquiror of Employee's employment under Section 8(a) for which Employee shall have the remedy set forth in Section 8(c). (c) Upon termination of Employee's employment pursuant to Section 8(a) or (b) for any reason other than Cause: (1) Acquiror will pay to Employee an amount equal to the product of employee's monthly Salary (at the monthly rate paid to Employee immediately prior to such termination) and the number of months (including fractions thereof) that remain from the date of employee's termination through the end of the Initial Period plus the target bonus specified in Section 4(b) (the "Termination Payment") immediately upon such ------------------- termination and (ii) the vesting of any options to purchase Acquiror Common Stock granted to Employee subsequent to the consummation of the Merger shall be accelerated by the number of months (including fractions thereof) that remain from the date of employee's termination through the end of the Initial Period. Acquiror's obligation to make the Termination Payment and accelerate vesting of stock options pursuant to this Section 8(c) is in lieu of any damages or any other payment or benefits, including without limitation stock benefits (except that with regard to the vesting and termination of stock options. such stock options will vest and terminate according to the terms of specific stock option grant agreements), which Acquiror might otherwise be obligated to pay Employee as a result of Employee's termination of employment. Acquiror and Employee agree that, in view of the nature of the issues likely to arise in the event of such a termination, it would be impracticable or extremely difficult to fix the actual damages resulting from such termination and proving actual damages. causation and foreseeability in the case of such termination would be costly, inconvenient and difficult. In requiring Acquiror to make the Termination Payment and to accelerate the vesting of stock options as set forth herein, it is the intent of the parties to provide, as of the date of this Agreement. for a liquidated amount of damages to be paid by Acquiror to Employee. Such liquidated amount shall be deemed full and adequate damages for such termination and is not intended by either party to be a penalty. -3- (d) Upon Death. If Employee dies during the term of this Agreement, ---------- Acquiror will pay Employee's estate an amount equal to all salary, bonuses and benefits accrued as of the date of Employee's death. (e) Definition of Cause. For purposes of this Agreement. "Cause" for ------------------- ----- Employee's termination will exist at any time after the happening of one or more of the following events: (i) an act of personal dishonesty constituting willful and material misconduct, (ii) a violation of employment obligations (including confidentiality or noncompetition obligations) which is demonstrably willful and material misconduct which has not been cured within 30 days after written notice of such violation has been given to Employee, (iii) the willful engaging in illegal conduct that is materially and demonstrably injurious to the Company, (iv) Employee's continued failure to substantially perform his or her duties for a period of 90 days after written notice thereof setting forth in reasonable detail the respects in which the Company believes Employee has so failed, or (v) Employee being convicted of a felony or misappropriating property of the Company. (f) Survival. Employee's and Acquiror's obligations under Sections 5, -------- 6, 7, 8 and 9 (h) of this Agreement will survive the termination of Employee's employment by Acquiror. 9. Miscellaneous. ------------- (a) Notices. Any and all notices permitted or required to be given -------- under this Agreement must be in writing. Notices will be deemed given (i) when personally received or when sent by facsimile transmission (to the receiving party's facsimile number), (ii) on the first business day after having been sent by commercial overnight courier with written verification of receipt, or (iii) on the third business day after having been sent by registered or certified mail from a location on the United States mainland, return receipt requested, postage prepaid, whichever occurs first, at the address set forth below or at any new address, notice of which will have been given in accordance with this Section 9(a): If to Acquiror: Applied Micro Circuits Corporation Attn: President 6290 Sequence Drive San Diego, CA 92121 -4- with a copy to: Venture Law Group 2800 Sand Hill Road Menlo Park, CA 94025 Attn: Mark A. Medearis If to Employee: Ramakrishna Sudireddy 15 Messinia Drive Andover, MA 01810 with a copy to: Hale and Dorr LLP 60 State Street Boston. MA 02109 Attention: Patrick Rondeau (b) Amendments. This Agreement, including the Exhibits hereto, ---------- contains the entire agreement and supersedes and replaces all prior agreements between Acquiror and Employee or Target and Employee concerning Employee's employment. This Agreement may not be changed or modified in whole or in part except by a writing signed by the party against whom enforcement of the change or modification is sought. (c) Successors and Assigns. This Agreement will not be assignable by ---------------------- either Employee or Acquiror, except that the rights and obligations of Acquiror under this Agreement may be assigned to a corporation which becomes the successor to Acquiror as the result of a merger or other corporate reorganization and which continues the business of Acquiror, or any other subsidiary of Acquiror, provided that Acquiror guarantees the performance by such assignee of Acquiror's obligations hereunder. (d) Governing Law. This Agreement will be governed by and interpreted ------------- according to the substantive laws of the Commonwealth of Massachusetts without regard to such state's conflicts law. (e) No Waiver. The failure of either party to insist on strict --------- compliance with any of the terms of this Agreement in any instance or instances will not be deemed to be a waiver of any term of this Agreement or of that party's right to require strict compliance with the terms of this Agreement in any other instance. (f) Severability. Employee and Acquiror recognize that the ------------ limitations contained herein are reasonably and properly required for the adequate protection of the interests of Acquiror. If for any reason a court of competent jurisdiction or binding arbitration proceeding finds any provision of this Agreement, or the application thereof, to be unenforceable, the remaining provisions of this Agreement will be interpreted so as best to reasonably effect the intent of the parties. The parties further agree that the court or arbitrator shall replace any such invalid or unenforceable provisions with valid and enforceable provisions designed to achieve, to the extent possible, the business purposes and intent of such unenforceable provisions. -5- (g) Counterparts. This Agreement may be executed in counterparts ------------ which when taken together will constitute one instrument. Any copy of this Agreement with the original signatures of all parties appended will constitute an original. (h) Expenses. The reasonable fees and expenses of either party which -------- may be reasonably incurred by such party as the result of any claim or contest by the Employee to enforce his or her rights under this Agreement shall be paid promptly, to the full extent permitted by law, by the party prevailing in such claim or contest. (i) Dispute Resolution. ------------------ (i) Arbitration of Disputes. Any dispute under this Agreement ----------------------- shall be resolved by arbitration in Boston, Massachusetts, and, except as herein specifically stated, in accordance with the commercial arbitration rules of the American Arbitration Association ("AAA Rules") then in effect. However, in all --------- events, these arbitration provisions shall govern over any conflicting rules which may now or hereafter be contained in the AAA Rules. Any judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction over the subject matter thereof. The arbitrator shall have the authority to grant any equitable and legal remedies that would be available in any judicial proceeding instituted to resolve such dispute. (ii) Compensation of Arbitrator. Any such arbitration will be -------------------------- conducted before a single arbitrator who will be compensated for his or her services at a rate to be determined by the parties or by the American Arbitration Association, but based upon reasonable hourly or daily consulting rates for the arbitrator in the event the parties are not able to agree upon his or her rate of compensation. (iii) Selection of Arbitrator. The American Arbitration ----------------------- Association will have the authority to select an arbitrator from a list of arbitrators who are partners in a nationally recognized firm of independent certified public accountants from the management advisory services department (or comparable department or group) of such firm; provided, however, that such firm cannot be the firm of certified public accountants then auditing the books and records of either party or providing management or advisory services for either party, that each patty will have the opportunity to make such reasonable objection to any of the arbitrators listed as such party may wish and that the American Arbitration Association will select the arbitrator from the list of arbitrators as to whom neither party makes any such objection. In the event that the foregoing procedure is not followed, each party will choose one person from the list of arbitrators provided by the American Arbitration Association (provided that such person does not have a conflict of interest), and the two persons so selected will select from the list provided by the American Arbitration Association the person who will act as the arbitrator. (iv) Payment of Costs. Acquiror and Employee will bear the ---------------- expense of deposits and advances required by the arbitrator in equal proportions, but either party may advance such amounts, subject to recovery as an addition or offset to any award. The arbitrator will award to the prevailing party, as determined by the arbitrator, all costs, fees and expenses -6- related to the arbitration, including reasonable fees and expenses of attorneys, accountants and other professionals incurred by the prevailing party. (v) Burden of Proof. For any dispute submitted to arbitration, --------------- the burden of proof will be as it would be if the claim were litigated in a judicial proceeding. (vi) Award. Upon the conclusion of any arbitration proceedings ----- hereunder, the arbitrator will render findings of fact and conclusions of law and a written opinion setting forth the basis and reasons for any decision reached and will deliver such documents to each party to this Agreement along with a signed copy of the award. (vii) Terms of Arbitration. The arbitrator chosen in accordance -------------------- with these provisions will not have the power to alter, amend or otherwise affect the terms of these arbitration provisions or the provisions of this Agreement. (viii) Exclusive Remedy. Except as specifically otherwise ---------------- provided in this Agreement, arbitration will be the sole and exclusive remedy of the parties for any dispute arising out of this Agreement. -7- IN WITNESS WHEREOF, this Agreement is made and effective as of the Effective Date. APPLIED MICRO CIRCUITS EMPLOYEE CORPORATION By: /s/ [SIGNATURE ILLEGIBLE] /s/ Ram Sudireddy ----------------------------- ------------------------ Title: PRES/CEO RAM SUDIREDDY -------------------------- Signature page to Employment Agreement List of Exhibits: - ---------------- Attachment A Stock Option Grant Attachment B Inventions, Confidentiality and Trade Secrets Agreement ================================================================================ Applied Micro Circuits Corporation Notice of Grant of Stock Options ID: 94-2586591 and Option Agreement 6290 Sequence Drive San Diego, CA 92121 ================================================================================ Ramakrishna R. Sudireddy Option Number: 99030015 15 Messinia Drive Plan: 92 Andover, MA 01810 ID: ###-##-#### ================================================================================ Effective 3/17/99, you have been granted a(n) Incentive Stock Option to buy 10,239 shares of Applied Micro Circuits Corporation (the Company) stock at $39.06250 per share. The total option price of the shares granted is $399,960.94. Shares in each period will become fully vested on the date shown.
Shares Vest Type Full Vest Expiration -------- ------------ --------- ---------- 1,462 On Vest Date 3/17/00 3/17/09 1,097 Monthly 12/17/00 3/17/09 2,560 Monthly 12/17/01 3/17/09 2,560 Monthly 12/17/02 3/17/09 2,560 Monthly 3/17/03 3/17/09
================================================================================ By your signature and the Company's signature below, you and the Company agree that these options are granted under and governed by the terms and conditions of the Company's Stock Option Plan as amended and the Option Agreement, all of which are attached and made a part of this document. ================================================================================ /s/ [SIGNATURE ILLEGIBLE] 3/18/99 - -------------------------------------- ---------------------------- Applied Micro Circuits Corporation Date /s/ R. R. Sudireddy 3/18/99 - -------------------------------------- ---------------------------- Ramakrishna R. Sudireddy Date No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 4. Optionee's Representations. In the event this Option and the Shares -------------------------- purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, if required by the Company, concurrently with the exercise of all or any portion of this Option, deliver to the Company an investment representation statement in the customary form, a copy of which is available for Optionee's review from the Company upon request. 5. Method of Payment. Payment of the exercise price shall be by any of ----------------- the following, or a combination thereof, at the election of the Board, in its sole discretion: (i) cash; (ii) check; (iii) surrender of other shares of Common Stock of the Company at a value equal to the exercise price of the Shares as to which the Option is being exercised; or (iv) delivery of a property executed Exercise Notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price. 6. Restrictions on Exercise. This Option may not be exercised until such ------------------------ time as the Plan has been approved by the stockholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 7. Termination of Status as an Employee. In the event of termination of ------------------------------------ Optionee's Continuous Status as an Employee, the Optionee may, but only within thirty (30) days after the date of such termination (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), exercise this Option to the extent exercisable at the date of such termination. Optionee's employment shall be deemed terminated on such date, if any, as Optionee becomes a part-time employee, as defined in the Company's then current employment guidelines. To the extent this Option was not exercisable at the date of such termination, or if the Optionee does not exercise this Option within the time specified herein, the Option shall terminate. -2- OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE NOTICE OF GRANT AND SECTION 3 HEREOF IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH SUCH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE SUCH OPTIONEE'S EMPLOYMENT AT ANY TIME, WITH OR WITHOUT CAUSE. Optionee acknowledges receipt of a copy of the Plan and certain related information and represents that Optionee is familiar with the terms and provisions of these documents, and hereby accepts this Option subject to all of those terms and provisions. Optionee has reviewed the Plan and this Option in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option and fully understands all provisions of the Option. Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under the Plan. Optionee further agrees to notify the Company upon any change in the residence address indicated below. Dated: 3/18/99 ----------------- /s/ R. R. Sudireddy --------------------------------------------- (Optionee) Ramakrishna Sudireddy Residence Address: 15 Messinia Drive Andover, MA 01810 -4- EXHIBIT B --------- NOTICE OF DISQUALIFYING DISPOSITION To: Applied Micro Circuits Corporation Attn: Stock Option Administrator Subject: Notice of Disqualifying Disposition ----------------------------------- This is official notice that the undersigned disposed of Shares of Applied Micro Circuits Corporation Common Stock acquired by exercise of an incentive stock option, under and pursuant to the Company's 1992 Stock Option Plan, as follows:
Option Market Total Shares Option Date of Exercise Price (Per Transfer Value (Per Transferred/ Number Grant Date Share) Date Share) Sold - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
I understand that for Federal Income Tax Purposes, AMCC is required to report on a Form W-2 the compensation of employees who dispose of Incentive Stock Options shares within one year from the Date of Exercise, or within two years from the date of grant. Optionee's Signature: /s/ R. R. Sudireddy -------------------------------- Print Name:___________________________________________ Home Address:_________________________________________ City, State, Zip Code:________________________________ Daytime Phone:________________________________________ Social Security Number:_______________________________ You must use this form if you have disposed of ISO shares within two years of the grant date or one year of the exercise date. -6- ================================================================================ Applied Micro Circuits Corporation Notice of Grant of Stock Options ID: 94.2586591 and Option Agreement 6290 Sequence Drive San Diego, CA 92121 ================================================================================ Ramakrishna R. Sudireddy Option Number: 99030016 15 Messinia Drive Plan: 92 Andover, MA 01810 ID: ###-##-#### ================================================================================ Effective 3/17/99, you have been granted a(n) Non-Qualified Stock Option to buy 89,761 shares of Applied Micro Circuits Corporation (the Company) stock at $39,06250 per share. The total option price of the shares granted is $3,506,289.06 Shares in each period will become fully vested on the date shown.
Shares Vest Type Full Vest Expiration --------------- ------------- --------- ---------- 23,539 On Vest Date 3/17/00 3/17/09 17,652 Monthly 12/17/00 3/17/09 22,440 Monthly 12/17/01 3/17/09 22,440 Monthly 12/17/02 3/17/09 3,690 Monthly 3/17/03 3/17/09
================================================================================ By your signature and the Company's signature below, you and the Company agree that these options are granted under and governed by the terms and conditions of the Company's Stock Option Plan as amended and the Option Agreement, all of which are attached and made a part of this document. ================================================================================ /s/ Joel O. Holliday 3/18/99 - ---------------------------------------- ------------------------ Applied Micro Circuits Corporation Date /s/ R. R. Sudireddy 3/18/99 - ---------------------------------------- ------------------------ Ramakrishna R. Sudireddy Date Date: 3/18/99 Time: 2:00:01 PM holder's investment intent with respect to such Shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company or the Secretary's designee. The Exercise Notice shall be accompanied by payment of the exercise price. This Option shall be deemed to be exercised upon receipt by the Company of such Exercise Notice accompanied by the exercise price. No Shares will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares. 4. Optionee's Representations. In the event this Option and the Shares -------------------------- purchasable pursuant to the exercise of this Option have not been registered under the Securities Act of 1933, as amended, at the time this Option is exercised, Optionee shall, if required by the Company concurrently with the exercise of all or any portion of this Option, deliver to the Company an investment representation statement in the customary form, a copy of which is available for Optionee's review from the Company upon request. 5. Method of Payment. Payment of the exercise price shall be by any of ----------------- the following, or a combination thereof, at the election of the Board, in its sole discretion: (i) cash; (ii) check; (iii) surrender of other shares of Common Stock of the Company at a value equal to the exercise price of the Shares as to which the Option is being exercised; or (iv) delivery of a property executed Exercise Notice together with such other documentation as the Administrator and the broker, if applicable, shall require to effect an exercise of the Option and delivery to the Company of the sale or loan proceeds required to pay the exercise price. 6. Restrictions of Exercise. This Option may not be exercised until such ------------------------ time as the Plan has been approved by the stockholders of the Company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation. 7. Termination of Status as an Employee or Consultant. In the event of -------------------------------------------------- termination of Optionee's Continuous Status as an Employee or Consultant, the Optionee may, but only within thirty (30) days after the date of such termination (but in no event later than the date of expiration of 2 to be withheld by the Company as a result of any exercise of the Option from amounts payable to such person, subject to the following limitations: (i) such election shall be irrevocable; (ii) such election shall be subject to the disapproval of the Board at any time; (iii) such election may not be made within six months of the grant date of the Option (except that this limitation shall not apply in the event of death or disability of such person occurring prior to the expiration of the six-month period); and (iv) such election must be made either (A) six months prior to the date that the amount of tax to be withheld upon such exercise is determined or (B) in any ten-day period beginning on the third business day following the date of release by the Company for publication of quarterly or annual summary statements of sales or earnings of the Company. Any securities so withheld or tendered will be valued by the Company as of the date of exercise. APPLIED MICRO CIRCUITS CORPORATION a Delaware corporation By: /s/ Joel O. Holliday -------------------- Joel 0. Holliday Title: Vice President Finance & Administration THIS SPACE INTENTIONALLY LEFT BALNK-SIGNATURE OF OPTIONEE ON FOLLOWING PAGE 4 EXHIBIT A --------- STOCK OPTION NOTICE OF EXERCISE To: Applied Micro Circuits Corporation Attn: Stock Option Administrator Subject: Notice of Intention to Exercise Stock Option -------------------------------------------- This is official notice that the undersigned ("Optionee") intends to exercise Optionee's option to purchase Shares of Applied Micro Circuits Corporation Common Stock, all of which are vested, under and pursuant to the Company's 1992 Stock Option Plan, as follows:
Type of Number of Option Total Option Option Option Shares Being Price Tax Due* Amount Number Date ISO/NSO Purchased (Per Share) (if applicable) Due AMCC - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------
* AMCC is required to withhold taxes when employees exercise an NSO. Under current tax law, U.S. income tax withholding is not required when exercising an ISO. I am paying the cost to exercise as specified below by method a, b or c (circle one below) a. Cash Payment: Enclosed is my check # _______________ in the amount of ___________________. b. Cashless Exercise and Same-Day Sale: I will call my stock broker (check one below) to authorize them to issue a check payable to AMCC from my account # _____________________. _____ BancBoston Robertson Stephens-Corporate Services, Pon Smolokoff, 555 California Street, Suite 2600, San Francisco, CA 94104, TEL: (415) 693-3510, FAX: (415) 956-5265, E-MAIL: ron_smolokoff@rsco.com _____ SG Cowen & Company-Private Client Group, Matthew O. Casey, Four Embarcadero Center, Suite 1200, San Francisco, CA 94111, TEL: (415)646-7394 or (800)858-9316, FAX: (415)646-7316, E-MAIL: caseym@cowen.com c. Surrender of AMCC Shares: (Shares acquired from AMCC must have been held for at least six months.) I certify that the stock purchased through the exercise of these options will not be sold in a manner that would violate the Company's policy on Insider Trading. Optionee's Signature: /s/ R. R. Sudireddy -------------------------------- Print Name:___________________________________________ Home Address:_________________________________________ City, State, Zip Code:________________________________ Daytime Phone:________________________________________ Social Security Number:_______________________________ 6 APPLIED MICRO CIRCUITS CORPORATION INVENTIONS, CONFIDENTIALITY AND TRADE SECRETS AGREEMENT AGREEMENT between APPLIED MICRO CIRCUITS CORPORATION, a California Corporation ("AMCC"), and ________________________________ ("Employee"). In consideration of the employment of the Employee by AMCC and the salary or wages to be paid him/her during the period of employment it is agreed as follows: 1. OWNERSHIP OF INVENTIONS. Every invention, discovery, improvement, device, design, apparatus, practice, process, method, concept, original work of authorship, trade secret or product (each of which is called an "invention"), whether patentable or not, made, developed, perfected, devised, conceived or first reduced to practice by the Employee, either solely or in collaboration with others, during the period of employment by AMCC, whether or not during regular working hours, shall be the sole and exclusive property of AMCC except as may otherwise be required as provided in paragraph 4 below. The Employee shall hold each and every such invention in fiduciary capacity for the sole benefit of AMCC and shall promptly disclose in writing full information concerning each and every such invention to AMCC, which shall receive employee's disclosure in confidence. Nothing in this Agreement shall obligate AMCC to apply for any patent. If AMCC in its sole discretion chooses, it will seek patent protection where appropriate. THE PROVISIONS OF THIS ARTICLE DO NOT APPLY TO AN INVENTION WHICH QUALIFIES FULLY UNDER THE PROVISIONS OF SECTION 2870 of the LABOR CODE OF THE STATE OF CALIFORNIA, a copy of this section and associated Sections 2871 and 2872 are attached to this Agreement. The provisions of this paragraph 1 are subordinate to paragraph 4 of this Agreement. 2. OWNERSHIP OF OTHER WORKS. All works of authorship, developments, concepts, know-how, improvements or trade secrets which an Employee shall create during employment that relate to AMCC's business, products or research or that relate to any work performed by Employee for AMCC, including without limitation all writings, programs and art produced by Employee, such works of authorship shall constitute a "work for hire" pursuant to title 17, United States Code, Sections 101 and 201 (b.), a copy of which is attached to this Agreement. 3. WORK OUTSIDE THE COMPANY. At the time of execution of this Agreement and from time to time thereafter during employment as necessary, Employee agrees to notify AMCC, in advance, of his intent and/or plan to engage in research, development and/or inventive work at any time not within regular working hours, and from time to time to advise AMCC of the results thereof. Such notification shall be in writing and shall identify the area(s) of activity contemplated. 4. ASSISTANCE IN OBTAINING AND DISPOSING OF PATENTS. At the request of AMCC at any time after submittal of the invention disclosure form pertaining to an invention and without further compensation (except that the Employee shall be reimbursed for expenses necessary and related to the invention not covered by his salary) the Employee shall: (a) assist AMCC, its attorneys and nominees in preparing and prosecuting in the United States and all foreign countries applications for patents covering all inventions, (b) execute, acknowledge and deliver any and all instruments deemed necessary or proper by AMCC, its attorneys or nominees to make, file, or prosecute all applications or in connection with their continuation, renewal or reissuance or in the conduct of all proceedings or litigation regarding them, (c) execute any and all documents deemed necessary or proper by AMCC, its attorneys or nominees to transfer title in and to the applications or title in and to all patents, copyrights, trademarks, maskwork rights, moral rights or other intellectual property rights covering the inventions to AMCC or its nominees, and (d) execute any other documents AMCC may request so it may transfer or dispose of the invention. If AMCC is unable because of mental or physical incapacity, unavailability or for any other reason, to secure Employee's signature to apply for or to pursue any application for any United States or foreign patents or copyright registrations covering inventions or original works of authorship assigned to AMCC as above, then Employee hereby irrevocably designates and appoints AMCC and its duly authorized officers and agents as agent and attorney in fact, to act for and in Employee's behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the application for, prosecution, issuance, maintenance or transfer of letters patent or copyright registrations thereon with the same legal force and effect as if originally executed by Employee. The Employee hereby waives and irrevocably quitclaims to AMCC any and all claims, of any nature whatsoever, which Employee now or hereafter has for infringement of any and all proprietary rights assigned to AMCC. 5. RIGHTS OF THE UNTIED STATES GOVERNMENT. The Employee understands that AMCC has entered into, or from time to time in the future may enter into, agreements or arrangements with agencies of the United States Government and that AMCC may be subject to laws and regulations which impose obligations, restrictions and limitations on it with respect to inventions and patents acquired by it or conceived or developed by employees, consultants and other agents rendering services to AMCC. The Employee shall be bound by all such obligations, restrictions and limitations applicable to any invention conceived or developed by the Employee during the period of employment and shall take any obligations and to comply with the restrictions and limitations. 6. RECORDS. The Employee will keep complete, accurate and authentic accounts, notes, data and records of all inventions in the manner and form requested by AMCC. The Employee acknowledges that California Labor Code Section 2860 provides that everything that an employee acquires by virtue of his/her employment belongs to the employer. Upon termination of Employee's employment, Employee agrees to promptly surrender to the company documents and materials Employee acquired, received or developed during his/her employment, including, but not limited to, all correspondence, drawings, blueprints, manuals, letters, notes, reports, flow charts, diagrams, programs, proposals, or any other physical items or documents relating to the Company's Trade Secrets, and agrees that he/she will not make or retain any unauthorized copies or other reproductions of such materials. The Employee recognizes that the unauthorized taking of any of the Company's Trade Secrets is a crime under California penal Code Section 499(c) and is punishable by imprisonment for a period not exceeding one year, or by a fine not exceeding five thousand dollars ($5,000.00), or both. The Employee further -2- acknowledges that such unauthorized misappropriation of the company's Trade Secrets could also result in civil liability under California Civil Code Section 3426. and that willful misappropriation may result in an award against employee for double the amount of the Company's damages and the Company's fees in collecting such damages. 7. CONFIDENTIAL DISCLOSURE. The Company intends to and has expended substantial sums of money and devoted a great deal of time, labor and effort to the development, creation and acquisition of a large body of confidential information that is used by it in its business and is not generally known or available to the public. Such confidential information gives the Company a valuable advantage over its competitors and prospective competitors and is proprietary to the Company. Such confidential and proprietary information includes, but is not limited to, lists of actual or potential customers, clients or candidates; techniques and formulas; marketing and sales plans; materials relating to other employees; financial information; cost rate and pricing information; business plans; diagrams; sources of supplies; drawings; plans; processes; proposals; codes; notebooks; and the content of any contracts or proposals involving the Company which are made, developed, perfected, devised, conceived or first reduced to practice by Employee, the company or its employees, agents, consultants, affiliates or assistants, either alone or jointly with others (collectively "Trade Secrets"). Employee agrees that he/she will, both during and after the period of employment, treat any information of the company which is not readily publicly available as a Trade Secret of the Company unless the company advises Employee otherwise in writing. Employee acknowledges that Trade Secrets include not only technical information, but any business information that the Company treats as confidential. Employee recognizes that AMCC has received and in the future will receive confidential or proprietary information from third parties subject to a duty on AMCC's part to maintain the confidentiality of such information and to use it only for certain limited purposes. Employee agrees to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation or to use it except as necessary in carrying out work for AMCC consistent with AMCC's agreement with such third party. 8. PRE-EXISTING INVENTIONS. Except as to reserved inventions, if any, identified in Exhibit A, attached, (a) Employee has no inventions previously made or conceived by the Employee which the Employee wants to be excluded from the scope of this Agreement and (b) the Employee releases AMCC from any and all claims, known or unknown, by the Employee by reasons of any use by AMCC of any innovation previously made or conceived by the Employee. If, in the course of employment with AMCC, Employee incorporates into an AMCC product, process or machine a pre-existing invention owned by the Employee or in which Employee has an interest, AMCC is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license (with the rights to sublicense) to make, have made, copy, modify, make derivative works of, use, sell and otherwise distribute such pre-existing invention as part of or in connection with such product, process or machine. 9. NO CONFLICTING AGREEMENT. The Employee represents that performance of all terms of this Agreement as an Employee or consultant of AMCC has not breached and will not breach any agreement to keep in confidence proprietary information, knowledge or data acquired by the Employee in confidence or trust prior or subsequent to the commencement of -3- employment with AMCC, and Employee will not disclose to AMCC, or induce AMCC to use, any inventions, confidential proprietary information or material belonging to any previous employer or any other party. 10. EMPLOYMENT WITH AFFILIATED COMPANY. If Employee's employment is with an affiliated company of AMCC, then apart from this paragraph 10, whenever the term AMCC or Applied Micro Circuits Corporation appears in this Agreement, the name of the affiliated company is to be substituted. Employee agrees that AMCC may exercise any right conferred on, or perform any duty under this Agreement for, the affiliated company. An affiliated company is an entity at least 50% owned by AMCC. 11. SOLICITATION OF EMPLOYEES. Employee will be called upon to work closely with employees of AMCC in performing services for AMCC. Employee expressly agrees that he/she will not, during his/her employment with AMCC and for one year thereafter, solicit or take away or assist any other individual or business in soliciting any employee of AMCC. In addition, all information about such employees which becomes known to Employee during the course of his/her employment with AMCC, and which is not otherwise known to the public, is a trade secret of AMCC and shall not be used by Employee in soliciting or taking away employees of AMCC at any time during or after termination of his/her employment with AMCC. 12. AT-WILL EMPLOYMENT. Employee understands and expressly agrees that his/her employment is not for a specified term and that his/her employment may be terminated by AMCC at anytime, with or without cause and with or without notice. Employee expressly acknowledges that this provision is included in the employee handbook, was reviewed during new hire orientation, and is to be the complete and final expression of AMCC's and employee's understanding regarding the terms and conditions under which his/her employment may be terminated. Employee further understands and agrees that no representations contrary to this provision are valid, and that this provision may not be augmented, contradicted or modified in any way, except by a writing signed by the employee and the President of AMCC. This employment at-will relationship may not be modified by any oral or implied agreement. 13. TERM. This Agreement shall become effective as of the date of the commencement of the Employee's employment by AMCC, and except as provided in paragraph 14, shall terminate as of the termination of employment. 14. NOTIFICATION OF OTHER PARTIES. In the event that the Employee leaves the employ of AMCC, the Employee hereby consents to notification by AMCC to his/her new employer about the Employee's rights and obligations under this Agreement. 15. SURVIVAL OF OBLIGATIONS. The obligations of the parties shall survive the termination of this Agreement and of the Employee's employment by AMCC. 16. SUCCESSORS, ASSIGNS, ETC. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of AMCC, but not assignable to the heirs, executors and administrators of the Employee. -4- 17. AMENDMENT. This Agreement may be amended only by a written amendment executed by the Employee and the President of AMCC acting on behalf of AMCC. 18. ENTITLEMENT OF INJUNCTIVE RELIEF. Employee agrees and acknowledges that violation of any of the provisions in this Agreement would cause irreparable injury to AMCC, that the remedy at law for any violation or threatened violation of this Agreement would be inadequate, and that AMCC shall be entitled to temporary and permanent injunctive or other equitable relief without the necessity of proving actual damages. In any proceeding by AMCC to enforce any of the provisions contained in this Agreement, the prevailing party shall be entitled to reimbursement of all costs and reasonable attorneys' fees incurred in such litigation. 19. GOVERNING LAW. This Agreement shall be interpreted, construed, governed and enforced in accordance with the laws of the State of California. 20. SEPARATE TERMS. Each term, condition, covenant or provision of this Agreement shall be viewed as separate and distinct, and in the event that any such term, covenant or provision shall be held by a court of competent jurisdiction to be invalid, the remaining provisions shall continue to be in full force and effect. 21. WAIVER. A waiver by either party of a breach of provision or provisions of this Agreement shall not constitute a general waiver, or prejudice the other party's right otherwise to demand strict compliance with that provision or any other provision in this Agreement. 22. ENTIRE AGREEMENT. Employee acknowledges receipt of this Agreement and agrees that this Agreement and attached exhibits represent the entire agreement with AMCC concerning the subject matter hereof, and supersedes any previous oral or written communications, representations, understandings or agreements with AMCC or any officer or agent thereof. Employee understands that no representative of AMCC has been authorized to enter into any agreement or commitment with employee that this inconsistent in any way with the terms of this Agreement. 23. CONSTRUCTION. This Agreement shall not be construed against any party on the grounds that such party drafted the Agreement or caused it to be drafted. 24. ACKNOWLEDGMENT. Employee acknowledges that he/she has been advised by AMCC to consult with independent counsel of his/her own choice, at his/her own expense, concerning this agreement, that he/she has had the opportunity to do so, and that he/she has taken advantage of that opportunity to the extent that he/she desires. Employee further acknowledges that he/she has read and understands this agreement, is fully aware of its legal effect, and has entered into it freely based on his/her own judgment. -5- 24. ACKNOWLEDGMENT. Employee acknowledges that he/she has been advised by AMCC to consult with independent counsel of his/her own choice, at his/her own expense, concerning this agreement, that he/she has had the opportunity to do so, and that he/she has taken advantage of that opportunity to the extent that he/she desires. Employee further acknowledges that he/she has read and understands this agreement, is fully aware of its legal effect, and has entered into it freely based on his/her own judgment. EXECUTED by the parties hereto as of__________________, 19____. APPLIED MICRO CIRCUITS CORPORATION By: /s/ [SIGNATURE ILLEGIBLE] ------------------------------ Witness: /s/ [SIGNATURE ILLEGIBLE] /s/ R. R.Sudireddy - ----------------------------- ------------------------------ Employee's Signature /s/ RAM SUDIREDDY ------------------------------ Employee's Name (Printed) EXHIBIT A RESERVED INVENTIONS MADE OR CONCEIVED PRIOR TO EMPLOYMENT AND BRIEF DESCRIPTION THEREOF 4 EX-10.29 5 AGREEMENT TO SELL Exhibit 10.29 AGREEMENT TO SELL AND PURCHASE AND ESCROW INSTRUCTIONS Between KILROY REALTY, L.P. as "Seller" and APPLIED MICRO CIRCUITS CORPORATION as "Purchaser" AGREEMENT TO SELL AND PURCHASE AND ESCROW INSTRUCTIONS ----------------------- THIS AGREEMENT TO SELL AND PURCHASE AND ESCROW INSTRUCTIONS (this "Agreement") is dated as of January 8, 1999 (the "Effective Date") and entered into by and between KILROY REALTY, L.P., a Delaware limited partnership ("Seller"), and APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation ("Purchaser"), with reference to the following facts and intentions: R E C I T A L S: - - - - - - - - A. Seller, as Landlord, and Purchaser, as Tenant, are parties to that certain Ground Lease effective as of January 1, 1998 (the "Ground Lease"). Capitalized terms used herein and not separately defined shall have the meanings ascribed to them in the Ground Lease. B. The parties have caused this Agreement to be executed and delivered pursuant to the exercise of the Purchase Option by Purchaser as provided under the Ground Lease. NOW, THEREFORE, for the consideration hereafter set forth, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, Seller and Purchaser hereby agree as follows: 1. Agreement of Purchase and Sale. ------------------------------ Seller shall convey, and Purchaser shall purchase and acquire in accordance with the terms set forth herein: A. That certain real property located in the City of San Diego., County of San Diego, State of California, more particularly described in Exhibit A attached hereto and incorporated herein by this reference (the "Land") B. All of Seller's right, title and interest in and to any improvements, if any, affixed to the Land (collectively the "Improvements"). C. All of Seller's rights, privileges, entitlements, easements, approvals, licenses, permits and appurtenances pertaining to the Land and the Improvements, including any right, title and interest of Seller (but without -1- warranty whether statutory, express or implied) in and to adjacent streets, alleys or rights-of-way. D. All of Seller's right, title and interest in and to any intangible warranties, guaranties, contract rights and/or other claims, to the extent assignable, relating to the Land and/or the Improvements. The items described in Sections 1(A) through 1(C) above are -------- hereinafter called the "Real Property;" the items described in Section 1(D) are called the "Intangible Property;" and the Real Property and the Intangible Property are collectively referred to as the "Property." 2. Purchase Price. -------------- The purchase price ("Purchase Price") for the Property shall be $3,636,036. 3. Payment of Purchase Price. ------------------------- The Purchase Price shall be paid as follows: A. As part of the Opening of Escrow (as defined below), Purchaser shall deliver to Chicago Title Company ("Escrow Holder" and "Title Company") a deposit of One Thousand Dollars ($1,000.00) (the "Deposit"). The Deposit shall be in the form of wire transfer, cash or a certified or bank cashier's check for immediately available funds. Escrow Holder shall place the Deposit in an interest-bearing account acceptable to Purchaser and Seller. All interest earned on the Deposit shall be included within the meaning of the term "Deposit" in this Agreement such that Purchaser shall receive the benefit of any interest earned thereon through a credit at the Close of Escrow. B. Upon the Close of Escrow, Purchaser shall deposit or cause to be deposited with Escrow Holder, in cash, by a certified or bank cashier's check made payable to Escrow Holder or by a confirmed wire transfer of funds, the balance of the Purchase Price plus closing costs and other charges payable by Purchaser pursuant to this Agreement. 4. Escrow Instructions. ------------------- A. Opening of Escrow. As soon as reasonably practicable following ----------------- the mutual execution of this Agreement, but in no event later than two (2) business days thereafter, the parties shall open an escrow ("Escrow") with the Escrow Holder in order to consummate the purchase and sale of the Property in accordance with the terms and provisions hereof by depositing the -2- Deposit and a signed original of this Agreement in the Escrow. The provisions hereof shall constitute joint primary escrow instructions to the Escrow Holder; provided, however, that the parties shall execute such additional instructions - --------- ------- as requested by the Escrow Holder not inconsistent with the provisions hereof unless such additional instructions state that these instructions are being modified, state the modification in full and are signed by both parties. The date as of which the Escrow Holder shall receive (i) the Deposit and (ii) an original of this Agreement executed on behalf of both Seller and Purchaser (which execution may be effected in multiple counterparts) shall constitute the "opening of Escrow." Escrow Holder shall deliver written confirmation of the date of the Opening of Escrow to the parties in the manner set forth in Section ------- 14 of this Agreement. B. Documents and Funds Delivered to or by Escrow. The following --------------------------------------------- shall be delivered into the Escrow or by Escrow in connection with the transfer of the Property: (1) Delivery by Seller into Escrow. At least two (2) business ------------------------------ days prior to the Closing Date (as defined below), Seller shall deposit into Escrow: (a) a grant deed (the "Grant Deed") to the Property in recordable form, duly executed and acknowledged by Seller in substantially the same form as set forth in Exhibit "B" attached hereto; ---------- (b) two (2) originals of an assignment and assumption of intangible property (the "Assignment of Intangible Property"), duly executed by Seller in substantially the same form as set forth in Exhibit "C" attached ---------- hereto; (c) two (2) originals of an affidavit from Seller which satisfies the requirements of Section 1445 of the Internal Revenue Code, as amended (the "Section 1445 Affidavit") in substantially the same form as set forth in Exhibit "D" attached hereto; ---------- (d) two (2) originals of a Withholding Exemption Certificate, California Form 590 (the "Certificate"), in substantially the same form as set forth in Exhibit "E" attached hereto; ---------- (e) two (2) originals of the Termination of Ground Lease and Termination of Memorandum of Ground Lease in substantially the same forms as set forth in Exhibits "F-1" and "F-2" attached hereto (the "Termination of Ground Lease"); -3- (f) a duly executed certificate of Seller ("Seller's Bringdown Certificate") in the form of Exhibit "G" and ---------- (g) such other instruments and documents as may be reasonably requested by Escrow Holder relating to Seller, to the Property and/or as otherwise required to transfer the Property to Purchaser. (2) Delivery of Documents by Purchaser into Escrow. Prior to the ---------------------------------------------- Closing Date, Purchaser shall deposit into Escrow executed counterparts of the documents referred under Subsections B(l) (b), (e) and (g) above. ----------- (3) Delivery by Escrow. At least two (2) business days prior to ------------------ the Close of Escrow, Escrow Holder shall deliver to Purchaser and Seller a pro forma closing statement which sets forth, in a manner satisfactory to Purchaser and Seller, the prorations and other credits and debits contemplated by this Agreement. C. Conditions to Close. Escrow shall not close unless and until the ------------------- following conditions precedent and contingencies have been satisfied or waived in writing by the party for whose benefit the conditions have been included: (1) All funds and instruments described in this Section 4 have ------- been delivered to the Escrow Holder. (2) The Title Company is in a position and is unconditionally committed to issue to Purchaser the Title Policy described in Section 6 below. ------- - (3) All representations and warranties made by Seller in Section ------- 8 below and Purchaser in Section 9 below shall be true and correct in all ------- - material respects as of the Closing Date. (4) Except as expressly provided in this Section 4(c) (4), Seller and Purchaser shall each have performed, observed and complied with all of their respective covenants, agreements and conditions required by this Agreement to be performed, observed and/or complied with by Seller and Purchaser, as the case may be, prior to, or as of, the Closing. If Seller fails to deposit into Escrow the Section 1445 Affidavit or the Certificate as required by this Agreement, Purchaser may at its option either (i) delay Close of Escrow until such time as Seller has complied with the conditions set forth herein (which adjournment shall not place Purchaser in default of its obligations hereunder) or (ii) withhold from the Purchase Price and remit to the Internal Revenue Service, a sum equal to ten -4- percent (10%) of the gross selling price of the Property and such other sum as shall be required in accordance with the withholding obligations imposed upon Purchaser pursuant to Section 1445 of the Internal Revenue Code, as amended, and the laws of the State of California. Such withholding shall not place Purchaser in default under this Agreement, and Seller shall not be entitled to claim that such withholding shall excuse Seller's performance under this Agreement. If Closing shall have occurred with the consent of both parties, any non-material condition not otherwise satisfied or waived as of the Closing shall be deemed fully satisfied or waived by the party for whose benefit the condition had been included. D. Recordation and Transfer. Upon satisfaction of the ------------------------ conditions set forth in Section 4(C) above, Escrow Holder shall transfer the ------- Property as follows: (1) Cause the Termination of Memorandum of Ground Lease and Grant Deed to be recorded in the Official Records of San Diego County, California and deliver conformed copies thereof to each of Seller and Purchaser; (2) Deliver to Purchaser one (1) fully executed original of the Termination of Ground Lease, the Section 1445 Affidavit, the Assignment of Intangible Property, the Seller's Bringdown Certificate, and the Certificate; (3) Deliver to Seller one (l) fully executed original of the Termination of Ground Lease, the Section 1445 Affidavit, the Assignment of Intangible Property, the Seller's Bringdown Certificate, and the Certificate; (4) Deliver to the parties entitled thereto any other closing documents, including, without limitation, the final closing statement for the Escrow (the "Final Statement"), which shall contain no material differences from the pro forma closing statement, previously delivered to, and approved by, each party; (5) Disburse all funds deposited with Escrow Holder by Purchaser pursuant to Section 3 as follows: (a) deliver to Seller the Purchase Price less amounts chargeable to Seller pursuant to instructions to be delivered by Seller to Escrow Holder; and (b) disburse any remaining balance of the funds deposited by Purchaser to Purchaser upon the Close of -5- Escrow pursuant to instructions to be delivered by Purchaser to Escrow Holder less amounts chargeable to Purchaser. E. Close of Escrow. Escrow shall close upon the recordation of --------------- the Grant Deed in accordance with the terms and conditions hereof ("Close of Escrow" or "Closing Date" or "Closing") . The Close of Escrow shall be May 31, 1999. 5. Condition of Title. It shall be a condition to the Close of Escrow ------------------ for Purchaser's benefit that title to the Real Property be conveyed to Purchaser by Seller subject only to the following approved condition of title ("Approved Condition of Title"): (a) The matters referred to in Part 1, Schedule B of the Title Policy; (b) Non-delinquent general and special real estate taxes; (c) The Permitted Exceptions described in Exhibit "C" to the Ground Lease and any additional matters expressly approved by Purchaser arising from or relating to the Approved Lot Line Adjustment; and (d) Such other matters created by Purchaser. Upon the Opening of Escrow, Seller, at its sole cost and expense, shall cause the Title Company to prepare and deliver to Seller and Purchaser an updated preliminary title report for the Real Property (the "Title Report") and shall cause Latitude 33 to prepare, issue and certify to Purchaser and Title Company a revised ALTA/ACSM survey of the Real Property consistent with the Approved Lot Line Adjustment (the "Survey") Purchaser shall reimburse Seller at Closing, for the cost of the Survey. Seller covenants and agrees that during the term of the Escrow, it will not cause or permit (without objection) title to the Real Property to differ from the Approved Condition of Title described in this Section 5. Any liens, encumbrances, encroachments, easements, restrictions, conditions, covenants, rights, rights-of-way, or matters other than those contained with the Approved Condition of Title shall also be subject to Purchaser's approval and must be eliminated or ameliorated to Purchaser's satisfaction and for Purchaser's benefit prior to the Close of Escrow as a condition of the Close of Escrow. 6. Title Policy. Title to the Real Property shall be evidenced by the ------------ unconditional commitment of the Title Company to -6- issue its ALTA Extended Coverage (Form 8-1970) Owner's Policy of Title Insurance ("Title Policy") in the amount of the Purchase Price, insuring fee title to the Real Property vested in Purchaser subject only to the Approved Condition of Title. The issuance of the Title Policy shall be in lieu of any express or implied warranty of Seller concerning title to the Property. Purchaser agrees that its only remedy for damages incurred by reason of any defect in title shall be against the Title Company. 7. AS-IS SALE. EXCEPT AS OTHERWISE PROVIDED FOR IN THIS ---------- AGREEMENT, IT IS UNDERSTOOD AND AGREED THAT WITH RESPECT TO THE LEGAL, PHYSICAL AND ENVIRONMENTAL CONDITION OF THE PROPERTY, THE PROPERTY IS BEING SOLD AND CONVEYED HEREUNDER AND PURCHASER AGREES TO ACCEPT THE PROPERTY "AS -- IS," "WHERE IS" AND "WITH ALL FAULTS" AND SUBJECT TO ANY PHYSICAL - -- ----- -- ---- --- ------ CONDITION, INCLUDING ANY ENVIRONMENTAL CONDITION, WHICH MAY EXIST, WITHOUT ANY REPRESENTATION OR WARRANTY BY SELLER EXCEPT AS EXPRESSLY SET FORTH IN SECTION 8 OF THIS AGREEMENT. PURCHASER HEREBY EXPRESSLY ACKNOWLEDGES AND AGREES THAT (i) PURCHASER SHALL BE SOLELY RESPONSIBLE FOR DETERMINING THE STATUS AND CONDITION OF THE PROPERTY, INCLUDING, WITHOUT LIMITATION, EXISTING ZONING CLASSIFICATIONS, BUILDING REGULATIONS AND GOVERNMENTAL ENTITLEMENT AND DEVELOPMENT REQUIREMENTS APPLICABLE TO THE PROPERTY AND PURCHASER HAS OR WILL HAVE PRIOR TO THE CLOSING DATE, THOROUGHLY INSPECTED AND EXAMINED THE PROPERTY TO THE EXTENT DEEMED NECESSARY BY PURCHASER IN ORDER TO ENABLE PURCHASER TO EVALUATE THE PURCHASE OF THE PROPERTY AND (ii) PURCHASER IS RELYING SOLELY UPON SUCH INSPECTIONS, EXAMINATION, AND EVALUATION. PURCHASER SHALL NOT BE RELIEVED OF ITS OBLIGATIONS UNDER THIS AGREEMENT BY THE PENDENCY, THREATENING OR PASSING, OF ANY INITIATIVE, OR BY THE IMPOSITION OF ANY MORATORIUM ON DEVELOPMENT, OR SIMILAR ACTIONS ADVERSELY AFFECTING THE PROPERTY, AND SUCH INITIATIVES, MORATORIA AND ACTIONS SHALL NOT BE CONSIDERED AS PART OF PURCHASER'S INSPECTION OF THE PROPERTY. PURCHASER HEREBY ASSUMES THE RISK THAT CERTAIN CONDITIONS, INCLUDING ENVIRONMENTAL CONDITIONS, MAY EXIST ON THE PROPERTY AND HEREBY RELEASES SELLER OF AND FROM ANY AND ALL CLAIMS, ACTIONS, DEMANDS, RIGHTS, DAMAGES, COSTS OR EXPENSES WHICH MIGHT ARISE OUT OF OR IN CONNECTION WITH THE CONDITION OF THE PROPERTY. As used herein, the term "Environmental Condition" shall mean any condition with respect to the Property which could or does result in any damage, loss, cost, expense or liability to or against the owner of the Property by any third party (including without limitation any governmental entity) including, without limitation, any condition resulting from operations conducted on the Property or on property adjacent thereto. -7- 8. Representations and Warranties of Seller. ---------------------------------------- A. Seller represents and warrants to Purchaser that as of the date hereof and as of the Close of Escrow: (1) Seller is a limited partnership, duly organized, validly existing and in good standing under the laws of the Sate of Delaware. Seller is qualified to do business and is in good standing under the laws of the State of California. Seller has the right, power and authority to make and perform its obligations under this Agreement, and the execution, delivery and performance of this Agreement (i) does not violate the partnership agreement of Seller or any contract, agreement or commitment to which Seller is a party or by which Seller is bound and is evidence that the general partner of Seller has approved this transaction and (ii) have been duly authorized by all necessary action on the part of Seller and its partners, shareholders and/or board of directors, as applicable. In addition, the person executing this Agreement on behalf of Seller has the authority to do so. (2) Other than Purchaser as Tenant under the Ground Lease, there are no parties in possession of any portion of the property as lessees, tenants at sufferance or trespassers. (3) Seller has received no written notice from any governmental authority advising that the Property is not in compliance with applicable building codes, zoning, subdivision, and land use laws and other local, state and federal laws and regulations. (4) This Agreement constitutes the legal, valid and binding obligation of Seller, enforceable in accordance with its terms, subject to laws applicable generally to applicable bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles affecting or limiting the right of contracting parties generally. (5) The Property is not presently the subject of any pending claims, litigation, legal action, or eminent domain proceeding, and to Seller's knowledge, no such claim, litigation or proceeding is currently threatened or planned. (6) There are no management, service, supply or maintenance contracts affecting the Property in effect on the date of this Agreement or which shall affect the Property on or following the Close of Escrow. -8- (7) Seller is not a "foreign person" within the meaning of Section 1445 of the Internal Revenue Code of 1986 (i.e., Seller is not a non- resident alien, foreign corporation, foreign partnership, foreign trust or foreign estate as those terms are defined in the Code and regulations promulgated thereunder). (8) Seller (a) is not in receivership or dissolution; (b) has not made any assignment for the benefit of creditors; (c) has not admitted in writing its inability to pay its debts as they mature; (d) has not been adjudicated a bankrupt; (e) has not filed a petition in voluntary bankruptcy, a petition or answer seeking reorganization, or an arrangement with creditors under the Federal Bankruptcy Law or any other similar law or statute of the United States or any state; or (f) does not have any such petition described in Subparagraph (e) above filed against Seller. (9) Seller shall immediately give Purchaser notice of any event or occurrence which would cause any of Seller's above representations and warranties to cease to be true or correct in any respect. B. As used in this Section 8, the term "to Seller's ------- knowledge" (i) shall mean and apply to the knowledge of Steven L. Black and Steve Scott of Kilroy Realty Corporation (collectively, the "Involved Parties"), who are the representatives of Seller who are or were directly engaged in the acquisition by Seller of the Property, the management of the Property and/or the sale and purchase transaction described herein, and not to any other parties, (ii) shall mean the current knowledge of such Involved Parties, or the knowledge such Involved Parties would have had following a reasonable investigation or inquiry; and (iii) shall not mean such Involved Parties are charged with knowledge of the acts, omissions and/or knowledge of the predecessors in title to the Property or with knowledge of the acts, omissions and/or knowledge of Seller's agents, consultants or employees. The Involved Parties shall be reasonably available to Purchaser during Seller's normal business hours to confirm such matters as are identified in this Section 8 as subject to Seller's ------- knowledge thereof. C. The representations of Seller herein shall survive the Close of Escrow for a period of two (2) years. D. PURCHASER ACKNOWLEDGES AND AGREES THAT, OTHER THAN THE LIMITED REPRESENTATIONS SET FORTH IN THIS SECTION 8, SELLER MAKES NO ------- REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, AS TO THE PROPERTY. PURCHASER HEREBY WAIVES AND RELINQUISHES ALL RIGHTS AND PRIVILEGES ARISING OUT OF, OR WITH -9- RESPECT OR IN RELATION TO, ANY REPRESENTATIONS (OTHER THAN THE LIMITED REPRESENTATIONS SET FORTH IN THIS SECTION 8), WARRANTIES OR COVENANTS, --------- WHETHER EXPRESS OR IMPLIED, WHICH MAY HAVE BEEN MADE OR GIVEN, OR WHICH MAY BE DEEMED TO HAVE BEEN MADE OR GIVEN, BY SELLER EXCEPT FOR THOSE COVENANTS SET FORTH HEREIN WHICH ARE EXPRESSLY TO SURVIVE THE CLOSING. PURCHASER HEREBY FURTHER ACKNOWLEDGES AND AGREES THAT WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE EXCLUDED FROM THE TRANSACTION CONTEMPLATED HEREBY, AS ARE ANY WARRANTIES ARISING FROM A COURSE OF DEALING OR USAGE OF TRADE, AND THAT THE SELLER HAS NOT WARRANTED, AND DOES NOT HEREBY WARRANT, THAT THE PROPERTY NOW OR IN THE FUTURE WILL MEET OR COMPLY WITH THE REQUIREMENTS OF ANY SAFETY CODE OR REGULATION OF ANY APPLICABLE GOVERNMENTAL AUTHORITY OR JURISDICTION. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, PURCHASER HEREBY ASSUMES ALL RISK AND LIABILITY (AND AGREES THAT SELLER SHALL NOT BE LIABLE FOR ANY SPECIAL, DIRECT, INDIRECT, CONSEQUENTIAL, OR OTHER DAMAGES) RESULTING OR ARISING FROM OR RELATING TO THE OWNERSHIP, USE, CONDITION, LOCATION, MAINTENANCE, REPAIR, OR OPERATION OF THE PROPERTY. PURCHASER ACKNOWLEDGES AND AGREES THAT THE SALE PROVIDED FOR HEREIN IS MADE, WITHOUT ANY WARRANTY BY SELLER AS TO THE NATURE OR QUALITY OF THE PROPERTY; THE DEVELOPMENT POTENTIAL OF THE PROPERTY; THE PRIOR HISTORY OF OR ACTIVITIES ON THE PROPERTY; THE QUALITY OF LABOR AND/OR MATERIALS INCLUDED IN ANY OF THE IMPROVEMENTS; THE FITNESS OF THE PROPERTY FOR AND/OR THE SOIL CONDITIONS EXISTING AT THE PROPERTY FOR ANY PARTICULAR PURPOSE OR DEVELOPMENT POTENTIAL; THE PRESENCE OR SUSPECTED PRESENCE OF HAZARDOUS WASTE OR SUBSTANCES ON, ABOUT, OR UNDER THE PROPERTY OR THE IMPROVEMENTS; OR THE ZONING OR OTHER LEGAL STATUS OF THE PROPERTY. EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT, NO PERSON ACTING ON BEHALF OF SELLER IS AUTHORIZED TO MAKE, AND BY THE EXECUTION HEREOF PURCHASER HEREBY ACKNOWLEDGES THAT NO PERSON HAS MADE, ANY REPRESENTATION, AGREEMENT, STATEMENT, WARRANTY, GUARANTY OR PROMISE REGARDING THE PROPERTY, OR THE TRANSACTION CONTEMPLATED HEREIN, OR REGARDING THE ZONING, CONSTRUCTION, PHYSICAL CONDITION OR OTHER STATUS OF THE PROPERTY, AND NO REPRESENTATION, WARRANTY, AGREEMENT, STATEMENT, GUARANTY OR PROMISE, IF ANY, MADE BY ANY PERSON ACTING ON BEHALF OF SELLER WHICH IS NOT CONTAINED HEREIN SHALL BE VALID OR BINDING UPON SELLER. 9. Representations and Warranties of Purchaser. ------------------------------------------- A. Purchaser represents and warrants to Seller that: (1) Purchaser is a corporation, duly organized, validly existing and in good standing under the laws of Delaware. The execution and delivery by Purchaser of, and Purchaser's performance under, this Agreement, are within Purchaser's powers and Purchaser (and the person(s) executing -10- this Agreement on behalf of Purchaser) has the authority to execute and deliver this Agreement. (2) This Agreement constitutes the legal, valid and binding obligation of Purchaser enforceable in accordance with its terms, subject to laws applicable generally to applicable bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles affecting or limiting the rights of contracting parties generally. (3) Execution and performance of this Agreement will not result in any breach of, or constitute any default under, any agreement or other instrument to which Purchaser is a party. (4) Purchaser (a) is not in receivership or dissolution, (b) has not made any assignment for the benefit of creditors, (c) has not admitted in writing its inability to pay its debts as they mature, (d) has not been adjudicated a bankrupt, (e) has not filed a petition in voluntary bankruptcy, a petition or answer seeking reorganization, or an arrangement with creditors under the federal bankruptcy law, or-any other similar law or statute of the United States or any state, or (f) does not have any such petition described in (e) filed against Purchaser. B. The representations of Purchaser herein shall survive the Close of Escrow for a period of two (2) years. 10. Condemnation. ------------ Promptly upon obtaining knowledge of the institution of the proceedings for the condemnation of part of the Property, Seller or Purchaser will notify the other of the pendency of such proceedings. In the event of the condemnation or threatened condemnation of any material (i.e., more than 10% of the Property) or the sale of any material portion of the Property in lieu of condemnation prior to the Closing which would entitle Purchaser to terminate the Ground Lease, Purchaser may elect to terminate this Agreement (provided Purchaser also elects to terminate the Ground Lease) by notice in writing to Seller within ten (10) business days following the date on which Purchaser or Seller received actual notice of such condemnation of the Property or conveyance in lieu thereof, in which event the Deposit and all Rent and other charges paid by Purchaser pursuant to the Ground Lease or this Agreement shall be returned to Purchaser and the parties shall have no further right or obligation hereunder except as specifically provided herein. If Purchaser does not elect to terminate within said ten (10) business day period, Purchaser shall be deemed to waive all rights to terminate pursuant to this provision and this Agreement shall remain in full force and effect, without reduction in the -11- purchase Price, but with any condemnation award or proceeds being paid and/or assigned to Purchaser. In all events, Seller shall solely be entitled to any award attributed to any property, other than the Property, which is owned by Seller. 11. Prorations and Costs Upon Closing. --------------------------------- A. Impositions relating to the Property shall be prorated as of October 1, 1998. If the Closing shall occur before the actual taxes for the then current fiscal year are known, the apportionment of taxes shall be upon the basis of taxes for the Property for the immediately preceding year, provided that, if the taxes for the current fiscal year are thereafter determined to be more or less than the taxes for the preceding fiscal year (after any appeal of the assessed valuation thereof is concluded), Seller and Purchaser promptly shall adjust the proration of such taxes and Seller or Purchaser, as the case may be, shall pay to the other any amount required as a result of such adjustment. All Impositions assessed for the period from and after October 1, 1998, shall be paid or reimbursed by Purchaser at the Closing. Purchaser shall only be obligated to pay those Impositions and assessments prorated hereunder applicable to the Property. To the extent the tax bills upon which the prorations are based include real property in addition to the Property, the amount of such taxes and assessments to be prorated between the parties shall be that fraction which the aggregate square footage of the Property bears to the aggregate square footage of all real property covered by such tax bills. (1) At Closing, Purchaser shall pay (1) documentary transfer tax (or any other taxes imposed on account of the conveyance of the Property to Purchaser) in the amount Escrow Holder determines to be required by law: (2) the cost of the Title Policy described in Section 6 above and any endorsements requested by Purchaser; (3) Escrow Holder's escrow fee; and (4) other closing charges, recording fees and expenses imposed by Escrow Holder. (2) If Escrow shall fail to close because of failure of Seller to comply with its obligations hereunder, without limitation of Purchaser's other rights and remedies against Seller by reason thereof, the costs customarily charged and incurred in connection with Escrow, including the cost of any cancellation fees or other costs of Title company, shall be paid by Seller (excluding any special Escrow cost incurred by Purchaser prior to the Close of Escrow, premiums or fees paid for a commitment, or any other title insurance product). If Escrow shall fail to close because of failure of Purchaser to comply with its obligations hereunder, such costs shall be paid by Purchaser. If Escrow shall fail to close for any other reason, -12- such costs shall be equally divided between the parties (excluding any special Escrow cost incurred by Purchaser prior to the Close of Escrow, premiums or fees paid for a commitment, or any other title insurance product) 12. Remedies. -------- A. IN THE EVENT THE CLOSE OF ESCROW FAILS TO OCCUR AS A RESULT OF SELLER'S DEFAULT UNDER THIS AGREEMENT AND NOT DUE TO PURCHASER'S MATERIAL DEFAULT, PURCHASER, AS ITS SOLE AND EXCLUSIVE REMEDY UNDER THIS AGREEMENT, EXCEPT AS OTHERWISE PROVIDED HEREIN, SHALL RECEIVE A REFUND OF THE DEPOSIT AND SHALL BE ENTITLED TO (i) PURSUE THE SPECIFIC PERFORMANCE OF THE CONVEYANCE OF THE PROPERTY PURSUANT TO THIS AGREEMENT OR (ii) PURSUE SELLER FOR ACTUAL DAMAGES; PROVIDED, HOWEVER, (1) IN NO EVENT SHALL PURCHASER BE ENTITLED TO A --------- ------- RECOVERY OR CLAIM AGAINST SELLER FOR ACTUAL DAMAGES IN EXCESS OF AN AMOUNT EQUAL TO THE AMOUNT OF THE RENT PAID UNDER THE GROUND LEASE AND (2) SELLER SHALL NOT BE LIABLE TO PURCHASER FOR ANY PUNITIVE, SPECULATIVE OR CONSEQUENTIAL DAMAGES. B. PROVIDED PURCHASER HAS NOT ELECTED TO TERMINATE THIS AGREEMENT PURSUANT TO ANY OF PURCHASER'S RIGHTS TO DO SO CONTAINED HEREIN, IF PURCHASER COMMITS A DEFAULT UNDER THIS AGREEMENT AND THE CLOSE OF ESCROW FAILS TO OCCUR SOLELY BY REASON OF SUCH DEFAULT, THEN SELLER, AS ITS SOLE AND EXCLUSIVE REMEDY, MAY TERMINATE THIS AGREEMENT BY NOTIFYING PURCHASER THEREOF AND RECEIVE OR RETAIN THE DEPOSIT. THE PARTIES AGREE THAT SELLER WILL SUFFER DAMAGES IN THE EVENT OF PURCHASER'S DEFAULT ON ITS OBLIGATIONS. ALTHOUGH THE AMOUNT OF SUCH DAMAGES IS DIFFICULT OR IMPOSSIBLE TO DETERMINE, THE PARTIES AGREE THAT THE AMOUNT OF THE DEPOSIT IS A REASONABLE ESTIMATE OF SELLER'S LOSS IN THE EVENT OF PURCHASER'S DEFAULT. THUS, SELLER SHALL ACCEPT AND RETAIN THE DEPOSIT AS LIQUIDATED DAMAGES BUT NOT AS A PENALTY. SUCH LIQUIDATED DAMAGES SHALL CONSTITUTE SELLER'S SOLE AND EXCLUSIVE REMEDY IN LIEU OF ANY OTHER RELIEF, RIGHT OR REMEDY, AT LAW OR IN EQUITY TO WHICH SELLER WOULD OTHERWISE BE ENTITLED BY REASON OF PURCHASER'S DEFAULT, INCLUDING WITHOUT LIMITATION, ANY AND ALL RIGHTS SELLER WOULD HAVE OTHERWISE HAD UNDER CALIFORNIA CIVIL CODE SECTION 3389. PURCHASER ACKNOWLEDGES AND AGREES THAT NO TECHNICAL OR NON-MATERIAL DEFAULT BY SELLER UNDER THIS AGREEMENT SHALL IN ANY WAY AFFECT THE RIGHTS OR REMEDIES OF SELLER AGAINST PURCHASER HEREUNDER. IN THE EVENT SELLER IS ENTITLED TO THE DEPOSIT AS LIQUIDATED DAMAGES AND TO THE EXTENT SELLER HAS NOT ALREADY RECEIVED THE DEPOSIT, THE DEPOSIT SHALL BE IMMEDIATELY PAID TO SELLER BY THE ESCROW HOLDER UPON RECEIPT OF WRITTEN NOTICE FROM SELLER THAT PURCHASER HAS DEFAULTED UNDER THIS AGREEMENT, AND PURCHASER AGREES TO TAKE ALL SUCH ACTIONS AND TO EXECUTE AND DELIVER ALL SUCH DOCUMENTS NECESSARY OR APPROPRIATE TO EFFECT SUCH PAYMENT. IN CONSIDERATION OF SELLER RECEIVING THE -13- LIQUIDATED DAMAGES, SELLER WILL BE DEEMED TO HAVE WAIVED ALL OF ITS RIGHTS AND REMEDIES AGAINST PURCHASER FOR DAMAGES WITH RESPECT TO SUCH BREACH OR DEFAULT. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS SECTION 12(B), IF PURCHASER BRINGS AN ACTION AGAINST SELLER FOR AN ALLEGED BREACH OR DEFAULT BY SELLER OF ITS OBLIGATIONS UNDER THIS AGREEMENT, AND, IN CONNECTION WITH THAT ACTION, RECORDS A LIS PENDENS OR OTHERWISE ENJOINS OR RESTRICTS SELLER'S ABILITY TO SELL OR TRANSFER THE PROPERTY ("PURCHASER'S ACTION"), SELLER SHALL NOT BE RESTRICTED BY THE PROVISIONS OF THIS SECTION 12(B) FROM SEEKING EXPUNGEMENT OR RELIEF FROM THAT LIS PENDENS, INJUNCTION OR OTHER RESTRAINT, AND RECOVERING DAMAGES, COSTS OR EXPENSES (INCLUDING ATTORNEYS' FEES) WHICH SELLER MAY SUFFER OR INCUR AS A RESULT OF PURCHASER' S ACTION, AND THE AMOUNT OF ANY SUCH DAMAGES AWARDED TO SELLER SHALL NOT BE LIMITED TO THE LIQUIDATED DAMAGES SET FORTH HEREIN. FURTHERMORE, IN NO EVENT SHALL THIS SECTION 12(B) HAVE ANY APPLICATION TO OR LIMIT SELLER'S RIGHTS AGAINST PURCHASER IN CONNECTION WITH ANY OF THE FOLLOWING: (i) SECTION 13 OF THIS AGREEMENT, (ii) SECTION 15 OF THIS AGREEMENT, (iii) SECTION 24 OF THIS AGREEMENT, OR (iv) ANY DUTY OR OBLIGATION OF PURCHASER TO INDEMNIFY SELLER AS PROVIDED IN THIS AGREEMENT AND WHICH DUTY OR OBLIGATION EXPRESSLY SURVIVES TERMINATION OF THIS AGREEMENT. SELLER AND PURCHASER ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTAND THE PROVISIONS OF THE FOREGOING LIQUIDATED DAMAGES PROVISION AND BY THEIR SIGNATURES IMMEDIATELY BELOW AGREE TO BE BOUND BY ITS TERMS. Seller: Purchaser: KILROY REALTY, L.P. APPLIED MICRO CIRCUITS CORPORATION By: KILROY REALTY CORPORATION Its: General Partner By: ______________________________ By: /s/ [SIGNAYURE ILLEGIBLE] ------------------------------------- Its: ______________________________ Its: V.P. ------------------------------------- C. Except as provided below, in the event the Close of Escrow fails to occur for any reason, and in addition to the respective rights and obligations of the parties set forth in subsections A and B above, Purchaser may exercise the Rescission Option as more particularly set forth in Article 14 of the Ground Lease. If Purchaser exercised the Extension Option along with its Purchase Option, and the Approved Lot Line Adjustment had been recorded prior to December 30, 1998, Purchaser may not exercise such Rescission Option. -14- 13. Real Estate Commissions. ----------------------- Except for David Marino of The Irving Hughes Group, Inc. whom Purchaser has retained as its agent and will compensate pursuant to a separate agreement, each party hereto represents to the other that it has not authorized any broker or finder to act on its behalf in connection with the sale and purchase hereunder and that such party has not dealt with any broker or finder purporting to act on behalf of any other party. Each party hereto agrees to indemnify, defend and hold harmless the other party from and against any and all losses, liens, claims, judgments, liabilities, costs, expenses or damages (including reasonable attorneys' fees and court costs) of any kind or character arising out of or resulting from any agreement, arrangement or understanding (except as set forth above with respect to the Agent) alleged to have been made by such party or on its behalf with any broker or finder in connection with this Agreement or the transaction contemplated hereby. 14. Notices. ------- Any notice or communication required or permitted hereunder shall be given in writing, sent by (a) personal delivery delivered by a representative of the party giving such notice, or (b) delivery service with proof of delivery, or (c) United States mail, postage prepaid, registered or certified mail, or (d) telecopier, addressed as follows: If to Purchaser, to: Applied Micro Circuits Corporation 6290 Sequence Drive San Diego, California 92121 Attention: Mr. Joel Holliday Chief Financial Officer Telecopier: (619) 535-6800 With a copy to: Luce, Forward, Hamilton & Scripps, LLP 600 W. Broadway, Suite 2600 San Diego, California 92101 Attention: David Hymer, Esq. Telecopier: (619) 232-8311 With additional copy to: Brobeck, Phleger & Harrison, LLP 550 West "C" Street, Suite 1300 San Diego, CA 92101 Attention: Todd J. Anson, Esq. Telecopier: (619) 234-3848 -15- If to Seller, to: Kilroy Realty L.P. 4365 Executive Drive, Suite 850 San Diego, California 92121-2130 Attention: Mr. Steven L. Black, Executive Vice-President Telecopier: (619) 550-1935 With a copy to: Kilroy Realty Corporation 2250 E. Imperial Highway El Segundo, California 90245 Attention: Mr. Jeffrey C. Hawken Executive Vice--President and Chief Operating Officer Telecopier: (310) 322-5981 With an additional Allen, Matkins, Leck, Gamble & copy to: Mallory LLP 501 W. Broadway, Suite 900 San Diego, California 92101 Attention: Vernon C. Gauntt, Esq. Telecopier: (619) 233-1158 or to such other address or to the attention of such other person as hereafter shall be designated in writing by the applicable party sent in accordance herewith. Any such notice or communication shall be deemed to have been delivered either at the time of personal delivery when actually received by the addressee or a representative of the addressee at the address provided above or, if delivered on a business day in the case of delivery service or as to certified or registered mail, as of the earlier of the date delivered or the date 72 hours following the date deposited in the United States mail at the address provided herein, or if by telecopier, upon electronic confirmation of good receipt by the receiving telecopier. 15. Assignment. ---------- Purchaser shall not have the right to assign its interest in this Agreement without obtaining the prior written consent of Seller except to an entity controlled by, under common control with, or controlling, Purchaser. Notwithstanding the foregoing, Seller expressly consents to an assignment of this Agreement to an entity affiliated with any bank, trust or financial institution as may be required in connection with Purchaser' s financing. -16- 16. Section Headings. ---------------- The Section headings contained in this Agreement are for convenience only and shall in no way enlarge or limit the scope or meaning of the various and several Sections hereof. 17. Entire Agreement. ---------------- This Agreement and the Ground Lease embodies the entire agreement between the parties hereto and supersedes any prior understandings or written or oral agreements between the parties concerning the Property. Further, this Agreement cannot be varied, modified, amended, altered or terminated except by the written agreement of the parties. 18. Applicability. ------------- The terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns, except as expressly set forth herein. 19. Time. ---- TIME IS OF THE ESSENCE IN THE PERFORMANCE OF THE PARTIES' OBLIGATIONS UNDER THIS AGREEMENT. 20. Gender and Number. ----------------- Within this Agreement, words of any gender shall be held and construed to include any other gender, and words in the singular number shall be held and construed to include the plural, unless the context otherwise requires. 21. Reporting of Foreign Investment. ------------------------------- Seller and Purchaser agree to comply with any and all reporting requirements applicable to the transaction which is the subject of this Agreement which are set forth in any law, statute, ordinance, rule, regulation, order or determination of any governmental authority, including, but not limited to, The International Investment Survey Act of 1976, The Agricultural Foreign Investment Disclosure Act of 1978, The Foreign Investment in Real Property Tax Act of 1980 and the Tax Reform Act of 1984 and further agree upon request of one party to furnish the other party with evidence of such compliance. -17- 22. Counterpart Execution. --------------------- This Agreement may be executed in multiple counterparts, each of which shall be deemed to be an original and all of which together shall constitute one document. 23. Applicable Law. -------------- This Agreement shall be construed and interpreted in accordance with the laws of the State of California. 24. Confidentiality. --------------- Notwithstanding anything to the contrary contained elsewhere herein, Purchaser hereby agrees and acknowledges that all information furnished by Seller to Purchaser or obtained by Purchaser in the course of Purchaser's investigation and inspection of the Property, or in any way arising from or relating to any and all studies or entries upon the Property by Purchaser, its agents or representatives, shall be treated as confidential information. Purchaser further hereby agrees and acknowledges that if any such confidential information is disclosed to third parties, Seller may suffer damages and irreparable harm. In connection therewith, Purchaser hereby expressly understands, acknowledges, covenants and agrees (a) that unless such disclosure is reasonably required to comply with securities rules or regulations applicable to Purchaser or any of its affiliates, Purchaser will not make any press release or other public disclosure concerning this transaction or disclose any of the contents or information contained in or obtained as a result of any reports or any other studies made in connection with Purchaser's investigation of the Property, in any form whatsoever (including, but not limited to, any oral information received by Purchaser during the course of Purchaser's inspection and investigation of the Property), to any party other than (i) the Seller, seller's employees, agents or representatives, or Purchaser's agents, employees, representatives, attorneys, accountants, or consultants, without the prior express written consent of Seller (which consent shall not file unreasonably withheld), (ii) in response to lawful process or subpoena or other valid or enforceable order of a court of competent jurisdiction or as otherwise required to comply with laws; (iii) or to Purchaser's lenders or Prospective lenders and their affiliates, respective directors, officers, employees, agents and consultants; and (iv) to any permitted transferee or assignee of Purchaser and their respective directors, officers, employees and agents; (b) that in making any disclosure of such information as permitted hereunder except for a disclosure reasonably required to comply with securities rules or regulations, Purchaser will advise said parties of the confidentiality of such information -18- and the potential of damage to Seller and the liability of Purchaser and such other party as a result of any disclosure of such information by said party and be responsible for said party's compliance; (c) to furnish Seller with copies of all reports or studies made in connection with Purchaser's inspection, study or investigation of the Property (other than internal analyses and any confidential attorney client or attorney work product privileged documents) within a reasonable time (not to exceed ten (10) days) of receipt of Seller's written request by Purchaser; and (d) that Seller is relying on Purchaser's covenant not to disclose any of the contents or information contained in any such reports or investigations to third parties (all of which is deemed to be confidential information by the provisions of this Section) except in accordance with this Agreement. In the event this Agreement is terminated, Purchaser agrees to return to Seller all information, studies, and Due Diligence Reports Purchaser or Purchaser's agents have obtained or commissioned with respect to the Property or the condition of the Property. The provisions of this Section 24 shall terminate ------- and be of no further force or effect upon the Close of Escrow. The parties consent and understand that either of them may desire or be required to file this Agreement, the Ground Lease, the Consulting Agreement and other agreements related to this transaction with the Securities and Exchange Commission or other regulatory authorities. 25. Time Calculations. ----------------- Should the calculation of any of the various time periods provided for herein result in an obligation becoming due on a Saturday, Sunday or legal holiday, then the due date of such obligation or scheduled time of occurrence of such event shall be delayed until the next business day. 26. No Recordation. -------------- Seller and Purchaser hereby agree and acknowledge that neither this Agreement nor any memorandum or affidavit thereof shall be recorded with the county recorder of the applicable California county. 27. Merger Provision. ---------------- Except as expressly set forth herein, any and all rights of action of Purchaser for any breach by Seller of any representation, warranty or covenant contained in this Agreement shall not merge with the Grant Deed and other instruments executed at Closing, and shall survive the Closing. -19- 28. Further Assurances. ------------------ Purchaser and Seller agree to execute all documents and instruments reasonably required in order to consummate the purchase and sale herein contemplated. 29. Severability. ------------ If any portion of this Agreement is held to be unenforceable by a court of competent jurisdictions the remainder of this Agreement shall remain in full force and effect. 30. Additional Instructions to Escrow Holder. ---------------------------------------- Notwithstanding anything to the contrary contained in this Agreement, Escrow Holder's General Provisions, are incorporated by reference herein to the extent they are not inconsistent with the provisions of this Agreement. If there is any inconsistency between those General Provisions and any of the provisions of this Agreement, the provisions of this Agreement shall control. If any requirements relating to the duties or obligations of Escrow Holder are unacceptable to Escrow Holder, or if Escrow Holder requires additional instructions, the parties agree to make any deletions, substitutions and additions, as counsel for Purchaser and Seller shall mutually approve, and which do not materially alter the terms of this Agreement. Any supplemental instructions shall be signed only as an accommodation to Escrow Holder and shall not be deemed to modify or amend the rights of Purchaser and Seller, as between Purchaser and Seller, unless those signed supplemental instructions expressly so provide. If Escrow Holder is the prevailing party in any action or proceeding between Escrow Holder and one or both of the parties to the Escrow, Escrow Holder shall be entitled to all costs, expenses and reasonable attorneys' fees expended or incurred in connection therewith. If Escrow Holder is required to respond to any legal summons or proceedings not involving a breach or fault upon Escrow Holder's part, the parties to this Agreement agree to share equally all costs, expenses and reasonable attorneys' fees expended or incurred by Escrow Holder. In the event costs, expenses and attorneys' fees are reimbursed to Escrow Holder, Purchaser and Seller agree that the prevailing party between Purchaser and Seller shall be awarded reimbursement of such costs, expenses and attorneys' fees paid by it to Escrow Holder hereunder. 31. Amendments. ---------- This Agreement may be amended only by written agreement signed by both of the parties hereto. -20- 32. Exhibits Incorporated by Reference. ----------------------------------- All exhibits attached to this Agreement are incorporated into this Agreement by reference. 33. Preliminary Change of Ownership Report. -------------------------------------- Purchaser shall be fully responsible for all matters in connection with the filing of a Preliminary Change of Ownership Report in accordance with the California Revenue and Taxation Code Section 480.3. 34. Attorneys' Fees. --------------- In any action to enforce the terms of this Agreement, the prevailing party shall be entitled to an award of reasonable attorneys' fees and court costs from the non-prevailing party. As used herein, the term "prevailing party" shall mean the party which obtains the principal relief it has sought, whether by compromise, settlement or judgment. If the party which shall have instituted suit shall dismiss it as against the other party without the concurrence of such other party, such other party shall be deemed the prevailing party. 35. New Association and CC&Rs. ------------------------- Purchaser acknowledges that the Property is currently not subject to governance by the Lusk Mira Mesa Business Park East II Owners' Association (the "Existing Association"), established for the purpose of owning, operating and maintaining certain landscape maintenance areas, structural maintenance areas and common areas pursuant to a certain Declaration of Covenants, Conditions and Restrictions for Lusk Mira Mesa Business Park East II (the "Existing CC&Rs"), and as contemplated under the articles of incorporation and bylaws of the Existing Association. Purchaser further acknowledges that Seller has provided Purchaser with drafts of a declaration of covenants, conditions and restrictions and formation documents for an owners' association to be formed and to be effective against the Land together with certain other property, including other property owned by Seller, adjacent to the Land. Seller and certain other adjoining land owners currently contemplate entering into such covenants, conditions and restrictions (the "New CC&Rs") and forming an owners' association for the enforcement thereof (the "New Association"). Purchaser shall reasonably consider subjecting the Property to the New CC&Rs; provided, however, the New CC&Rs do not adversely affect the value or utility of the Property. Notwithstanding the foregoing, Seller agrees that the recording and implementation of the New CC&Rs will be subject to Purchaser's prior written approval of -21- the New CC&Rs, as well as Purchaser's demand that certain provisions of the New CC&Rs which may affect the improvements Purchaser plans to build on the Property be waived with respect to Purchaser (e.g., any design approval). In the event Purchaser does not enter into the New CC&Rs or join the New Association, or Seller and said other adjoining land owners are unable, or elect not, to form the New Association and cause their properties to be subject to the New CC&Rs, Purchaser may voluntarily or, upon written demand from Seller (if Purchaser's failure to do so would subject Seller to liability therefor) or the City (which demand may be contested by Purchaser in good faith) Purchaser shall, subject the Property to the lien of the Existing CC&Rs and shall join the Existing Association; provided, however, that Purchaser receive an estoppel certificate from an authorized officer of the Existing Association stating that Purchaser is not in violation of the Existing CC&Rs. IN WITNESS WHEREOF, this Agreement is executed as of the date set forth above. "PURCHASER" APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation By: /s/ [SIGNATURE ILLEGIBLE] ------------------------------- Name: /s/ [SIGNATURE ILLEGIBLE] ----------------------------- Title: V.P. ---------------------------- "SELLER" KILROY REALTY, L.P., a Delaware limited partnership By: KILROY REALTY CORPORATION, a Maryland corporation. Its: General Partner Name:______________________________ Title:_____________________________ -22- An original fully executed copy of this Agreement, together with the Deposit, has been received by the Escrow Holder this _____ day of January, 1999, and by the execution hereof the Escrow Holder hereby covenants and agrees to be bound by the terms of this Agreement. "Escrow Holder" CHICAGO TITLE COMPANY By:___________________________ Name:_________________________ Title:________________________ Escrow No. - --------- -23- EXHIBIT "A" ---------- PROPERTY DESCRIPTION THE LAND REFERRED TO HEREIN IS SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF SAN DIEGO, AND IS DESCRIBED AS FOLLOWS: PARCEL 1 OF PARCEL MAP NO. 18118 OF MAPS WITHIN THE CITY OF SAN DIEGO, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA FILED WITH THE OFFICIAL RECORDS OF SAN DIEGO COUNTY, CALIFORNIA ON SEPTEMBER 25, 1998, AS FILE NO. 1998--613615. EXHIBIT "A" ---------- EXHIBIT "B" ---------- FORM OF GRANT DEED RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: ___________________________ ___________________________ ___________________________ Attention: ________________ ================================================================================ (Space Above For Recorder's Use) GRANT DEED ---------- For valuable consideration, receipt of which is acknowledged, KILROY REALTY, L.P., a Delaware limited partnership (Grantor"), hereby grants to ______________________________, a _______________________ ("Grantee"), all right, title and interest in (i) the real property in the City of San Diego, County of San Diego, State of California, described in Exhibit A attached hereto and made a part hereof, (ii) any improvements permanently affixed to said real property, and (iii) all entitlements, easements and appurtenances that pertain to said real property, including over adjacent streets, alleys or rights-of-way (the "Property"). IN WITNESS WHEREOF, Grantor has caused this instrument to be executed by its authorized agent "hereunto duly authorized. Dated: ___________, 1998 KILROY REALTY, L.P., a Delaware limited partnership By: Kilroy Realty Corporation, a Maryland corporation Its General Partner By:_______________________________ Name:__________________________ Title:_________________________ EXHIBIT "B" ----------- - OPTIONAL SECTION - CAPACITY CLAIMED BY SIGNER Although statute does not require the Notary to fill in the data below, doing so may prove invaluable to persons relying on the document. [_] INDIVIDUAL [_] CORPORATE OFFICER(S) _______________________________________ Title (s) _______________________________________ Title (s) [_] PARTNER(s) [_] LIMITED [_] GENERAL [_] ATTORNEY-IN-FACT [_] TRUSTEE(S) [_] GUARDIAN/CONSERVATOR [_] OTHER: _____________________________________________ SIGNOR IS REPRESENTING: NAME OF PERSON(S) OR ENTITY(IES) ______________________________________ ______________________________________ ______________________________________ STATE OF _________________) ) ss. COUNTY OF _____________________) On ________________________, before me, ________________________ a Notary Public in and for said state, personally appeared _______________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument, the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. _______________________________________________________ Notary Public in and for said State EXHIBIT "B" ----------- EXHIBIT "A" ----------- LEGAL DESCRIPTION ----------------- [TO BE ATTACHED] EXHIBIT "A" EXHIBIT "C" ----------- FORM OF ASSIGNMENT OF INTANGIBLE PROPERTY ----------------------------------------- ASSIGNMENT OF INTANGIBLE PROPERTY --------------------------------- THIS ASSIGNMENT OF INTANGIBLE PROPERTY (the "Assignment") is made this _____ day of _____________________, 19 ___, by and between KILROY REALTY, L.P., a Delaware limited partnership ("Assignor") and ___________________________________,a ______________ corporation ("Assignee"), with reference to the following facts: A. Assignor has used or acquired (or may have acquired) certain intangible rights in connection with the Property described on the attached Exhibit "A", including, but not limited to, any licenses, permits, air rights, building rights and other entitlements, certificates of occupancy, rights of way, sewer agreements, water line agreements, utility agreements, water rights and oil, gas and mineral rights (collectively, the "Intangibles"). B. Pursuant to the terms of that certain Agreement of Purchase and Sale and Escrow Instructions entered into by Assignor, as Seller, and Assignee, as Purchaser (the "Purchase Agreement"), Assignor now desires to assign and transfer to Assignee all of its right, title and interest in and to the Intangibles, to the extent such right, title and interest may exist and is assignable by Assignor, and Assignee desires to accept any such Intangibles to the extent they exist and are assignable. NOW THEREFORE, in consideration of the mutual covenants and conditions hereinbelow set forth, it is agreed: 1. Assignment. Effective as of the Close of Escrow, as that phrase is ---------- defined in the Purchase Agreement, Assignor assigns and transfers to Assignee and its successors and assigns, all of Assignor's right, title and interest in and to the Intangibles, to the extent such right, title and interest may exist and is assignable by Assignor. 2. Assumption. Effective as of the Close of Escrow, Assignee accepts ---------- the assignment of the Intangibles and shall be entitled to all rights and benefits accruing to Assignor thereunder and hereby assumes all obligations thereunder from and after the Close of Escrow. 3. No Rights in Trade Names. Nothing herein shall be construed to ------------------------ allow Assignee any right, title or interest in EXHIBIT "C" ----------- Assignor's trade names or marks, or to use said names or marks in any manner. 4. Counterparts. This Assignment may be executed in counterparts which ------------ taken together shall constitute one and the same instrument. 5. Successors and Assigns. The provisions of this instrument shall be ---------------------- binding upon and inure to the benefit of Assignor and Assignee and their respective successors and assigns. 6. Further Assurances. Assignor hereby covenants that it will, at any ------------------ time and from time to time, at no material cost or expense to Assignor, execute any documents and take such additional actions as Assignee or its successors or assigns shall reasonably require in order to more completely or perfectly carry out the transfers intended to be accomplished by this Assignment. IN WITNESS WHEREOF, Assignor and Assignee have executed this Assignment of Intangible Property as of the date set forth above. "ASSIGNOR" KILROY REALTY, L.P., a Delaware limited partnership By: Kilroy Realty Corporation, a Maryland corporation Its: General Partner By:_____________________________ Name:________________________ Title: ______________________ "ASSIGNEE" _____________________________________ a ___________________________________ By: ________________________________ Name: _______________________________ Title:_______________________________ EXHIBIT "C" ----------- EXHIBIT "A" ---------- TO ASSIGNMENT OF INTANGIBLE PROPERTY LEGAL DESCRIPTION ----------------- EXHIBIT "A" EXHIBIT "D" ----------- TRANSFEROR'S CERTIFICATION OF NON-FOREIGN STATUS ------------------------------------------------ To inform _____________________________________, a ____________________, (the "Transferee") that withholding of tax under Section 1445 of the Internal Revenue Code of 1954, as amended ("Code") will not be required by KILROY REALTY, L.P., a Delaware limited partnership, (the "Transferor"), the undersigned hereby certifies the following on behalf of the Transferor: 1. The Transferor is not a foreign corporation, foreign partnership, foreign trust, foreign estate or foreign person (as those terms are defined in the Code and the Income Tax Regulations promulgated thereunder); 2. The Transferor's U.S. employer or tax identification number is ______________________; The Transferor understands that this Certification may be disclosed to the Internal Revenue Service by the Transferee and that any false statement contained herein could be punished by fine, imprisonment, or both. Under penalty of perjury I declare that I have examined this Certification and to the best of my knowledge and belief it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of the Transferor. "Transferor" KILROY REALTY, L.P., a Delaware limited partnership By: KILROY REALTY CORPORATION a Maryland corporation, General Partner By: ________________________ Dated: _________________ EXHIBIT "D" ----------- EXHIBIT "F-1" ------------- TERMINATION OF GROUND LEASE --------------------------- THIS TERMINATION OF GROUND LEASE (this "Agreement") is entered into as of the _______ day of __________, _____, by and between KILROY REALTY L.P., a Delaware limited partnership ("Landlord") and ____________________________, a ____________________________ ("Tenant"). R E C I T A L S : - - - - - - - - A. Landlord and Applied Micro Circuits Corporation, a Delaware corporation, as predecessor to Tenant, entered into that certain Ground Lease made effective January 1, 1998 (the "Lease") whereby Landlord ground leased to Tenant, and Tenant ground leased from Landlord, that certain real property located in the City of San Diego, County of San Diego, State of California, more particularly described on Exhibit "A" attached hereto (the "Premises"). The Lease is incorporated herein by this reference. B. Pursuant to Article 13 of the Lease, Tenant has exercised its Purchase Option (as defined in the Lease) with respect to a portion of the Premises, and Landlord and Tenant have entered into that certain Agreement to Sell and Purchase and Escrow Instructions dated January___, 1999, in order to effectuate such purchase and sale (the "Purchase Agreement") C. Tenant and Landlord desire to enter into this Agreement in order to terminate the Lease and to release one another from their respective obligations thereunder, except as otherwise provided herein. A G R E E M E N T : - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing recitals and the conditions and the covenants hereinafter contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. Termination of the Lease. Landlord and Tenant hereby agree that ------------------------ the Lease shall terminate and be of no further force or effect as of the date hereof (the "Termination Date"). EXHIBIT "F-1" ------------ EXHIBIT "E" Withholding Exemption Certificate for YEAR Real Estate Sales (For use by sellers of California real estate) CALIFORNIA FORM ---------- --------------------------- 1998 590-RE - ------------------------------------------------------------------------------------------------------------------------------------ File this form with your withholding agent or buyer. Withholding agent's name - ------------------------------------------------------------------------------------------------------------------------------------ Seller's name Kilroy Realty, L.P., a Delaware limited partnership - ------------------------------------------------------------------------------------------------------------------------------------ Seller's address (number and street) Seller's daytime telephone number 4365 Executive Drive, Suite 850 ( ) - ------------------------------------------------------------------------------------------------------------------------------------ City State Zip Code San Diego CA 92121-2130 - ------------------------------------------------------------------------------------------------------------------------------------ Read the following carefully and check the box that applies to the seller: [_] Certificate of Residency -- Individuals: --------------------------------------- I am a resident of California and I reside at the address shown above. See Side 2 for the definition of a resident. [_] Certificate of Principal Residence -- Individuals: ------------------------------------------------- The California reel property located at _________________________________________________________________ qualifies as my principal residence within the meaning of the Internal Revenue Code Section 1034. See Side 2 for the definition of a principal residence. [_] Corporations: ------------ The above-named corporation has a permanent place of business in California at the address shown above or is qualified to do business in California. See Side 2 for the definition of a permanent place of business. [X] Partnerships: ------------ The above-named entity is a partnership and the recorded title to the property is in the name of the partnership. The partnership will file a California return to report the sale and will withhold on foreign and domestic nonresident partners when required. [_] Limited Liability Companies (LLC's): ----------------------------------- The above-named entity is an LLC and the recorded title to the property is in the name of the LLC. The LLC will file a California return to report the sale and will withhold on foreign and domestic nonresident partners when required. [_] Tax-Exempt Entitles and Nonprofit Organizations: ----------------------------------------------- The above-named entity is exempt from tax under California or federal law. [_] Irrevocable Trusts: ------------------ At least one trustee of the above-named irrevocable trust is a California resident The trust will file a California fiduciary return reporting the sale and will withhold on foreign and domestic nonresident beneficiaries when required. [_] Certificate of Residency of Deceased Person -- Estates: ------------------------------------------------------ I am the executor of the above-named person's estate. The decedent was a California resident at the time of death. The estate will file a California fiduciary return reporting the sale and will withhold on foreign end domestic nonresident beneficiaries when required. - -------------------------------------------------------------------------------
CERTIFICATE: Please complete and sign below. Under penalties of perjury, I hereby certify that the information provided herein in, to the best of my knowledge, true and correct. If conditions change, I will promptly inform the withholding agent. KILROY REALTY, L.P. a Delaware limited partnership By: KILROY REALTY CORPORATION, a Maryland corporation, General Partner By: ________________________________ Date _______________________ Seller's social security number, California corporation number, FEIN or California Secretary of State file number _____________________ (NOTE: Failure to provide your identification number will render this certificate void.) EXHIBIT "E" ----------- 2. Release of Liability. -------------------- (a) Landlord and Tenant shall, as of the Termination Date, be fully and unconditionally released and discharged from their respective obligations arising after the Termination Date from or connected with the provisions of the Lease; and (b) this Agreement shall fully and finally settle all demands, charges, claims, accounts or causes of action of any nature, including, without limitation, both known and unknown claims and causes of action that may arise out of or in connection with the obligations of the parties under the Lease. Each of the parties expressly waives the provisions of California Civil Code Section 1542, which provides: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor." Each party acknowledges that it has received the advice of legal counsel with respect to the aforementioned waiver and understands the terms thereof. 3. Representations of Landlord and Tenant. Landlord and Tenant each -------------------------------------- represent and warrant to the other (except, in the case of Tenant, or Tenant's predecessor, as permitted in the Lease or the Purchase Agreement) that: (a) it has not heretofore assigned or sublet all or any portion of its interest in the Lease; (b) no other person, firm or entity has any right, title or interest as landlord or tenant in or under the Lease; and (c) it has the full right, legal power and actual authority to enter into this Agreement and to terminate the Lease without the consent of any other person, firm or entity. Notwithstanding the termination of the Lease and the release of liability provided for herein, the representations and warranties set forth in this Paragraph 3 shall survive the Termination Date and Landlord and Tenant shall be liable to each other for any inaccuracy or any breach thereof. 4. Attorney's Fees. Should any dispute arise between the parties --------------- hereto or their legal representatives, successors and assigns concerning any provision of this Agreement or the rights EXHIBIT "F-1" ------------- -2- and duties of any person in relation thereto, the party prevailing in such dispute shall be entitled, in addition to such other relief that may be granted, to recover reasonable attorneys' fees and legal costs in connection with such dispute. 5. Governing Law. This Agreement shall be governed and construed ------------- under the laws of the State of California. 6. Counterparts. This Agreement may be executed in counterparts, each ------------ of which shall be deemed an original, but such counterparts, when taken together, shall constitute one agreement. 7. Binding Effect. This Agreement shall inure to the benefit of, and -------------- shall be binding upon, the parties hereto and their respective legal representatives, successors and assigns. 8. Time of the Essence. Time is of the essence of this Agreement and ------------------- the provisions contained herein. 9. Further Assurances. Landlord and Tenant hereby agree to execute ------------------ such further documents or instruments as may be necessary or appropriate to carry out the intention of this Agreement. IN WITNESS WHEREOF, Landlord and Tenant have executed this Agreement as of the day and year first above written. "Tenant" ___________________________________, a ________________________________________ By: _____________________________________ Name:________________________________ Title:_______________________________ "Landlord" KILROY REALTY L.P., a Delaware limited partnership By: Kilroy Realty Corporation, a Maryland corporation Its General Partner By:_______________________________________ Name: _______________________________ Title:_______________________________ EXHIBIT "F-1" ------------- -3- EXHIBIT "A" ----------- LEGAL DESCRIPTION OF THE PREMISES --------------------------------- EXHIBIT "A" ----------- EXHIBIT "F-2" ------------- TERMINATION OF MEMORANDUM OF GROUND LEASE ----------------------------------------- RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: Kilroy Realty L.P. 4365 Executive Drive, Suite 850 San Diego, California 92121-2130 Attention: Mr. Steven L. Black - -------------------------------------------------------------------------------- TERMINATION OF MEMORANDUM OF GROUND LEASE ----------------------------------------- THIS TERMINATION OF MEMORANDUM OF GROUND LEASE (this "Agreement") is entered into as of the _____ day of __________, 1999, by and between KILROY REALTY L.P., a Delaware limited ("Landlord") and _____________________________, a _______________________ ("Tenant"). R E C I T A L S : - - - - - - - - A. Landlord and Applied Micro Circuits Corporation, a Delaware corporation, as predecessor to Tenant, entered into that certain Ground Lease made effective January 1, 1998 (the "Lease") whereby Landlord ground leased to Tenant, and Tenant ground leased from Landlord, that certain real property located in the City of San Diego, County of San Diego, State of California, more particularly described in Exhibit "A" attached hereto (the "Premises"). That certain Memorandum of Ground Lease with regard to the Lease was recorded on July 28, 1998, as Instrument No. 1998-0470328, in the Official Records of San Diego County, California (the "Memorandum"). B. In conjunction with Tenant's purchase of a portion of the Premises, Tenant and Landlord entered into that certain Termination of Ground Lease dated as of the date hereof (the "Termination"), terminating the Lease. C. Landlord and Tenant desire to enter into this Agreement in order to terminate of record the Memorandum. EXHIBIT "F-2" ------------- A G R E E M E N T : - - - - - - - - - NOW, THEREFORE, in consideration of the foregoing recitals and the conditions and the covenants hereinafter contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: 1. Termination of the Memorandum. Landlord and Tenant hereby agree ----------------------------- that the Lease has been terminated pursuant to the Termination and that the Memorandum shall be and hereby is terminated and of no further force or effect as of the date hereof. 2. Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed an original, but such counterparts, when taken together, shall constitute one agreement. IN WITNESS WHEREOF, Landlord and Tenant have executed this Agreement as of the day and year first above written. "Tenant" _________________________________________, a _________________________________________ By: ______________________________________ Name: ________________________________ Title: _______________________________ "Landlord" KILROY REALTY L.P., a Delaware limited partnership By: Kilroy Realty Corporation, a Maryland corporation Its General Partner By: _______________________________________ Name: _______________________________ Title:_______________________________ EXHIBIT "F-2" ------------- STATE OF ) ________________ ) ss. COUNTY OF ________________) On ________________________________, before me, ____________________, a Notary Public in and for said state, personally appeared _______________________ and ______________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the persons whose names are subscribed to the within instrument and acknowledged to me that they executed the same in their authorized capacities, and that by their signatures on the instrument, the persons, or the entity upon behalf of which the persons acted, executed the instrument. WITNESS my hand and official seal. ________________________________________ Notary Public in and for said State STATE OF ) ________________ ) ss. COUNTY OF ________________) On ______________________________________, before me, ____________________, a Notary Public in and for said state, personally appeared __________________ and __________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the persons whose names are subscribed to the within instrument and acknowledged to me that they executed the same in their authorized capacities, and that by their signatures on the instrument, the persons, or the entity upon behalf of which the persons acted, executed the instrument. WITNESS my hand and official seal. __________________________________________ Notary Public in and for said State EXHIBIT "F-2" ------------- EXHIBIT "G" ----------- BRING DOWN CERTIFICATE This Certificate is dated and made effective _______, 199--, by K1LROY REALTY, L.P., a Delaware limited partnership ("Seller") in favor of ____________ ("Purchaser") and is delivered pursuant to the terms and provisions of that Agreement to Sell and Purchase and Escrow Instructions by and between Seller and Purchaser dated January --, 1999 (the "Purchase Agreement"). Seller hereby certifies, represents and warrants to Purchaser that Seller's representations and warranties set forth in Article 8 of the Purchase Agreement are true and correct as of the date hereof. "Seller" KILROY REALTY, L.P., a Delaware limited partnership By: Kilroy Realty Corporation, a Maryland corporation, General Partner By: __________________________________ Name:_____________________________ Title:____________________________ EXHIBIT "G" ----------- EX-10.30 6 LEASE Exhibit 10.30 LEASE KILROY REALTY, L.P., a Delaware limited partnership Landlord APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation Tenant TABLE OF CONTENTS
Page ---- ARTICLE I - TERM OF LEASE................................................................................................. 1 1.1 Initial Term..................................................................................................... 1 1.2 Option to Extend................................................................................................. 2 ARTICLE II - CONSTRUCTION OF THE IMPROVEMENTS.............................................................................. 2 2.1 The Improvements................................................................................................. 2 2.2 Plans and Specifications......................................................................................... 3 2.3 Design Disputes.................................................................................................. 7 2.4 Substantial Completion of the Improvements....................................................................... 8 2.5 Delay in Substantial Completion.................................................................................. 9 2.6 Liquidated Damages for Delay in Substantial Completion........................................................... 10 2.7 Building Permit for the Improvements............................................................................. 11 2.8 Construction Warranties.......................................................................................... 11 2.9 Condition of Demised Premises; Limited Warranty.................................................................. 11 2.10 Tenant Improvement Allowance; Tenant Responsibility.............................................................. 12 2.11 Responsibility for Excess Shell Costs and Excess Tenant Improvement Costs........................................ 14 2.12 Contractor....................................................................................................... 15 2.13 Tenant's Entry Into the Building Prior to Substantial Completion................................................. 16 ARTICLE III - RENT......................................................................................................... 16 3.1 Base Rent........................................................................................................ 16 3.2 Base Rent During Option Term..................................................................................... 17 3.3 Additional Obligations; Additional Rent.......................................................................... 19 3.4 Delinquent Rental Payments....................................................................................... 20 ARTICLE IV - USE OF DEMISED PREMISES....................................................................................... 20 4.1 Permitted Use.................................................................................................... 20 4.2 Preservation of Demised Premises................................................................................. 21 4.3 Hazardous Substances............................................................................................. 21 4.4 Access Easement.................................................................................................. 24 ARTICLE V - PAYMENT OF TAXES, ASSESSMENTS, ETC............................................................................. 24 5.1 Payment of Impositions........................................................................................... 24 5.2 Tenant's Right to Contest Impositions............................................................................ 25 5.3 Levies and Other Taxes........................................................................................... 26 5.4 Evidence of Payment.............................................................................................. 27 5.5 Escrow for Taxes and Assessments................................................................................. 27 5.6 Landlord's Right to Contest Impositions.......................................................................... 27 ARTICLE VI - INSURANCE..................................................................................................... 27 6.1 Casualty Insurance............................................................................................... 27 6.2 Public Liability Insurance....................................................................................... 28 6.3 Other Insurance.................................................................................................. 28 6.4 Certain Insurance Provisions..................................................................................... 29 6.5 Waiver of Subrogation............................................................................................ 30
i 6.6 Tenant's Indemnification of Landlord............................................................................. 30 6.7 Unearned Premiums................................................................................................ 30 6.8 Blanket Insurance Coverage....................................................................................... 30 6.9 Landlord's Liability Insurance Coverage.......................................................................... 30 ARTICLE VII - UTILITIES.................................................................................................... 31 7.1 Payment of Utilities............................................................................................. 31 7.2 Additional Charges............................................................................................... 31 7.3 Landlord's Responsibility for Utility Hook-Up Charges and Fees................................................... 31 ARTICLE VIII - REPAIRS AND MAINTENANCE OF DEMISED PREMISES................................................................ 31 8.1 Tenant's Responsibilities........................................................................................ 31 8.2 Landlord's Responsibilities...................................................................................... 32 8.3 Sharing of Expenses of Capital Items............................................................................. 32 8.4 Tenant's Waiver of Claims Against Landlord....................................................................... 33 8.5 Prohibition Against Waste........................................................................................ 33 ARTICLE IX - COMPLIANCE WITH APPLICABLE LAWS AND RESTRICTIONS.............................................................. 33 9.1 Compliance with Applicable Laws and Restrictions................................................................. 33 9.2 Tenant's Obligations............................................................................................. 34 9.3 Tenant's Right to Contest Laws and Ordinances.................................................................... 34 ARTICLE X - MECHANIC'S LIENS AND OTHER LIENS............................................................................... 35 10.1 Mechanic's Liens................................................................................................. 35 10.2 Landlord's Indemnification....................................................................................... 36 10.3 Removal of Liens................................................................................................. 36 10.4 Equipment and Trade Fixtures..................................................................................... 36 ARTICLE XI - LANDLORD'S PERFORMANCE OF TENANT'S OBLIGATIONS................................................................ 37 ARTICLE XII - DEFAULTS OF TENANT........................................................................................... 37 12.1 Events of Default................................................................................................ 37 12.2 Landlord's Remedies.............................................................................................. 38 12.3 Right to Collect Rent as Due..................................................................................... 39 12.4 New Lease Following Termination.................................................................................. 39 12.5 Cumulative Rights; No Waiver..................................................................................... 39 12.6 Surrender of Demised Premises.................................................................................... 40 12.7 Interest on Unpaid Amounts....................................................................................... 40 ARTICLE XIII - DESTRUCTION AND RESTORATION................................................................................. 40 13.1 Destruction and Restoration...................................................................................... 40 13.2 Application of Insurance Proceeds................................................................................ 41 13.3 Continuance of Tenant's Obligations.............................................................................. 42 13.4 Availability of Insurance Proceeds............................................................................... 42 13.5 Completion of Restoration........................................................................................ 42 13.6 Termination of Lease............................................................................................. 42 ARTICLE XIV - CONDEMNATION................................................................................................. 44 14.1 Condemnation of Entire Demised Premises.......................................................................... 44 14.2 Partial Condemnation/Termination of Lease........................................................................ 44 14.3 Partial Condemnation/Continuation of Lease....................................................................... 45
ii 14.4 Continuance of Obligations....................................................................................... 45 14.5 Adjustment of Rent............................................................................................... 45 ARTICLE XV - ASSIGNMENT, SUBLETTING, ETC.................................................................................... 45 15.1 Restriction on Transfer.......................................................................................... 45 15.2 Transfer to Affiliates; Sale or Merger........................................................................... 47 15.3 Restriction Against Further Assignment........................................................................... 47 15.4 Tenant's Failure to Comply....................................................................................... 47 ARTICLE XVI - SUBORDINATION, NONDISTURBANCE, NOTICE TO MORTGAGEE AND ATTORNMENT............................................. 48 16.1 Subordination by Tenant.......................................................................................... 48 16.2 Landlord's Default............................................................................................... 48 16.3 Attornment....................................................................................................... 48 ARTICLE XVII - SIGNS........................................................................................................ 49 ARTICLE XVIII - FINANCIAL STATEMENTS OF TENANT.............................................................................. 49 ARTICLE XIX - CHANGES AND ALTERATIONS....................................................................................... 49 ARTICLE XX - MISCELLANEOUS PROVISIONS....................................................................................... 52 20.1 Entry by Landlord................................................................................................ 52 20.2 Exhibition of Demised Premises................................................................................... 53 20.3 Indemnification by Tenant........................................................................................ 53 20.4 Notices.......................................................................................................... 53 20.5 Quiet Enjoyment.................................................................................................. 55 20.6 Landlord's Continuing Obligations................................................................................ 55 20.7 Estoppel......................................................................................................... 55 20.8 Delivery of Corporate Documents.................................................................................. 56 20.9 Memorandum of Lease.............................................................................................. 57 20.10 Severability..................................................................................................... 57 20.11 Successors and Assigns........................................................................................... 57 20.12 Captions......................................................................................................... 57 20.13 Relationship of Parties.......................................................................................... 57 20.14 Entire Agreement................................................................................................. 57 20.15 No Merger........................................................................................................ 57 20.16 Possession and Use............................................................................................... 57 20.17 Surrender of Demised Premises.................................................................................... 57 20.18 Holding Over..................................................................................................... 58 20.19 Survival......................................................................................................... 58 20.20 Broker's Commission.............................................................................................. 58 20.21 Applicable Law................................................................................................... 58 20.22 Counterparts..................................................................................................... 58 20.23 Attorney's Fees.................................................................................................. 59
iii LEASE THIS LEASE ("Lease") is made this 17/th/ day of February, 1999, by and between KILROY REALTY, L.P., a Delaware limited partnership ("Landlord"), and APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation ("Tenant"). WITNESSETH: "Land" means that certain vacant lot located to the north of the building currently occupied by Tenant at 6290 Sequence Drive located in San Diego, California (the "Adjacent Building"), which is described in Exhibit "A" attached hereto and made a part hereof. "Building" means a building (known generally as the "Engineering Building") which shall be comprised of approximately 58,000 rentable square feet of space in two (2) stories with sixteen foot (16') minimum slab to slab clearance. Rentable square footage shall be calculated according to BOMA standards for a single tenant building, and any "drip line" area shall not exceed 200 rentable square feet. "Improvements" means the Building and all improvements, machinery, equipment, fixtures and other property, real, personal or mixed (except Tenant's trade fixtures, machinery and equipment) installed or constructed on the Land or in the Building by Landlord (including, without limitation, the parking facility and other site improvements and landscaping), together with all additions, alterations and replacements thereof. "Demised Premises" means the Land and the Improvements. Landlord, for and in consideration of the rents, covenants and agreements hereinafter reserved, mentioned and contained on the part of Tenant, its successors and assigns, to be paid, kept, observed and performed under this Lease, hereby leases, rents, lets and demises to Tenant, and upon and subject to the conditions and limitations expressed in this Lease, Tenant takes and hires from Landlord, the Demised Premises. ARTICLE I TERM OF LEASE 1.1 Initial Term. This Lease shall be effective and binding upon the ------------ parties hereto upon mutual execution hereof (the "Effective Date"). The term of this Lease (the "Initial Term") shall commence upon the Commencement Date and shall end one hundred twenty (120) months after the Commencement Date (as defined below), subject to extension pursuant to Section 1.2, below. The "Commencement Date" (as that term is used in this Lease) shall mean the date upon which Substantial Completion (as defined in Section 2.3 below) of the Improvements occurs. Substantial Completion of the Improvements and the Commencement Date are currently anticipated to be not later than May 1, 2001 (the "Target Commencement Date"). In the event the Commencement Date is May 1, 2001, the Initial Term of this Lease would end on April 30, 2011. Tenant shall have the right to advance the Target Commencement 1 Date to a date earlier than May 1, 2001. Landlord has agreed to commence construction of the Improvements at least one (1) year prior to the Target Commencement Date. Accordingly, if Tenant desires to exercise its right to advance the Target Commencement Date, Tenant shall deliver written notice of such election ("Advance Notice") to Landlord no later than twelve (12) months prior to the date which Tenant elects to have as the accelerated Target Commencement Date. For example, if Tenant elects to advance the Target Commencement Date to December 1, 2000, Tenant shall deliver the Advance Notice to Landlord no later than December 1, 1999. If Tenant elects to advance the Target Commencement Date, then all references herein to the Target Commencement Date shall mean such date as advanced by Tenant pursuant to this Section 1.1. In addition, if Tenant elects to advance the Target Commencement Date, Tenant shall be entitled to a reduction in Base Rent as provided in Section 3.1 below. 1.2 Option to Extend. Tenant shall have three (3) options to extend (the ---------------- "Extension Options") the Initial Term for consecutive five (5) year periods (the foregoing option terms shall be referred to hereinafter sometimes as the "Option Terms"), by delivering a binding written notice of exercise to Landlord ("Extension Notice"), so that Landlord receives the Extension Notice with respect to the first Option Term at least three hundred sixty (360) days prior to the end of the Initial Term and with respect to the second Option Term, at least three hundred sixty (360) days prior to the end of the first Option Term and with respect to the third Option Term, at least three hundred sixty (360) days prior to the end of the second Option Term. Tenant may exercise the Extension Options only if this Lease is in full force and effect and there is no uncured Event of Default, or any breach of Tenant's obligations under this Lease which with the passage of time or the giving of notice, or both, would constitute an Event of Default if not cured within any applicable cure period (an "Incipient Default"), at the time of exercise of the right of renewal or at the time of the commencement of the Option Term, but Landlord shall have the right at its sole discretion to waive the non-default conditions herein; provided, however, that if an Event of Default or Incipient Default exists at the time Tenant exercises the Extension Option and Landlord does not elect to waive, Landlord shall provide written notice to Tenant of the existence and nature of such Event of Default or Incipient Default and Tenant shall be allowed an amount of time to cure such Event of Default or Incipient Default as is otherwise provided for curing defaults of that type under this Lease, and, if timely cured, Tenant's exercise of the Extension Option shall be reinstated effective as of the time of exercise. The Initial Term, together with any Option Term, are referred to in this Lease as the "Term." ARTICLE II CONSTRUCTION OF THE IMPROVEMENTS 2.1 The Improvements. Landlord agrees to furnish all of the material, ---------------- labor and equipment for the construction of the Improvements in a good and workmanlike manner in conformance with the Plans and Specifications (as defined in Section 2.2) and in compliance with all covenants, conditions and restrictions to which the Land is subject and all then applicable building laws, ordinances, orders, rules, regulations and requirements of all federal, state and municipal governments with jurisdictional authority over the development of the Land and the construction of the Improvements, including, but not limited to, the Americans With 2 Disabilities Act and Title 24 (the "Applicable Land Use Laws and Restrictions"). Landlord shall use its diligent, best efforts to achieve Substantial Completion of the Improvements by the Target Commencement Date. 2.2 Plans and Specifications. The Plans and Specifications for the ------------------------ development of the Property and the construction of the Improvements shall be developed on a "two-track" basis, with one "track" related to the creation of Plans and Specifications for the Shell Improvements (as defined in Section 2.10(a) hereof) and a second "track" related to the creation of Plans and Specifications for the Tenant Improvements (as defined in Section 2.10(b) hereof. Pacific Cornerstone Architects shall be the architect and space planner for the Improvements (the "Architect"). (a) Shell Improvements Plans and Specifications. The Plans and ------------------------------------------- Specifications for the development of the Shell Improvements shall be developed as follows: (i) As used in this Lease, the term "Shell Improvements Plans and Specifications" shall mean collectively the "Preliminary Plans and Specifications," the "Shell Improvements Schematic Design Drawings," the "Shell Improvements Design Development Drawings", the "Shell Improvements Construction Drawings" (all as defined herein) which shall be prepared by Architect, and all related plans, drawings, specifications and notes. The Shell Improvements Plans and Specifications shall be prepared by Landlord in compliance with all Applicable Land Use Laws and Regulations. (ii) Landlord and Tenant shall agree on a set of preliminary plans and specifications ("Preliminary Plans") for the Shell Improvements which shall (a) describe and depict the Shell Improvements, (b) specify the components of the Shell Improvements, and (c) preliminarily depict the Tenant Improvements. On or before May 1, 2000, or as soon as reasonably possible following Landlord's receipt of the Advance Notice, whichever is earlier, Landlord shall submit to Tenant proposed Preliminary Plans. Within fifteen (15) business days after Landlord delivers to Tenant the Preliminary Plans, Tenant shall deliver to Landlord written notice of its approval or disapproval thereof. Tenant shall not unreasonably withhold its approval of the Preliminary Plans or use the approval process as a vehicle for expanding the scope of the Shell Improvements. If Tenant disapproves any portion of the Preliminary Plans, then Tenant shall specifically and in writing (a) approve those portions which are acceptable to Tenant and (b) disapprove those portions which are not acceptable to Tenant, specifying the reasons for such disapproval and describing in detail the change Tenant requests for each item disapproved. In the event the Preliminary Plans have not been fully approved by Tenant, and Landlord and Tenant are unable to resolve the basis for Tenant's disapproval after good faith efforts to do so over a period of fifteen (15) business days after delivery of Tenant's notice disapproving the Preliminary Plans, Landlord and Tenant shall resolve such differences through binding arbitration as more particularly provided in Section 2.3 below. (iii) As soon as is reasonably possible following approval of the Preliminary Plans, Landlord shall submit to Tenant reasonably detailed and dimensioned 1/8 scale preliminary schematic design drawings ("Shell Improvements Schematic Design Drawings") for the Shell Improvements elements of the Demised Premises, which Shell Improvements 3 Schematic Design Drawings shall be consistent with the Preliminary Plans. Within fifteen (15) business days after Landlord delivers to Tenant the Shell ImprovementsSchematic Design Drawings, Tenant shall deliver to Landlord written notice of its approval or disapproval thereof. Tenant shall not unreasonably withhold its approval of the Shell Improvements Schematic Design Drawings or use the approval process as a vehicle for expanding the scope of the Shell Improvements. If Tenant disapproves any portion of the Shell Improvements Schematic Design Drawings, then Tenant shall specifically and in writing (a) approve those portions which are acceptable to Tenant and (b) disapprove those portions which are not acceptable to Tenant, specifying the reasons for such disapproval and describing in detail the change Tenant requests for each item disapproved. In the event the Shell Improvements Schematic Design Drawings have not been fully approved by Tenant, and Tenant and Landlord are unable to resolve the basis for Tenant's disapproval after good faith efforts to do so over a period of fifteen (15) business days after delivery of Tenant's notice disapproving the Schematic Shell Improvements Design Drawings, Landlord and Tenant shall resolve such differences through binding arbitration as more particularly provided in Section 2.3 below. (iv) As soon as is reasonably possible following approval of the Shell Improvements Schematic Design Drawings, Landlord shall submit to Tenant reasonably detailed preliminary construction drawings for the Shell Improvements elements of the Demised Premises ("Shell Improvements Design Development Drawings"), which Shell Improvements Design Development Drawings shall be consistent with the Shell Improvements Schematic Design Drawings. Within fifteen (15) business days after Tenant receives the Shell Improvements Design Development Drawings, Tenant shall deliver to Landlord written notice of Tenant's approval or disapproval of the Shell Improvements Design Development Drawings. Tenant shall not unreasonably withhold its approval of the Shell Improvements Design Development Drawings or use the approval process as a vehicle for expanding the scope of the Shell Improvements. If Tenant disapproves any portion of the Shell Improvements Design Development Drawings, then Tenant shall specifically and in writing (a) approve those portions which are acceptable to Tenant and (b) disapprove those portions which are not acceptable to Tenant, specifying the reasons for such disapproval and describing in detail the change Tenant requests for each item disapproved. In the event the Shell Improvements Design Development Drawings have not been fully approved by Tenant, and Tenant and Landlord are unable to resolve the basis for Tenant's disapproval after good faith efforts to do so over a period of fifteen (15) business days after delivery of Tenant's notice disapproving the Shell Improvements Design Development Drawings, Landlord and Tenant shall resolve such differences through binding arbitration as more particularly provided in Section 2.3 below. (v) As soon as is reasonably possible following approval of the Shell Improvements Design Development Drawings, Landlord shall submit to Tenant 1/4 or 1/8 scale construction drawings for the Shell Improvements elements of the Demised Premises ("Construction Drawings"), which Construction Drawings shall be consistent with the previously approved Shell Improvements Design Development Drawings. These Construction Drawings shall include all information reasonably necessary to construct the Shell Improvements. Within fifteen (15) business days after Tenant receives the Shell Improvements Construction Drawings, Tenant shall deliver to Landlord written notice of Tenant's approval or disapproval of the Shell Improvements Construction Drawings. Tenant shall not unreasonably withhold its approval of 4 the Shell Improvements Construction Drawings or use the approval process as a vehicle for expanding the scope of the Shell Improvements. If Tenant disapproves any portion of the Shell Improvements Construction Drawings, then Tenant shall specifically and in writing (a) approve those portions which are acceptable to Tenant and (b) disapprove those portions which are not acceptable to Tenant, specifying the reasons for such disapproval and describing in detail the change Tenant requests for each item disapproved. In the event the Shell Improvements Construction Drawings have not been fully approved by Tenant, and Tenant and Landlord are unable to resolve the basis for Tenant's disapproval after good faith efforts to do so over a period of fifteen (15) business days after delivery of Tenant's notice disapproving the Shell Improvements Construction Drawings, Landlord and Tenant shall resolve such differences through binding arbitration as more particularly provided in Section 2.3 below. (vi) Upon approval of the Shell Improvements Construction Drawings, the Shell Improvements Plans and Specifications shall be deemed approved by Landlord and Tenant and shall, thereafter, be the Shell Improvements element of the Plans and Specifications for the construction of the Improvements. (b) Tenant Improvements Plans and Specifications. The Plans and -------------------------------------------- Specifications for the development of the Tenant Improvements shall be developed as follows: (i) As used in this Lease, the term "Tenant Improvements Plans and Specifications" shall mean collectively the "Preliminary Plans", the "Tenant Improvements Schematic Design Drawings," the "Tenant Improvements Design Development Drawings", the "Tenant Improvements Construction Drawings" (all as defined herein) which shall be prepared by Architect, and all related plans, drawings, specifications and notes. The Tenant Improvements Plans and Specifications shall be prepared by Landlord in compliance with all Applicable Land Use Laws and Regulations. (ii) As soon as is reasonably possible following approval of the Preliminary Plans, or as soon as reasonably possible following Landlord's receipt of the Advance Notice, Landlord shall submit to Tenant reasonably detailed and dimensioned 1/8 scale preliminary schematic design drawings ("Tenant Improvements Schematic Design Drawings") for the Tenant Improvements elements of the Demised Premises consistent with the Preliminary Plans. Within fifteen (15) business days after Landlord delivers to Tenant the Tenant Improvements Schematic Design Drawings, Tenant shall deliver to Landlord written notice of its approval or disapproval thereof. Tenant shall not unreasonably withhold its approval of the Tenant Improvements Schematic Design Drawings. If Tenant disapproves any portion of the Tenant Improvements Schematic Design Drawings, then Tenant shall specifically and in writing (a) approve those portions which are acceptable to Tenant and (b) disapprove those portions which are not acceptable to Tenant, specifying the reasons for such disapproval and describing in detail the change Tenant requests for each item disapproved. In the event the Tenant Improvements Schematic Design Drawings have not been fully approved by Tenant, and Tenant and Landlord are unable to resolve the basis for Tenant's disapproval after good faith efforts to do so over a period of fifteen (15) business days after delivery of Tenant's notice disapproving the Tenant Improvements Schematic Design Drawings, Landlord and Tenant shall 5 resolve such differences through binding arbitration as more particularly provided in Section 2.3 below. (iii) As soon as is reasonably possible following approval of the Tenant Improvements Schematic Design Drawings, Landlord shall submit to Tenant reasonably detailed preliminary construction drawings for the Tenant Improvements elements of the Demised Premises ("Tenant Improvements Design Development Drawings"), which Tenant Improvements Design Development Drawings shall be consistent with the Tenant Improvements Schematic Design Drawings. Within fifteen (15) business days after Tenant receives the Tenant Improvements Design Development Drawings, Tenant shall deliver to Landlord written notice of Tenant's approval or disapproval of the Tenant Improvements Design Development Drawings. Tenant shall not unreasonably withhold its approval of the Tenant Improvements Design Development Drawings. If Tenant disapproves any portion of the Tenant Improvements Design Development Drawings, then Tenant shall specifically and in writing (a) approve those portions which are acceptable to Tenant and (b) disapprove those portions which are not acceptable to Tenant, specifying the reasons for such disapproval and describing in detail the change Tenant requests for each item disapproved. In the event the Tenant Improvements Design Development Drawings have not been fully approved by Tenant, and Tenant and Landlord are unable to resolve the basis for Tenant's disapproval after good faith efforts to do so over a period of fifteen (15) business days after delivery of Tenant's notice disapproving the Tenant Improvements Design Development Drawings, Landlord and Tenant shall resolve such differences through binding arbitration as more particularly provided in Section 2.3 below. (iv) As soon as is reasonably possible following approval of the Tenant Improvements Design Development Drawings, Landlord shall submit to Tenant 1/4 or 1/8 scale construction drawings for the Tenant Improvements elements of the Demised Premises ("Construction Drawings"), which Construction Drawings shall be consistent with the Tenant Improvements Design Development Drawings. These Construction Drawings shall include all information reasonably necessary to construct the Tenant Improvements. Within fifteen (15) business days after Tenant receives the Tenant Improvements Construction Drawings, Tenant shall deliver to Landlord written notice of Tenant's approval or disapproval of the Tenant Improvements Construction Drawings. Tenant shall not unreasonably withhold its approval of the Tenant Improvements Construction Drawings. If Tenant disapproves any portion of the Tenant Improvements Construction Drawings, then Tenant shall specifically and in writing (a) approve those portions which are acceptable to Tenant and (b) disapprove those portions which are not acceptable to Tenant, specifying the reasons for such disapproval and describing in detail the change Tenant requests for each item disapproved. In the event the Tenant Improvements Construction Drawings have not been fully approved by Tenant, and Tenant and Landlord are unable to resolve the basis for Tenant's disapproval after good faith efforts to do so over a period of fifteen (15) business days after delivery of Tenant's notice disapproving the Tenant Improvements Construction Drawings, Landlord and Tenant shall resolve such differences through binding arbitration as more particularly provided in Section 2.3 below. (v) Upon approval of the Tenant Improvements Construction Drawings, the Tenant Improvements Plans and Specifications shall be deemed approved by 6 Landlord and Tenant and shall, thereafter, be the Tenant Improvements element of the Plans and Specifications for the construction of the Improvements. (vi) During the process of preparing and reviewing the Tenant Improvements Schematic Design Drawings, Tenant Improvements Design Development Drawings and Tenant Improvements Construction Drawings, Landlord shall reasonably cooperate with Tenant, and Landlord shall cause its contractor and design professionals to reasonably cooperate with Tenant, in Tenant's efforts to control the cost of the Tenant Improvements through "value engineering." Nothing in this subsection (vii) nor related to the "value engineering" of the Tenant Improvements shall extend the dates by which Tenant must review the plans and specifications delivered to it under this Section 2.2 or otherwise delay the completion of the Tenant Improvements Plans and Specifications. (c) Final Plans and Specifications. The final Shell Improvements ------------------------------ Plans and Specifications and the final Tenant Improvements Plans and Specifications are sometimes collectively referred to in this Lease as the "Plans and Specifications" and shall be the final plans and specifications for the development of the Improvements. Tenant shall not assume any liability for defects in the design of the Shell Improvements or the Tenant Improvements as a result of Tenant's involvement in the process described in this Section 2.2 and shall not diminish Landlord's responsibilities under this Lease for any such defects. 2.3 Design Disputes. In the event Landlord and Tenant are unable to --------------- resolve Tenant's disapproval of a phase of the development of the Plans and Specifications under Section 2.2 above (a "Design Dispute"), they shall resolve those differences through the binding arbitration of a neutral third-party in accordance with the procedure set forth in this Section 2.3: Landlord and Tenant shall immediately meet to make a good faith attempt to mutually appoint a single party who shall be a licensed architect ("Arbitrating Architect"), with not less than ten (10) years experience in commercial and industrial architecture and who is not employed or otherwise previously affiliated with either party, to arbitrate their differences and resolve the Design Dispute. If Landlord and Tenant are unable to agree upon a single Arbitrating Architect, then each shall, within two (2) business days after the meeting, select an architect that meets the foregoing qualifications. The two (2) architects so appointed shall, within two (2) business days after their appointment, appoint a third architect meeting the foregoing qualifications who shall serve as the Arbitrating Architect. If the two (2) architects so selected cannot agree on the selection of the Arbitrating Architect within the time above specified, then either party, on behalf of both parties, may request the appointment of the Arbitrating Architect to the Presiding Judge of the San Diego County Superior Court. The procedures for arbitrating and resolving the Design Dispute shall be established by the Arbitrating Architect, provided, however, that the parties agree to the use of the rules of the American Arbitration Association regarding resolution of commercial disputes. The determination of the Arbitrating Architect shall be limited solely to the issue of the Design Dispute and shall be made within ten (10) business days of its submission by the parties for arbitration. The decision of the Arbitrating Architect shall be binding on both parties. The costs of the arbitration, including, without limitation, attorneys' fees and costs, witness fees, expert witness fees, and costs of the arbitration proceeding shall be awarded as determined to be reasonable by the Arbitrating Architect. In the event of any judicial enforcement or confirmation proceeding relating to an arbitration award, the prevailing party 7 shall be entitled to recover from the other party all related costs, including attorneys' fees and costs. 2.4 Substantial Completion of the Improvements. ------------------------------------------ (a) "Substantial Completion" of the Improvements shall be deemed to have occurred on the earlier to occur of when (i) (A) the Improvements have been completed in conformance with the Plans and Specifications, subject to the completion of "punch-list" items (the "Punchlist") identified by Landlord and Tenant as described in Section 2.3(c) below ("punch-list items" being defined to mean minor items needing correction or repair which do not or will not materially interfere with Tenant's use and enjoyment of the Building), (B) the parking facilities to which Tenant is entitled under this Lease have been completed other than as identified on the Punchlist, (C) all systems of the Building are in good working order, and (D) Tenant can physically and legally occupy the Demised Premises (e.g., a permanent Certificate of Occupancy or temporary certificate of occupancy which is subsequently converted into or replaced without any lapse by a permanent certificate of occupancy ("Certificate of Occupancy") has been issued for the Demised Premises by the City of San Diego ("City")), or (ii) the Improvements would have been so completed and Tenant legally entitled to occupy the Demised Premises but for any Tenant-Caused Delays in Landlord (A) achieving Substantial Completion or (B) or obtaining the Certificate of Occupancy. Landlord shall deliver to Tenant a copy of any Certificate of Occupancy issued by City for the Demised Premises promptly upon receipt. Landlord will use its best efforts to (i) keep Tenant informed on a monthly basis following execution of this Lease of the anticipated Commencement Date, and (ii) provide Tenant with no less than thirty (30) days advance notice of the actual Commencement Date. Landlord shall deliver to Tenant a certificate from the Architect (as defined below) certifying Substantial Completion of the Improvements on or before the Commencement Date. (b) "Tenant-Caused Delay" shall be defined as (i) the failure of Tenant, its officers, directors, partners, agents, employees, or contractors to (A) perform some act or pay some amount within the time provided in this Lease, or (B) approve or reasonably disapprove any draft of the Plans and Specifications within the time period specified in Section 2.2 above, (ii) any change to the Plans and Specifications requested by Tenant, including both during preparation of the Plans and Specifications and during construction of the Demised Premises, including as a result of Tenant's efforts to control Tenant Improvements Cost through "value engineering" (as provided in Section 2.2(b)(vii) hereof) (a "Tenant Change Order"), or (iii) any other act or omission by Tenant, its officers, directors, partners, agents, employees, or contractors to the extent it causes a delay in Substantial Completion or in the issuance of the Certificate of Occupancy (including, without a limitation, a delay caused by a delay in finalization of the Plans and Specifications); provided, however, that Landlord shall have given written notice to Tenant of the number of days of Tenant-Caused Delay due to such requested Tenant Change Order. Tenant may revoke a Tenant Change Order if it notifies Landlord of such revocation within two (2) business days following receipt of Landlord's written notice. Landlord shall notify Tenant in writing of the occurrence of any Tenant- Caused Delay within two (2) business days after learning of the same. If Landlord fails to timely notify Tenant of an event which would otherwise be a Tenant-Caused Delay, the Tenant-Caused Delay shall not commence until such notice is delivered. 8 (c) On or immediately before the Commencement Date, Landlord and Tenant shall conduct a walk-through inspection of the Demised Premises and shall jointly prepare the Punchlist which shall be a list of items which have not been completed in substantial conformance with the Plans and Specifications that need to be corrected. Landlord shall cause such items to be corrected within thirty (30) days thereafter, provided, however, if by the nature of such punch-list item, more than thirty (30) days is required to effect such correction, Landlord shall not be in default hereunder if such correction is commenced within such thirty (30) day period and is diligently pursued to completion. Approximately thirty (30) days following the Commencement Date, Landlord and Tenant shall again conduct a walk-through inspection to determine if any remaining punch-list items require correction, and Landlord shall cause all such corrective work to be undertaken and completed promptly thereafter. If, thereafter, Landlord fails to diligently pursue completion of the Punchlist items with due diligence, and such failure continues for five (5) days after notice from Tenant, Tenant may complete such items and offset the reasonable cost thereof against Base Rent and Additional Rent. (d) Tenant shall not be liable to Landlord for the payment of Base Rent, Additional Rent (as hereinafter defined) or any other amount to be paid by Tenant under this Lease (except as specifically provided elsewhere in this Lease) until the Commencement Date. The failure of Tenant to take possession of or to occupy the Demised Premises on or after the Commencement Date shall not serve to relieve Tenant of its obligations or delay Tenant's obligation to pay Rent, Additional Rent, or any other amount to be paid by Tenant to Landlord under this Lease. (e) If the Commencement Date has not occurred by the Target Commencement Date, as such Target Commencement Date may be extended pursuant to Section 2.5, below) Landlord shall not be liable for any damages caused thereby, except as provided in Section 2.5, below, and this Lease shall remain in full force, except as provided in Section 2.5 below. 2.5 Delay in Substantial Completion. Landlord shall diligently proceed, in ------------------------------- accordance with the Project Schedule, with the construction of the Improvements and complete the same and deliver possession thereof to Tenant on the Target Commencement Date, provided, however, to the extent (i) a Tenant-Caused Delay, or (ii) a Force Majeure (as defined below), results in a delay in Substantial Completion of the Improvements, the Target Commencement Date shall be extended for the amount of time the Substantial Completion of the Improvements is delayed thereby. "Force Majeure" shall be defined as any factor or condition which is outside the control of either Tenant or Landlord and for which neither could have reasonably been anticipated or expected to plan, including, without limitation, (i) unusually inclement weather, or inclement weather which occurs at unusual times, (ii) other acts of God, (iii) labor disputes, (iv) casualties, (v) embargo, (vi) governmental restrictions, (vii) shortages of fuel, labor, or building materials, (viii) civil unrest, (ix) action or non-action of public utilities, or of local, state or federal governments which delay the Substantial Completion of the Demised Premises, and (x) action or non-action of local, state or federal governments which prevent, prohibit or stop construction of the Demised Premises. Notwithstanding the foregoing, (A) those events described in subsections (iii), (v), (vi), (vii), (ix) and (x) of the preceding sentence will constitute 9 Force Majeure events only if they are generally applicable to the construction industry in San Diego, and (B) no Force Majeure event, or any combination thereof, will result in a delay in the Target Commencement Date for more than thirty (30) days, other than those described in subsections (ii), (viii) and (x) of the preceding sentence. Landlord shall give written notice to Tenant of the estimated number of days of delay due to Force Majeure within two (2) business days after Landlord learns of such delay. If Landlord fails to timely notify Tenant of an event which would otherwise be a delay due to Force Majeure, the Force Majeure delay shall not commence until such notice is delivered. 2.6 Liquidated Damages for Delay in Substantial Completion. If the ------------------------------------------------------ Commencement Date has not occurred (or been deemed to have occurred) by the Target Commencement Date, as it may be adjusted as described in Sections 1.1 or 2.4, above, then Landlord shall pay Tenant liquidated damages of Two Thousand Five Hundred Dollars ($2,500.00) per day for each day the Commencement Date is delayed beyond the Target Commencement Date (as adjusted pursuant to Section 2.4, above) for up to six (6) months after the Target Commencement Date (as adjusted pursuant to Section 2.4, above). Such liquidated damages shall be paid within thirty (30) days after the end of each month of delay beyond the Target Commencement Date. In addition to Tenant's rights to such liquidated damages, Tenant shall have the right to terminate this Lease if the delay in the Commencement Date beyond the Target Commencement Date (as adjusted pursuant to Section 2.4, above) exceeds six (6) months in length. If Tenant elects not to terminate this Lease at that time, (i) Landlord's liability for such delay shall be limited to the liquidated damages already paid or accrued, (ii) Landlord shall not be liable for any additional liquidated damages, and (iii) Landlord shall have no liability for damages related to the additional delay unless such delay is caused by Landlord's intentional misconduct. If Tenant elects not to terminate this Lease at the end of such six (6) month period, Landlord shall endeavor to achieve Substantial Completion of the Demised Premises with due diligence, provided Tenant may terminate the Lease at any time thereafter, which termination shall be effective ninety (90) days following delivery by Tenant to Landlord of a written notice of such termination, unless Substantial Completion and the Commencement Date occurs within such ninety (90) day period, in which case the termination notice shall be deemed withdrawn and of no further force or effect. If the Commencement Date has not occurred (or been deemed to have occurred) by one (1) year after the Target Commencement Date (as that date may be adjusted pursuant to Section 2.4, above), either Tenant or Landlord provided that Landlord may only so terminate this Lease if the delay is not within Landlord's reasonable control), upon written notice to the other, may terminate the Lease. If Landlord fails to timely pay Tenant the liquidated damages, Tenant may, in addition to its other rights and remedies, offset the amount thereof against any rent or other amount due hereunder to Landlord. LANDLORD AND TENANT AGREE THAT TENANT'S ACTUAL DAMAGES IN THE EVENT OF A DELAY IN THE COMMENCEMENT DATE BEYOND THE TARGET COMMENCEMENT DATE (AS ADJUSTED PURSUANT TO SECTION 2.4, ABOVE), WOULD BE EXTREMELY DIFFICULT OR IMPRACTICABLE TO DETERMINE AND THAT THE AMOUNTS DESIGNATED ABOVE AS LIQUIDATED DAMAGES PAYABLE BY LANDLORD TO TENANT IN SUCH EVENTS ARE EACH REASONABLE AMOUNTS TO BE SET AS 10 DAMAGES FOR SUCH EVENTS UNDER THE CIRCUMSTANCES EXISTING AT THE TIME THIS LEASE HAS BEEN ENTERED INTO. IN CONSIDERATION OF THE PAYMENT OF LIQUIDATED DAMAGES, TENANT SHALL BE DEEMED TO HAVE WAIVED ALL OTHER CLAIMS FOR DAMAGES OR RELIEF AT LAW OR IN EQUITY DUE TO SUCH DELAY INCLUDING ANY RIGHTS TO SPECIFIC PERFORMANCE TENANT MAY OTHERWISE HAVE. Tenant: /s/ [SIGNATURE ILLEGIBLE] Landlord: [SIGNATURE ILLEGIBLE] --------------------------- ---------------------- 2.7 Building Permit for the Improvements. Landlord shall be responsible ------------------------------------ (at its sole cost and expense) for obtaining from any relevant and jurisdictional governmental authority necessary (generally an "Authority"), all governmental approvals including a building permit for the construction of the Improvements ("Building Permit"). If a change to the Plans and Specifications or Approved Working Drawings is required by the Authority, such change shall be made to the Plans and Specifications or Approved Working Drawings by Landlord. Tenant shall not unreasonably withhold its consent to any such change. 2.8 Construction Warranties. Landlord shall obtain the manufacturer's ----------------------- warranties for the elements or systems which are part of the Demised Premises and which are customarily given by such manufacturers without additional cost to Landlord and warranties and guaranties from the contractors and subcontractors with respect to the Improvements and which are customarily given by such contractors and subcontractors without additional cost to Landlord. Landlord shall assign to Tenant (or, should Tenant not be legally capable of doing so itself, at Tenant's expense, prosecute on Tenant's behalf), on a non-exclusive basis, all statutory and contractual warranties and guaranties to which Landlord is entitled in connection with the Demised Premises, express or implied, including, without limitation the warranties arising under any construction contract between Landlord and Landlord's contractors and/or subcontractors involved in the construction of the Demised Premises. Other than the assignment to Tenant of such warranties, or as otherwise specifically provided in this Lease, Landlord shall have no obligation or responsibility to Tenant, or its successors, with respect to any condition of the Improvements. Landlord, at no cost or expense to Landlord, shall cooperate with Tenant in the enforcement by Tenant, at Tenant's sole cost and expense, of any such warranties or guaranties. 2.9 Condition of Demised Premises: Limited Warranty. Except as ----------------------------------------------- specifically provided in this Section 2.9, Landlord makes no warranties or representations with regard to the Demised Premises, or any portion thereof, and Tenant shall accept the Demised Premises in the condition in which they are delivered on the Commencement Date, provided that (i) the Demised Premises shall be constructed in (A) conformance with the Plans and Specifications and Approved Working Drawings, and (B) conformance with all Applicable Land Use Laws and Restrictions then in effect and (ii) for the Term of this Lease, the Improvements shall be free of latent defects in design and construction of the Demised Premises, including, without limitation, the drainage of surface water runoff from adjacent properties, and Landlord shall be responsible, at Landlord's sole cost and expense, for the prompt and diligent repair of any such latent defects which manifest themselves during the Term. 11 2.10 Tenant Improvement Allowance: Tenant Responsibility. --------------------------------------------------- (a) Landlord shall be responsible for constructing, entirely at its expense, subject to the provisions of Section 3.3 of this Lease, the Shell Improvements (as that term is defined below). The Shell Improvements shall consist of (and the term "Shell Improvements" shall be used in this Lease to mean) those components of the Demised Premises which are identified as elements of the basic Building shell or specifically as "Shell Improvements," land, land preparation and landscaping or as otherwise mutually identified by Landlord and Tenant, in writing, concurrent with or subsequent to the execution of this Lease, including all utilities (including fiber optic cabling) stubbed to the Building. The Base Rent specified in this Lease includes Landlord's obligation to complete and deliver to Tenant the Shell Improvements in accordance with this Lease. The cost of constructing the Shell Improvements are referred to in this Lease as the "Shell Improvements Cost" Shell Improvements Cost shall include a developer fee of $3.00 per rentable square foot, payable to Landlord, or an affiliate (with no direct obligation to Tenant to pay such fee). The Shell Improvements shall result in the construction by Landlord of a two (2) story research and development and office concrete tilt-up building on a "cold shell" basis. In addition, the Shell Improvements shall include, at Landlord's expense, including: (i) Water and sewer services to the Building and power of 3,000 amps of 277/480, 3 phases; (ii) One (1) grade level loading door, (iii) Column spacing of forty-eight (48) feet; (iv) Exterior glazing wrapping around both floors of the Building consistent with the Adjacent Building (i.e., the AMCC building at 6290 Sequence Drive); (v) Approximately 4.0 parking spaces per 1,000 rentable square feet of Building area to be paved and lighted based upon the site plan which is attached to this Lease as part of Exhibit "B;" (vi) A distributed fire sprinkler system (excluding dropping of heads); (vii) Two percent (2%) roof skylight coverage; (viii) A four (4)-ply roof; (ix) All exterior landscaping and hardscaping consistent with the Adjacent Building (i.e., the AMCC building at 6290 Sequence Drive) ; (x) Second floor structure completed to code with any stairways for fire exiting, main stairway structure and a 3,000 pound elevator that complies with the Americans With Disabilities Act; (xi) One (1) trash enclosure with four (4) dumpsters; (xii) Natural gas service (two (2)-inch diameter, low- pressure) to the Building; and 12 (xiii) All other items commonly included as part of a "cold shell." The specifications defined in this Section 2.10(a) shall take precedence over the attached exhibits. The Building will be designed substantially in accordance with the attached architectural Exhibit "B," which shall incorporate all of the above items. (b) Landlord shall be responsible for constructing, subject to the provisions of this Section 2.10 and 2.11, the Tenant Improvements (as that term is defined below). The Tenant Improvements shall consist of (and the term "Tenant Improvements" shall be used in this Lease to mean) those portions of the Demised Premises which are not Shell Improvements, are identified in the final Plans and Specifications as part of the Tenant Improvements, or as otherwise mutually identified by Landlord and Tenant, in writing, concurrent with or subsequent to the execution of this Lease. (c) Landlord shall provide an allowance to be applied by Landlord towards paying the costs of designing and constructing the Tenant Improvements (the "Tenant Improvements Cost"), in the amount of Twenty-Five Dollars ($25.00) per rentable square foot of the Demised Premises, which is currently anticipated to total One Million Four Hundred Fifty Thousand Dollars ($1,450,000.00) (the "Allowance"). In the event the final square footage of the Building is more or less than 58,000 square feet, the Allowance shall be adjusted to an amount which reflects the increase or decrease in square footage. The Allowance shall be used to pay the direct construction cost (excluding any overhead or profit to Landlord or any affiliate) of the Tenant Improvements which are paid to the Contractor (as defined below) or others performing such construction work, Tenant Improvement permits and space planning fees and reimbursables. The Allowance shall not be applied to the following items, the cost of which shall be Landlord's responsibility: (i) the cost of the Land and financing or carry costs associated with the Land; (ii) financing fees, imputed interest, costs of carry and taxes/insurance during construction; (iii) brokerage commissions or developer fees; or (iv) architectural or engineering fees and reimbursables for the Shell Improvements. The Allowance shall not be applied to the following items, the cost of which shall be Tenant's responsibility: (i) building signage, (ii) security systems, (iii) specialized cabling; or (iv) Tenant's moving expenses. (d) In the event that the Allowance is insufficient in amount to pay the Tenant Improvements Costs, Tenant shall pay such excess as Tenant's Share pursuant to the procedure set forth in Section 2.11 below. (e) Upon execution of this Lease and again, upon submittal of the Tenant Improvements Schematic Design Drawings, the Tenant Improvements Design Development Drawings, and the Tenant Improvements Construction Drawings, Landlord shall also provide Tenant with an estimate of the Tenant Improvements Cost. No later than ninety (90) days prior to the commencement of construction of the Improvements, Landlord shall prepare and deliver to Tenant a Tenant Improvements Budget Estimate ("Tenant Improvements Budget Estimate"), which Landlord and Tenant shall then mutually finalize prior to the commencement of construction. Within fifteen (15) days prior to the commencement of construction of the Improvements, and no less than monthly thereafter during the course of construction of the Improvements, Landlord shall deliver to Tenant a revised Tenant Improvements Budget 13 Estimate, whether reflecting an increase or a decrease in the Tenant Improvement Costs, together with an explanation in reasonable detail of the cause of such cost change and an accounting of actual costs to date ("Periodic Cost Report"). Additionally, prior to any Tenant Change Order being effective, Landlord will provide Tenant with an estimate of the cost of said Tenant Change Order and obtain Tenant's prior approval thereof, which Tenant shall grant or withhold within two (2) business days following receipt of such estimated Tenant Change Order cost. In addition, Landlord shall deliver a Periodic Cost Report to Tenant no later than five (5) business days after Landlord learns of a material change affecting the Tenant Improvements Budget Estimate. Similarly, Landlord shall provide Tenant with an estimate of the cost of any Tenant-Caused Delay claimed by Landlord as soon as reasonably possible after Landlord learns of the Tenant- Caused Delay. 2.11 Responsibility for Excess Shell Costs and Excess Tenant Improvement ------------------------------------------------------------------- Costs. - ----- (a) The Base Rent has been determined based on the assumption that the final Plans and Specifications will not be altered as a result of Tenant Change Orders, and that no costs will be incurred in connection with the construction of the Demised Premises resulting from Tenant-Caused Delays. (b) Tenant shall be directly responsible, as additional rent, for any increases in the cost to Landlord of the construction of the Shell Improvements (including financing costs), (A) subject to Section 2.10(e) above, resulting directly from Tenant Change Orders and which have not been offset by savings resulting directly from Tenant Change Orders, or (B) subject to Section 2.10(e) above, resulting directly from Tenant-Caused Delays ("Excess Shell Costs"). Each Periodic Cost Report and the Final Cost Report (as defined below), shall include notification of any Excess Shell Costs and shall include reasonably detailed documentation supporting the determination of such Excess Shell Cost. Tenant shall pay the Excess Shell Costs to Landlord (i) upon commencement of construction, if Landlord has notified Tenant of Excess Shell Costs prior thereto, (ii) if later, within ten (10) business days after notification to Tenant by Landlord of any Excess Shell Costs in a Periodic Cost Notice, (iii) within ten (10) business days after the Final Cost Report, if such report includes Excess Shell Costs which have not been previously paid to Landlord, or (iv) as otherwise required by Landlord's construction lender, but in no event prior to the construction of the Shell Improvements. (c) Tenant shall be responsible, as additional rent, for any Tenant Improvements Costs to the extent they exceed the Allowance ("Excess Tenant Improvements Costs"). Tenant shall pay the Excess Tenant Improvements Costs to Landlord upon the earlier to occur of (i) funding of Landlord's construction loan or commencement of construction, whichever is later, if the then applicable Tenant Improvements Budget Estimate reflects that the Allowance will be insufficient to fully fund the Tenant Improvements Costs anticipated to be incurred as of that date, (ii) within ten (10) business days after notification to Tenant by Landlord that it has determined, in a periodic review of the Tenant Improvements Costs during construction of the Tenant Improvements, pursuant to Subsection 2.10(e), above, that the Allowance will be insufficient to cover all the Tenant Improvements Costs anticipated to be incurred, or (iii) within ten (10) business days after Landlord has notified Tenant that it has made a final determination, pursuant to subsection (g), below, that the Allowance is insufficient to 14 cover all the Tenant Improvements Costs which have been incurred, or (iv) as otherwise required by Landlord's construction lender, but in no event prior to commencement of construction of the Tenant Improvements. (d) Landlord shall deposit the funds paid to it by Tenant under subsections (b) or (c) of this Section 2.11 in its construction loan control account with the construction Lender (as that term is defined in Section 3.4 hereof) and those funds shall be applied to the cost of construction of the Shell Improvements and Tenant Improvements as provided under Landlord's construction loan. (e) Within ninety (90) days following Substantial Completion of the Improvements, Landlord shall calculate, and report to Tenant, in writing, (i) the final Shell Improvements Cost and the final Tenant Improvements Cost, and (ii) the amount of any Excess Shell Costs or Excess Tenant Improvements Costs (the "Final Cost Report"). In the event that there is an amount which has not been paid by Tenant at the time of such final determination (i.e. Excess Shell Improvements Costs or Excess Tenant Improvements Costs) then Tenant shall pay such additional amount to Landlord within ten (10) business days following such final determination. (f) If the Final Cost Report, shows that the amounts previously paid by Tenant under subsections (b) and (c) of this Section 2.11 exceeded the final amount of Excess Shell Improvements Costs or Excess Tenant Improvements Costs, as the case may be (i.e. Tenant has paid to Landlord more than was ultimately needed), then such overpayment shall be refunded to Tenant within ten (10) business days following delivery to Tenant of such Final Cost Report. In any event, whether additional amounts are owed or a refund is due, within ten (10) business days following the delivery to Tenant of the Final Cost Report, Landlord shall pay to Tenant any amount equal to the product of (i) amount paid to Landlord by Tenant under subsections (b)(i) and (c)(i) of this Section 2.11, (ii) multiplied by five percent (.05), (iii) divided by two (2). (g) All of the Periodic Cost Reports and the Final Cost Report shall include reasonably detailed supporting explanations and documentation. Landlord shall maintain accurate and complete books and records of all Shell Improvement Costs and Tenant Improvement Costs. Tenant shall have the right to inspect, audit and copy such books and records at Landlord's office in San Diego, California. 2.12 Contractor. Reno Contracting, Inc., a California corporation ---------- ("Reno") shall act as the general contractor ("Contractor"), for the construction of the Shell Improvements and the Tenant Improvements. Notwithstanding the foregoing, in the event that Reno's quality of construction and professional reputation in the community has, in the reasonable opinion of Landlord and Tenant, materially deteriorated between the date of this Lease and the time the construction contract is to be entered into, a different general contractor shall be selected for the construction of the Shell Improvements and Tenant's Improvements which general contractor shall be subject to the reasonable approval of both Landlord and Tenant. Contractor's contract shall be on a "cost-plus" basis, with Contractor entitled to (i) reimbursement for direct insurance expenses and direct "G&A" or "General Conditions" expenses, as provided in the Estimated Budget and (ii) a profit of no more than five percent (5%). Landlord shall cause the Contractor 15 to bid each component of the Improvements to at least three (3) qualified subcontractors and, unless Landlord and Tenant agree otherwise, shall select the lowest qualified bidder. Tenant shall have the right to approve the list of subcontractors to be solicited for bids and to designate subcontractors to participate in the bidding process. Tenant shall also have the right to select subcontractors to perform components of the Improvements if Tenant agrees to pay any Excess Shell Costs or Excess Tenant Improvements Costs attributable to such election, provided such subcontractor is reasonably acceptable to Landlord and Contractor. In no event shall the profit and overhead percentages for the Tenant Improvements exceed the percentages paid by Landlord to Contractor for the Shell Improvements. 2.13 Tenant's Entry Into the Building Prior to Substantial Completion. ---------------------------------------------------------------- Provided that Tenant and its agents, employees and contractors do not materially interfere with the Contractor's work on the Demised Premises (any such interference constituting a basis for a Tenant-Caused Delay), Landlord shall allow and shall require the Contractor to allow, Tenant and Tenant's agents, employees and contractors access to the Building prior to Substantial Completion of the Improvements so that Tenant may install its furniture, trade fixtures, data and telecommunications wiring and equipment, photocopy equipment and other business equipment in the Building. Prior to Tenant's entry into the Building as permitted by the terms of this Section 2.13, Tenant shall arrange a schedule with Landlord and the Contractor in order to coordinate the timing of Tenant's entry with the actions of the Contractor. Prior to any such entry, Tenant or its agents and contractors (as applicable) shall provide evidence of insurance reasonably satisfactory to Landlord. Tenant acknowledges that Section 20.3 below shall apply with respect to any and all claims which may arise as a result of the entry by Tenant, its agents, employees and contractors on the Demised Premises in accordance with this Section 2.13. Tenant's responsibilities under Section 7.1 of this Lease shall commence upon such early occupancy as opposed to the Commencement Date. ARTICLE III RENT 3.1 Base Rent. In consideration of the lease of the Demised Premises --------- evidenced by this Lease, Tenant covenants to pay Landlord, without previous demand therefor and without any right of set-off or deduction whatsoever except as expressly provided in this Lease, at the office of Landlord at: Kilroy Realty, L.P. Kilroy Realty Corporation 2250 East Imperial Highway, Suite 1200 El Segundo, California 90245 Attention: Chief Financial Officer or at such other place as Landlord may from time to time designate in writing, a rental for the Initial Term of this Lease as hereinafter set forth, payable monthly, in advance, in equal installments as hereinafter set forth, with the first payment due on the Commencement Date, and 16 continuing on the first day of each month thereafter for the succeeding months during the balance of the Term ("Base Rent"):
Period Annual Base Rent Monthly Base Rent ------ ---------------- ----------------- Months 1-24 $1,050,960 $ 87,580 Months 25-48 $1,114,020 $ 92,835 Months 49-72 $1,180,860 $ 98,405 Months 73-96 $1,251,708 $104,309 Months 97-120 $1,326,816 $110,568
The Base Rent scheduled above is based on the assumption that the final rentable square footage of the Building is 58,000. In the event the rentable square footage of the Building upon Substantial Completion is more or less than 58,000, then the initial Base Rent shall be increased or decreased, as appropriate, to an amount equal to the product of(i) $1.51 per rentable square foot per month, and (ii) the final rentable square footage of the Building. Such adjusted initial Base Rent shall be increased every twenty-four (24) months by a factor of six percent (6%). In the event the Commencement Date occurs on other than the first (1st) day of a month, the amount of the first and last monthly payment of Base Rent shall be apportioned to account for the fact that the last month of the Initial Term shall be less than a full calendar month. In the event that the Commencement Date occurs before the Target Commencement Date, the initial Base Rent shall be decreased by an amount equal to the produce of(i) $.01, (ii) the number of rentable square feet in the Demised Premises, and (iii) the number of thirty (30) day periods the Commencement Date occurs prior to May 1,2001; provided, however, that in no event shall the initial Base Rent for the Demised Premises be less than Seventy Five Thousand Four Hundred Dollars ($75,400.00) per month. Such adjusted initial Base Rent shall be increased every twenty-four (24) months by a factor of six percent (6%) 3.2 Base Rent During Option Term. The Base Rent during the Option Term ---------------------------- ("Option Term Base Rent") shall be an amount equal to the greater of (i) the then fair market rental value of the Demised Premises ("Fair Market Rental Value"), as stated on a monthly basis and determined pursuant to this Section 3.2, or (ii) the Base Rent during the last month of the Initial Term, multiplied by 1.06. The initial Option Term Base Rent during each Option Term shall thereafter be increased in accordance with market rate increases, if any. Upon receipt by Landlord of Tenant's Extension Notice under Section 1.2, above, Landlord and Tenant shall meet in an effort to negotiate, in good faith, the Option Term Base Rent which shall become effective as of the first day of the Option Term ("Option Term Commencement Date"). If Landlord and Tenant have not agreed upon the Option Term Base Rent (which Option Term Base Rent shall, for purposes of this Section 3.2 , include market rate increases) within thirty (30) days after the delivery of Tenant's Extension Notice, the Option Term Base Rent shall be determined as follows: (a) Landlord and Tenant shall attempt to agree in good faith upon a single appraiser not later than thirty-five (35) days after delivery of Tenant's Extension Notice. If 17 Landlord and Tenant are unable to agree upon a single appraiser within such time period, then Landlord and Tenant shall each appoint one appraiser not later than five (5) days after the deadline for selecting a single appraiser. Landlord and Tenant shall each give written notice to the other as to the name of the appraiser it has selected, as soon as the selection is made. Within ten (10) days thereafter, the two appointed appraisers shall appoint a third appraiser. All appraisers shall be independent from, and disinterested in, both Landlord and Tenant. (b) The only task which the appraiser(s) shall perform shall be forming and reporting to Landlord and Tenant an opinion of the Fair Market Rental Value of the Demised Premises for use in determining the Option Term Base Rent. (c) If either Landlord or Tenant fails to appoint its appraiser within the prescribed time period, the single appraiser appointed shall determine the Fair Market Rental Value of the Demised Premises. If both parties fail to appoint appraisers within the prescribed time periods, then the first appraiser thereafter selected by a party shall determine the Fair Market Rental Value of the Demised Premises. (d) Each party shall bear the cost of its own appraiser and the parties shall share equally the cost of any single or third appraiser, if applicable. All appraisers so designated herein shall have at least five (5) years' experience in the appraisal of commercial properties similar to the Demised Premises in San Diego County, California and shall be members of professional organizations such as MAI or its equivalent. (e) For the purpose of such appraisal and this subsection (d), the term "Fair Market Rental Value" shall mean the price that a ready and willing single tenant would pay, as of the Option Term Commencement Date, as annual rent to a ready and willing landlord of a property comparable to the Demised Premises on the terms of this Lease, if such property were exposed for lease on the open market for a reasonable period of time. A "comparable property" shall mean a research and development and office facility located in the Sorrento Mesa area of the City of San Diego, California (the "Market Area"), with improvements similar in age and character to the Demised Premises, which has been improved with the tenant improvements comparable to those constructed in the Demised Premises; provided, however, that the appraisal shall disregard the value of Tenant's and any other improvements paid for by Tenant (including Tenant Improvements but only to the extent such Tenant Improvements were paid for by Tenant as Excess Tenant Improvement Costs). The appraiser shall give appropriate consideration to all relevant factors, including, without limitation, (i) the fact that this Lease is a "triple net" lease, (ii) rental concessions and tenant improvement allowances generally being offered by landlords of comparable properties, (iii) the age of the Improvements, (iv) the condition of the Demised Premises on the assumption that Tenant has complied with its obligations to maintain and repair the Demised Premises, (v) rental market conditions then in existence, (vi) whether Landlord will or will not be required to pay a real estate brokerage commission in connection with Tenant's exercise of the Extension Option, and (vii) the fact that the Tenant will be accepting the Demised Premises in an "As-Is" condition. (f) If a single appraiser is chosen, then such appraiser shall determine the Fair Market Rental Value of the 18 Demised Premises shall be the arithmetic average of the two (2) appraisals which are closest in amount, and the third appraisal shall be disregarded. (g) Landlord and Tenant shall instruct the appraiser(s), in writing, to complete their written determination of the Fair Market Rental Value not later than thirty (30) days after their selection. If the Fair Market Rental Value has not been determined by such date, then the Fair Market Rental Value shall be determined thereafter, and if it has not been determined by the Option Term Commencement Date, then Tenant shall continue to pay Landlord monthly installments of Annual Rent in the amount applicable to the Demised Premises immediately prior to the Option Term Commencement Date until the Fair Market Rental Value is determined. In no event shall the Rent be less than the Rent in the last year of the Lease Term increased by six percent (6%), and adjusted based on market rate increases thereafter. When the Fair Market Rental Value of the Demised Premises is determined, Landlord shall deliver notice thereof to Tenant, and Tenant shall pay to Landlord, within ten (10) days after receipt of such notice, the difference between the monthly installments of Base Rent actually paid by Tenant to Landlord subsequent to the Option Term Commencement Date and the new monthly installments of Base Rent which are determined to have been actually owing during such period in accordance with this Section 3.2. (h) On or before the date which is fifteen (15) months prior to the expiration of the Initial Term or the first Option Term, as the case may be, Tenant may deliver to Landlord a notice that it intends to exercise an Extension Option provided in Section 1.2 hereof (a "Pre-Exercise Notice"). If a Pre- Exercise Notice is timely delivered by Tenant, the provisions of this Section 3.2 regarding the determination of the Option Term Base Rent shall be implemented as if Tenant had delivered the Extension Notice pursuant to Section 1.2. If the Option Term Base Rent has not been determined in accordance with this Section 3.2 on or before the date which is three hundred sixty (360) days prior to the end of the Initial Term or the first Option Term, as the case may be, then when it is thereafter determined, Tenant shall have the option, to be exercised within two (2) business days after notice of such determination is given to Tenant, of (i) delivering to Landlord a written notice rescinding Tenant's Pre-Exercise Notice (i.e. electing not to extend the Lease), in which case the Initial Term or the first Option Term, as the case may be, shall be extended to the date which is three hundred sixty (360) days after the date such rescission notice is delivered, or (ii) delivering its Extension Notice, in which case such Extension Notice shall be deemed timely delivered in accordance with Section 1.2. If the Option Term Base Rent has been determined in accordance with this Section 3.2 prior to the date which is three hundred sixty (360) days prior to the end of the Initial Term or the first Option Term, as the case may be, then provisions of this subsection (h) shall not apply. If the provisions of this subsection (h) apply, and Tenant fails to deliver either a rescission notice or the Extension Notice, Tenant shall be deemed to have rescinded the Pre-Exercise Notice and not to have timely delivered the Extension Notice. 3.3 Additional Obligations: Additional Rent. The Base Rent shall be --------------------------------------- absolutely "net" to Landlord so that this Lease shall yield to Landlord the Base Rent specified in Section 3.1 and that all Impositions, insurance premiums, utility charges, maintenance, repair and replacement expenses, all expenses relating to compliance with all present or future applicable governmental laws, rules and regulations, and all other costs, fees, charges, expenses, reimbursements and 19 obligations of every kind and nature whatsoever relating to the Demised Premises which may arise or become due during the term or by reason of events occurring during the term of this Lease (all such items being sometimes referred to as "Additional Obligations") shall be paid or discharged by Tenant, except to the extent they are expressly the responsibility of Landlord under this Lease. To the extent the following are the obligations of Tenant under this Lease, Tenant hereby agrees to indemnify, defend and save Landlord harmless from and against such Impositions, insurance premiums, utility charges, maintenance, repair and replacement expenses, all expenses relating to compliance with all present and future governmental laws, rules and regulations becoming effective during the Term, and all other costs, fees, charges, expenses, reimbursements and obligations referred to above. Any amounts referred to in this Lease as additional rent (including, without limitation, the Additional Obligations) are referred to collectively as "Additional Rent." 3.4 Delinquent Rental Payments. All payments of Base Rent and Additional -------------------------- Rent shall be payable without previous demand therefor and without any right of set-off or deduction whatsoever (except as expressly provided in this Lease), and in case of nonpayment of any item of Additional Rent by Tenant when the same is due, Landlord shall have, in addition to all its other rights and remedies, all of the rights and remedies available to Landlord under the provisions of this Lease or by law in the case of nonpayment of Base Rent. The performance and observance by Tenant of all the terms, covenants, conditions and agreements to be performed or observed by Tenant hereunder shall be performed and observed by Tenant at Tenant's sole cost and expense. Any installment of Base Rent or Additional Rent or any other charges payable by Tenant under the provisions hereof which shall not be paid within five (5) days after they are due shall, (i) be subject to a late charge of five percent (5%) of the amount due and not timely paid, and (ii) bear interest from the date when such payment was due at the lesser of(A) the default rate of interest under Landlord's most senior debt obligation encumbering the Demised Premises, or (B) an annual rate of eighteen percent (18%) per annum, but in no event in excess of the maximum lawful rate permitted to be charged by Landlord against Tenant. Said rate of interest is sometimes hereinafter referred to as the "Maximum Rate of Interest." Notwithstanding the foregoing provisions of this Section 3.4, if any mortgagee under any mortgage, beneficiary under any deed of trust, or ground lessor under any ground lease, which encumbers the Land (a "Lender"), imposes fees, charges, penalties or interest on Landlord for late payments under such instrument which fees, charges, penalties or interest are less in amount than those described in this Section 3.4, Landlord will not impose any late payment charge or interest which is greater than the amounts charged by such Lender. ARTICLE IV USE OF DEMISED PREMISES 4.1 Permitted Use. Tenant intends to use the Demised Premises primarily ------------- as a research and development and office facility and related lawful purposes, and they shall be used for no other purpose without first securing the prior written consent of Landlord, which consent shall not be unreasonably withheld. Tenant shall not use or occupy the same, or knowingly permit them to be used or occupied, contrary to any statute, rule, order, ordinance, requirement or regulation applicable thereto, or in any manner which would violate any certificate of occupancy 20 affecting the same, or which would make void or voidable any insurance then in force with respect thereto (provided Tenant has received a copy of the policy) or which would make it impossible to obtain fire or other insurance thereon required to be furnished hereunder by Tenant, or which would cause structural injury to the improvements, or which would constitute a public or private nuisance or waste, and Tenant agrees that it will promptly, upon discovery of any such use, take all necessary steps to compel the discontinuance of such use. 4.2 Preservation of Demised Premises. Tenant shall not use, or permit the -------------------------------- Demised Premises, or any portion thereof, to be used by Tenant, any third party or the public in such manner as might reasonably tend to impair Landlord's title to the Demised Premises, or any portion thereof, or in such manner as might reasonably make possible a claim or claims of adverse usage or adverse possession by the public, as such, or third persons, or of implied dedication of the Demised Premises, or any portion thereof. Nothing contained in this Lease, and no action or inaction by Landlord, shall be deemed or construed to mean that Landlord has granted to Tenant any right, power or permission to do any act or make any agreement that may create, or give rise to or be the foundation for any right, title, interest, lien, charge or other encumbrance upon the estate of Landlord in the Demised Premises other than as expressly set forth in this Lease. 4.3 Hazardous Substances. -------------------- (a) Subject to Section 4.3(f), Tenant shall at all times and in all respects comply with all federal, state and local laws, ordinances and regulations ("Hazardous Materials Laws") relating to the industrial hygiene, environmental protection or the use, analysis, generation, manufacture, storage, presence, disposal or transportation of any oil, flammable explosives, asbestos, urea formaldehyde, polychlorinated biphenyls, radioactive materials or waste, or other hazardous, toxic, contaminated or polluting materials, substances or wastes, including without limitation any "hazardous substances," "hazardous wastes," "hazardous materials" or toxic substances" under any such laws, ordinances or regulations (collectively, "Hazardous Materials") at the Demised Premises. (b) Subject to Section 4.3(f), Tenant shall at its own expense procure (other than a certificate of occupancy), maintain in effect and comply with all conditions of any and all permits, licenses and other governmental and regulatory approvals required for Tenant's use of the Demised Premises, including, without limitation, discharge of (appropriately treated) materials or waste into or through any sanitary sewer system serving the Demised Premises. Tenant shall in all respects handle, treat, deal with and manage any and all Hazardous Materials in, on, under or about the Demised Premises in complete conformity with all applicable Hazardous Materials Laws and prudent industry practices regarding the management of such Hazardous Materials. Subject to Section 4.3(f), all reporting obligations imposed by Hazardous Materials Laws are solely the responsibility of Tenant. Upon expiration or earlier termination of this Lease and subject to Section 4.3(f), Tenant shall cause all Hazardous Waste Materials (as defined in 22 CCR 66261.3) to be removed from the Demised Premises and transported for use, storage or disposal in accordance with and in complete compliance with all applicable Hazardous Materials Laws. Tenant shall not take any remedial action in response to the presence of any Hazardous Materials in, on, about or under the Demised Premises or in any Improvements 21 situated on the Land other than in the normal course of Tenant's business operations as now contemplated in accordance with all Hazardous Materials Laws or as necessitated by emergency considerations in accordance with all applicable Hazardous Materials Laws, nor enter into any settlement agreement, consent decree or other compromise in respect to any claims relating to any Hazardous Materials in any way connected with the Demised Premises or the Improvements on the Land without first notifying Landlord of Tenant's intention to do so and affording Landlord ample opportunity to appear, intervene or otherwise appropriately assert and protect Landlord's interest with respect thereto. In addition, at Landlord's request, at the expiration of the term of this Lease, Tenant shall remove all tanks or fixtures which were placed on the Demised Premises during the term of this Lease and which contain, have contained or are contaminated with Hazardous Waste Materials. (c) Tenant shall immediately notify Landlord in writing of (i) any enforcement, cleanup, removal or other governmental or regulatory action instituted, completed or threatened pursuant to any Hazardous Materials Laws; (ii) any claim made or threatened by any person against Landlord or the Demised Premises relating to damage, contribution, cost recovery, compensation, loss or injury resulting from or claimed to result from any Hazardous Materials; and (iii) any non-routine reports made to any environmental agency arising out of or in connection with any Hazardous Materials in, on or about the Demised Premises or with respect to any Hazardous Materials removed from the Demised Premises, including any complaints, notices, warnings, reports or asserted violations in connection therewith. Tenant shall also provide to Landlord, as promptly as possible, and in any event within five (5) business days after Tenant first receives or sends the same, copies of all claims, reports, complaints, notices, warnings or asserted violations from any governmental agency of any Hazardous Materials Laws relating in any way to the Demised Premises or Tenant's use thereof. Upon written request of Landlord (to enable Landlord to defend itself from any claim or charge related to any Hazardous Materials Laws), Tenant shall promptly deliver to Landlord notices of hazardous waste manifests reflecting the legal and proper disposal of all such Hazardous Materials removed from the Demised Premises. Subject to Section 4.3(f), all such manifests shall list the Tenant or its agent as a responsible party and in no way shall attribute responsibility for any such Hazardous Materials to Landlord. (d) Subject to Section 4.3(f), Tenant shall indemnify, defend (with counsel reasonably acceptable to Landlord), protect and hold Landlord and each of Landlord's officers, directors, partners, shareholders, affiliates, employees, agents, attorneys, successors and assigns free and harmless from and against any and all claims, liabilities, damages, costs, penalties, forfeitures, losses or expenses (including attorneys' fees) for death or injury to any person or damage to any property whatsoever (including water tables and atmosphere) to the extent arising or resulting in whole or in part, directly or indirectly, from the presence or discharge of Hazardous Materials in, on, under, upon or from the Demised Premises or the Improvements located thereon or from the transportation or disposal of Hazardous Materials to or from the Demised Premises to the extent brought onto the Demised Premises by Tenant whether knowingly or unknowingly, the standard herein being one of strict liability. For purposes of the indemnity provided herein, any act or omission of Tenant or its agents, employees, contractors or subcontractors (whether or not they are negligent, intentional, willful or unlawful) shall be strictly attributable to Tenant. Subject to Section 4.3(f), Tenant's obligations hereunder shall 22 include, without limitation, and whether foreseeable or unforeseeable, all costs of any required or necessary repairs, clean-up or detoxification or decontamination of the Demised Premises or the Improvements, and the presence and implementation of any closure, remedial action or other required plans in connection therewith, and shall survive the expiration of or early termination of the term of this Lease. For purposes of the indemnity provided herein, any acts or omissions of Tenant or its employees, agents, customers, sublessees, assignees, contractors or subcontractors (whether or not they are negligent, intentional, willful or unlawful) shall be strictly attributable to Tenant. (e) Landlord may, at its expense, commission an environmental audit of the Demised Premises at any time after prior written notice thereof to Tenant; provided that such environmental audit does not unreasonably interfere with Tenant's use of the Demised Premises, or any portion thereof, and provided further that Landlord indemnifies, defends and holds harmless Tenant and its officers, agents, employees and customers from and against any loss, liabilities or damages to Tenant's machinery, equipment, fixtures and personal property, and all liability, loss or damage arising from an injury to the property of Tenant, or its officers, agents, employees or customers, and any death or personal injury to any person or persons to the extent arising out of such environmental audit except for liability, loss or damage caused by Tenant's gross negligence or willful misconduct. However, should Tenant breach any of its obligations set forth in this Section 4.3 in a manner that may expose Landlord to liability, and Landlord provides written notice to Tenant of the reasonable basis upon which it believes it has been exposed to liability, then Landlord shall have the right to require Tenant to undertake and submit to Landlord an environmental audit from an environmental company reasonably acceptable to Landlord, which audit shall evidence Tenant's compliance with this Section 4.3. (f) Landlord represents and warrants that as of the date of this Lease there are, and as of the Commencement Date there will be, no Hazardous Materials located on the Demised Premises, other than an as required for the normal operation of the Demised Premises and in accordance with all Hazardous Materials Laws. Landlord shall indemnify, defend (with counsel reasonably acceptable to Tenant), protect and hold Tenant and each of Tenant's officers, directors, partners, shareholders, affiliates, employees, agents, attorneys, successors and assigns free and harmless from and against any and all claims, liabilities, damages, costs, penalties, forfeitures, losses or expenses (including attorneys' fees) for death or injury to any person or damage to any property whatsoever (including water tables and atmosphere) arising or resulting in whole or in part, directly or indirectly, from the presence of Hazardous Materials in, on, under, upon or from the Demised Premises or the Improvements located thereon prior to the Commencement Date, or from the transportation or disposal of Hazardous Materials to or from the Demised Premises to the extent caused by Landlord whether knowingly or unknowingly, the standard being one of strict liability. For purposes of the indemnity provided herein, any act or omission of Landlord or its agents, employees, contractors or subcontractors (whether or not they are negligent, intentional, willful or unlawful) shall be strictly attributable to Landlord. Subject to Section 4.3(f), Landlord's obligations hereunder shall include, without limitation, and whether foreseeable or unforeseeable, all costs of any required or necessary repairs, clean-up or detoxification or decontamination of the Demised Premises or the Improvements, and the 23 presence and implementation of any closure, remedial action or other required plans in connection therewith, and shall survive the expiration of or early termination of the term of this Lease. (g) The obligations of Landlord and Tenant under this Section 4.3 shall survive the expiration or earlier termination of this Lease. 4.4 Access Easement. --------------- Landlord as owner of the building adjacent to the north, and identified in Exhibit "B" as the "Existing Comstream Building," shall grant Tenant access for ingress and egress between the Building and the "Existing Comstream Building." If Landlord sells either property, Landlord will grant or reserve an easement evidencing Tenant's ingress and egress rights. ARTICLE V PAYMENT OF TAXES, ASSESSMENTS, ETC. 5.1 Payment of Impositions. ---------------------- (a) Except as provided to the contrary in this Section 5.1 below, Tenant covenants and agrees to pay during the Term of this Lease, as Additional Rent, and before any fine, penalty, interest or cost may be added thereto for the nonpayment thereof, all real estate taxes, regular or special assessments, water rates and charges, sewer rates and charges, including any sum or sums payable for present or future sewer or water capacity, (except as set forth in Section 2.6 above) charges for public utilities, street lighting, excise levies, licenses, permits, inspection fees, other governmental charges and all other charges or burdens of whatsoever kind and nature (including costs, fees and expenses of complying with any restrictive covenants to which the Land is subject as of the date of this Lease or similar agreements to which the Demised Premises are subject, incurred in the use, occupancy, ownership, operation, leasing or possession of the Demised Premises), without particularizing by any known name or by whatever name hereafter called, and whether any of the foregoing be general or special, ordinary or extraordinary, foreseen or unforeseen (all of which are sometimes herein referred to as "Impositions"), which at any time during the Term may have been or may be assessed or levied on the Demised Premises or any portion thereof or any appurtenance thereto, rents or income therefrom, and such easements or rights as may now or hereafter be appurtenant or appertain to the use of the Demised Premises. Tenant shall pay the current portions of all special (or similar) assessments which during the Term of this Lease shall be laid, assessed, levied or imposed upon or become payable or become a lien upon the Demised Premises or any portion thereof; provided, however, that if by law any special assessment is payable (without default) or, at the option of the owner, may be paid (without default) in installments (whether or not interest shall accrue on the unpaid balance of such special assessment), Tenant may (and shall only be obligated to) pay the same, in installments as the same respectively become payable and before any fine, penalty, interest or cost may be added thereto for the nonpayment of any such installment and the interest thereon. Notwithstanding the generality of the foregoing, Tenant 24 shall not be responsible (and Landlord shall pay prior to delinquency) for Impositions charged by any association which includes the Land to the extent the amount of the Impositions therefrom exceeds the amount which Tenant would have incurred had Tenant performed the work and provided the services performed or provided by the association. (b) Notwithstanding the foregoing provisions of Section 5.1(a), Tenant shall not be responsible for (and Landlord shall pay prior to delinquency) any increase in ad valorem property taxes or other taxes which might result from the sale or other transfer (deemed a change of ownership for California tax purposes) of the Demised Premises during the Term of the Lease to the extent such increase results from the fact that the assessed value of the Demised Premises exceeds the total cost (including the direct and indirect costs (including the costs of permits, fees and professional services) of the Land, Shell Improvements and Tenant Improvements) of the Demised Premises. Payment of any taxes, assessments or similar charges which are directly related to the acquisition of the Land or the construction of the Improvements or Demised Premises will be Landlord's financial responsibility. (c) Landlord shall pay all installments of special assessments (including interest accrued on the unpaid balance) which are payable for periods prior to the Commencement Date and after the termination date of the Term of this Lease. Landlord will deliver to Tenant the tax bills at least thirty (30) days prior to any delinquency date. Tenant shall pay all real estate taxes, whether heretofore or hereafter levied or assessed upon the Demised Premises or any portion thereof, which are due and payable for periods during the Term of this Lease. Landlord shall pay all real estate taxes which are payable for periods prior to the Commencement Date and after the termination date of the Term of this Lease. Provisions herein to the contrary notwithstanding, Landlord shall pay that portion of the real estate taxes and installments of special assessments due and payable in respect to the Demised Premises during the year in which the Initial Term commences and the year in which the Term ends which the number of days in said year not within the Term of this Lease bears to 365, and Tenant shall pay the balance of said current real estate taxes and current installments of special assessments during said years. 5.2 Tenant's Right to Contest Impositions. Tenant shall have the right at ------------------------------------- its own expense to contest the amount or validity, in whole or in part, of any Imposition by appropriate proceedings diligently conducted in good faith; provided, however, if the payment of such Imposition is necessary to properly appeal such Imposition, Tenant shall pay such imposition before delinquency; and, provided further, if there is then an uncured Event of Default hereunder, Tenant shall have first deposited with Landlord cash or a certificate of deposit payable to Landlord issued by a national bank or federal savings and loan association in the amount of the Imposition so contested and unpaid, together with all interest and penalties which may accrue in Landlord's reasonable judgment in connection therewith, and all charges that may or might be assessed against or become a charge on the Demised Premises or any portion thereof during the pendency of such proceedings. If there is then in an uncured Event of Default hereunder and if during the continuance of such proceedings, Landlord shall, from time to time, reasonably deem the amount deposited, as aforesaid, insufficient, Tenant shall, upon demand of Landlord, make additional deposits of such additional sums of money or such additional certificates of deposit as Landlord may reasonably request. If Tenant is required to make such additional deposits 25 hereunder and Tenant fails to make same, the amount theretofore deposited may be applied by Landlord to the payment, removal and discharge of such Imposition, and the interest, fines and penalties in connection therewith, and any costs, fees (including attorneys' fees) and other liability (including costs incurred by Landlord) accruing in any such proceedings. Upon the termination of any such proceedings, Tenant shall pay the amount of such Imposition or part thereof, if any, as finally determined in such proceedings, the payment of which may have been deferred during the prosecution of such proceedings, together with any costs, fees, including attorneys' fees, interest, penalties, fines and other liability in connection therewith, and upon such payment, if Landlord had previously received any amounts or certificates as a deposit, Landlord shall return all amounts or certificates deposited with it with respect to the contest of such Imposition, as aforesaid, or, at the written direction of Tenant, Landlord shall make such payment out of the funds on deposit with Landlord and the balance, if any, shall be returned to Tenant. Tenant shall be entitled to the refund of any Imposition, penalty, fine and interest thereon received by Landlord which has been paid by Tenant or which has been paid by Landlord but for which Landlord has been previously reimbursed in full by Tenant. Landlord shall not be required to join in any proceedings referred to in this Section 5.2 unless the provisions of any law, rule or regulation at the time in effect shall require that such proceedings be brought by or in the name of Landlord, in which event Landlord shall join in such proceedings or permit the same to be brought in Landlord's name upon compliance with such conditions as Landlord may reasonably require. Landlord shall not ultimately be subject to any liability for the payment of any fees, including attorneys' fees, costs and expenses in connection with such proceedings. Tenant agrees to pay all such fees (including reasonable attorneys' fees), costs and expenses or, on demand, to make reimbursement to Landlord for such payment for fees reasonably incurred by Landlord in connection with such proceedings as provided above. During the time when any such certificate of deposit is on deposit with Landlord, and prior to the time when the same is returned to Tenant or applied against the payment, removal or discharge of Impositions, as above provided, Tenant shall be entitled to receive all interest paid thereon. Cash deposits shall not bear interest. 5.3 Levies and Other Taxes. If, at any time during the Term of this Lease, ---------------------- any method of taxation shall be such that there shall be levied, assessed or imposed on Landlord, or on the Base Rent or Additional Rent, or on the Demised Premises, or any portion thereof, a capital levy, gross receipts tax, transaction privilege tax or other tax on the rents received therefrom or a franchise tax, or an assessment, levy or charge measured by or based in whole or in part upon such rents, Tenant covenants to pay and discharge the same, it being the intention of the parties hereto that the rent to be paid hereunder, shall be paid to Landlord absolutely net, without deduction or charge of any nature whatsoever, foreseeable or unforeseeable, ordinary or extraordinary, or of any nature, kind or description, except as in this Lease otherwise expressly provided. Nothing in this Lease contained shall require Tenant to pay any municipal, state or federal net income, franchise, or excess profits taxes assessed against Landlord, or any municipal, state or federal capital levy, estate, succession, inheritance or transfer taxes of Landlord, or corporation franchise taxes imposed upon any corporate owner of the fee of the Demised Premises nor shall anything in this Lease require Tenant to pay any income tax of Landlord or any tax in the nature of income and/or franchise tax or in lieu of income tax. 26 5.4 Evidence of Payment. Tenant covenants to furnish Landlord, within ------------------- thirty (30) days after Landlord requests the same, official receipts of the appropriate taxing authority, or other appropriate proof reasonably satisfactory to Landlord, evidencing the payment of the same. The certificate, advice or bill of the appropriate official designated by law to make or issue the same or to receive payment of any Imposition or other tax, assessment, levy or charge may be relied upon by Landlord as sufficient evidence that such Imposition or other tax, assessment, levy or charge is due and unpaid at the time of the making or issuance of such certificate, advice or bill. 5.5 Escrow for Taxes and Assessments. At Landlord's written demand after -------------------------------- any Event of Default (as hereinafter defined) and for as long as such Event of Default is uncured, Tenant shall pay to Landlord the known or estimated yearly real estate taxes and assessments payable with respect to the Demised Premises in monthly payments equal to one-twelfth (1/12) of the known or estimated yearly real estate taxes and assessments next payable with respect to the Demised Premises. From time to time, Landlord may re-estimate the amount of real estate taxes and assessments, and in such event Landlord shall notify Tenant, in writing, of such re-estimate and fix future monthly installments for the remaining period prior to the next tax and assessment due date in an amount sufficient to pay the re-estimated amount over the balance of such period after giving credit for payments made by Tenant on the previous estimate. If the total monthly payments made by Tenant pursuant to this Section 5.5 shall exceed the amount of payments necessary for said taxes and assessments, such excess shall be credited on subsequent monthly payments of the same nature; but if the total of such monthly payments so made under this paragraph shall be insufficient to pay such taxes and assessments when due, then Tenant shall pay to Landlord such amount as may be necessary to make up the deficiency. Payment by Tenant of real estate taxes and assessments under this Section 5.5 shall be considered as performance of such obligation under the provisions of Section 5.1 hereof. 5.6 Landlord's Right to Contest Impositions. In addition to the right of --------------------------------------- Tenant under Section 5.2 to contest the amount or validity of Impositions, Landlord shall also have the right, but not the obligation, to contest the amount or validity, in whole or in part, of any Impositions not contested by Tenant, by appropriate proceedings conducted in the name of Landlord or in the name of Landlord and Tenant. If Landlord elects to contest the amount or validity, in whole or in part, of any Impositions, such contests by Landlord shall be at Landlord's expense; provided, however, that if the amounts payable by Tenant for Impositions are reduced (or if a proposed increase in such amounts is avoided or reduced) by reason of Landlord's contest of Impositions, Tenant shall reimburse Landlord for the costs reasonably incurred by Landlord in contesting such Impositions, but such reimbursements shall not be in excess of the amount saved by Tenant. ARTICLE VI INSURANCE 6.1 Casualty Insurance. Tenant, at its sole cost and expense, shall obtain ------------------ and continuously maintain in full force and effect during the Term of this Lease, commencing with the Commencement Date (subject to the provisions of Section 2.12), policies of insurance covering the Building constructed, installed or located on the Demised Premises naming the 27 Landlord as an additional insured, against (a) loss or damage by fire; (b) loss or damage from such other risks or hazards now or hereafter embraced by an "Extended Coverage Endorsement," including, but not limited to, windstorm, hail, explosion, vandalism, riot and civil commotion, damage from vehicles, smoke damage, water damage and debris removal; (c) loss for flood if the Demised Premises are in a designated flood or flood insurance area and if such coverage is required by Landlord's lender, (d) loss or damage caused by earthquake (but only if required by a Lender) subject to standard deductibles (provided, however, that (i) Tenant shall not be required to maintain earthquake insurance if it is not reasonably obtainable and (ii) Tenant's financial responsibility for the premium associated with earthquake insurance shall not exceed $50,000.00 per year during the Initial Term or any Option Term); and (e) loss or damage from such other risks or hazards of a similar or dissimilar nature which are now or may hereafter be customarily insured against with respect to improvements similar in construction, design, general location, use and occupancy to the Improvements. If the premium associated with earthquake insurance exceeds $50,000.00 per year, Landlord shall have the option to either pay the excess premium over and above such $50,000.00 amount or delete the requirement that Tenant obtain earthquake coverage. At all times, such insurance coverage shall be in an amount equal to one hundred percent (100%) of the then "Full Replacement Cost" of the Improvements. "Full Replacement Cost" shall be interpreted to mean the cost of replacing the Improvements, without deduction for depreciation or wear and tear, including costs attributable to improvements or upgrades in the Improvements required by changes in laws and regulations governing zoning, public access and accommodation, workplace conditions, public health or safety or similar matter, and it shall include to the extent reasonably obtainable a reasonable sum for architectural, engineering, legal, administrative and supervisory fees connected with the restoration or replacement of the Improvements in the event of damage thereto or destruction thereof. If a sprinkler system shall be located in the Improvements, sprinkler leakage insurance shall be procured and continuously maintained by Tenant at Tenant's sole cost and expense. Any deductible, self-insured retention or similar limitation on coverage shall be submitted to Landlord for its prior written approval, which shall be granted or withheld in Landlord's reasonable discretion. 6.2 Public Liability Insurance. From and after the Commencement Date, -------------------------- Tenant, at its sole cost and expense, shall obtain and continuously maintain in full force and effect comprehensive general liability insurance against any loss, liability or damage on, about or relating to the Demised Premises, or any portions thereof, with limits of not less than Ten Million Dollars ($10,000,000.00); provided, however, such coverage may be maintained by Tenant pursuant to an "umbrella" policy covering the Demised Premises and Tenant's other properties and operations. Any such insurance obtained and maintained by Tenant shall name Landlord as an additional insured therein or shall include a "loss payee" endorsement in favor of Landlord, and shall be obtained and maintained from and with a reputable and financially sound insurance company authorized to issue such insurance in the state in which the Demised Premises are located. Such insurance shall to the extent reasonably obtainable specifically insure (by contractual liability endorsement) Tenant's obligations under Section 20.3 of this Lease. 6.3 Other Insurance. --------------- (a) During the Term of this Lease, commencing with the Commencement Date, Tenant, at its sole cost and expense, shall obtain and continuously maintain in full force 28 and effect boiler and pressure vessel (including, but not limited to, pressure pipes, steam pipes and condensation return pipes) insurance, provided the Building contains a boiler or other pressure vessel or pressure pipes. Landlord shall be named as an additional insured or loss payee in such policy or policies of insurance. (b) During the Term of this Lease commencing with the Commencement Date, Tenant, at its sole cost and expense, shall obtain and continuously maintain, in full force and effect, loss of use and business interruption coverage for the payment for no less than one (1) year of (i) the Base Rent and (ii) those Impositions which will continue to be payable even during a period when the Demised Premises are not operational. (c) During the Term of this Lease, Tenant, at its sole cost and expense, shall obtain and continuously maintain in full force and effect such other insurance in such amounts against other insurable hazards which at the time are commonly insured against in the case of premises and/or buildings or improvements similar in construction, design, general location, use and occupancy to the Demised Premises if required by Landlord's construction or permanent lenders; provided, however, that this Section 6.3(c) is not intended to, and shall not, supersede the cap on Tenant's financial responsibility for earthquake insurance premiums specified in Section 6.1(d)(ii), above. 6.4 Certain Insurance Provisions. All policies of insurance required by ---------------------------- Section 6.1 shall contain deductibles which are no higher than those which are customarily maintained for casualty and liability insurance in connection with facilities similar to the Demised Premises and provide that the proceeds thereof shall be payable to Landlord and if Landlord so requests shall also be payable to any contract purchaser of the Demised Premises and the holder of any mortgages now or hereafter becoming a lien on the fee of the Demised Premises, or any portion thereof, as the interest of such purchase or holder appears pursuant to a standard named insured or mortgagee clause or as an additional insured. Tenant shall not, on Tenant's own initiative or pursuant to request or requirement of any third party, take out separate insurance concurrent in form or contributing in the event of loss with that required in Section 6.1 hereof, unless Landlord is named therein as an additional insured with loss payable as provided in Section 6.1. Tenant shall immediately notify Landlord whenever any such separate insurance is taken out and shall deliver to Landlord original certificates evidencing the same. Each policy required under this Article VI shall have attached thereto (a) an endorsement that such policy shall not be canceled and that the coverage under such policy will not be materially changed without at least thirty (30) days prior written notice to Landlord, and (b) to the extent reasonably obtainable an endorsement to the effect that the insurance as to the interest of Landlord shall not be invalidated by any act or neglect of Landlord or Tenant. All policies of insurance shall be written with companies reasonably satisfactory to Landlord and licensed in the state in which the Demised Premises are located. Such certificates of insurance shall be in a form reasonably acceptable to Landlord and shall be delivered to Landlord upon the Commencement Date and, prior to expiration of such policy, new certificates of insurance shall be delivered to Landlord not less than twenty (20) days prior to the expiration of the then current policy term. 29 Insurance required hereunder shall be obtained from companies duly licensed to transact business in the state of California, and maintaining during the policy term a "General Policyholders Rating" of at least "A" and financial category rating of "Class VII" in "Best's Insurance Guide." 6.5 Waiver of Subrogation. Landlord and Tenant hereby mutually waive any --------------------- and all rights of recovery against one another for real or personal property loss or damage occurring to the Demised Premises, or any part thereof, or any personal property therein from perils insured against under the insurance maintained hereunder for the benefit of the respective parties, and to the extent the proceeds of such insurance are actually recovered, and each shall use commercially reasonable efforts to assure that such insurance permits waiver of liability and contains a waiver of subrogation. 6.6 Tenant's Indemnification of Landlord. Tenant may maintain insurance ------------------------------------ coverage upon all personal property of Tenant or the personal property of others kept, stored or maintained on the Demised Premises against loss or damage by fire, windstorm or other casualties or causes for such amount as Tenant may desire. To the extent Tenant maintains such insurance, Tenant agrees that such policies shall, to the extent obtainable, name Landlord as an "additional insured" and contain a waiver of subrogation clause as to Landlord. 6.7 Unearned Premiums. Upon expiration or other termination of the Term of ----------------- this Lease, the unearned premiums upon any insurance policies or certificates thereof lodged with Landlord by Tenant shall, subject to the provisions of Article XIII hereof, be payable to Tenant, provided that an Event of Default does not then exist (or if an Event of Default does then exist, any excess over the amount required to cure such default shall be so payable to Tenant). 6.8 Blanket Insurance Coverage. Nothing in this Article VI shall prevent -------------------------- Tenant from taking out insurance of the kind and in the amount provided for under the preceding paragraphs of this Article VI under a blanket insurance policy or policies (and certificates thereof reasonably satisfactory to Landlord shall be delivered to Landlord) which may cover other properties owned, leased or operated by Tenant as well as the Demised Premises; provided, however, that any such policy of blanket insurance of the kind provided for shall not contain any clause which would result in the insured thereunder being required to carry any insurance with respect to the property covered thereby in an amount not less than any specific percentage of the Full Replacement Cost of such property in order to prevent the insured therein named from becoming a co-insurer of any loss with the insurer under such policy; and further provided, however, that such policies of blanket insurance shall, as respects the Demised Premises, contain the various provisions required of such an insurance policy by the foregoing provisions of this Article VI. 6.9 Landlord's Liability Insurance Coverage. Landlord, at its sole cost and --------------------------------------- expense, shall obtain and continuously maintain in full force and effect during the Term of this Lease, commencing with the Commencement Date, comprehensive general liability insurance in such amounts as it shall deem reasonably appropriate. 30 ARTICLE VII UTILITIES 7.1 Payment of Utilities. During the Term of this Lease, Tenant shall pay, -------------------- when due, all charges of every nature, kind or description for utilities furnished to the Demised Premises or chargeable against the Demised Premises, including all charges for water, sewage, heat, gas, light, garbage, electricity, telephone, steam, power, or other public or private utility services. 7.2 Additional Charges. In the event that any charge or fee is required ------------------ after the Commencement Date by the state in which the Demised Premises are located, or by any agency, subdivision or instrumentality thereof, or by any utility company furnishing services or utilities to the Demised Premises, as a condition precedent to furnishing or continuing to furnish utilities or services to the Demised Premises, such charge or fee shall be deemed to be a utility charge payable by Tenant. The provisions of this Section 7.2 shall include, but not be limited to, any charges or fees for future water or sewer capacity to serve the Demised Premises, any charges for the underground installation of gas or other utilities or services subsequent to the installation thereof, and other charges relating to the extension of or change in the facilities necessary to provide the Demised Premises with adequate utility services. In the event that Landlord has paid any such charge or fee after the Commencement Date, Tenant shall reimburse Landlord for such utility charge. 7.3 Landlord's Responsibility for Utility Hook-Up Charges and Fees. -------------------------------------------------------------- Notwithstanding anything contained in this Article VII to the contrary, (a) as of the Commencement Date, all utilities contemplated by the Improvements shall be hooked-up and fully operational and functional to the Demised Premises and all capacity, hookup and similar charges (except to the extent they constitute Excess Shell Costs or Excess Tenant Improvement Costs) shall have been paid by Landlord; and (b) if any utility or service charge or fee related to capital improvements made during the Term of this Lease, whose tax depreciable life extends beyond the termination date of this Lease, Tenant shall only pay the pro rata portion of such charge or fee to the extent that such tax depreciable life is within the Term of this Lease. ARTICLE VIII REPAIRS AND MAINTENANCE OF DEMISED PREMISES 8.1 Tenant's Responsibilities. Except to the extent specifically identified ------------------------- as Landlord's responsibility in Section 8.2, below, Tenant shall, at its own expense, keep the Demised Premises, and every part thereof, including, but not by way of limitation, the grounds, landscaped areas, truck parking and loading and dock areas, the roof surface and roof membrane (but only as to routine and ongoing maintenance), drainage swales, gutters, downspouts, glass, interior and exterior portions of the Building, and the plumbing, heating, air conditioning, wiring, elevators and other mechanical systems therein, the facilities thereof and all sidewalks, parking areas, driveways, passageways and alleys adjacent thereto and other appurtenances thereunto belonging, in good order, appearance, condition and repair (reasonable wear and tear excepted), free of obstructions, dirt, and rubbish, and so as to comply fully and at all times with all present 31 and future applicable governmental laws, rules and regulations, consistent with other comparable business and industrial parks in the Market Area. Tenant agrees to make all replacements and repairs to the Demised Premises necessary to maintain the Demised Premises in the condition described in the preceding sentence. Tenant, at its own expense, shall also seal (paint) the exterior of the Building periodically during the Term (including any Option Term) of this Lease in accordance with the recommendations of the manufacturer of the material used for the exterior of said Building. Tenant shall maintain regular service contracts for all of the Demised Premises' (i) HVAC system, and (ii) elevator(s), and shall, upon Landlord's request, provide Landlord copies of such contracts or any other maintenance or service contracts maintained by Tenant with respect to the Demised Premises. Any such contract shall be terminable by Tenant (or its successors, including Landlord or a Lender) on not less than thirty (30) days notice to the contractor or shall provide that it does not bind a Lender. All repairs, replacements and renewals shall be at least equal in quality and class to the original work. Because Tenant is undertaking the responsibility for most aspects of the ongoing maintenance of the Demised Premises, Tenant waives the provisions of California Civil Code Sections 1941 and 1942 with respect to Landlord's obligations for tenantability of the Demised Premises and Tenant's right to make repairs and deduct the expenses of such repairs from Rent. When used in this Article VIII, "repairs" shall include all necessary replacements, renewals, alterations, additions and betterments. 8.2 Landlord's Responsibilities. Landlord shall, at its own expense, --------------------------- repair any failure in the structural elements of the roof, all exterior and load-bearing walls (except for painting of the exterior walls, which shall be Tenant's responsibility), the Building foundation and for keeping all underground utilities in good order, condition and repair. In addition, Landlord shall be responsible, at Landlord's sole cost and expense, for the prompt and diligent repair of any latent defects in design and construction of the Demised Premises which manifest themselves during the Term, including, but not limited to, latent defects in the design and/or construction of the drainage system constructed on the Demised Premises as part of the Improvements. Landlord shall not charge Tenant for any property management fees during the Term of the Lease. 8.3 Sharing of Expenses of Capital Items. Certain items of repair and ------------------------------------ maintenance which are Tenant's responsibility under Section 8.1, may, under generally acceptable accounting principles consistently applied, be considered to have a reasonable useful life which would extend beyond the end of the Term (a "Capital Item"). Landlord and Tenant shall share the expenses associated with such Capital Items, as follows: (a) Tenant shall pay all expenses related to Capital Items. (b) At any time Tenant intends to incur an expense related to a Capital Item, Tenant shall notify Landlord, in writing, and Landlord shall approve or disapprove such expenditure, which approval shall not be unreasonably withheld or delayed. Landlord shall not be required to approve any expenditure which is not required for the maintenance and operation of the Demised Premises. 32 (c) At that time, Landlord and Tenant shall also agree on the "useful" life of the Capital Item and, shall determine a level per-year useful life allocation (the "Useful Life Allocation") of financial responsibility for that Capital Item. By way of example only, financial responsibility for a Capital Item which requires the expenditure of $50,000.00 and which has a five- year "useful" life would be assigned a $10,000.00 per year Useful Life Allocation. (d) The Useful Life Allocation shall be applied to the item of expense related to the Capital Item, until the full amount of such expense has been amortized, although Tenant shall have the responsibility for paying all expenses related to Capital Items when incurred. (e) If, at the end of the Term of Lease, including any Option Term, there remains any unamortized Useful Life Allocation(s), Landlord shall, within thirty (30) days after the end of the Term, refund to Tenant, such unamortized Useful Life Allocations, in cash. 8.4 Tenant's Waiver of Claims Against Landlord. Except as provided in ------------------------------------------ Article II, Section 8.2 and Article XIII of this Lease, or as expressly provided under any other provision hereof, Landlord shall not be required to furnish any services or facilities or to make any repairs or alterations in, about or to the Demised Premises or any improvements hereafter erected thereon. Subject to the requirements of Article II, Section 8.2 and Article XIII of this Lease, or as expressly provided under any other provision hereof, Tenant hereby assumes the full and sole responsibility for the condition, operation, repair, replacement, maintenance and management of the Demised Premises and all improvements hereafter erected thereon, and Tenant hereby waives any rights created by any law now or hereafter in force to make repairs to the Demised Premises or improvements hereafter erected thereon at Landlord's expense. 8.5 Prohibition Against Waste. Tenant shall not do or suffer any waste, ------------------------- damage, disfigurement or injury to the Demised Premises, or any improvements hereafter erected thereon, or to the fixtures or equipment therein, or permit or suffer any overloading of the floors or other use of the Improvements that would place an undue stress on the same or any portion thereof beyond that for which the same was designed. ARTICLE IX COMPLIANCE WITH APPLICABLE LAWS AND RESTRICTIONS 9.1 Compliance with Applicable Laws and Restrictions. Subject to ------------------------------------------------ Landlord's obligations under Article II, Section 8.2 and Article XIII of this Lease, or as expressly provided under any other provision hereof, throughout the Term of this Lease, and at Tenant's sole cost and expense (except as provided in Sections 2.8 and 8.3 above), Tenant shall promptly comply or cause compliance with or remove or cure any violation caused by Tenant of any and all present and future laws, rules and regulations applicable to the Demised Premises (including, without limitation, those reflected on the Preliminary Title Report prepared by First American Title Company, dated October 28, 1998; provided, however, Landlord hereby agrees that Tenant shall have no responsibility with respect to the Memorandum of Contribution Agreement described in Exception No. 14 of said Preliminary Title Report), and the appropriate departments, commissions, boards, associations and officers enforcing them, and the orders, rules 33 and regulations of the Board of Fire Underwriters where the Demised Premises are situated, or any other governmental body now or hereafter constituted exercising lawful or valid authority over the Demised Premises, or any portion thereof, or exercising authority with respect to the use or manner of use of the Demised Premises, whether or not the compliance, curing or removal of any such violation and the costs and expenses necessitated thereby shall have been foreseen or unforeseen, ordinary or extraordinary, and whether or not the same shall be presently within the contemplation of Landlord or Tenant or shall involve any change of governmental policy or require structural or extraordinary repairs, alterations or additions by Tenant and irrespective of the costs thereof. Tenant shall also comply with, observe and perform all provisions and requirements of all policies of insurance at any time in force with respect to the Demised Premises and required to be obtained and maintained under the terms of Article VI hereof, and Tenant shall comply with all development permits issued by governmental authorities issued in connection with development of the Demised Premises, copies of which shall be supplied to Tenant by Landlord promptly after issuance. In addition to the matters of record to which the Demised Premises are subject as of the date of this Lease, Tenant acknowledges that, prior to the Commencement Date, the Demised Premises will become subject to a Reciprocal Easement Agreement the purpose of which will be to establish certain access and maintenance rights and obligations with regard to driveway, fire suppression and storm drain facilities shared by the Demised Premises and the property which is located adjacent to the Demised Premises, provided that Landlord shall obtain Tenant's approval of such Reciprocal Easement Agreement prior to the Demised Premises becoming subject thereto, and to any other modifications to the matters of record to which the Demised Premises are subject and which would have an affect on Tenant's use and enjoyment of the Demised Premises, which approval shall not be unreasonably withheld. 9.2 Tenant's Obligations. Notwithstanding that it may be usual and -------------------- customary for Landlord to assume responsibility and performance of any or all of the obligations set forth in this Article IX, and notwithstanding any order, rule or regulation directed to Landlord to perform, subject to the provisions of Article II, Section 8.2 and Article XIII of this Lease, Tenant hereby assumes such obligations because, by nature of this Lease, or as expressly provided under any other provision hereof, the rents and income derived from this Lease by Landlord are "net" rentals not to be diminished by any expense incident to the ownership, occupancy, use, leasing or possession of the Demised Premises or any portion thereof (except as expressly provided in this Lease). 9.3 Tenant's Right to Contest Laws and Ordinances. After prior written --------------------------------------------- notice to Landlord, Tenant, at its sole cost and expense and without cost or expense to Landlord, shall have the right to contest the validity or application of any Applicable Laws or Restrictions in the name of Tenant or Landlord, or both, by appropriate legal proceedings diligently conducted but only if compliance with the terms of any such law or ordinance pending the prosecution of any such proceeding, may legally be delayed without incurring of any lien, charge or liability of any kind against the Demised Premises, or any portion thereof, and without subjecting Landlord or Tenant to any liability, civil or criminal, for failure so to comply therewith until the final determination of such proceeding; provided, however, if any lien, charge or civil liability would be incurred by reason of any such delay, Tenant nevertheless, on the prior written consent of Landlord, which consent shall not be unreasonably withheld, may contest as aforesaid and delay as aforesaid, provided that such delay would not subject Tenant or Landlord to criminal liability 34 and Tenant (a) furnishes Landlord security, reasonably satisfactory to Landlord, against any loss or injury by reason of any such contest or delay, (b) prosecutes the contest with due diligence and in good faith, and (c) agrees to indemnify, defend and hold harmless Landlord and the Demised Premises from any charge, liability or expense whatsoever. The security furnished to Landlord by Tenant shall be in the form of a cash deposit or a Certificate of Deposit issued by a national bank or federal savings and loan association payable to Landlord. Said deposit shall be held, administered and distributed in accordance with the provisions of Section 5.2 hereof relating to the contest of the amount or validity of any Imposition. If necessary or proper to permit Tenant so to contest the validity or application of any such law or ordinance, Landlord shall, at Tenant's sole cost and expense, including reasonable attorneys' fees incurred by Landlord, execute and deliver any appropriate papers or other documents; provided, however, that Landlord shall not be required to execute any document or consent to any proceeding which would result in the imposition of any cost, charge, expense or penalty on Landlord or the Demised Premises. ARTICLE X MECHANIC'S LIENS AND OTHER LIENS 10.1 Mechanic's Liens. ---------------- (a) Tenant shall keep the Demised Premises free from any liens arising out of work performed, materials furnished and obligations incurred by Tenant. Tenant covenants and agrees that any mechanic's lien filed against the Demised Premises for work claimed to have been done for, or materials claimed to have been furnished to, Tenant shall be discharged by Tenant, by bond or otherwise, within thirty (30) days after the filing thereof, at the sole cost and expense of Tenant. This provision does not apply to any claim or lien arising out of the original construction of the Demised Premises by Landlord pursuant to this Lease. (b) Tenant shall have the right to contest with due diligence the validity or amount of any lien or claimed lien created by Tenant if Tenant shall give to Landlord such security as Landlord may reasonably require to insure payment thereof and prevent any sale, foreclosure or forfeiture of the Demised Premises or any portion thereof by reason of such nonpayment. On final determination of the lien or claim for lien, Tenant shall immediately pay any judgment rendered with all proper costs and charges and shall have the lien released or judgment satisfied at Tenant's own expense, and if Tenant shall fail to do so, Landlord may at its option, pay any such final judgment and clear the Demised Premises therefrom. If Tenant shall fail to contest with due diligence the validity or amount of any such lien or claimed lien created by Tenant, or to give Landlord security as hereinabove provided, Landlord may, but shall not be required to, contest the validity or amount of any such lien or claimed lien or settle or compromise the same without inquiring into the validity of the claim or the reasonableness of the amount thereof. Should any lien be filed against the Demised Premises or should any action of any character affecting the title thereto be commenced, Tenant shall give to Landlord written notice thereof as soon as notice of such lien or action comes to the knowledge of Tenant. 35 (c) Should Tenant fail to discharge any such lien, Landlord may, at Landlord's election, pay such claim or post a bond or otherwise provide security to eliminate the lien as a claim against title, and the cost thereof shall be immediately due from Tenant as Additional Rent. Tenant shall not suffer or permit any mechanic's lien or other lien to be filed against the Demised Premises, or any portion thereof, by reason of work, labor, skill, services, equipment or materials supplied or claimed to have been supplied to the Demised Premises at the request of Tenant, or anyone holding the Demised Premises, or any portion thereof, through or under Tenant. (d) All materialmen, contractors, artisans, mechanics, laborers and any other person now or hereafter furnishing any labor, services, materials, supplies or equipment to Tenant with respect to the Demised Premises, or any portion thereof, are hereby charged with notice that they must look exclusively to Tenant to obtain payment for the same. Notice is hereby given that Landlord shall not be liable for any labor, services, materials, supplies, skill, machinery, fixtures or equipment furnished or to be furnished to Tenant upon credit, and that no mechanic's lien or other lien for any such labor, services, materials, supplies, machinery, fixtures or equipment shall attach to or affect the estate or interest of Landlord in and to the Demised Premises or any portion thereof. 10.2 Landlord's Indemnification. The provisions of Section 10.1 above -------------------------- shall not apply to any mechanic's lien or other lien for labor, services, materials, supplies, machinery, fixtures or equipment furnished to the Demised Premises in the performance of Landlord's obligations to construct the Improvements required by the provisions of Article II hereof or in the performance of Landlord's other obligations under this Lease, and Landlord does hereby agree to indemnify and defend Tenant against and save Tenant and the Demised Premises and any portion thereof harmless from all losses, costs, damages, expenses, liabilities and obligations, including, without limitation, reasonable attorneys' fees resulting from the assertion, filing, foreclosure or other legal proceedings with respect to any such mechanic's lien or other lien. 10.3 Removal of Liens. Except as otherwise provided for in this Article ---------------- X, Tenant shall not create, permit or suffer, and shall promptly discharge and satisfy of record, any other lien, encumbrance, charge, security interest or other right or interest which shall be or become a lien, encumbrance, charge or security interest upon the Demised Premises, or any portion thereof, or the income therefrom, or on the interest of Landlord or Tenant in the Demised Premises, or any portion thereof, if such lien, encumbrance, charge, security interest or other right or interest shall result from the actions of Tenant or others acting on the behalf of or for Tenant (other than Landlord). 10.4 Equipment and Trade Fixtures. Landlord expressly waives and ---------------------------- disclaims any lien which it may have by statute or otherwise on the equipment and trade fixtures which Tenant brings to the Demised Premises. In addition, Landlord acknowledges that Tenant may, from time to time, offer all or portions of such equipment and trade fixtures as collateral for obligations to lenders. Landlord will promptly execute such reasonable documentation as Tenant may request in order to evidence to any such lender Landlord's lack of any claim to such equipment and trade fixtures. 36 ARTICLE XI LANDLORD'S PERFORMANCE OF TENANT'S OBLIGATIONS In the event Tenant fails to pay or discharge any Additional Obligation, Landlord may, but shall not be obligated to, in addition to its remedies in an Event of Default, provide a factually correct written notice of such failure, and if Tenant still fails to cure such failure within ten (10) days after Tenant's receipt of such notice, Landlord may pay or perform the same, and in that event Tenant shall within ten (10) days after invoice reimburse Landlord therefor (together with interest at the Maximum Rate of Interest from the date Landlord made such payment), which amount shall be deemed Additional Rent; provided, however, that Landlord shall be entitled to pay such amount without prior notice to Tenant if Landlord reasonably believes that any further delay would expose Landlord or the Demised Premises to (i) civil or criminal penalties, (ii) a potential default under a mortgage, deed of trust or similar obligation, or (iii) lack of insurance coverage as required hereunder, or is otherwise an emergency. Nothing herein contained shall be deemed as a waiver or release of Tenant from any obligation of Tenant contained in this Lease. ARTICLE XII DEFAULTS OF TENANT 12.1 Events of Default. Any one or more of the following events shall be ----------------- an event of default by Tenant ("Event of Default") under this Lease: (a) Tenant fails to pay any Base Rent or Additional Rent or any other sum required by this Lease to be paid by Tenant, within five (5) business days after the same is due and payable; (b) Tenant fails to perform or comply with any other term hereof, and such failure shall continue for more than thirty (30) days after notice thereof from Landlord, and Tenant shall not within such period commence with due diligence and thereafter dispatch the curing of such default, or, having so commenced, shall thereafter fail or neglect to prosecute or complete with due diligence and dispatch the curing of such default; (c) Tenant makes a general assignment for the benefit of creditors or admits in writing its inability to pay its debts as they become due or files a petition in bankruptcy, or is adjudicated as bankrupt or insolvent, or files a petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statutes, law or regulation, or files an answer admitting or fails to reasonably contest the material allegations of a petition filed against it in any such proceeding, or seeks or consents to or acquiesces in the appointment of any trustee, receiver or liquidator of Tenant or any material part of its properties (provided, however, that this Section 12.1(c) shall apply only to the extent it is enforceable under applicable law); or 37 (d) Within ninety (90) days after the commencement of any proceeding against Tenant seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such proceeding has not been dismissed, or if, within ninety (90) days after the appointment without the consent or acquiescence of Tenant of any trustee, receiver or liquidator of Tenant or of any material part of its properties, such appointment has not been vacated (provided, however, that this Section 12.1(d) shall apply only to the extent it is enforceable under applicable law); or (e) Tenant permits the abandonment or nonoccupancy of the entire Demised Premises (except for temporary vacancies or portions thereof, or to the extent caused by damage, destruction or condemnation). 12.2 Landlord's Remedies. Upon the occurrence of an Event of Default, ------------------- Landlord, at its option, without further notice or demand to Tenant, shall have, in addition to all other rights and remedies provided in this Lease, at law or in equity, the option to pursue any one or more of the following remedies, each and all of which shall be cumulative and nonexclusive, without any notice or demand whatsoever: (a) Terminate this Lease, in which event Tenant shall immediately surrender the Demised Premises to Landlord, and if Tenant fails to do so, Landlord may, without prejudice to any other remedy which it may have for possession or arrearages in Base Rent or Additional Rent, enter upon and take possession of the Demised Premises and expel or remove Tenant and any other person who may be occupying the Demised Premises or any part thereof, without being liable for prosecution or any claim or damages therefor; and Landlord may recover from Tenant the following: (i) The worth at the time of award of any unpaid Base Rent and Additional Rent which has been earned at the time of such termination; plus (ii) The worth at the time of award of the amount by which the unpaid Base Rent and Additional Rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iii) The worth at the time of award of the amount by which the unpaid Base Rent and Additional Rent for the balance of the Lease Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; plus (iv) Any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom; and (v) Such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by applicable law. 38 The term "Rent" as used in this Section 12.2 shall be deemed to be and to mean all sums of every nature required to be paid by Tenant pursuant to the terms of this Lease, whether to Landlord or to others. As used in subsections (i) and (ii), above, the "worth at the time of award" shall be computed at the Maximum Rate of Interest. As used in subsection (iii), above, the "worth at the time of award" shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). Nothing herein shall be deemed to relieve Landlord of its obligation to mitigate its damages following an Event of Default. 12.3 Right to Collect Rent as Due. Landlord shall have the remedy ---------------------------- described in California Civil Code Section 1951.4 (Landlord may continue lease in effect after Tenant's breach and abandonment and recover rent as it becomes due, if Tenant has the right to sublet or assign, subject only to reasonable limitations). Accordingly, if Landlord does not elect to terminate this Lease on account of any default by Tenant, Landlord may, from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all Base Rent and Additional Rent as they become due. 12.4 New Lease Following Termination. In the event Landlord elects to ------------------------------- terminate this Lease and relet the Premises, it may execute any new lease in its own name. Tenant hereunder shall have no right or authority whatsoever to collect any Base Rent, Additional Rent or other sums from such tenant. The proceeds of any such reletting shall be applied as follows: (a) First, to the payment of any indebtedness other than Base Rent or Additional Rent due hereunder from Tenant to Landlord, including but not limited to storage charges or brokerage commissions owing from Tenant to Landlord as the result of such reletting; (b) Second, to the payment of the costs and expenses of reletting the Premises, including alterations and repairs which Landlord deems reasonably necessary and advisable, and reasonable attorneys' fees incurred by Landlord in connection with the retaking of the Demised Premises and such reletting; (c) Third, to the payment of Base Rent, Additional Rent and other charges due and unpaid hereunder, and (d) Fourth, to the payment of future Base Rent, Additional Charges and other damages payable by Tenant under this Lease. 12.5 Cumulative Rights; No Waiver. All rights, options and remedies of ---------------------------- Landlord contained in this Lease shall be construed and held to be non-exclusive and cumulative. Landlord shall have the right to pursue any or all of such remedies or any other remedy or relief which may be provided by law, whether or not stated in this Lease. No waiver of any Event of Default of Tenant hereunder shall be implied from the acceptance by Lender of any payments due hereunder (except with respect to the amount so collected) or any omission by Landlord party to take any action on account of such Event of Default if such Event of Default persists or is repeated, and no express waiver shall affect defaults other than as specified in said waiver. 39 12.6 Surrender of Demised Premises. Upon any expiration or termination of ----------------------------- this Lease, Tenant shall quit and peaceably surrender the Demised Premises and all portions thereof to Landlord, and Landlord may, upon or at any time after any such expiration or termination and without further notice, enter upon and reenter the Demised Premises and all portions thereof and possess and repossess itself thereof by force, summary proceeding, ejectment or otherwise, and may dispossess Tenant and remove Tenant and all other persons and property from the Demised Premises and all portions thereof and may have, hold and enjoy the Demised Premises and the right to receive all rental and other income of and from the same. 12.7 Interest on Unpaid Amounts. If Tenant shall commit an Event of -------------------------- Default, Landlord may cure the same, but shall not be required to do so, as provided in, and subject to, Section 11.1 above, and in exercising any such right, may employ counsel and pay necessary and incidental costs and expenses, including reasonable attorneys' fees. All reasonable sums so paid by Landlord, and all reasonable and necessary costs and expenses, including reasonable attorneys' fees, in connection with the performance of any such act by Landlord, together with interest thereon at the Maximum Rate of Interest from the date of making such expenditure by Landlord, shall be deemed Additional Rent hereunder and, except as is otherwise expressly provided herein, shall be payable to Landlord within ten (10) days after written demand, and Tenant covenants to pay any such sum or sums, with interest as aforesaid, and Landlord shall have, in addition to any other right or remedy of Landlord, the same rights and remedies in the event of nonpayment thereof by Tenant as in the case of default by Tenant in the payment of monthly Base Rent. Landlord shall not be limited in the proof of any damages which Landlord may claim against Tenant arising out of or by reason of Tenant's failure to provide and keep in force insurance as aforesaid, to the amount of the insurance premium or premiums not paid or not incurred by Tenant, and which would have been payable upon such insurance, but Landlord shall also be entitled to recover as damages for such breach the uninsured amount of any loss (to the extent of any deficiency between the dollar limits of insurance required by the provisions of this Lease and the dollar limits of the insurance actually carried by Tenant) and reasonable costs and expenses, including reasonable attorneys' fees, suffered or incurred by reason thereof occurring during any period when Tenant shall have failed or neglected to provide insurance as aforesaid. ARTICLE XIII DESTRUCTION AND RESTORATION 13.1 Destruction and Restoration. Tenant covenants and agrees that, in --------------------------- case of damage to or destruction of the Improvements during the Term, whether by fire or otherwise, Tenant shall make funds available to Landlord and Landlord shall promptly restore, repair, replace and rebuild the same as nearly as possible to the condition that the same were in immediately prior to such damage or destruction with such changes or alterations as may be reasonably acceptable to Landlord and Tenant or required by Applicable Land Use Laws and Restrictions then in effect. Tenant shall immediately give Landlord written notice of such damage or destruction upon Tenant's or any assignee's or subtenant's knowledge of the occurrence thereof and specify in such notice, in reasonable detail, the extent thereof. Such restorations, repairs, replacements, rebuilding, changes and alterations, including the cost of 40 temporary repairs for the protection of the Demised Premises, or any portion thereof, pending completion thereof are sometimes hereinafter referred to as the "Restoration." Landlord shall be entitled to recover all "soft" costs incurred in connection with Landlord's performance of the Restoration including a fee competitive with others providing similar services. The Restoration shall be carried on and completed in accordance with the provisions and conditions of Section 13.2 hereof. If the amount of the insurance proceeds recovered from the policy or policies maintained (or required to be maintained) by Tenant, as described in Article VI of this Lease, is reasonably deemed insufficient by a qualified contractor, reasonably acceptable to Tenant and Landlord (or Landlord's lender, as the case may be) to complete the Restoration of such Improvements (exclusive of Tenant's personal property and trade fixtures which shall be restored, repaired or rebuilt, at Tenant's discretion, out of Tenant's separate funds), except as provided in this Section 13.1 below, Tenant shall, upon request of Landlord (or by Landlord's lender, as the case may be), deposit with Landlord (or Landlord's lender, if required) a cash deposit equal to the reasonable estimate of the amount necessary to complete the Restoration of such Improvements less the amount of such insurance proceeds available. Notwithstanding the foregoing, if Landlord is prohibited from effecting the Restoration of the Demised Premises due to applicable governmental laws, rules or regulations then in effect, Landlord shall not be required to effect such Restoration. In such an event, any insurance proceeds shall be paid to, and may be retained by, Landlord or Landlord's lender, as the case may be, and this Lease, and all obligations of the parties hereunder (except those which expressly survive the termination hereof) shall terminate. 13.2 Application of Insurance Proceeds. All moneys recovered from the --------------------------------- insurance policy or policies maintained (or required to be maintained) by Tenant, shall be paid directly to Landlord (or held by Landlord's lender, if required) on account of such damage or destruction. Such amounts, less the reasonable costs, if any, incurred by Landlord in recovering such funds, shall be applied to the payment of the costs of the Restoration and shall be paid out from time-to-time as the Restoration progresses upon the written request of Tenant, accompanied by a certificate of the architect or a qualified professional engineer in charge of the Restoration stating that as of the date of such certificate (a) the sum requested is justly due to the contractors, subcontractors, materialmen, laborers, engineers, architects, or persons, firms or corporations furnishing or supplying work, labor, services or materials for such Restoration, and when added to all sums previously paid out does not exceed the value of the Restoration performed to the date of such certificate by all of said parties; (b) except for the amount, if any, stated in such certificates to be due for work, labor, services or materials, there is no outstanding indebtedness known to the person signing such certificate, after due inquiry, which is then due for work, labor, services or materials in connection with such Restoration, which, if unpaid, might become the basis of a mechanic's lien or similar lien with respect to the Restoration or a lien upon the Demised Premises, or any portion thereof; and (c) the costs, as estimated by the person signing such certificate, of the completion of the Restoration required to be done subsequent to the date of such certificate in order to complete the Restoration do not exceed the sum of the remaining insurance moneys, plus the amount deposited by the parties (as applicable) after payment of the sum requested in such certificate. If the insurance moneys and such other sums, if any, deposited with Landlord (or with Landlord's lender) pursuant to Section 13.1 hereof, shall be insufficient to pay the entire costs of the Restoration, Tenant agrees to pay any deficiency promptly upon demand. Upon completion of the Restoration and payment in full thereof by Tenant, Landlord shall, within a reasonable period of time, turn over to Tenant all insurance moneys or other moneys then remaining upon the parties' joint, good-faith determination that the Restoration has been paid for in full and the damaged or destroyed Building and other Improvements repaired, restored or rebuilt as nearly as possible to the condition they were in immediately prior to such damage or destruction, or with such changes or alterations as may be made in conformity with Section 13.1 and Article XIX hereof. 13.3 Continuance of Tenant's Obligations. Except as provided for in this ----------------------------------- Section 13.3 and in Section 13.6, no destruction of or damage to the Demised Premises, or any portion thereof, by fire, casualty or otherwise shall permit Tenant to surrender this Lease or shall relieve Tenant from its liability to pay to Landlord the Base Rent and Additional Rent payable under this Lease or from any of its other obligations under this Lease, and Tenant waives any rights now or hereafter conferred upon Tenant by present or future law or otherwise to quit or surrender this Lease or the Demised Premises, or any portion thereof, to Landlord or to any suspension, diminution, abatement or reduction of rent on account of any such damage or destruction, including, without limitation, the provisions of California Civil Code Sections 1932(2) and 1933(4). 13.4 Availability of Insurance Proceeds. To the extent that any ---------------------------------- insurance moneys which would otherwise be payable and used in the Restoration of the damaged or destroyed Improvements are paid to any mortgagee of Landlord and applied in payment of or reduction of the sum or sums secured by any such mortgage or mortgages made by Landlord on the Demised Premises, Landlord shall make available, for the purpose of Restoration of such Improvements, an amount equal to the amount payable to its mortgagee out of such proceeds, and such sum shall be applied in the manner provided in Section 13.2 hereof. 13.5 Completion of Restoration. The foregoing provisions of this Article ------------------------- XIII apply only to damage or destruction of the Improvements by fire, casualty or other cause occurring after the Commencement Date. Any such damage or destruction occurring prior to such time shall be restored, repaired, replaced and rebuilt by Landlord. 13.6 Termination of Lease. -------------------- (a) For purposes of this Lease, the term "Threshold Amount" shall mean an amount equal to the product of (i) One Million Dollars ($1,000,000.00) multiplied by (ii) a fraction, the numerator of which is the number of months from the date of damage or destruction until the expiration of the Term of this Lease, and the denominator of which is eighteen (18); and the term "Threshold Period" shall mean the product of (a) one hundred eighty (180) days multiplied by a fraction, the numerator of which is the number of months from the date of such damage or destruction until the date of expiration of the Term of this Lease, and the denominator of which is eighteen (18). (b) If, within eighteen (18) months prior to the expiration of the Term of this Lease, the Improvements shall be destroyed or damaged to such an extent that the Restoration 42 thereof is reasonably estimated to cost more than the Threshold Amount to complete, Tenant and Landlord shall, as soon as reasonably possible following such event of damage or destruction, compute the amount of the insurance proceeds available from the insurance required to be maintained by Tenant under this Lease and the amount, if any, over and above the net proceeds of such insurance which will be necessary for such Restoration, as determined by a qualified contractor, reasonably acceptable to Tenant and Landlord (or Landlord's Lender, as the case may be), which latter amount is hereinafter referred to as the "Excess Cost." Within five (5) business days following the determination of the Excess Cost, Tenant shall notify Landlord, in writing, whether Tenant is willing to pay to such Excess Cost to restore such damage or destruction for occupancy by Tenant. If Tenant notifies Landlord that it is willing to pay such Excess Cost, it shall do so in accordance with the provisions of Sections 13.1, 13.2 and 13.3 hereof. (c) If, within eighteen (18) months prior to the expiration of the Term of this Lease, the Improvements shall be destroyed or damaged to such an extent that, in the opinion of a reasonably qualified contractor selected by Landlord and Tenant, the Restoration shall take longer than the Threshold Period to complete, Tenant shall be entitled to notify Landlord, in writing, of such fact, which notice shall be accompanied by a detailed statement of the nature and extent of such damage or destruction and the estimated period of Restoration. (d) If (i) Tenant elects not to pay the Excess Cost, as described under subsection (b), above, or (ii) if the period of Restoration as estimated by the contractor selected by Landlord and Tenant exceeds the Threshold Period, then Tenant shall have the option, within thirty (30) days after Tenant's notice to Landlord, to surrender the Demised Premises to Landlord by a notice, in writing, addressed to Landlord, specifying such election; provided, however, if Landlord elects to pay such Excess Cost, which election shall be made within ten (10) business days after Tenant notifies Landlord of its election not to pay the Excess Cost, then Tenant shall not have the right to terminate this Lease pursuant to subsection (i) of this subsection (d) and, provided Tenant has not elected to terminate this Lease under subsection (ii) of this subsection (d), Landlord shall pay such Excess Cost. If Tenant terminates this Lease in accordance with this subsection (d), the applicable notice shall be accompanied by (A) Tenant's payment of the balance of the Base Rent and Additional Rent due for the remainder of the term of this Lease and other charges hereafter specified in this Section 13.6, or, in the alternative, (B) reasonably satisfactory evidence (e.g. a certificate from the insurer) that the loss of use and business interruption insurance Tenant is required to maintain shall be paid by the insurer directly to Landlord in an amount equal to the lesser of (x) if more than one (1) year of the Term remains the Base Rent and Additional Rent provided under this Lease for no less than one (1) year, or (y) the Base Rent and Additional Rent provided under this Lease for the remainder of the Term. (e) In such an event Landlord shall be entitled to the proceeds of all insurance required to be maintained by Tenant under Section 6.1 above (other than proceeds related to trade fixtures, furniture, equipment and other personal property of Tenant) and Tenant shall execute all documents reasonably requested by Landlord to allow such proceeds to be paid to Landlord or as Landlord may otherwise direct (e.g., to Landlord's lender). 43 ARTICLE XIV CONDEMNATION 14.1 Condemnation of Entire Demised Premises. If, during the Initial --------------------------------------- Term of this Lease or any extension or renewal thereof, the entire Demised Premises or the entire Building shall be taken as the result of the exercise of the power of eminent domain (hereinafter referred to as the "Proceedings"), this Lease and all right, title and interest of Tenant hereunder shall cease and come to an end on the date of vesting of title pursuant to such Proceedings. In any taking of the Demised Premises, or any portion thereof, whether or not this Lease is terminated as in this Article provided, Tenant shall not be entitled to any portion of the award for the taking of the Demised Premises or damage to the Improvements, except as otherwise provided in Section 14.3 with respect to the restoration of the Improvements, and Tenant hereby waives any right it now has or may have under present or future law to receive any separate award of damages for its interest in the Demised Premises or any portion thereof, except that Tenant shall have, nevertheless, the limited right to prove in the Proceedings and to receive any award which may be made for damages to or condemnation of Tenant's movable trade fixtures and equipment, for goodwill and for Tenant's relocation costs in connection therewith. 14.2 Partial Condemnation/Termination of Lease. If, during the Term of ----------------------------------------- this Lease an amount less than the entire Demised Premises shall be taken in such Proceedings with the result that it will materially and adversely interfere with Tenant's enjoyment and intended use (as described in Section 4.1, hereof), as reasonably determined by Tenant, Tenant may, at its option, terminate this Lease as to the remainder of the Demised Premises. Tenant shall not have the right to terminate this Lease pursuant to the preceding sentence unless (a) the business of Tenant conducted in the portion of the Demised Premises taken cannot reasonably be carried on with substantially the same utility and efficiency in the remainder of the Demised Premises, and (b) Tenant (or Landlord for Tenant) cannot construct or secure on the Demised Premises substantially similar space to the space so taken and as a substantially integrated whole with the remaining portion of the Demised Premises. Such termination as to the remainder of the Demised Premises shall be effected by notice in writing given not more than sixty (60) days after the date of vesting of title in such Proceedings, and shall specify a date no more than sixty (60) days after the giving of such notice as the date for such termination. Upon the date specified in such notice, the Term of this Lease, and all right, title and interest of Tenant hereunder, shall cease and come to an end. If this Lease is terminated as provided in this Section 14.2, Landlord shall be entitled to and shall receive the total award made in such Proceedings, Tenant hereby assigning any interest in such award, damages, and compensation to Landlord, and Tenant hereby waiving any right Tenant now has or may have under present or future law to receive any separate award of damages for its interest in the Demised Premises or any portion thereof or its interest in this Lease, except as otherwise provided in Section 14.1. The right of Tenant to terminate this Lease as provided in this Section 14.2, shall not cure or otherwise release Tenant from any then existing breach of Tenant's performance of any of the terms, covenants or conditions of this Lease on its part to be performed. In the event that Tenant elects not to terminate this Lease as to the remainder of the Demised Premises, the rights and obligations of Landlord and Tenant shall be governed by the provisions of Section 14.3 hereof. 44 14.3 Partial Condemnation/Continuation of Lease. If this Lease is not ------------------------------------------ terminated as provided in Section 14.2 hereof; then this Lease shall, upon vesting of title in the Proceedings, terminate as to the parts so taken, and Tenant shall have no claim or interest in the award, damages, consequential damages and compensation, or any part thereof except as otherwise provided in Section 14.1, Tenant hereby waiving any right Tenant now has or may have under present or future law to receive any separate award of damages for its interest in the Demised Premises or any portion thereof or its interest in this Lease, except as otherwise provided in Section 14.1 and except that Tenant shall have the right to apply to Landlord for reimbursement as hereinafter provided from such funds as specified in this Section 14.3. The net amount of the award (after deduction of all costs and expenses, including attorneys' fees) shall be held by Landlord (or Landlord's lender) and applied as hereinafter provided. Landlord, in such case, covenants and agrees, at Landlord's sole cost and expense promptly to restore that portion of the Improvements on the Demised Premises not so taken to a complete architectural and mechanical unit for the use and occupancy of Tenant as provided in this Lease. In the event that the net amount of the award (after deduction of all costs and expenses, including attorneys' fees) that may be received by Landlord in any such Proceedings for physical damage to the Improvements as a result of such taking, and held by Landlord (or Landlord's lender) for restoration of the Demised Premises, is insufficient to pay all costs of such restoration work, Landlord shall pay the difference. Tenant shall not be liable for any additional sum. 14.4 Continuance of Obligations. In the event of any termination of this -------------------------- Lease or any part thereof as a result of any such Proceedings, Tenant shall pay to Landlord all Base Rent, all Additional Rent and other charges payable hereunder with respect to that portion of the Demised Premises so taken in such Proceedings with respect to which this Lease shall have terminated justly apportioned to the date of such termination. From and after the date of vesting of possession in such Proceedings, Tenant shall continue to pay the Base Rent, Additional Rent and other charges payable hereunder as in this Lease provided to be paid by Tenant, subject to an abatement of a just and proportionate part of the Base Rent according to the extent and nature of such taking as provided for in Sections 14.3 and 14.5 hereof in respect to the Demised Premises remaining after such taking. 14.5 Adjustment of Rent. In the event of a partial taking of the Demised ------------------ Premises under Sections 14.2 or 14.3 hereof in which case this Lease is not terminated, the Base Rent for the period from and after the date of vesting of title in such Proceedings, until the termination of this Lease, shall be reduced to a sum equal to the product of the Base Rent provided for herein multiplied by a fraction, the numerator of which is the value of the Demised Premises after such taking and after the same shall have been restored to a complete architectural unit, and the denominator of which is the value of the Demised Premises prior to such taking. ARTICLE XV ASSIGNMENT, SUBLETTING, ETC. 15.1 Restriction on Transfer. Tenant shall not sublet the Demised ----------------------- Premises or any portion thereof, nor assign, mortgage, pledge, transfer or otherwise encumber or dispose of this 45 Lease or any interest therein, or in any manner assign, mortgage, pledge, transfer or otherwise encumber or dispose of its interest or estate in the Demised Premises or any portion thereof without obtaining Landlord's prior written consent in each and every instance. For purposes of this Article XV, an assignment shall not be deemed to include any sale or similar transfer of any stock in Tenant so long as Tenant's stock is publicly traded.. Landlord's consent to an assignment or subletting under this Section 15.1 shall not be unreasonably withheld or delayed, provided the following conditions are complied with: (a) Any assignment of this Lease shall transfer to the assignee all of Tenant's right, title and interest in this Lease and all of Tenant's estate or interest in the Demised Premises. (b) At the time of any assignment or subletting and at the time Tenant requests Landlord's written consent thereto, this Lease must be in full force and effect without any uncured Event of Default or Incipient Default thereunder on the part of Tenant. (c) Any such assignee shall assume, by written, recordable instrument, in form and content satisfactory to Landlord, the due performance of all of Tenant's obligations under this Lease from and after the time of the effective date of the assignment, and such assumption agreement shall state that the same is made by the assignee for the express benefit of Landlord as a third party beneficiary thereof. A copy of the assignment and assumption agreement, both in form and content satisfactory to Landlord, fully executed and acknowledged by assignee, together with a certified copy of a properly executed corporate resolution (if the assignee be a corporation) authorizing the execution and delivery of such assumption agreement, shall be sent to Landlord ten (10) days after the effective date of such assignment. (d) In the case of a subletting, a copy of any sublease fully executed and acknowledged by Tenant and the sublessee shall be mailed to Landlord ten (10) days after to the effective date of such subletting, which sublease shall be in form and content acceptable to Landlord. (e) Each sublease permitted under this Section 15.1 shall contain provisions to the effect that (i) such sublease is only for actual use and occupancy by the sublessee; (ii) such sublease is subject and subordinate to all of the terms, covenants and conditions of this Lease and to all of the rights of Landlord thereunder, and (iii) in the event this Lease shall terminate before the expiration of such sublease, the sublessee thereunder will, at Landlord's option, attorn to Landlord and waive any rights the sublessee may have to terminate the sublease or to surrender possession thereunder as a result of the termination of this Lease. (f) Any and all compensation paid to Tenant, in whatever form, in consideration of such assignment or subletting, including any differential between Base Rent and rent paid to Tenant by such assignee or subtenant, or any assignment fee or any other amount which can be attributed to the assignment or subletting, shall be paid directly by such assignee or subtenant to Landlord; provided, however, that Tenant shall Tenant be entitled to deduct from such compensation the amount of any (i) leasing commissions it has incurred in connection with such assignment or subletting, (ii) the direct cost of improvements constructed and paid for by Tenant in connection with such assignment or subletting, provided such improvements have been 46 made in accordance with the terms of this Lease (including, without limitation, requirements for Landlord's approval and that they be completed on a lien-free basis), and (iii) the actual cost of similar concessions actually made by Tenant in connection with such assignment or subletting. (g) Tenant agrees to pay on behalf of Landlord any and all reasonable costs of Landlord, including reasonable attorneys' fees paid or payable to outside counsel, occasioned by such assignment or subletting, but not to exceed One Thousand Dollars ($1,000.00). 15.2 Transfer to Affiliates; Sale or Merger. Notwithstanding the -------------------------------------- foregoing provisions of Section 15.1, Tenant shall be permitted to assign or sublet the Demised Premises or Tenant's rights under this Lease, without Landlord's prior consent, to (i) an entity in which Tenant, directly or indirectly, owns or beneficially controls more than fifty percent (50%) of the outstanding voting interests, (ii) an entity which directly or indirectly owns or beneficially controls more than fifty percent (50%) of the outstanding voting interests of Tenant, (iii) an entity, the outstanding voting interests of which are directly or indirectly owned by the same persons or entities which own or beneficially control the outstanding voting interests of Tenant (each, a "Sister Entity"), (iv) an entity in which a Sister Entity owns or beneficially controls more than fifty percent (50%) of the outstanding voting interests, or (v) an entity deemed to have been assigned the Lease through a sale of Tenant's stock or assets or through merger with Tenant, provided, that in any such case Tenant shall be required to give Landlord written notice of that assignment or subletting within thirty (30) days thereafter, including written evidence of the identity of the assignee or sublessee (actual or deemed) and its affiliation with Tenant. Tenant shall not be entitled to share in any profits Tenant might obtain as a result of an authorized assignment or sublet of the Demised Premises and Tenant shall arrange for any such profits which might otherwise be paid to Tenant by such assignee or sublessee to be paid directly to Landlord. 15.3 Restriction Against Further Assignment. Notwithstanding anything --------------------------------------- contained in this Lease to the contrary and notwithstanding any consent by Landlord to any sublease of the Demised Premises or any portion thereof or to any assignment of this Lease or of Tenant's interest or estate in the Demised Premises, except as provided in Section 15.2 above, no sublessee shall assign its sublease nor further sublease the Demised Premises or any portion thereof, and no assignee shall further assign its interest in this Lease or its interest or estate in the Demised Premises or any portion thereof; nor sublease the Demised Premises or any portion thereof; without Landlord's prior written consent in each and every instance, which consent shall not be unreasonably withheld or unduly delayed. No such assignment or subleasing shall relieve Tenant from any of Tenant's obligations contained in this Lease. 15.4 Tenant's Failure to Comply. Tenant's failure to comply with all of -------------------------- the foregoing provisions and conditions of this Article XV shall, at Landlord's option, render any purported assignment or subletting null and void and of no force and effect. 47 ARTICLE XVI SUBORDINATION, NONDISTURBANCE, NOTICE TO MORTGAGEE AND ATTORNMENT 16.1 Subordination by Tenant. This Lease and all rights of Tenant ----------------------- therein and all interest or estate of Tenant in the Demised Premises or any portion thereof shall be subject and subordinate to the lien of any mortgage, deed of trust, security instrument or other document of like nature (collectively, "Mortgage"), which at any time after the date of this Lease may be placed upon the Demised Premises or any portion thereof, and to each and every advance made under any such Mortgage. Tenant agrees at any time hereafter, to execute and deliver to Landlord any instruments, releases or other documents that may be reasonably required for the purpose of subjecting and subordinating this Lease to the lien of any such Mortgage. It is agreed, nevertheless, that so long as an Event of Default does not exist, that such subordination agreement or other instrument, release or document shall not interfere with, hinder or molest Tenant's right to quiet enjoyment under this Lease, shall not modify the terms of this Lease, nor the right of Tenant to continue to occupy the Demised Premises and all portions thereof, and to conduct its business thereon in accordance with the covenants, conditions, provisions, terms and agreements of this Lease. The lien of any such Mortgage shall not cover Tenant's trade fixtures or other personal property located in or on the Demised Premises. Landlord shall deliver to Tenant a commercially reasonably nondisturbance agreement executed by all lenders having a lien on the Demised Premises on the Commencement Date as a condition precedent in Tenant's favor, and from each future lender as a condition to Tenant's subordination or attornment hereunder. 16.2 Landlord's Default. In the event of any act or omission of Landlord ------------------ constituting a default by Landlord, other than Landlord's failure to have the Improvements substantially completed on a timely basis as provided in Article II and to make the same fully available to Tenant as therein provided, Tenant shall not exercise any remedy until Tenant has given Landlord and any mortgagee whose name and address have been previously provided to Tenant prior written notice of such act or omission and until a 30-day period of time to allow Landlord or the mortgagee to remedy such act or omission shall have elapsed following the giving of such notice; provided, however, if such act or omission cannot with due diligence and in good faith be remedied within such 30-day period, Landlord and/or mortgagee shall be allowed such further period of time as may be reasonably necessary provided that it shall have commenced remedying the same with due diligence and in good faith within said 30-day period. In the event any act or omission of Landlord which constitutes a Landlord's default hereunder results in an immediate threat of bodily harm to Tenant's employees, agents or invitees or damage to Tenant's property, or exposes Tenant to criminal liability, Tenant may proceed to cure the default without prior notice to Landlord or its mortgagee; provided, however, in that event Tenant shall give written notice to Landlord and its mortgagee as soon as possible after commencement of such cure. Nothing herein contained shall be construed or interpreted as requiring any mortgagee to remedy such act or omission. 16.3 Attornment. Subject to Section 16.1 above, if any mortgagee shall ---------- succeed to the rights of Landlord under this Lease or to ownership of the Demised Premises, whether through 48 possession or foreclosure or the delivery of a deed to the Demised Premises, then, upon the written request of such mortgagee so succeeding to Landlord's rights hereunder, Tenant shall attorn to and recognize such mortgagee as Tenant's landlord under this Lease, and shall promptly execute and deliver any instrument that such mortgagee may reasonably request to evidence such attornment (whether before or after making of the mortgage). In the event of any other transfer of Landlord's interest hereunder, upon the written request of the transferee and Landlord, Tenant shall attorn to and recognize such transferee as Tenant's landlord under this Lease and shall promptly execute and deliver any instrument that such transferee and Landlord may reasonably request to evidence such attornment. ARTICLE XVII SIGNS Tenant shall be allowed prominent Building and monument signage during the Term of this Lease, provided that such sign or signs (a) do not cause any structural damage or other material damage to the Building; (b) comply with and do not violate applicable governmental laws, ordinances, rules or regulations; (c) comply with and do not violate any existing restrictions affecting the Demised Premises and which are of a matter of record as of the date of this Lease; (d) are compatible with the architecture of the Building and the landscaped area adjacent thereto, and (e) the design, size and location of such signs have been mutually approved by Landlord and Tenant, which approval shall not be unreasonably withheld or delayed. The cost of such signs shall not be funded from the Tenant Improvement Allowance and shall be entirely Tenant's separate expense, except as provided in Section 2.10(c). ARTICLE XVIII FINANCIAL STATEMENTS OF TENANT From time to time, at Landlord's request, Tenant shall provide Landlord with Tenant's most recent financial statements in form and content reasonably satisfactory to Landlord and Landlord's lenders (which, if Tenant is an entity which files periodic financial disclosures to securities regulatory authorities, shall be those which are periodically filed with those authorities). Landlord may provide copies of those financial statements to current and prospective lenders, investors and buyers, identified in writing to Tenant, for examination and review. Landlord shall keep all such financial statements strictly confidential and may provide copies of such financial statements to such other parties only upon receiving in return a covenant from each recipient that such recipient shall keep the financial statements confidential except with the prior written consent of Tenant. ARTICLE XIX CHANGES AND ALTERATIONS Tenant shall have the right at any time, and from time to time during the Term of this Lease, to make such changes and alterations, structural or otherwise, to the Building, 49 improvements and fixtures hereafter erected on the Demised Premises as Tenant shall deem necessary or desirable in connection with the requirements of its business, which changes and alterations (other than changes or alterations of Tenant's movable trade fixtures and equipment) shall be made in all cases subject to the following conditions, which Tenant covenants to observe and perform: (a) Permits. No change or alteration shall be undertaken until Tenant shall ------- have procured and paid for, so far as the same may be required from time to time, all municipal, state and federal permits and authorizations of the various governmental bodies and departments having jurisdiction thereof; and Landlord agrees to join in the application for such permits or authorizations whenever such action is necessary, all at Tenant's sole cost and expense, provided such applications do not cause Landlord to become liable for any cost, fees or expenses. (b) Compliance with Plans and Specifications. Before commencement of any ---------------------------------------- change, alteration, restoration or construction (hereinafter sometimes referred to as "Work") involving in the aggregate an estimated cost of more than Fifty Thousand Dollars ($50,000.00) or which, in Landlord's reasonable judgment, would materially alter the mechanical, structural or electrical components of the Demised Premises, Tenant shall (i) furnish Landlord with detailed plans and specifications of the proposed change or alteration; (ii) obtain Landlord's prior written consent, which consent shall not be unreasonably withheld; (iii) obtain Landlord's prior written approval of a licensed architect or licensed professional engineer selected and paid for by Tenant who shall approve any such work (hereinafter referred to as "Alterations Architect or Engineer"); (iv) obtain Landlord's prior written approval (which shall not be unreasonably withheld or delayed) of detailed plans and specifications prepared and approved in writing by said Alterations Architect or Engineer and of each amendment and change thereto, and (v) for any Work involving in the aggregate an estimated cost of more than One Hundred Thousand Dollars ($100,000.00), furnish to Landlord a surety company performance bond issued by a surety company licensed to do business in the state in which the Demised Premises are located and reasonably acceptable to Landlord in an amount equal to the estimated cost of such work guaranteeing the completion thereof within a reasonable time thereafter (1) free and clear of all mechanic's liens or other liens, encumbrances, security interests and charges, and (2) in accordance with the plans and specifications approved by Landlord. Tenant shall retain Contractor as the general contractor for the build-out of any portion of the Demised Premises which are left in "shell" condition as of the Commencement Date, provided Contractor's contract is on substantially the same terms as described in Section 2.12 of this Lease. (c) Value Maintained. Any change or alteration shall, when completed, be of ---------------- such character so as not to reduce the value of the Demised Premises or the Building to which such change or alteration is made below its value or utility to Landlord immediately before such change or alteration, nor shall such change or alteration reduce the area or cubic content of the Building to use without Landlord's express written consent. (d) Compliance with Laws. All Work done in connection with any change or -------------------- alteration shall be done promptly and in a good and workmanlike manner and in compliance with all building and zoning laws of the place in which the Demised Premises are situated, and in compliance with all laws, ordinances, orders, rules, regulations and requirements of all federal, 50 state and municipal governments and appropriate departments, commissions, boards and officers thereof; and in accordance with the orders, rules and regulations of the Board of Fire Underwriters where the Demised Premises are located or any other body exercising similar functions. The cost of any such change or alteration shall be paid in cash so that the Demised Premises and all portions thereof shall at all times be free of liens for labor and materials supplied to the Demised Premises or any portion thereof. The Work or any change or alteration shall be prosecuted with reasonable dispatch, delays due to strikes, lockouts, acts of God, inability to obtain labor or materials, governmental restrictions or similar causes beyond the control of Tenant excepted. Tenant or Tenant's contractor or subcontractor shall obtain and maintain at its sole cost and expense during the performance of the Work workers' compensation insurance covering all persons employed in connection with the Work and with respect to which death or injury claims could be asserted against Landlord or Tenant or against the Demised Premises or any interest therein, together with comprehensive general liability insurance for the mutual benefit of Landlord and Tenant with limits of not less than One Million Dollars ($1,000,000.00) in the event of injury to one person, Three Million Dollars ($3,000,000.00) in respect to any one accident or occurrence, and Five Hundred Thousand Dollars ($500,000.00) for property damage, and the fire insurance with "extended coverage" endorsement required by Section 6.1 hereof shall be supplemented with "builder's risk" insurance on a completed value form or other comparable coverage on the Work if the cost of such work will be in excess of Fifty Thousand Dollars ($50,000.00). All such insurance shall be in a company or companies authorized to do business in the state in which the Demised Premises are located and reasonably satisfactory to Landlord, and all such policies of insurance or certificates of insurance shall be delivered to Landlord endorsed "Premium Paid" by the company or agency issuing the same, or with other evidence of payment of the premium satisfactory to Landlord. (e) Property of Landlord. All improvements and alterations (other than -------------------- Tenant's movable trade fixtures, furniture and equipment) made or installed by Tenant shall, immediately upon completion or installation thereof, become the property of Landlord without payment therefor by Landlord, and shall be surrendered to Landlord on the expiration of the Term of this Lease unless and to the extent Tenant is required or permitted to remove the same upon termination or expiration of the Term as provided in subsection (g), below, in which event they shall become the property of Tenant, provided that Tenant shall be required to restore the Demised Premises in accordance with Section 19(g), below. (f) Location of Improvements. No change, alteration, restoration or new ------------------------ construction shall be in, or connect the Improvements with, any property, building or other improvement located outside the boundaries of the parcel of land described in Exhibit "A" attached hereto, nor shall the same obstruct or ----------- interfere with any existing easement. (g) Removal of Improvements. As a condition to granting approval for any ----------------------- changes or alterations, Landlord may require Tenant, by written notice to Tenant given at or prior to the time of granting such approval, to remove any improvements, additions or installations installed by Tenant in the Demised Premises at Tenant's sole cost and expense at the end of the term of this Lease and repair and restore any damage caused by the installation and removal of such improvements, additions, or installations; provided, however, the only improvements, additions or installations which Tenant shall remove shall be those specified in such notice. All 51 improvements, additions or installations installed by Tenant which did not require Landlord's prior approval shall be removed by Tenant as provided for in this Section 19(g), unless such improvements, additions or installations do not adversely affect Landlord's ability to re-lease the Demised Premises. Prior to making any improvements, additions or alterations that do not require Landlord's approval, Tenant may request Landlord to specify whether Landlord considers such improvements, additions or installations to be of the type that would adversely affect Landlord's ability to re-lease the Demised Premises if not removed by Tenant Notwithstanding anything to the contrary contained herein, Tenant shall have the right to remove any improvements, additions or alterations installed by Tenant and at its expense (specifically not including any of the original Tenant Improvements) upon expiration or earlier termination of the Term so long as Tenant repairs any damage caused by such removal at its sole cost and expense and returns the applicable portion of the Demised Premises to its original condition prior to the installation of such improvement, addition or alteration. (h) Reasonable Consent. All consents required of Landlord under this ------------------ Article XIX shall not be unreasonably withheld by Landlord. (i) Notice to Landlord. Regardless of whether Landlord's consent is ------------------ required to any change or alteration to the Demised Premises made or to be made by Tenant, such changes or alterations shall not be commenced until two (2) business days notice after Landlord has received notice from Tenant stating the date such changes or alterations are to commence so that Landlord can post and record an appropriate notice of nonresponsibility. ARTICLE XX MISCELLANEOUS PROVISIONS 20.1 Entry by Landlord. Tenant agrees to permit Landlord and authorized ----------------- representatives of Landlord to enter upon the Demised Premises at all reasonable times during ordinary business hours upon at least two (2) business day's advance notice to Tenant for the purpose of inspecting the same and making any repairs required to be made thereto by Landlord under the terms of this Lease, or as required to be made thereto by Tenant under the terms of this Lease provided that Landlord shall have first given written notice to Tenant to make such repairs and Tenant shall have failed to make such repairs within thirty (30) days after notice; provided, however, Tenant shall be allowed such further period of time as may be provided in Section 12.1(b); and, provided further, that Landlord shall be allowed to enter upon the Demised Premises during an emergency. Nothing herein contained shall imply any duty upon the part of Landlord to do any such work which, under any provision of this Lease, Tenant may be required to perform, and the performance thereof by Landlord shall not constitute a waiver of Tenant's default in failing to perform the same. Landlord may, during the progress of any work, keep and store upon the Demised Premises all necessary materials, tools and equipment in areas designated by Tenant. Landlord shall not in any event be liable for inconvenience, annoyance, disturbance, loss of business or other damage to Tenant by reason of making such repairs or the performance of any such work in or about the Demised Premises or on account of bringing material, supplies and equipment into, upon or through the Demised Premises during the course thereof, and the obligations of Tenant under this Lease shall not be thereby affected in any 52 manner whatsoever, except that Landlord shall use its best efforts to not unreasonably interfere with Tenant's use of the Demised Premises, or any portion thereof; by reason of Landlord's making such repairs or the performance of any such work in or about the Demised Premises or on account of bringing materials, supplies and equipment into, upon or through the Demised Premises during the course thereof. Tenant may accompany Landlord on any inspection or entry by Landlord. 20.2 Exhibition of Demised Premises. Landlord is hereby given the right ------------------------------ during usual business hours upon at least two (2) business days' advance notice to Tenant at any time during the Term of this Lease to enter upon the Demised Premises and to exhibit the same for the purpose of mortgaging or selling the same. During the final year of the Term, Landlord shall be entitled (i) to display on the Demised Premises in such manner as to not unreasonably interfere with Tenant's business, signs reasonably approved as to design and location by Tenant indicating that the Demised Premises are for rent and/or sale and suitably identifying Landlord or its agent, and (ii) upon at least two (2) business days' advance notice to Tenant, to exhibit the Demised Premises to prospective tenants. 20.3 Indemnifications by Tenant. To the fullest extent allowed by law, -------------------------- Tenant shall at all times indemnify, defend and hold Landlord harmless against and from any and all claims by or on behalf of any person or persons, firm or firms, corporation or corporations, arising from the conduct or management, or from any work or things whatsoever done in or about the Demised Premises during the Term of this Lease, other than as a result of the negligence or willful misconduct of Landlord or its officers, agents, employees, contractors or subcontractors, or as a result of Landlord's breach of its obligations under this Lease, and Tenant shall further indemnify, defend and hold Landlord harmless against and from any and all claims arising during the Term of this Lease from any condition of the Improvements (other than defects in construction of the initial Improvements or other items Landlord is required to repair or maintain), or of any passageways or space therein, other than as a result of the negligence or willful misconduct of Landlord or its officers, employees, agents, contractors or subcontractors or as a result of Landlord's breach of its obligations under this Lease, or arising from any act or gross negligence of Tenant, its agents, servants, employees or licenses, or arising from any accident, injury or damage whatsoever caused to any person, firm or corporation occurring during the Term of this Lease in or about the Demised Premises, other than as a result of the negligence or willful misconduct of Landlord or its officers, employees, agents, contractors or subcontractors, or as a result of Landlord's breach of its obligations under this Lease, and from and against all costs, attorneys' fees, expenses and liabilities incurred in or about any such claim or action or proceeding brought thereon; and in case any action or proceeding be brought against Landlord by reason of any such claim, Tenant, upon notice from Landlord, covenants to defend such action or proceeding by counsel reasonably satisfactory to Landlord subject to the requirements of Tenant's insurer. Tenant's obligations under this Section 20.3 shall be insured by contractual liability endorsement on Tenant's policies of insurance required under the provisions of Section 6.2 hereof to the extent reasonably obtainable. 20.4 Notices. All notices, demands and requests which may be or are ------- required to be given, demanded or requested by either party to the other shall be in writing, and shall be sent by United States registered or certified mail, postage prepaid, by an independent overnight courier 53 service marked for next business day delivery, or by telephonic facsimile transmission with automatic written time and date confirmation of delivery transmitted between the hours of 9:00 a.m. and 5:00 p.m. (time zone of recipient, but only if confirmed within two (2) business days by receipt of a mailed or personally delivered copy), and addressed as follows: To Landlord: Kilroy Realty, L.P. 2250 East Imperial Highway, Suite 1200 El Segundo, California 92045 Attention: Nadine Kirk Facsimile: (310) 322-8790 with copy to: Kilroy Realty, L.P. 2250 East Imperial Highway, Suite 1200 El Segundo, California 92045 Attention: Jeff Hawken Facsimile: (310) 322-5981 with an additional copy to: Kilroy Realty, L.P. 4365 Executive Drive, Suite 850 San Diego, California 92121 Attention: Steve Scott Facsimile: (619) 550-1935 To Tenant: Applied Micro Circuits Corporation 6920 Sequence Drive San Diego, California 92121-2793 Attention: Mr. Joel 0. Holliday Facsimile: (619) 535-6800 With a copy to: David B. Marino The Irving Hughes Group, Inc. 501 West Broadway, Suite 2020 San Diego, California 92101 Facsimile: (619) 238-1025 54 or at such other place as a party hereto may from time to time designate by written notice thereof to the other. Notices, demands and requests which shall be served upon Landlord by Tenant, or upon Tenant by Landlord, in the manner aforesaid, shall be deemed received three (3) days after delivery to United States mail, one (1) business day after delivery to an overnight courier service, or at the time such notice, demand or request shall be transmitted by facsimile (if confirmed as written above). 20.5 Quiet Enjoyment. Landlord covenants and agrees that Tenant, upon --------------- paying the Base Rent and Additional Rent and upon observing and keeping the covenants, agreements and conditions of this Lease on its part to be kept, observed and performed, shall lawfully and quietly hold, occupy and enjoy the Demised Premises (subject to the provisions of this Lease) during the Term of this Lease without hindrance or molestation by Landlord or by any person or persons claiming under Landlord. 20.6 Landlord's Continuing Obligations. The term "Landlord," as used in --------------------------------- this Lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners at the time in question of the fee of the Demised Premises, and in the event of any transfer or transfers or conveyance, the then grantor shall be automatically freed and relieved from and after the date of such transfer or conveyance of all liability as respects the performance of any covenants or obligations on the part of Landlord contained in this Lease thereafter to be performed, provided that any funds in the hands of such landlord or the then grantor at the time of such transfer, in which Tenant has an interest, shall be turned over to the grantee, and any amount then due and payable to Tenant by Landlord or the then grantor under any provision of this Lease, shall be paid to Tenant, and further provided that the new Landlord expressly assumes in writing for the benefit of Tenant all obligations of Landlord under this Lease. The covenants and obligations contained in this Lease on the part of Landlord shall, subject to the aforesaid, be binding on Landlord's successors and assigns during and in respect of their respective successive periods of ownership. Nothing herein contained shall be construed as relieving Landlord of its obligations under Article II of this Lease or releasing Landlord from any obligation to complete the cure of any breach by Landlord during the period of its ownership of the Demised Premises. However, Tenant agrees to look solely to Landlord's interest in the Land, the Building and the Improvements for the recovery of any judgment from Landlord, it being agreed that, if Landlord is a partnership, Landlord's partners, whether general or limited, or if Landlord is a corporation, its directors, officers and shareholders, shall never be personally liable for any such judgments or damages. Notwithstanding the foregoing, Landlord and its general partner shall be fully and personally liable for claims by Tenant relating to Landlord's obligations under Sections 2.1 (The Improvements), 2.6 (Liquidated Damages for Delay in Substantial Completion) and 2.9 (Condition of Demised Premises; Limited Warranty). 20.7 Estoppel. Tenant shall, without charge at any time and from time to -------- time, within ten (10) business days after written request by Landlord, certify by written instrument, duly executed, acknowledged and delivered to any mortgagee, assignee of a mortgagee, proposed mortgagee, purchaser or proposed purchaser, or any other person dealing with Landlord or the Demised Premises: 55 (a) That this Lease (and all guaranties, if any) is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect, as modified and stating the modifications); (b) The dates to which the Base Rent or Additional Rent have been paid in advance. (c) Whether or not there are then existing any breaches or defaults by such party or the other party known by such party under any of the covenants, conditions, provisions, terms or agreements of this Lease, and specifying such breach or default, if any, or any set-offs or defenses against the enforcement of any covenant, condition, provision, term or agreement of this Lease (or of any guaranties) upon the part of Landlord or Tenant (or any guarantor), as the case may be, to be performed or complied with (and, if so, specifying the same and the steps being taken to remedy the same); and (d) Such other statements or certificates as Landlord or any mortgagee may reasonably request. It is the intention of the parties hereto that any statement delivered pursuant to this Section 20.7 may be relied upon by any of such parties dealing with Landlord or the Demised Premises. Failure by Tenant to timely respond to such request shall be deemed Tenant's certification of the accuracy of such matters. 20.8 Delivery of Corporate Documents. In the event that Tenant is a ------------------------------- corporation or similar business entity (e.g., limited partnership, limited liability company or limited liability partnership), Tenant shall, without charge to Landlord, at any time and from time to time within ten (10) business days after written request by Landlord, deliver to Landlord, in connection with any proposed sale or mortgage of the Demised Premises, the following instruments and documents: (a) Certificate of Good Standing in the state of incorporation of Tenant and in the state in which the Demised Premises are located issued by the appropriate state authority and bearing a current date; (b) A copy of Tenant's articles of incorporation and by-laws (or partnership or operating agreement, as the case may be) and any amendments or modifications thereof certified by the secretary or assistant secretary (or managing partner or member, as the case may be) of Tenant; (c) A written and certified confirmation from the secretary or assistant secretary (or managing partner or member, as the case may be) that (i) this Lease has been duly authorized by all necessary corporate action and is a valid and binding agreement enforceable in accordance with its terms; and (ii) Tenant is a duly organized and validly existing corporation under the laws of its state of incorporation, is duly authorized to carry on its business, and is in good standing under the laws of the state in which the Demised Premises are located, if different from the state of incorporation. 56 20.9 Memorandum of Lease. Concurrently with their execution and delivery ------------------- of this Lease, the parties shall execute, acknowledge and deliver to each other, a Memorandum of Lease in the form attached hereto as "Exhibit C" and made a part --------- hereof. Such Memorandum of Lease may be recorded by either party' at their sole cost and expense. 20.10 Severability. If any covenant, condition, provision, term or ------------ agreement of this Lease shall, to any extent, be held invalid or unenforceable, the remaining covenants, conditions, provisions, terms and agreements of this Lease shall not be affected thereby, but each covenant, condition, provisions, term or agreement of this Lease shall be valid and in force to the fullest extent permitted by law. 20.11 Successors and Assigns. The covenants and agreements herein contained ---------------------- shall bind and inure to the benefit of Landlord, its successors and assigns, and Tenant and its permitted successors and assigns. 20.12 Captions. The caption of each article of this Lease is for -------- convenience and reference only, and in no way defines, limits or describes the scope or intent of such article or of this Lease. 20.13 Relationship of Parties. This Lease does not create the relationship ----------------------- of principal and agent, partnership, joint venture, or any association or relationship between Landlord and Tenant, the sole relationship between Landlord and Tenant being that of landlord and tenant. 20.14 Entire Agreement. All preliminary and contemporaneous negotiations ---------------- are merged into and incorporated in this Lease. This Lease, together with the exhibits attached hereto, contains the entire agreement between the parties and shall not be modified or amended in any manner except by any instrument in writing executed by the parties hereto. 20.15 No Merger. There shall be no merger of this Lease or of the leasehold --------- estate created by this Lease with any other estate or interest in the Demised Premises by reason of the fact that the same person, firm, corporation or other entity may acquire, hold or own, directly or indirectly, (a) this Lease or the leasehold interest created by this Lease or any interest therein, and (b) any such other estate or interest in the Demised Premises, or any portion thereof. No such merger shall occur unless and until all persons, firms, corporations or other entities having an interest (including a security interest) in (1) this Lease or the leasehold estate created thereby, and (2) any such other estate or interest in the Demised Premises, or any portion thereof; shall join in a written instrument expressly affecting such merger and shall duly record the same. 20.16 Possession and Use. Tenant acknowledges that the Demised Premises are ------------------ the property of Landlord and that Tenant has only the right to possession and use thereof upon the covenants, conditions, provisions, terms and agreements set forth in this Lease. 20.17 Surrender of Demised Premises. Subject to the other provisions of ----------------------------- this Lease, at the expiration of the Term of this Lease, Tenant shall surrender the Demised Premises in the same condition as they were in upon delivery of possession thereto at the Commencement Date, 57 reasonable wear and tear, casualty and condemnation excepted, and shall surrender all keys to the Demised Premises to Landlord at the place then fixed for the payment of Base Rent, and shall inform Landlord of all combinations on locks, safes and vaults, if any. Tenant shall at such time remove all of its property therefrom and all alterations and improvements placed thereon by Tenant if so requested by Landlord, or otherwise allowed, subject to Sections 19(e) and (g). Tenant shall repair any damage to the Demised Premises caused by such removal, and any and all such property not so removed shall, at Landlord's option, become the exclusive property of Landlord or be disposed of by Landlord, at Tenant's cost and expense, without further notice to or demand upon Tenant, subject to applicable law and Sections 19(e) and (g). All property of Tenant not removed on or before the last day of the Term of this Lease shall be deemed abandoned in accordance with, and subject to, applicable law. 20.18 Holding Over. In the event Tenant remains in possession of the ------------ Demised Premises after expiration of this Lease and without the execution of a new lease, it shall be deemed to be occupying the Demised Premises as a tenant from month-to-month, subject to all the provisions, conditions and obligations of this Lease insofar as the same can be applicable to a month-to-month tenancy, except that the Base Rent shall be escalated to one hundred and twenty-five percent (125%) of the then current Base Rent for the Demised Premises for the first three (3) months of such tenancy and one hundred fifty percent (150%) of such amount thereafter, and from and after such three (3) month period, Tenant shall indemnify, defend and hold Landlord harmless against loss or liability resulting from the delay by Tenant in so surrendering the Demised Premises, including without limitation any claim made by any succeeding occupant founded on such delay. Tenant's obligation to observe or perform this covenant shall survive the expiration or other termination of this Lease. 20.19 Survival. All obligations of either party (together with interest or -------- money obligations at the Maximum Rate of Interest) accruing prior to expiration of the Term of this Lease shall survive the expiration or other termination of this Lease. 20.20 Broker's Commission. Tenant and Landlord represent that they have ------------------- dealt only with The Irving Hughes Group, Inc., as broker in connection with this Lease. Landlord shall be responsible for paying the commissions owing to such brokers under a separate written agreement between Landlord and such broker. Tenant and Landlord will indemnify, defend and hold the other harmless from and against any loss, cost or expense, including, but not limited to, reasonable attorneys' fees and court costs, resulting from any claim for a fee or commission by any other broker or finder resulting from their own actions. 20.21 Applicable Law. This Lease shall be governed and interpreted in -------------- accordance with the laws of the State of California. 20.22 Counterparts. This Lease may be executed in one or more ------------ counterparts, each of which shall be deemed an original and all of which, when taken together, shall constitute a single instrument. 58 20.23 Attorney's Fees. In the event of any litigation, arbitration, --------------- mediation or any other action taken by either party to this Lease to enforce any provision of this Lease, enforce any remedy available upon default under this Lease, or seek a declaration of the rights of a party under this Lease, the prevailing party shall be entitled to recover in such action such attorneys' fees and costs as may be reasonably incurred, including, without limitation, the costs of reasonable investigation, preparation and professional or expert consultation, travel expenses, costs on appeal, court reporter fees and expenses, incurred by reason of such litigation, arbitration or other action. All other attorneys' fees and cost relating to this Agreement and the transactions described herein shall be borne by the party incurring the same. IN WITNESS WHEREOF, each of the parties hereto have caused this Lease to be duly executed as of the day and year first above-written. LANDLORD: KILROY REALTY, L.P., a Delaware limited partnership By: Kilroy Realty Corporation, a Maryland corporation Its General Partner By: [SIGNATURE ILLEGIBLE] By:______________________ ---------------------------- Name:__________________________ Name:____________________ Its:______________________ Its: _______________ TENANT: APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation By: /s/ Joel O. Holiday ---------------------------- Joel O. Holliday Its: Vice President, Finance and Administration By: /s/ David M. Rickey ---------------------------- David M. Rickey Its: President & CEO 59 EXHIBIT "A" LEGAL DESCRIPTION OF LAND LEGAL DESCRIPTION BEING A PORTION OF PARCELS 3 AND 4 OF PARCEL MAP NO. 17755, ON FILE IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, IN THE CITY, OF SAN DIEGO, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA. MORE PARTICULARLY DESCRIBED AS FOLLOWS: EGINNING AT THE SOUTHWEST CORNER OF SAID PARCEL 3; THENCE ALONG THE WESTERLY LINE OF SAID PARCEL 3 1. NORTH 04 degrees 43'00" EAST 40.06 FEET; THENCE 2. NORTH 00 degrees 19'33" WEST 199.65 FEET; THENCE LEAVING SAID WESTERLY LINE 3. NORTH 89 degrees 57'12" EAST 57.50 FEET; THENCE 4. NORTH 00 degrees 19'33" WEST 99.68 FEET: THENCE 5. NORTH 86 degrees 40'27" WEST 31.29 FEET; THENCE 6. NORTH 00 degrees 00'00" EAST 23.80 FEET; THENCE 7. SOUTH 85 degrees 37'38" EAST 274.92 FEET TO A POINT ON THE WESTERLY LINE OF SEQUENCE DRIVE AS DEDICATED PER MAP NO. 12685, ON FILE IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, IN THE CITY OF SAN DIEGO, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA. POINT ALSO LIES ON THE ARC OF A 1573.00 FOOT RADIUS CURVE, CONCAVE EASTERLY, A RADIAL TO TO SAID POINT BEARS NORTH 87 DEGREES 02' 12" WEST: THENCE ALONG THE ARC OF SAID CURVE AND SAID WESTERLY LINE 8. SOUTHERLY 318.25 FEET THROUGH A CENTRAL ANGLE OF 11 DEGREES 35'31"; THENCE LEAVING SAID WESTERLY LINE IN A NON- TANGENT DIRECTION 9. SOUTH 86 degrees 32'09" WEST 380.84 FEET TO THE POINT OF BEGINNING. CONTAINS 2.69 AC. MORE OR LESS. /s/ Mark J. Rowson Jan 25, 1999 ---------------------------------------------- MARK J. ROWSON, R.C.E. 30836 DATE [SEAL] (Registration expires 3-31-2000) EXHIBIT A --------- EXHIBIT "B" SITE PLAN [TO BE ATTACHED] EXHIBIT B --------- EXHIBIT "C" MEMORANDUM OF LEASE RECORDING REQUESTED BY: ) AND WHEN RECORDED RETURN TO: ) ) Applied Micro Circuits Corporation ) c/o Luce, Forward, Hamilton & Scripps, LLP) 600 West Broadway, Suite 2600 ) San Diego, California 92101 ) Attn: David Hymer, Esq. ) - ------------------------------------------- (Space Above For Recorder's Use Only) MEMORANDUM OF LEASE 1. This Memorandum of Lease is made as of the ______ day of __________, 1999, by and between KILROY REALTY, L.P., a Delaware limited partnership ("Landlord"), and APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation ("Tenant"). By this Memorandum, for good and adequate consideration, Landlord does hereby lease to Tenant and Tenant does hereby rent from Landlord that certain real property depicted on Schedule "A" attached hereto as the Demised ----------- Premises, which real property is situated in the City of San Diego, County of San Diego, State of California. 2. The terms, conditions, covenants and agreements governing the leasing of the Demised Premises from Landlord to Tenant are set forth at length in that certain Lease (the "Lease") between Landlord and Tenant dated as of the same date as this Memorandum. All of the terms, conditions, covenants and agreements in the Lease are incorporated into this Memorandum with the same force and effect as if they were fully recited in this document 3. The term of the Lease shall commence upon the substantial completion of certain improvements to be constructed by Landlord at the Demised Premises, and shall terminate ten (10) years thereafter, unless sooner terminated or extended as provided in the Lease. Tenant has two (3) consecutive options to extend the term of the Lease for a period of five (5) years each. 4. In the event of inconsistency between the terms of this Memorandum or the Lease, the terms of the Lease shall control. EXHIBIT C --------- 1 IN WITNESS WHEREOF, the parties have executed this Memorandum of Lease as of the date first above written. LANDLORD: KILROY REALTY, L.P., a Delaware limited partnership By: Kilroy Realty Corporation, a Maryland corporation Its General Partner By:_____________________________ Name:___________________________ Its:_______________________ TENANT: APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation By: ____________________________ Joel O. Holliday Its: Vice President, Finance and Administration STATE OF ) )ss. COUNTY OF ) On _____________________,before me, ______________________, a Notary Public in and for said state, personally appeared ___________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument, the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. Notary Public in and for said State EXHIBIT C --------- 2 STATE OF ) ) ss. COUNTY OF ) On ____________________, before me, ____________________, a Notary Public in and for said state, personally appeared _________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity, and that by his/her signature on the instrument, the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. Notary Public in and for said State EXHIBIT C --------- 3 SCHEDULE "A" DESCRIPTION OF DEMISED PREMISES LEGAL DESCRIPTION BEING A PORTION OF PARCELS 3 AND 4 OF PARCEL MAP NO. 17755, ON FILE IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, IN THE CITY, OF SAN DIEGO, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA. MORE PARTICULARLY DESCRIBED AS FOLLOWS: BEGINNING AT THE SOUTHWEST CORNER OF SAID PARCEL 3; THENCE ALONG THE WESTERLY LINE OF SAID PARCEL 3 1. NORTH 04 degrees 43'00" EAST 40.06 FEET; THENCE 2. NORTH 00 degrees 19'33" WEST 199.65 FEET; THENCE LEAVING SAID WESTERLY LINE 3. NORTH 89 degrees 57'12" EAST 57.50 FEET; THENCE 4. NORTH 00 degrees 19'33" WEST 99.68 FEET: THENCE 5. NORTH 86 degrees 40'27" WEST 31.29 FEET; THENCE 6. NORTH 00 degrees 00'00" EAST 23.80 FEET; THENCE 7. SOUTH 85 degrees 37'35" EAST 274.92 FEET TO A POINT ON THE WESTERLY LINE OF SEQUENCE DRIVE AS DEDICATED PER MAP NO. 12685, ON FILE IN THE OFFICE OF THE COUNTY RECORDER OF SAN DIEGO COUNTY, IN THE CITY OF SAN DIEGO, COUNTY OF SAN DIEGO, STATE OF CALIFORNIA. POINT ALSO LIES ON THE ARC OF A 1573.00 FOOT RADIUS CURVE, CONCAVE EASTERLY, A RADIAL TO TO SAID POINT BEARS NORTH 87 DEGREES 02'12" WEST: THENCE ALONG THE ARC OF SAID CURVE AND SAID WESTERLY LINE 8. SOUTHERLY 318.25 FEET THROUGH A CENTRAL ANGLE OF 11 DEGREES 35'31"; THENCE LEAVING SAID WESTERLY LINE IN A NON- TANGENT DIRECTION 9. SOUTH 86 degrees 32'09" WEST 380.84 FEET TO THE POINT OF BEGINNING. CONTAINS 2.69 AC. MORE OR LESS. /s/ Mark J. Rowson Jan 25, 1999 ---------------------------------------------- MARK J. ROWSON, R.C.E. 30836 DATE [SEAL] (Registration expires 3-31-2000) SCHEDULE A ---------- EX-10.31 7 CUSTOM SALES AGREEMENT EXHIBIT 10.31 [*] CERTAIN INFORMATION IN EXHIBIT 10.31 HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. CUSTOM SALES AGREEMENT BASE AGREEMENT - -------------------------------------------------------------------------------- International Business Machines Corporation AGREEMENT NO. 000144 CUSTOMER: APPLIED MICRO CIRCUITS CORPORATION 6290 SEQUENCE DRIVE SAN DIEGO, CA 92121-4358 This Custom Sales Agreement, which consists of this Base Agreement and Statement of Work Attachments, shall be referred to as the "Agreement". The term of this Agreement commences on July 14, 1998 and expires on [*]. [*] to encompass the Process which includes [*] will the customer have access to [*] Process(es). The Customer shall have access to [*] Process(es) during the entire term of the Agreement ("Production Term"). The parties agree that this Agreement may be renewed annually upon mutual consent. By signing below, the parties each agree to be bound by: (1) the terms and conditions of this Agreement; and (2) the initial Statement of Work, Attachment No. 1. No additional signature on the initial Statement of Work is required. Subsequent Statement of Work Attachments under this Agreement must be signed by the parties to become effective. Upon signature by both parties, it is agreed this Agreement constitutes the complete and exclusive agreement between them superseding any prior agreements, written or oral, relating to the subject matter notwithstanding anything contained in any document issued by either party. This Agreement may not be amended or modified except by a written amendment signed by both parties. The parties expressly acknowledge that they have received and are in possession of a copy of any referenced item which is not physically attached to the Agreement and any such item will be treated as if attached, and will be considered an Attachment for the purposes of this Agreement. ACCEPTED AND AGREED TO: INTERNATIONAL BUSINESS MACHINES CORPORATION By:_______________________________ BY:___________________________ NAME: NAME: TITLE: TITLE: DATE:_____________________________ DATE:_________________________ 1.0 DEFINITIONS ----------- Capitalized terms in this Agreement have the following meanings. An Attachment may define additional terms; however, those terms apply only to that Attachment. 1.1 "Item" shall mean any part, specification, design, document, report, data or the like which Customer delivers to IBM under this Agreement. 1.2 "Manufacturing Process" mean IBM's SiGe IC manufacturing process employed at an IBM facility and as adapted for use by IBM in the fabrication of Products. 1.3 "NTAT" means Normal Turn Around Time, which denotes IBM's standard timeframe for completion of work performed. 1.4 "Product" shall mean production units to be sold or purchased under this Agreement. Products shall not include Prototypes. Page 1 of 7 CUSTOM SALES AGREEMENT BASE AGREEMENT 1.5 "Prototype" shall mean a preliminary version of a Product or an experimental device sold or purchased under this Agreement which may or may not be functional, is intended for evaluation and testing, is not suitable for production in commercial quantities, and [*]. 1.6 "Purchase Order Lead Time" shall mean the required minimum amount of time between IBM's receipt of the purchase order issued by Customer and the requested shipment date necessary to accommodate manufacturing cycle time. 1.7 [*] 1.8 "Related Company" of a party hereunder shall mean a corporation, company or other entity which controls or is controlled by such party or by another Related Company of such party, where control means ownership or control, direct or indirect, of more than fifty (50) percent of: (i) the outstanding voting shares or securities (representing the right to vote for the election of directors or managing authority), or (ii) the ownership interests representing the right to make decisions for such a corporation, company or other entity (as the case may be in partnership, joint venture or unincorporated association having no outstanding shares or securities). However, any such corporation, company or other entity shall be deemed to be a Related Company of such party only so long as such ownership or control exists. 1.9 "RTAT" means Rapid Turn Around Time, which denotes a faster than standard timeframe for completion of work, as opposed to NTAT. 1.10 "Service" shall mean any manufacturing activity or design, or engineering work IBM performs. 1.11 "Shipment Date" shall mean IBM's estimated date of shipment. 1.12 [*] 1.13 "Wafer Acceptance Criteria" means the engineering specifications, referenced in Exhibit A of this Statement of Work, which sets forth the technology parameters and physical criteria to which the Product will conform at the time of delivery. 2.0 AGREEMENT STRUCTURE ------------------- 2.1 This Agreement consists of: (i) the Base Agreement which defines the basic terms and conditions of the relationship between the parties; and (ii) Attachments which specify the details of a specific work task. An Attachment may include additional or differing terms and conditions, however such terms and conditions apply only to that Attachment. Attachments also include any specification documents agreed to by the parties, in writing, applicable to the specific work under that Attachment. 2.2 If there is a conflict among the terms and conditions of the various documents, Attachment terms and conditions govern. 2.3 Purchase orders and acknowledgements will be used to convey information only (including, as to purchase orders, method of shipment and carrier in accordance with Section 3.0 of the Attachment) and any terms and conditions on those are void and replaced by this Agreement. 2.4 Either party may include its Related Companies under this Agreement by written agreement with the other party. Page 2 of 7 CUSTOM SALES AGREEMENT BASE AGREEMENT 3.0 ORDER AND DELIVERY ------------------ 3.1 Customer shall order Products, Prototypes and Services by issuing written purchase orders, which are subject to acceptance by IBM, in accordance with Section 4.0 of the Attachment. Purchase orders for Products and/or Prototypes must be received by IBM in advance, with at least the Purchase Order Lead Time specified in the applicable Attachment. 3.2 Products and/or Prototypes will be shipped to Customer FOB plant of manufacture, except for Products and/or Prototypes shipped outside the United States which will be shipped EXWORKS (as defined in ICC INCOTERMS 1990). 3.3 Title to the Products and/or Prototypes and risk of loss shall pass to the Customer upon delivery to the carrier for shipment to the Customer. 4.0 CANCELLATION AND RESCHEDULING ----------------------------- 4.1 If IBM's supply of the Product, Prototypes and/or Services ordered hereunder becomes constrained, IBM will reduce the quantities of Products, Prototypes and/or Services to be supplied to the Customer in proportion to the reduction in quantities of products and/or services of the same technology or utilizing the same manufacturing process to be supplied to satisfy others. Receipt of such allocated supply and later delivery of all undelivered ordered quantities shall constitute Customer's exclusive remedy in the event of such a supply constraint. 4.2 Customer may cancel or reschedule an order for Products, Prototypes and/or Services only upon prior written notice to IBM. In the event of a cancellation or reschedule which exceeds the rescheduling rights set forth in an applicable Attachment, Customer shall pay the quoted price for Products, Prototypes and/or Services delivered or ready for shipment; otherwise, for Product, Prototype and/or Services not delivered or ready for shipment, Customer shall pay the cancellation charges set forth in the applicable Attachment. 4.3 Customer agrees that if Customer decreases the total quantity of an order that has a unit price based on an agreed to quantity Customer will pay an applicable higher unit price, if any, as specified in the applicable Attachment, for previous shipments and for new shipments. 5.0 PAYMENT ------- 5.1 Prices for Products, Prototypes and Services shall be as set forth in an applicable Attachment. With the exception of the activities referenced in Section 5.2 of the Attachment, IBM shall invoice Customer after the Products and/or Prototypes have been shipped or the Services provided. Payment by the Customer will be due within thirty (30) days from the date of invoice. Late payment of invoices will be assessed a charge equal to the lesser of one and one-half percent (1.5%) per month or the statutorily maximum rate of interest in accordance with the laws of the State of New York. In addition, if Customer's account balance exceeds its credit limit with IBM, or becomes delinquent, IBM may stop shipments to Customer or ship to Customer on a prepaid basis until the account is current again. 5.2 Payment defined in Section 5.2 of the Attachment shall be made via bank wire transfer to: [*] The following information is to be included in the wire detail: Applied Micro Circuits Corporation Reason for payment (Foundry Operations) [*] The pricing schedule in Section 5.2 of the Attachment shall act as the Customers invoice. 6.0 TERMINATION ----------- 6.1 If either party materially breaches a term of this Base Agreement or an Attachment, the other party may, at its option, terminate this Agreement or any or all Attachments provided that the party in breach is given written notice of such breach and fails to cure such breach within 30 days after delivery of such notice (within such 30 day period, the breaching party may send the non- breaching party written notice of the actions taken to cure the breach and the non-breaching party shall send notice back to the breaching party as to whether the actions taken were effective to cure the breach), or immediately in the event of (i) insolvency, dissolution or liquidation by or against either party, (ii) any assignment of either party's assets for the benefit of creditors, (iii) any act or omission of an act by a party Page 3 of 7 CUSTOM SALES AGREEMENT BASE AGREEMENT demonstrating its inability to pay debts generally as they become due, or (iv) if IBM has a reasonable basis to believe any of the Items infringe intellectual property rights. 6.2 If IBM terminates this Agreement or an Attachment pursuant to Section 6.1 of this Agreement, IBM shall be entitled to treat any or all applicable outstanding purchase orders as if cancelled by Customer and Customer shall pay (i) all applicable IBM NRE costs, (ii) the quoted price applicable for any affected Products, Prototypes and/or Services delivered or ready for shipment, and (iii) for Product, Prototype and/or Services not delivered or ready for shipment, the cancellation charges set forth in the applicable Attachment or Attachments. Monies owing IBM shall become immediately due and payable. 6.3 If Customer terminates this Agreement or an Attachment, IBM will fill all applicable previously accepted purchase orders for Products and/or Prototypes, but IBM shall not be obligated to accept further applicable purchase orders after receiving notice. 6.4 This Base Agreement will continue after its termination or expiration with respect to any Attachments already in place until they expire, are terminated or completed. Provided that no monies are due IBM, applicable Items shall be disposed of as directed by Customer in writing at Customer's expense after a termination or expiration, subject to the provisions of Section 6.3. 6.5 [*] 6.6 [*] 7.0 CONFIDENTIAL INFORMATION ------------------------ 7.1 With the exception of the terms and conditions of this Agreement, no information exchanged between the parties shall be considered confidential and/or proprietary to either party, or to any third party except as may be specified pursuant to Section 7.2 below. 7.2 In the event IBM or Customer needs to disclose specific confidential information to the other in order for IBM to furnish Products, Prototypes and/or Services hereunder, such information shall be disclosed only pursuant to the terms of the confidential information exchange agreement number V2518, dated 11/3/97, as executed by the parties. 8.0 LICENSE ------- 8.1 Subject to licenses expressly granted under this Agreement, no license, immunity or other right is granted herein to either party whether directly or by implication, estoppel or otherwise, with respect to any patent, trademark, copyright, mask work, trade secret or other intellectual property right of either party with the exception of: 1) Customer's right to use or resell any Product patented and sold by IBM to Customer pursuant to this Agreement, and 2) IBM's right to use Customer's design(s) to provide Products, Prototypes and/or Services to Customer, pursuant to this Agreement. . . 9.0 TRADEMARK --------- 9.1 Nothing in this Agreement grants either party any rights to use the other party's trademarks or trade names, directly or indirectly, in connection with any product, service, promotion. 10.0 INTELLECTUAL PROPERTY AND INDEMNIFICATION ----------------------------------------- 10.1 IBM agrees to indemnify Customer against damages assessed against Customer as a result of a final judgment of a court of competent jurisdiction holding that any Product sold or Service provided by IBM in connection with a [*] Process [*] to Customer hereunder infringes a patent, maskwork right or copyright of a third party in any country in which IBM sells or provides similar products or services, up to the amount paid by Customer for Products or Services provided hereunder; PROVIDED THAT Customer (1) promptly notifies IBM, in writing, of the charge of infringement; (2) allows IBM to control and cooperates with IBM in the defense and any related settlement action; and (3) upon the written request of IBM (a) allows IBM to modify or replace the Product with a non-infringing Product, consistent with this Base Agreement and all applicable Attachments, or (b) returns the Product to IBM for a credit equal to Customer's purchase price for the Product, provided Customer has followed generally accepted accounting principles. IBM has no obligation regarding any claim of infringement to the extent such claim is based on any of the following: (1) Customer's modification of a Product; (2) the combination, operation, or use of a Product with any product, data, or apparatus that IBM did not provide; (3) infringement by a non-IBM Product alone, as opposed to its combination as part of a system of Products that IBM provides; or (4) IBM's manufacture or modification of a Product in compliance with Customer's specifications. Page 4 of 7 CUSTOM SALES AGREEMENT BASE AGREEMENT 10.1.1 Customer agrees to indemnify IBM against damages assessed against IBM as a result of a final judgment of a court of competent jurisdiction holding that any Product or Prototype sold by Customer hereunder infringes a patent, maskwork right or copyright of a third party, up to the amount paid by Customer for Products or Prototypes provided hereunder; PROVIDED THAT IBM (1) promptly notifies Customer, in writing, of the charge of infringement; and (2) allows Customer to control and cooperates with Customer in the defense and any related settlement action. The foregoing states the entire obligation and exclusive remedy of IBM and Customer regarding any claim of patent or copyright infringement relating to any Product and/or Prototypes sold or Service provided hereunder. 10.2 Customer warrants that it is the originator, rightful owner or licensee of all Items supplied to IBM hereunder and that to the best of Customer's knowledge no part of such Items infringes any intellectual property rights. 11.0 LIMITATION OF LIABILITY ----------------------- 11.1 Neither party shall be entitled to indirect, incidental, consequential or punitive damages, including lost profits based on any breach or default of the other party, including those arising from infringement or alleged infringement of any patent, trademark, copyright, mask work, or any other intellectual property. 11.2 Except for nonpayment, no action, regardless of form, arising from this Agreement may be brought by either party more than one (1) year after the cause of action has arisen. IBM's liability for any and all causes of action shall be limited in the aggregate to the greater of: (1) [*] or (2) the applicable IBM price to Customer for the specific Products, Prototypes and/or Services that caused the damages or that are the subject matter of, or directly related to, the cause of action. 11.3 The limitation of Section 11.2 does not apply to: (1) payments referred to in Section 10.1 and (2) damages for bodily injury (including death) and damage to real property and tangible personal property caused by IBM's negligence. 11.4 Under no circumstances is IBM liable for any of the following: (A) third party claims against Customer for losses or damages other than those in 11.3(1) and (2) above; or (B) loss of, or damage to, Customer's or another parties' records or data; or (C) when the Products and/or Services are used in conjunction with medical devices or nuclear materials. 12.0 WARRANTIES ---------- 12.1 IBM warrants all Products delivered hereunder to be free from defects in material and workmanship for a period of one (1) year from the date of shipment unless otherwise stated in an Attachment applicable to such Products. Customer acknowledges that the functionality of Products is contingent on Customer's designs and, therefore, such warranty does not apply to the functionality of Products fabricated under this Agreement to the extent that functionality is dependant on such designs. All Prototypes are provided "As Is" without warranty of any kind. 12.2 THE FOREGOING WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS OR USAGE FOR A PARTICULAR PURPOSE. 12.3 No course of dealing, course of performance, usage of trade, or description of Product, Prototype or Service shall be deemed to establish a warranty, express or implied. 12.4 If Customer claims that any Products and any incidental Services are nonconforming, Customer shall (1) promptly notify IBM, in writing, of the basis for such nonconformity; (2) follow IBM's instructions for the return of the Products; and (3) return such Products freight collect to IBM's designated facility. If IBM determines the Products are nonconforming, IBM will, at its option, repair or replace the defective Products, or issue a credit or rebate for the purchase price. 12.5 IBM's sole liability and Customer's sole remedy for breach of warranty shall be limited as stated in this Section 12. 13.0 TAXES ----- 13.1 IBM shall bill Customer for all applicable sales, use and gross receipts taxes, unless Customer provides IBM with appropriate exemption certificates. 14.0 NOTICES ------- Page 5 of 7 CUSTOM SALES AGREEMENT BASE AGREEMENT 14.1 All communications and notices between the parties concerning this Agreement shall be given to the appropriate individual listed in the applicable Attachment and shall be deemed sufficiently made on the date if given by personal service, sent via certified mail, facsimile or electronic data interchange provided that any notice sent by certified mail shall be deemed to be delivered five (5) business days after deposit with postal authorities. Communication by facsimile or electronic data interchange is acceptable as a "writing". The autographs of representatives of the parties, as received by facsimile or electronic data interchange, shall constitute "original" signatures. 15.0 INDEPENDENCE OF ACTION ---------------------- 15.1 Each party agrees that this Agreement will not restrict the right of either party to enter into agreements with other parties for same or similar work, or to make, have made, use, sell, buy, develop, market or otherwise transfer any products or services, now or in the future, so long as confidential information is not disclosed. IBM shall not sell, market or otherwise transfer to any third party any Products using the trademark or trade name of Customer without prior written consent of Customer. 16.0 UTILIZATION OF PRODUCTS ----------------------- 16.1 Customer agrees that it will not act as an agent or as a "pass through foundry" for purchasing Products and or Prototypes for others from IBM hereunder. Customer also represents that all Prototypes from [*] purchased under this Agreement shall only be used by Customer internally and shall not be resold by Customer without IBM's prior written consent, except in situations where Customer is selling a limited number of Prototypes to its customers, provided that all such sales shall be at Customer's sole risk, and provided that Customer clearly sets forth in a written agreement with its customers that the Prototypes are intended for evaluation purposes only and are sold "as is" without warranty of any kind. . 17.0 GENERAL ------- 17.1 Neither party shall be responsible for failure to fulfill its obligations under this Agreement due to fire, flood, war or other such cause beyond its reasonable control and without its fault or negligence (excluding labor disputes or payment obligations) provided it promptly notifies the other party. 17.2 The substantive laws of the State of New York govern this Agreement without regard to conflict of law principles. Both parties agree to waive their right to a jury trial in any dispute arising out of this Agreement. The prevailing party in any legal action hereunder shall be entitled to reimbursement by the other party for its expenses, including without limitation reasonable attorney's fees. 17.3 Customer agrees that IBM may assign its right to collect payments under this Agreement. Customer may not assign any of its rights under this Agreement relating to IBM's [*] Manufacturing Processes [*] without IBM's consent. Otherwise, either party may assign its rights under this Agreement only in the event of a sale of all or substantially all of the assets of that part of its business relating to the Agreement, provided that if party to whom Customer wants to assign is currently in the business of manufacturing semiconductor products, the assignment will be subject to IBM's consent. 17.4 No delay or failure by either party to act in the event of a breach or default hereunder shall be construed as a waiver of that or any subsequent breach or default of any provision of this Agreement. 17.5 If any part, term or provision of this Agreement is declared unlawful or unenforceable, by judicial determination or performance, the remainder of this Agreement shall remain in full force and effect. 17.6 Any terms of this Agreement which by their nature extend beyond expiration or termination of this Agreement shall remain in effect until fulfilled and shall bind the parties and their legal representatives, successors, heirs and assigns. 17.7 The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 17.8 Each party will comply, at its own expense, with all applicable federal, state and local laws, regulations and ordinances including, but not limited to, the regulations of the U.S. Government relating to export and re-export. Customer agrees that it is responsible for obtaining required government documents and approvals prior to export and re-export of any commodity, machine, software or technical data. 17.9 The UN Convention on Contracts for the International Sale of Goods shall not apply to this Agreement. Page 6 of 7 CUSTOM SALES AGREEMENT BASE AGREEMENT 17.10 Press releases and other like publicity, advertising or promotional material which mention the other party by name, this Agreement or any term hereof shall be agreed upon by both parties in writing prior to any release. Page 7 of 7 SEMICONDUCTOR CUSTOM MANUFACTURING ATTACHMENT NO. CUSTOM SALES AGREEMENT NO. STATEMENT OF WORK CUSTOM SEMICONDUCTOR MANUFACTURING TASK ORDER 1.0 SCOPE OF WORK 1.1 IBM will provide the following: [*] 1.2 Subject to the terms and conditions of this Statement of Work, Customer will provide IBM with the Customer's Items and cooperate with IBM to enable IBM to perform foundry services in accordance with this Agreement. 1.3 IBM will provide a technical coordinator(s) for coordination of Customer engineering activities, as identified in Section 9.0 of this Attachment. The duties of the technical coordinator(s) will include arranging for training (as may be agreed upon from time to time by the parties), providing development lot tracking information, coordinating development lot requirements with Customer and aiding Customer in the resolution of technical issues regarding the use of pre-qualification models and processes. 1.4 [*] 1.5 IBM will provide access to an ECL library for Silicon Germanium which it agrees to make available to Customer under this Agreement. Updates to this library will be provided to Customer at least annually. IBM will consider additions or modifications to this library as suggested by Customer. IBM will provide the initial documentation for the ECL library to Customer within 30 days of the effective date of this Agreement. The ECL library shall be licensed under the terms of the IBM AMS Design Kit License Agreement, as modified, and as attached as Exhibit B of this Agreement. 1.6 When available and if requested by Customer, IBM shall provide Customer with preliminary versions of models and design kits [*], but only for the purpose of developing Prototypes to be manufactured solely by IBM. Such models and design kits shall be licensed under the terms of the IBM AMS Design Kit License Agreement, dated and attached as Exhibit B of this Agreement. IBM may modify or alter the models and design kits [*] at any time without notice. Such changes may cause the Prototype designs to be unuseable for the manufacture of Products. 1.7 The charges associated with the activities in Sections 1.3, 1.4, 1.5 and 1.6 of this Attachment are included as part of the development pricing in Section 5.2 of this Attachment. 1.8 Customer may, at any time and from time to time, by written notice to IBM, request changes to the part numbers, specifications, or work scope. IBM will submit a written report to Customer setting forth the probable effect, if any, of such requested change on prices, payment or delivery. IBM shall not proceed with any change until authorized in writing by Customer. The parties shall promptly amend this Attachment to incorporate any agreed changes. 1.9 IBM may implement engineering changes required to satisfy governmental standards, protect Product or system integrity, or for environmental, health or safety reasons, and shall notify Customer if such changes are implemented. Customer will use reasonable efforts to incorporate such changes in Products already shipped by IBM. IBM may implement engineering changes that result in cost reductions to Product with prior approval of Customer, which will not be unreasonably withheld. 2.0 FORECASTING Initial Forecast. Each Attachment shall contain an initial forecast of Customer's anticipated unit production demand requirements for Product(s) and/or Prototypes for at least the [*] period immediately following execution of the Attachment. Customer shall submit a purchase order (pursuant to Section 4.0) with the initial forecast for a minimum of the [*] period. Subsequent Forecasts. Customer shall provide an updated forecast in writing to IBM, on a monthly basis by no later than the fifteenth (15th) day of each month during the term of the Attachment. Each such forecast will cover at least a rolling [*] (not to exceed the term of this Attachment), and will be reviewed for acceptance by IBM. Within ten (10) business days after receipt IBM shall notify Customer with written notice of whether such forecast has been accepted or rejected. With each updated forecast Customer shall submit a purchase order (pursuant to Section 4.0). This purchase order shall be for the quantity of Products and/or Prototypes forecast for the [*] month of the rolling forecast (months [*] having already been committed under purchase order(s) pursuant to previous forecast(s)). Customer agrees that if it does not submit purchase orders for accepted forecasts, as discussed in Section 7.0 of this Attachment, then Customer shall be subject to the cancellation charges described therein. All purchase orders submitted shall be subject to the terms of Section 4.0 of the Base Agreement. IBM will accept purchase orders for months [*] of any forecast, provided the forecast has been accepted by IBM, the orders are placed in accordance with Section 4.0 and the quantities requested are within ten percent (10%) of the previously accepted forecast for said months. Months [*] (or greater, if Customer submits forecasts beyond [*]) of each forecast are non-binding on Customer and IBM, and provided for convenience purposes only. 3.0 Orders After the parties have executed a Attachment, Customer will request delivery of Products or Prototypes by issuing written purchase orders to IBM by the fifth (5th) day of each calendar month. As set forth in Section 2.0, Customer will maintain a minimum of [*] on IBM and may place purchase order(s) for months [*] of each forecast. Purchase orders are subject to, and IBM will accept and ship against purchase orders that comply with, the terms and conditions of the Agreement and this Attachment, and are consistent with the most recently accepted forecasts and the most recent Customer credit limit as granted by IBM. Customer will request delivery of Products or Prototypes by issuing written purchase orders to the IBM ordering location identified in Section 8.0 of this Attachment. Purchase orders shall only specify: a) Customer's purchase order number; b) Customer's tax status - exempt or non-exempt; c) ship to location - complete address; d) bill to location - complete address; e) order from location - complete address; f) Product part numbers and quantities being ordered (in increments of the Minimum Order Quantity ("MOQ"); g) the Product's applicable unit price; h) shipping instructions, including preferred courier; i) requested shipment dates; j) the Agreement Number of this Agreement; k) Name of Customer contact. 4.0 CUSTOMER REQUIREMENTS 4.1 Wafer: - Levels of metal: [*] 4.2 Wafer test: Wafers will conform to the Wafer Acceptance Criteria 4.3 Package: N/A 5.0 Pricing 5.1 Production pricing: Untested [*] process Wafers Per Calendar Year [*] Price Per Wafer (not to exceed) [*] Optional Features (1998 pricing only): [*] [*] per wafer [*] [*] per wafer [*] [*] per wafer [*] [*] per wafer [*] [*] per wafer RTAT's will be ordered using the normal forecast process at a price of [*] for mask set and [*] for wafers [*]. (For [*] level metal, wirebond configurations only). 5.2 Pricing for Section 1.1: Pricing for the activities described in Section 1.1 of the Attachment, not to include the pricing of Section 5.1, above, is a total of [*], due as follows: 30 days from signing of this Agreement:[*]; Due on [*] : [*]; Due on [*] : [*]; The above [*] fee includes [*] runs, up to [*] which can be used for unqualified processes and not to exceed [*] in any calendar year. RTAT runs include an IBM Mask Set from Customer, clean GDSII tape and the process start of [*] Wafers per run. RTAT runs under this Section cannot be used for [*] process. Additional Mask plate for RTAT's: [*] 6.0 DELIVERY SCHEDULE AND MINIMUM ORDER QUANTITIES Each Customer order shall be for a minimum of [*] Wafers. Delivery shall be made in increments of not less than [*]Wafers, and shall be delivered no more than six months apart. Turn around time (TAT) targets in calendar days from receipt of clean GDSII tape (For 3 level metal, wirebond configurations only): 4Q98 1999 RTAT [*] [*] NTAT [*] [*] 7.0 CANCELLATION CHARGES By giving written notice, Customer may cancel, in whole or in part, any order for Product. IBM may impose a cancellation charge for such canceled order, or portion thereof, subject to the provisions of Sections 4.2 and 6.2 of the Agreement, in accordance with the following table:
Number of Calendar Days Prior to Scheduled Shipment Date Cancellation Charge Expressed as a Percentage of the that Notice of Cancellation is Received by IBM Applicable Product Production Price - ---------------------------------------------------------------------------------------------------------------------- 0-30 [*] - ---------------------------------------------------------------------------------------------------------------------- 31-60 [*] - ---------------------------------------------------------------------------------------------------------------------- 61-105 [*] - ---------------------------------------------------------------------------------------------------------------------- 105+ [*] - ----------------------------------------------------------------------------------------------------------------------
Notwithstanding the above, if the pattern generator tape has been released to the mask shop for a specific Product and/or Prototype, including a shared mask set, Customer agrees to pay the quoted purchase price of the mask. Also, for a purchase order which is more than thirty (30) days from its scheduled shipment date, Buyer may request in writing a onetime deferral of the scheduled shipment date not to exceed thirty (30) days, with no cancellation charge imposed. If Buyer subsequently cancels a deferred order, Buyer agrees to pay the applicable Product cancellation charge above. 8.0 ORDERING LOCATION: SHIP TO: BILL TO: Same Same 9.0 COORDINATORS/ADMINISTRATORS Technical Coordinators: Customer: [*] IBM: [*] Phone: [*] Phone: [*] Fax: [*] Fax: [*] Email: [*] Email: [*] Contract Administrators: Customer: TBD IBM: [*] Phone: Phone: [*] Fax: Fax: [*] Email: Email: [*] Exhibit A 1.0 PRODUCT NAME AND DESCRIPTION: Untested Wafers 2.0 PRODUCT SPECIFICATIONS, WAFER ACCEPTANCE CRITERIA: See Exhibit C, attached, for Wafer Acceptance Criteria, 3.0 CUSTOMER'S ITEMS: Year: Month:
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
EXHIBIT B License ------- COPYRIGHT NOTICE The enclosed IBM AMS Design Kit materials (documentation, diskette, and/or tapes) are (C)Copyright 1993, 1994, 1995, 1996, 1997 IBM Corporation. All rights reserved. The software describe in this document is furnished under a license agreement. The software may be used or copied under the terms of the agreement. LICENSE AGREEMENT IMPORTANT-READ BEFORE INSTALLING Read this agreement carefully before installing the IBM AMS Design Kit (hereafter Program). This letter agreement between International Business Machines, A New York corporation, having a place of business at Essex Junction, Vermont (here after IBM) and You, if accepted by you, represents a Program License and Loan Agreement for the referenced Program, more specifically describe in the Attachment to this agreement. By installing the Program, you accept the terms of this agreement. If you do not accept the terms of this agreement, do not install this Program, and please return to IBM this letter and any software documentation received. You and IBM agree that the following terms and conditions will apply to any IBM Program licensed under this Agreement. This is a license agreement and not an agreement for sale. IBM retains title to the copy of the Program provided to you and any copy made from it. When an individual Program becomes subject to this Agreement, IBM will grant you a nontransferable and nonexclusive license in the United State and Puerto Rico for the Program. You may not transfer the Program without IBM's written consent. DEFINITIONS - ----------- The term "Program" means 1) machine readable instruction or statements, 2) any machine readable data base, and/or 3) any machine readable or printed related materials, including portions of such Program. Programs are copyrighted. The term "use," relating to the machine-readable portion of the Program, means copying any portion of the Program into a machine for processing, transmitting it to a machine for processing, and performing such processing. INTENDED USE - ------------ IBM AMS Design Kits are provided for uses by customers of IBM Microelectronics Division's Analog & Mixed Signal Technologies. They are intended solely to be used as design aids with other software tools to produce a Customer design in of IBM's Analog & Mixed Signal Technologies. The AMS Design kit contains information (performance models, design rules, guidelines, etc.) with which to estimate the possible future performance of a product. Your use of such information DOES NOT guarantee performance or correctness of the product design. You acknowledge these limitation and agree that you will not rely solely upon the results derived from the use of information provided in the AMS design kit in determining the final design, composition, structure, safety, reliability, or performance of any product. IBM will not be liable for any use of the AMS Design Kit including, but not limited to, misuse, errors EXHIBIT B in judgement or application of the AMS Design Kit in the development or use of said products. YOU MAY - ------- 1. Use the Program only for purposes of evaluation or as describe under the preceding section "Intended Use", and 2. Copy or translate the Program's machine readable portion into any machine readable or printed form to provide sufficient copies to support your authorized use, storage and modifications of the Program. YOU MAY NOT - ----------- 1. Reverse assemble or reverse compile the Program without IBM's prior written consent; 2. 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You will maintain records of the number and location of all copies of the Program. You will insure, before disposing of any media, that any Program contained on it has been erased or destroyed. For purposes specifically related to your use of the Program, You may make the Program available to 1) your employees or IBM's employees or 2) other persons a) during the period they are on your premises or b) whom you authorize to have remote access to the Program. You may not make the Program in any form available to any persons not associated with your organization through IBM's' written consent. TERM - ---- The license granted herein is effective for the period, as set forth in the Attachment, after you receive the Program for a maximum period of 90 days should the number of days not be indicated in the Attachment. This license may be renewed upon your written request and IBM's approval. You may terminate this agreement at any time by destroying the Program together with all copies, modification and merged EXHIBIT B portions in any form, It will also terminate upon conditions set forth elsewhere in this Agreement or if you fail to comply with any term or condition of this Agreement. You agree upon such termination to destroy the Program together with all copies, modifications and merge portions in any form. PATENTS AND COPYRIGHTS - ---------------------- If the operations of a Program becomes, or IBM believes is likely to become the subject of a claim that it infringes a patent or copyright in the United State or Puerto Rico you will permit IBM, at its option and expense, either to secure the right for you to continue using that Program or to replace or modify it so that it becomes noninfringing. However, if either of the foregoing alternatives is available on terms which are reasonable in IBM's judgment, you will return the Program to IBM upon IBM's written request. IBM will have no obligation with respect to any such claim based upon our modification of IBM equipment, Programs or programming or their combination, operation or use with any non-IBM apparatus or Programs. IBM will not have any liability regarding patent or copyright infringement for non-IBM items. This action states IBM's entire obligation to you regarding claims of patent or copyright infringement. CONFIDENTIAL INFORMATION - ------------------------ The parties agree that all information exchanged hereunder will be nonconfidential. If the activity under which this license is given requires the exchange or transfer of confidential information, a separate confidentiality agreement will be executed as part of, or will be an amendment to, this Agreement and the attachment to this Agreement will be so noted. 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You may not use IBM's trademarks or trade names, or refer to this agreement or your activity under this agreement, in connection with any product, promotion or publication, without IBM's written approval. You agree to comply will all United States and foreign laws and regulations relating to the export of technical information or data. In the event of the termination or expiration of this agreement, any provisions of this agreement which by their nature extend beyond the expiration or termination date shall remain in effect until fulfilled. This Agreement will be constructed under the laws of the State of New York without regard to its conflict of laws. THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS AGREEMENT, UNDERSTAND IT, AND AGREE TO BE BOUND BY ITS ITEMS AND CONDITION. YOU AND IBM AGREE THAT THE COMPLETE AND EXCLUSIVE STATEMENT OF EXHIBIT B AGREEMENT BETWEEN THE PARTIES RELATING TO THE LICENSING OF THE PROGRAMS SUBJECT TO THIS AGREEMENT SHALL CONSIST OF 1) THIS AGREEMENT AND ITS ATTACHMENTS, 2) LICENSE PROGRAM SPECIFICATION OR NOTICES OF AVAILABILITY, AS APPLICABLE 3) ITS EXHIBITS AND 4) ANY OTHER, APPLICABLE IBM AGREEMENTS, AMENDMENTS, SUPPLEMENTS, ADDENDA AND EXHIBITS, INCLUDING THOSE EFFECTIVE IN THE FUTURE. THIS STATEMENT OF THE AGREEMENT SUPERSEDES ALL PROPOSALS OR OTHER PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING THE PROGRAMS LICENSE UNDER THIS AGREEMENT. EXHIBIT C - SiGe [*] WAFER ACCEPTANCE CRITERIA PROCEDURE FOR RELEASE OF WAFERS TO EXTERNAL CUSTOMERS - ----------------------------------------------------- Prior to shipment of external customer wafers, [*] of all wafers built in RTAT or NRE lots are screened. In production, a sample testing of the lot at final metal level (minimum of [*] is performed. A summary of electrical test data for the lot will be made available. This lot summary will contain medians and distributions for the critical parameters and limits shown in the table below. In addition, for production wafers, if any of the wafers in the tested sample exceed the design manual specification [*], all wafers will be screened such that the [*] percentile of via, contact and metal resistances are within the design manual specifications. In this case, with [*] screening, any wafers failing will be scrapped. WAFER ACCEPTANCE CRITERIA: - -------------------------- IBM maintains a document specifying the acceptance criteria of a wafer for customer shipment. In brief, the list of critical parameters and specification limits described below must individually be met by [*] of the chips sampled on each wafer. Wafers not meeting the complete set of criteria will be either scrapped or shipped as "offspec" with product engineering concurrence. An accepted offspec is an indication that IBM in-line test, modeling, reliability and quality all agree that the highlighted measurement should have little impact on the customer. Typical reasoning could be that the measurement was believed inaccurate, or in the case of defect measurements with large critical areas, it is believed to be of minor impact to the integration level of a product. Where a critical parameter distribution falls out of normal range defined by the specification limits, the customer will be notified and the Technical Coordinators will promptly determine disposition of "offspec" wafers. Certain limits, indicated by a "P" in the tables below, have reliability implications when the values fall below or above the limit indicated. [*] - --- [*] [*] [*] [*] Page 1 EX-21.1 8 SUBSIDIARIES OF REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT AMCC (Barbados) Limited, a Barbados Corporation Wiley Acquisition Corporation, a Delaware Corporation EX-23.1 9 CONSENT OF ERNST & YOUNG EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Form S-8 No. 333-40905 pertaining to the 1997 Employee Stock Purchase Plan, No. 333-47185 pertaining to the 1982 Employee Incentive Stock Option Plan, the 1992 Employee Stock Option Plan and the 1997 Directors' Stock Option Plan, No. 333-76767 pertaining to the 1998 Employee Stock Purchase Plan, No. 333-74787 pertaining to the 1998 Cimaron Communications Corporation Stock Incentive Plan and in the Registration Statement on Form S-3 No. 333-76185 pertaining to the registration of shares issued upon the acquisition of Cimaron Communications Corporation of Applied Micro Circuits Corporation of our report dated April 21, 1999, with respect to the consolidated financial statements and schedule of Applied Micro Circuits Corporation included in the Annual Report on Form 10-K for the year ended March 31, 1999. Ernst & Young LLP San Diego, California June 21, 1999 EX-27.1 10 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10K FOR THE YEAR ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR YEAR MAR-31-1998 MAR-31-1999 APR-01-1997 APR-01-1998 MAR-31-1998 MAR-31-1999 6,460 13,530 61,436 73,010 12,529 19,452 350 177 8,185 9,813 94,526 125,020 46,678 58,708 29,460 35,580 112,834 150,655 17,109 21,403 4,091 7,558 0 0 0 0 225 266 91,409 121,428 112,834 150,655 76,618 105,000 76,618 105,000 34,321 37,937 34,321 37,937 27,546 43,147 157 50 381 542 15,622 27,366 406 10,233 15,216 17,133 0 0 0 0 0 0 15,216 17,133 1.44 .70 .75 .62
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