-----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, LhUWsLwfnoDaHQwRyLpiMc/mCFlgHs9mKB9MQURAbaUps1YCJOWLvdNnZhj6Iz0a dB3/VRGVJVPeboeSAjxRJw== 0001012870-97-001936.txt : 19971014 0001012870-97-001936.hdr.sgml : 19971014 ACCESSION NUMBER: 0001012870-97-001936 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 27 FILED AS OF DATE: 19971010 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED MICRO CIRCUITS CORP CENTRAL INDEX KEY: 0000711065 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 942586591 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-37609 FILM NUMBER: 97693475 BUSINESS ADDRESS: STREET 1: 6290 SEQUENCE DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6194509333 MAIL ADDRESS: STREET 1: 6290 SEQUENCE DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92121 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- APPLIED MICRO CIRCUITS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3674 94-2586591 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
--------------- 6290 SEQUENCE DRIVE SAN DIEGO, CALIFORNIA 92121 (619) 450-9333 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) --------------- DAVID M. RICKEY PRESIDENT AND CHIEF EXECUTIVE OFFICER APPLIED MICRO CIRCUITS CORPORATION 6290 SEQUENCE DRIVE SAN DIEGO, CALIFORNIA 92121 (619) 450-9333 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) --------------- COPIES TO: MARK A. MEDEARIS THOMAS W. KELLERMAN GLEN R. VAN LIGTEN CHRISTINA B. ROBINSON CARL L. SPATARO, JR. PATRICIA MONTALVO MITCHELL S. ZUKLIE BROBECK, PHLEGER & HARRISON LLP VENTURE LAW GROUP TWO EMBARCADERO PLACE A PROFESSIONAL CORPORATION 2200 GENG ROAD 2800 SAND HILL ROAD PALO ALTO, CA 94303 MENLO PARK, CA 94025 --------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] _____________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] _____________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] _____________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE
======================================================================================================== PROPOSED PROPOSED AMOUNT MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE REGISTRATION TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE - -------------------------------------------------------------------------------------------------------- Common Stock, par value $0.01........ 6,267,500 $12.00 $75,210,000 $22,791 ========================================================================================================
(1) Includes 817,500 shares of Common Stock issuable upon exercise of the Underwriters' over-allotment option. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING cPURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED OCTOBER 10, 1997 [LOGO OF AMCC] 5,450,000 SHARES COMMON STOCK Of the 5,450,000 shares of Common Stock offered hereby, 2,700,000 shares are being sold by Applied Micro Circuits Corporation, ("AMCC" or the "Company"), and 2,750,000 shares are being sold by certain stockholders of the Company. See "Principal and Selling Stockholders." The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price per share will be between $10.00 and $12.00. See "Underwriting" for information relating to the method of determining the initial public offering price. ----------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
============================================================================================ UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS - -------------------------------------------------------------------------------------------- Per Share.................. $ $ $ $ - -------------------------------------------------------------------------------------------- Total(2)................... $ $ $ $ ============================================================================================
(1) Before deducting expenses payable by the Company, estimated at $700,000. (2) The Company has granted the Underwriters a 30-day option to purchase up to an additional 817,500 shares of Common Stock solely to cover over- allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. ----------- The Common Stock is offered by the Underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. It is expected that delivery of such shares will be made through the offices of BancAmerica Robertson Stephens, San Francisco, California, on or about , 1997. BANCAMERICA ROBERTSON STEPHENS NATIONSBANC MONTGOMERY SECURITIES, INC. COWEN & COMPANY The date of this Prospectus is , 1997 AMCC's silicon solutions for high-bandwidth connectivity SONET/SDH/ATM .Three generations of products with increasing levels of integration .Low power, low jitter and low cost [Picture of group of six AMCC integrated circuits layered on a triangular background.] FIBRE CHANNEL/GIGABIT ETHERNET .Evolution to fully integrated transceiver .One chip for two standards [Picture of group of six AMCC integrated circuits layered on a triangular background.] SERIAL BACKPLANE .Crosspoint switches .Serializers/deserializers .Fast acquisition and fast reconfiguration times [Picture of group of four AMCC integrated circuits.] [Picture of cluster of optical fiber lines.] [Picture of wafer fabrication facility worker and printed circuit bound with an AMCC integrated circuit.] [Picture of personal computer monitor.] [Picture of an AMCC integrated circuit on top of a wafer.] [TO COME] CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED HEREBY, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING." 2 AMCC's silicon solutions for the advanced telecommunications and data communications solutions This 3Com switch uses AMCC's S3028 OC-12 transceiver chip in an ATM optical interface card [Picture of a computer switch, an ATM optical interface card and an AMCC transceiver chip.] ROUTER BRIDGE ETHERNET SWITCH LAN BACKBONE [Three symbols organized into a pictorial depiction of a LAN backbone.] Nortel's S/DMS Transport Node OC-48 ring uses AMCC's ASIC products [Picture of Nortel's S/DMS Transport Node OC-48 ring.] METROPOLITAN AREA NETWORK [Graphical depiction of a row of eight skyscrapers.] Alcatel uses AMCC's ASICs in OC-48 (2.4 GHz) and OC-192(9.6GHz) transmission equipment. [Picture of Alcatel's OC-48 transmission equipment.] Alcatel uses AMCC's S3017/18 transmitter/receiver pair in an OC-12, 622 Mbps, cross-connect switch. [Picture of Alcatel's OC-12 cross-connect switch and two AMCC.] WAN SONET/SDH World's communications infrastructure solutions AMCC provides high-performance, high-bandwidth products to worldwide industry leaders such as 3Com, Alcatel, GPT, Nortel (Northern Telecom), Sun Microsystems and Vixel. RAID DESKTOP PC FIBRE CHANNEL ATM SERVER WORKSTATION DATA NETWORK [Four symbols organized into a pictorial depiction of a data network.] A Sun Microsystems server with an OC-3/12 ATM interface uses AMCC's S3020/21 transmitter/receiver pair. [Picture of a Sun Microsystems' server and an AMCC transmitter/receiver pair.] WORKSTATION SERVER DISK DRIVE FIBRE CHANNEL FIBRE CHANNEL WORKSTATION ENGINEERING NETWORK [Four symbols organized into a pictorial depiction of an Engineering Network.] Vixel optical modules for the 1 GHz Fibre Channel interface uses AMCC's S2044/45 transmitter/receiver pair. [Picture of Vixel optical modules and an AMCC transmitter/receiver pair.] NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ---------------- TABLE OF CONTENTS
PAGE ---- Summary................................................................ 4 Risk Factors........................................................... 6 Use of Proceeds........................................................ 19 Dividend Policy........................................................ 19 Capitalization......................................................... 20 Dilution............................................................... 21 Selected Consolidated Financial Data................................... 22 Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................... 23 Business............................................................... 30 Management............................................................. 45 Certain Transactions................................................... 54 Principal and Selling Stockholders..................................... 55 Description of Capital Stock........................................... 58 Shares Eligible for Future Sale........................................ 60 Underwriting........................................................... 62 Legal Matters.......................................................... 64 Experts................................................................ 64 Additional Information................................................. 64 Index to Consolidated Financial Statements............................. F-1
---------------- The Company intends to furnish its stockholders with annual reports containing audited financial statements examined by independent auditors and make available to its stockholders unaudited quarterly information for the first three quarters of each fiscal year. AMCC is a registered trademark of the Company. All rights are fully reserved. This Prospectus also includes trademarks of companies other than the Company. The Company was incorporated in California in 1979 and reincorporated in Delaware in 1987. The Company's principal executive offices are located at 6290 Sequence Drive, San Diego, California 92121 and its telephone number is (619) 450-9333. 3 SUMMARY This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in the forward-looking statements and from the results historically experienced. Factors that may cause or contribute to such differences include, but are not limited to, those under "Risk Factors" and elsewhere in this Prospectus. The following summary is qualified in its entirety by the more detailed information including "Risk Factors" and the Consolidated Financial Statements and Notes thereto, appearing elsewhere in this Prospectus. THE COMPANY 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, mixed-signal design expertise, system-level knowledge and multiple silicon process technologies to offer IC products for the telecommunications markets that address the SONET/SDH and ATM transmission standards and for the data communications markets that address the Gigabit Ethernet, ATM and Fibre Channel transmission standards. The Company also leverages its technology to provide solutions for the ATE, high- speed computing and military markets. Customers of the Company include 3Com, Alcatel, Cisco Systems, Compaq, Hughes Electronics, Nortel, Sun Microsystems and Teradyne. Substantial growth in the Internet, World Wide Web and cellular and facsimile communications, the emergence of new applications such as video conferencing and the growing demand for remote network access and higher speed, data intensive communication between local area networks have caused current network system infrastructures to become bandwidth constrained due to the increasing volume and complexity of data types transmitted. In order to meet these increased bandwidth demands, communications systems OEMs must utilize increasingly complex ICs, which account for a greater portion of the value- added proprietary content of these systems. This trend has created a significant opportunity for IC suppliers with mixed-signal and system-level expertise that are capable of designing solutions that enable the transmission of increasing volumes of complex data at increasingly higher speeds. Dataquest estimates that the worldwide SONET/SDH market for ICs was approximately $240 million in 1996 and will increase to approximately $700 million in 2000 and that the ATM market for ICs was approximately $130 million in 1996 and will increase to approximately $700 million in 2000. The Fibre Channel and Gigabit Ethernet markets for ICs were relatively small in 1996, and Dataquest estimates these combined markets will be approximately $300 million in 2000. The Company addresses these market opportunities by leveraging its proven, stable and predictable bipolar and BiCMOS process technologies at its internal wafer fabrication facility, complemented by advanced CMOS processes from external foundries, to offer high-performance, high-frequency solutions optimized for specific applications and customer requirements. The Company believes silicon-based processes tend to be less expensive, more predictable with respect to yields and better able to ramp to high-volume production than non-silicon processes. By using its silicon-based processes and extensive design libraries, the Company is able to offer products that provide significant cost, power, performance and reliability advantages for communications systems OEMs. The Company has developed multiple generations of many of its products. In the telecommunications market, the Company provides ATM and SONET/SDH physical layer transceivers and Clock Recovery and Synthesis Units for the OC-3 and OC- 12 standards and is currently developing an OC-48 chip set. In the data communications market, the Company provides physical layer transceivers for Gigabit Ethernet and Fibre Channel applications as well as crosspoint switches for serial backplanes. In the high-speed computing market, the Company provides PCI controllers and high-frequency clock drivers and clock generators. In addition, the Company also provides high-performance, low-power ASIC products for the ATE and military markets. 4 THE OFFERING Common Stock Offered by the Company............. 2,700,000 shares Common Stock Offered by the Selling Stockhold- ers............................................ 2,750,000 shares Common Stock Outstanding after the Offering..... 19,801,750 shares(1) Use of Proceeds................................. For capital expenditures related to expansion of the Company's manufacturing operations, working capital and general corporate purposes Proposed Nasdaq National Market Symbol.......... AMCC
SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED FISCAL YEAR ENDED MARCH 31, SEPTEMBER 30, ----------------------------------------- --------------- 1993 1994 1995 1996 1997 1996 1997 ------- ------- ------- ------- ------- ------- ------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net revenues............ $38,296 $49,686 $46,950 $50,264 $57,468 $27,955 $35,208 Gross profit............ 17,735 20,499 19,437 16,095 27,411 12,201 18,674 Operating income (loss). 1,319 1,713 (783) (3,420) 7,004 2,895 5,942 Net income (loss)....... $ 993 $10,204 $(1,071) $(3,694) $ 6,316 $ 2,643 $ 5,934 ======= ======= ======= ======= ======= ======= ======= Pro forma net income per share(2)............... $ 0.33 $ 0.30 ======= ======= Shares used in pro forma net income per share calculation(2)......... 19,020 19,623 ======= =======
SEPTEMBER 30, 1997 ------------------- AS ACTUAL ADJUSTED(3) ------- ----------- CONSOLIDATED BALANCE SHEET DATA: Working capital............................................. $18,953 $45,874 Total assets................................................ 44,382 71,303 Long-term capital lease obligations, less current portion... 2,096 2,096 Total stockholders' equity.................................. 30,118 57,039
- ------- (1) Based on the pro forma number of shares of Common Stock outstanding at September 30, 1997. Excludes, as of September 30, 1997: (i) 157,968 shares of Common Stock issuable upon exercise of options outstanding under the Company's 1982 Employee Incentive Stock Option Plan (the "1982 Plan") at a weighted average exercise price of $0.46 per share; (ii) 2,049,309 shares of Common Stock issuable upon exercise of options outstanding under the Company's 1992 Stock Option Plan (the "1992 Plan") at a weighted average exercise price of $1.06 per share; (iii) 2,553,380 shares reserved for future issuance under the 1992 Plan; (iv) 200,000 shares reserved for future issuance under the Company's 1997 Directors' Plan (the "Directors' Plan"); (v) 400,000 shares of Common Stock reserved for issuance under the Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan"); (vi) 83,807 shares of Common Stock issuable upon exercise of certain warrants at a weighted average exercise price of $2.91 per share; and (vii) 24,755 shares of Common Stock issuable upon exercise of certain other outstanding options at a weighted average exercise price of $0.48 per share. (2) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the method used to determine the number of shares used to compute the pro forma net income per share amounts. (3) Adjusted to give effect to the sale of 2,700,000 shares of Common Stock by the Company at an assumed initial public offering price of $11.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." Unless otherwise indicated, all information in this Prospectus (i) reflects a 2-for-3 reverse stock split of the Preferred Stock and Common Stock to be effected upon the closing of this offering, (ii) reflects the conversion of each share of Preferred Stock into Common Stock upon the closing of this offering and (iii) assumes no exercise of the Underwriters' over-allotment option. See "Underwriting." 5 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. Prospective purchasers of the Common Stock offered hereby should review carefully the following risk factors as well as the other information set forth in this Prospectus. This Prospectus contains forward- looking statements based upon current expectations that involve risks and uncertainties. The Company's actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. FLUCTUATIONS IN OPERATING RESULTS AMCC has experienced and may in the future experience fluctuations in its operating results. The Company incurred net losses in fiscal 1995 and 1996. The Company's quarterly and annual operating results are affected by a wide variety of factors that could materially and adversely affect revenues, gross profit and operating income, including, but 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 announcement or 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 timing of depreciation and other expenses to be incurred by the Company in connection with the expansion of its existing manufacturing facility and in connection with its proposed new wafer fabrication facility; costs associated with compliance with applicable environmental regulations; costs associated with future litigation, if any, including without limitation, litigation relating to the use or ownership of intellectual property; general semiconductor industry conditions; and general economic conditions. The Company's expense levels are relatively fixed and are based, in part, on its expectations of future revenues. Because the Company is continuing to increase its operating expenses for personnel and new product development and is limited in its ability to reduce expenses quickly in response to any revenue shortfalls, the Company's business, financial condition and operating results would be adversely affected if increased revenues are not achieved. Furthermore, sudden shortages of raw materials or production capacity constraints can lead producers to allocate available supplies or capacity to customers with resources greater than those of the Company, which could interrupt the Company's ability to meet its production obligations. Finally, average selling prices in the semiconductor industry historically 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. In response to such pressures, the Company may take pricing or other actions that could have a material adverse effect on the Company's business, financial condition and operating results. The Company's 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, the Company typically plans its production and inventory levels based on internal forecasts of customer demand, which is 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 its outside foundries, the Company 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, the Company currently anticipates that an increasing portion of its 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 the Company to predict its revenues and inventory levels and adjust production appropriately in future periods. A failure by the Company to plan inventory and production levels effectively could have a material adverse effect on the Company's business, financial condition and operating results. 6 As a result of the foregoing or other factors, the Company may experience fluctuations in future operating results on a quarterly or annual basis that could materially and adversely affect its business, financial condition and operating results. Accordingly, the Company believes that period-to-period comparisons of its 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. There can be no assurance that the Company will be able to achieve increased sales or maintain its profitability in any future period. In certain future quarters, the Company's operating results may be below the expectations of public market analysts or investors. In such event, the market price of the Company's Common Stock could be materially and adversely affected. MANUFACTURING YIELDS The fabrication of semiconductors is a complex and precise process. Minute levels of contaminants in the manufacturing environment, defects in masks used to print circuits on a wafer, difficulties in the fabrication process or other factors can cause a substantial percentage of wafers to be rejected or a significant number of die on each wafer to be nonfunctional. In addition, the planned expansion of the clean room in the Company's existing wafer fabrication facility could increase the risk to the Company of contaminants in such facility. Many of these problems are difficult to diagnose, time consuming and expensive to remedy and can result in shipment delays. As a result, semiconductor companies often experience problems in achieving acceptable wafer manufacturing yields, which are represented by the number of good die as a proportion of the total number of die on any particular wafer, particularly in connection with the commencement of production in a new fabrication facility or the transfer of manufacturing operations between fabrication facilities. Because the majority of the Company's costs of manufacturing are relatively fixed, maintenance of the number of shippable die per wafer is critical to the Company's results of operations. Yield decreases can result in substantially higher unit costs and may result in reduced gross profit and net income. The Company has in the past experienced yield problems in connection with the manufacture of its products. For example, in the second quarter of fiscal 1997 the Company experienced a decrease in internal yields, which adversely impacted its gross margin for the quarter. The Company estimates 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. There can be no assurance that the Company will not suffer periodic yield problems in connection with new or existing products or in connection with the commencement of production in the Company's proposed new manufacturing facility or the transfer of the Company's manufacturing operations to such facility, any of which problems could cause the Company's business, financial condition and operating results to be materially and adversely affected. See "-- Manufacturing Capacity Limitations; New Production Facility." Semiconductor manufacturing yields are a function both of product design and process technology. In cases where products are manufactured for the Company 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 would require cooperation by and communication between the Company and the manufacturer. In some cases this risk could be compounded by the offshore location of certain of the Company's manufacturers, increasing the effort and time required to identify, communicate and resolve manufacturing yield problems. If the Company develops relationships with additional outside foundries, yields could be adversely affected due to difficulties associated with adopting the Company's technology and product design to the proprietary process technology and design rules of such new foundries. Because of the Company's limited access to wafer fabrication capacity from its outside foundries for certain of its products, any decrease in manufacturing yields of such products could result in an increase in the Company's per unit costs for such products and force the Company to allocate its available product supply among its customers, thus potentially adversely impacting customer relationships as well as revenues and gross margin. There can be no assurance that the Company's outside foundries will achieve or maintain acceptable manufacturing yields in the future. Furthermore, the Company also faces the risk of product recalls resulting from design or manufacturing defects which are not 7 discovered during the manufacturing and testing process. Any of the foregoing factors could have a material adverse effect on the Company's business, financial condition and operating results. RISKS ASSOCIATED WITH INCREASING DEPENDENCE ON TELECOMMUNICATIONS AND DATA COMMUNICATIONS MARKETS AND INCREASING DEPENDENCE ON APPLICATION-SPECIFIC STANDARD PRODUCTS An important part of the Company's strategy is to continue its focus on the telecommunications market and to leverage its technology and expertise to penetrate further the data communications market for high-speed ICs. The Company anticipates that sales to its 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 telecommunications and data 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, at the beginning of each such transition, the Company's products are unable to support the new features or performance levels being required by OEMs in these markets, the Company 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. There can be no assurance that the Company will be able to penetrate the telecommunications or data communications market successfully. A failure by the Company to develop products with required features or performance standards for the telecommunications or data communications markets, a delay as short as a few months in bringing a new product to market or a failure by the Company's telecommunications or data communications customers to achieve market acceptance of their products by end-users could significantly reduce the Company's revenues for a substantial period, which would have a material adverse effect on the Company's business, financial condition and operating results. See " -- Risks Associated with Dependence on High-Speed Computing Market." A significant portion of the Company's revenues in recent periods has been, and is expected to continue to be, derived from sales of products based on the Synchronous Optical Network ("SONET")/Synchronous Digital Hierarchy ("SDH") transmission standards and the Asynchronous Transfer Mode ("ATM") transmission standard. If the communications market evolves to new standards, there is no assurance the Company will be able to successfully design and manufacture new products that address the needs of its customers or that such new products will meet with substantial market acceptance. Although the Company has developed some initial products for the emerging Gigabit Ethernet and Fibre Channel communications standards, sales of these products have been minimal to date and there is no assurance AMCC will be successful in addressing the market opportunities for products based on these standards. The Company has under development a number of ASSPs for the telecommunications and data communications markets, from which it expects to derive an increasing portion of its future revenues. The Company has a limited operating history in selling ASSPs, particularly to customers in the telecommunications and data communications markets, upon which an evaluation of the Company's prospects in such markets can be based. In addition, the Company's relationships with certain customers in these markets have been established recently. The Company's 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 the Company's 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 the OEMs' products, if at all. The Company has in the past encountered difficulties in introducing new products in accordance with customers' delivery schedules and the Company's initial expectations. There can be no assurance the Company will not encounter such difficulties in the future or that the Company will be able to develop and introduce ASSPs in a timely manner so as to meet customer demands. Any such difficulties or a failure by the Company to develop and timely introduce such ASSPs would have a material adverse effect on the Company's business, financial condition and operating results. See "-- Rapid Technological Change; Necessity to Develop and Introduce New Products." 8 RISKS ASSOCIATED WITH DEPENDENCE ON HIGH-SPEED COMPUTING MARKET The Company historically has derived significant revenues from product sales to customers in the high-speed computing market and currently anticipates that it will continue to derive significant revenues from sales to customers in this market in the near term. The market for high-speed computing IC products is subject to extreme price competition. The Company believes that the average selling prices of the Company's IC products for the high-speed computing market will decline in future periods and that the Company's gross margin on sales of such products also will decline in future periods. There can be no assurance that the Company will be able to reduce the costs of manufacturing its high-speed computing IC products in response to declining average selling prices. Even if the Company successfully utilizes new processes or technologies to reduce the manufacturing costs of its high-speed computing products in a timely manner, there can be no assurance that the Company's customers in the high-speed computing market will purchase such new products. A failure by the Company to reduce its manufacturing costs sufficiently or a failure by the Company's customers to purchase such products could have a material adverse effect on the Company's business, financial condition and operating results. Furthermore, the Company expects that certain of its competitors may seek to develop and introduce products that integrate the functions performed by the Company's high-speed computing IC products on a single chip. In addition, one or more of the Company's customers may choose to utilize discrete components to perform the functions served by the Company's 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 the Company's IC products could be eliminated, which could adversely affect the Company's business, financial condition and operating results. See "-- Intense Competition." RAPID TECHNOLOGICAL CHANGE; NECESSITY TO DEVELOP AND INTRODUCE NEW PRODUCTS The markets for the Company's 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 and rapid product obsolescence. The Company's future success will depend, in large part, on its ability to develop, gain access to and use leading technologies in a cost-effective and timely manner and on its ability to continue to develop its technical and design expertise. The Company's ability to have its products designed into its customers' future products, to maintain close working relationships with key customers in order to develop new products, particularly ASSPs, that meet customers' changing needs and to respond to changing industry standards and other technological changes on a timely and cost-effective basis will also be a critical factor in the Company's future success. 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 significant costs associated with qualifying a new supplier. Accordingly, the failure by the Company to achieve design wins with its key customers could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business-- Research and Development." Products for telecommunications and data communications applications, as well as for high-speed computing applications are based on industry standards that are continually evolving. The Company's ability to compete in the future will depend on its ability to identify and ensure compliance with evolving industry standards. The emergence of new industry standards could render the Company's products incompatible with products developed by major systems manufacturers. As a result, the Company could be required to invest significant time and effort and to incur significant expense to redesign the Company's products to ensure compliance with relevant standards. If the Company's products are not in compliance with prevailing industry standards for a significant period of time, the Company could miss opportunities to achieve crucial design wins. There can be no assurance that the Company will be successful in developing or using new technologies or in developing new products or product enhancements on a timely basis, or that such new technologies, products or product enhancements will achieve market acceptance. In the past, the Company has encountered difficulties in introducing new products and product enhancements in accordance with customers' delivery 9 schedules and the Company's initial expectations. The Company could encounter such difficulties in the future. The Company's pursuit of necessary technological advances may require substantial time and expense. A failure by the Company, for technological or other reasons, to develop and introduce new or enhanced products on a timely basis that are compatible with industry standards and satisfy customer price and performance requirements would have a material adverse effect on the Company's business, financial condition and operating results. See "-- Fluctuations in Operating Results," and "-- Risks Associated with Increasing Dependence on Telecommunications and Data Communications Markets and Increasing Dependence on Application-Specific Standard Products." INTENSE COMPETITION The semiconductor market is highly competitive and subject to rapid technological change, price erosion and heightened international competition. The telecommunications, data communications, ATE and high-speed computing industries in particular are intensely competitive. The Company believes that the principal factors of competition in its markets are price, product performance, product quality and time-to-market. The ability of the Company to compete successfully in its 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 its IC products, ramp up of production of the Company's products for particular systems manufacturers, end-user acceptance of the systems 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. See "-- Risks Associated with Dependence on High- Speed Computing Market." In the telecommunications and data communications markets, the Company competes primarily against gallium arsenide ("GaAs") based companies such as Giga, TriQuint and Vitesse, and bipolar silicon based products from companies such as Hewlett-Packard, Maxim and Sony. In certain circumstances, most notably with respect to ASICs supplied to Nortel, AMCC's customers or potential customers have internal IC manufacturing capabilities, 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 Chrontel and PLX. 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 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 telecommunications and data communications markets, would have a material adverse effect on the Company's business, financial condition and results of operations. See "-- Risks Associated with Increasing Dependence on Telecommunications and Data Communications Markets and Increasing Dependence on Application-Specific Standard Products." 10 MANUFACTURING CAPACITY LIMITATIONS; NEW PRODUCTION FACILITY The Company currently manufactures a majority of its IC products at its four-inch wafer fabrication facility located in San Diego, California. The Company believes that, upon the completion of the planned expansion of the clean room in its existing fabrication facility, it will be able to satisfy its production needs of products produced in its fabrication facility through the end of 2001. The Company plans to use a portion of the proceeds of this offering to purchase equipment and make leasehold improvements related to the expansion in 1997 and 1998. In addition, the Company will be required to hire, train and manage additional production personnel in order to increase its production capacity as scheduled. In the event the Company's plans to expand the manufacturing capacity of its fabrication facility are not implemented on a timely basis, the Company could face production capacity constraints, which could have a material adverse effect on the Company's business, financial condition and operating results. The Company is currently in the process of planning construction of a new six-inch wafer fabrication facility, initially to complement, and potentially to replace, its existing facility in San Diego. The Company currently plans to acquire, or acquire rights to a site no later than mid-1998, initiate construction of the new facility during 1999 and to complete the physical plant during 2000. Following the completion of the physical plant, the Company must install equipment and perform necessary testing prior to commencing commercial production at the facility, a process which the Company anticipates will take at least nine months. Accordingly, the Company believes the new facility will not begin commercial production prior to late 2001. This new fabrication facility will have room for additional equipment and manufacturing capacity. The Company estimates that the cost of the new wafer fabrication facility will be at least $60.0 million, of which approximately $25.0 million relates to the purchase of land and construction of the building and approximately $35.0 million relates to capital equipment purchases necessary to establish the initial manufacturing capacity of the facility. The Company currently anticipates that it will incur a significant portion of the expense related to these capital equipment purchases prior to the end of 1999. The Company intends to fund part of the cost of the new facility with a portion of the proceeds of this offering. The balance of the cost of this facility will be funded through a combination of cash from operations and additional debt or equity financing. There can be no assurance that the Company will be able to obtain the additional financing necessary to fund the construction and completion of the new manufacturing facility. Any failure by the Company to obtain on a timely basis such financing could delay the completion of the facility and have a material adverse effect on the Company's business, financial condition and results of operations. To date, the Company has not acquired or acquired rights to a suitable site for its proposed new manufacturing facility. There can be no assurance that the Company will be able to acquire rights to such a site in a timely manner, if at all. Any significant delay by the Company in finding such a site could have a material adverse effect on the Company's business, financial condition and operating results. In addition, the Company's existing wafer fabrication facility is and its proposed new wafer fabrication facility will be located in California. There can be no assurance that these facilities will not be subject to natural disasters such as earthquakes or floods. In addition, the depreciation and other expenses to be incurred by the Company in connection with the expansion of its existing manufacturing facility and in connection with its proposed new wafer fabrication facility may adversely effect the Company's gross margin in any future fiscal period. See "-- Need For Additional Capital." The construction of the new wafer fabrication facility entails significant risks, including shortages of materials and skilled labor, unavailability or late delivery of process equipment, unforeseen environmental or engineering problems, work stoppages, weather interferences and unanticipated cost increases, any of which could have a material adverse effect on the building, equipping and production start-up of the new facility. In addition, unexpected changes or concessions required by local, state or federal regulatory agencies with respect to necessary licenses, land use permits, site approvals and building permits could involve significant additional costs and delay the scheduled opening of the facility and could reduce the Company's anticipated revenues. As a result of the foregoing and other factors, there can be no assurance that the project will be completed within its current budget or within the period currently scheduled by the Company, which could have a material adverse effect on its business, financial condition and operating results. Furthermore, if the Company is unable to achieve adequate manufacturing yields in its proposed new fabrication facility in a timely manner or if the Company's revenues do not increase commensurate with the anticipated increase in 11 manufacturing capacity associated with the new facility, the Company's business, financial condition and operating results could also be materially adversely affected. In addition, in the future, the Company may be required for competitive reasons to make capital investments in its existing wafer fabrication facility or to accelerate the timing of the construction of its new wafer fabrication facility in order to expedite the manufacture of products based on more advanced manufacturing processes. To the extent such capital investments are required, the Company's gross profit and, as a result, its business, financial condition and operating results, could be materially and adversely affected. See "-- Manufacturing Yields." The successful operation of the Company's proposed new wafer fabrication facility, if completed, as well as the Company's overall production operations, will also be subject to numerous risks. The Company has 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. The Company will be required to hire, train and manage production personnel in order to effectively operate the new facility. The Company does not have sufficient excess production capacity at its existing San Diego facility to fully offset any failure of the proposed new wafer fabrication facility to meet planned production goals. The Company may transfer its current San Diego manufacturing operations into the proposed new wafer fabrication facility subsequent to its completion. Should this transfer occur, there can be no assurance that the Company will not experience delays in completing product testing and documentation required by customers to qualify or requalify the Company's products from this facility as being from an approved source as a result of this transfer, which could materially adversely affect the Company's business, financial condition and operating results. The Company will also have to effectively coordinate and manage two manufacturing facilities to successfully meet its overall production goals. The Company has 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, the failure of the Company to successfully operate the proposed new wafer fabrication facility, to successfully coordinate and manage the two sites or to transfer the Company's manufacturing operations could adversely affect the Company's overall production and could have a material adverse effect on its business, financial condition and operating results. TRANSITION TO NEW PROCESS TECHNOLOGIES The markets for the Company's products are characterized by rapid changes in manufacturing process technologies. To provide competitive products to its target markets, the Company must develop improved process technologies. The Company's future success will depend, in large part, upon its ability to continue to improve its existing process technologies, develop new process technologies, and adapt its process technologies to emerging industry standards. The Company may in the future be required to transition one or more of its products to process technologies with smaller geometries in order to reduce costs and/or improve product performance. There can be no assurance that the Company will be able to improve its process technologies and develop new process technologies in a timely manner or that such improvements or developments will result in products that achieve market acceptance. A failure by the Company to improve its existing process technologies or processes or develop new process technologies in a timely manner could adversely affect the Company's business, financial condition and operating results. See " -- Rapid Technological Change; Necessity to Develop and Introduce New Products," " -- Manufacturing Capacity Limitations; New Production Facility" and "Business -- Research and Development." DEPENDENCE ON THIRD-PARTY MANUFACTURING AND SUPPLY RELATIONSHIPS The Company relies on outside foundries for the manufacture of certain of its products. The Company generally does not have long-term wafer supply agreements with its outside foundries that guarantee wafer or product quantities, prices or delivery lead times. Instead, the Company's products that are manufactured by outside foundries are manufacturered on a purchase order basis. The Company expects that, for the foreseeable future, certain of its 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 the Company's outside foundries would impact the production of the Company's products for a substantial 12 period of time, which could have a material adverse effect on the Company's business, financial condition and operating results. Furthermore, in the event that the transition to the next generation of manufacturing technologies at one or more of the Company's outside foundries is unsuccessful or delayed, the Company's business, financial condition and operating results could be materially and adversely affected. There are additional risks associated with the Company's dependence upon third party manufacturers for certain of its products, including, but not limited to, 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. With respect to certain of its products, the Company depends upon external foundries to produce wafers and, in some cases, finished products of acceptable quality, to deliver those wafers and products to the Company on a timely basis and to allocate to the Company a portion of their manufacturing capacity sufficient to meet the Company's needs. On occasion, the Company has experienced difficulties in causing these events to occur satisfactorily. The Company's wafer and product requirements typically represent a very small portion of the total production of these external foundries. The Company is subject to the risk that a producer will cease production on an older or lower-volume process that is used to produce the Company's parts. Additionally, there can be no assurance that such external foundries will continue to devote resources to the production of the Company's products or continue to advance the process design technologies on which the manufacturing of the Company's products are based. Any such difficulties could have a material adverse effect on the Company's business, financial condition and operating results. See "-- Manufacturing Yields." Certain of the Company's products are assembled and packaged by third-party subcontractors. The Company does not have long-term agreements with any of these subcontractors. Such assembly and packaging is conducted on a purchase order basis. As a result of its reliance on third-party subcontractors to assemble and package its products, the Company cannot directly control product delivery schedules, which could lead to product shortages or quality assurance problems that could increase the costs of manufacturing, assembly or packaging of the Company's products. In addition, the Company may, from time to time, be required to accept price increases for such assembly or packaging services that could have a material adverse effect on the Company's business, financial condition and operating results. Due to the amount of time normally required to qualify assembly and packaging subcontractors, product shipments could be delayed significantly if the Company is required to find alternative subcontractors. In the future, the Company may contract with third parties for the testing of its products. Any problems associated with the delivery, quality or cost of the assembly, testing or packaging of the Company's products could have a material adverse effect on the Company's business, financial condition and operating results. Due to an industry transition to six-inch wafer fabrication facilities, there is a limited number of suppliers of the four-inch wafers used by the Company to build products in its existing manufacturing facility. Although the Company believes that it will have sufficient access to four-inch wafers to support production in its existing fabrication facility for the foreseeable future, there can be no assurance that the Company's current suppliers will continue to supply the Company 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. If the Company is not able to obtain a sufficient supply of four-inch wafers or to obtain the requisite equipment for a four-inch process, the Company's business, financial condition and operating results would be materially adversely affected. CUSTOMER CONCENTRATION Historically, a relatively small number of customers has accounted for a significant portion of the Company's revenues in any particular period. The Company has no long-term volume purchase commitments from any of its major customers. In fiscal 1996 and 1997 and for the first six months of fiscal 1998, the Company's five largest customers accounted for approximately 44%, 44% and 41% of the Company's revenues, respectively. The Company anticipates that sales of its products to relatively few customers will 13 continue to account for a significant portion of its revenues. In the event of a reduction, delay or cancellation of orders from one or more significant customers or if one or more of its significant customers select products manufactured by one of the Company's competitors for inclusion in future product generations, the Company's business, financial condition and operating results could be materially and adversely affected. There can be no assurance that the Company's current customers will continue to place orders with the Company, that orders by existing customers will continue at current or historical levels or that the Company will be able to obtain orders from new customers. The loss of one or more of the Company's current significant customers could materially and adversely affect the Company's business, financial condition and operating results. See "-- Intense Competition" and "Business -- Products and Customers." MANAGEMENT OF GROWTH The Company has experienced, and may continue to experience, periods of rapid growth and expansion, which have placed, and could continue to place, a significant strain on the Company's limited personnel and other resources. To manage these expanded operations effectively, the Company will be required to continue to improve its operational, financial and management systems and to successfully hire, train, motivate and manage its employees. In particular, certain of the Company's senior management personnel recently joined the Company and the Company is currently recruiting for the position of Vice President, Operations. The Company's ability to manage growth successfully will require such personnel to work together effectively. In addition, the expansion of the Company's current wafer fabrication facility, the construction and operation of the Company's planned wafer fabrication facility, the initial integration of the proposed new wafer fabrication facility with the Company's current facility and the subsequent potential transfer of the Company's manufacturing operations to the proposed new wafer fabrication facility will require significant management, technical and administrative resources. There can be no assurance that the Company will be able to manage its growth or effectively integrate its planned wafer fabrication facility into its current operations, and a failure to do so could have a material adverse effect on the Company's business, financial condition and operating results. DEPENDENCE ON QUALIFIED PERSONNEL The Company's future success depends in part on the continued service of its key design engineering, sales, marketing and executive personnel and its ability to identify, hire and retain additional personnel. There is intense competition for qualified personnel in the semiconductor industry, in particular design engineers, and there can be no assurance that the Company will be able to continue to attract and train such engineers or other qualified personnel necessary for the development of its business or to replace engineers or other qualified personnel that may leave the Company's employ in the future. The Company's anticipated growth is expected to place increased demands on the Company's resources and will likely require the addition of new management personnel and the development of additional expertise by existing management personnel. Loss of the services of, or failure to recruit, key design engineers or other technical and management personnel could be significantly detrimental to 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. NEED FOR ADDITIONAL CAPITAL The Company requires substantial working capital to fund its business, particularly to finance inventories and accounts receivable and for capital expenditures. The Company believes that the net proceeds of this offering, together with its available cash, cash equivalents and short-term investments and cash generated from operations, will be sufficient to meet the Company's capital requirements through the next twelve months, although the Company could be required, or could elect, to seek to raise additional financing during such period. The Company's future capital requirements will depend on many factors, including the costs associated with the expansion of its 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 the Company's products. The Company expects that it will need to raise additional debt or equity financing in 14 the future, primarily for purposes of financing the acquisition of property for its 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. There can be no assurance that such additional debt or equity financing will be available on commercially reasonable terms or at all. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." UNCERTAINTY REGARDING PATENTS AND PROTECTION OF PROPRIETARY RIGHTS The Company relies in part on patents to protect its intellectual property. In the United States, the Company has been issued 13 patents, which principally cover certain aspects of the design and architecture of the Company's IC products and have expiration dates ranging from 2004 to 2009. In addition, the Company has three 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 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. The Company also relies on a combination of mask work protection, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements to protect its intellectual property. 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. In March 1997, the Company received a written notice from legal counsel for Dr. Chou Li asserting that the Company manufactures certain of its products in ways that appear to such counsel to infringe a United States patent held by Dr. Li (the "Li Patent"). After a review of its technology in light of such assertion, the Company believes that the Company's processes do not infringe any of the claims of this patent. However, there can be no assurance that Dr. Li will not file a lawsuit against the Company or that the Company would prevail in any such litigation. Any litigation relating to the intellectual property rights of third parties, including, but not limited to the Li Patent, whether or not determined in the Company's favor or settled by the Company, would at a minimum be costly and could divert the efforts and attention of the Company's management and technical personnel, which could have a material adverse effect on the Company's business, financial condition or operating results. 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. 15 INTERNATIONAL SALES International sales (including sales to Canada) accounted for 44%, 40% and 41% of revenues in fiscal 1996, fiscal 1997 and the first six months of fiscal 1998, respectively. The Company anticipates that international sales may increase in future periods and may account for an increasing portion of the Company's revenues. As a result, an increasing portion of the Company's revenues may be subject to certain risks, including changes in regulatory requirements, tariffs and other barriers, timing and availability of export licenses, political and economic instability, difficulties in accounts receivable collections, natural disasters, difficulties in staffing and managing foreign subsidiary and branch operations, difficulties in managing distributors, difficulties in obtaining governmental approvals for telecommunications 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. The Company is also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. The Company cannot predict whether quotas, duties, taxes or other charges or restrictions upon the importation or exportation of the Company's products will be implemented by the United States or other countries. Because sales of the Company's 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 the Company's 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 the Company's results of operations. Some of the Company's customer purchase orders and agreements are governed by foreign laws, which may differ significantly from United States laws. Therefore, the Company may be limited in its ability to enforce its rights under such agreements and to collect damages, if awarded. Any of the foregoing factors could have a material adverse effect on the Company's business, financial condition and operating results. ENVIRONMENTAL REGULATIONS 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. The Company uses significant amounts of water throughout its 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. There can be no assurance that near term reductions in water allocations to manufacturers will not occur, which could have a material adverse affect on the Company's business, financial condition or operating results. ABSENCE OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE Prior to this offering, there has been no public market for the Common Stock and there can be no assurance that an active trading market will develop or be sustained. The initial offering price for Common 16 Stock to be sold by the Company was determined by negotiations among the Company and the Underwriters and may bear no relationship to the price at which the Common Stock will trade after completion of this offering. See "Underwriting" for factors considered in determining such offering price. The market price of the Common Stock could be subject to significant fluctuations in response to quarter-to-quarter variations in the Company's anticipated or actual operating results; announcements or introductions of new products; technological innovations or setbacks by the Company or its 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, 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 the Common Stock. Furthermore, the shares of the Company's Common Stock that were outstanding immediately prior to this offering are held by a large number of individual stockholders. Upon the expiration of lock-up agreements between the Underwriters and certain of these stockholders, which lock-up agreements expire upon the later of (i) 180 days after the effectiveness of this offering or (ii) three days after the public release of the Company's earnings for the fiscal period ending on or immediately prior to the completion of such 180-day period (as applicable, the "Lock-Up Period"), substantially all of the Company's outstanding Common Stock held by stockholders immediately prior to this offering will be eligible for sale in the public market, subject in some cases to the volume and other restrictions of Rule 144 and Rule 701 under the Securities Act of 1933 (the "Securities Act"). There can be no assurance that sales of Common Stock by such stockholders upon expiration of the Lock-Up Period will not adversely affect the market price of the Common Stock. See "-- Shares Eligible for Future Sale" and "Shares Eligible for Future Sale." SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of Common Stock (including shares issued upon the exercise of outstanding options and warrants) in the public market following this offering could adversely affect the market price for the Common Stock. Such sales could also make it more difficult for the Company to sell its equity or equity-related securities in the future at a time and price that the Company deems appropriate. Upon completion of this offering, the Company will have 19,801,750 shares of Common Stock outstanding. The 5,450,000 shares offered hereby will be immediately tradable without restriction. The 14,351,750 remaining shares of Common Stock outstanding upon completion of this offering will be "restricted securities" as that term is defined in Rule 144 under the Securities Act ("Restricted Shares"). Of the Restricted Shares, approximately 665,000 will be eligible for immediate sale in the public market upon completion of this offering without restriction under Rule 144(k) under the Securities Act, and approximately 571,500 will be eligible for sale 90 days after the effective date of the registration statement filed pursuant to this offering (the "Effective Date") under Rule 144 under the Securities Act, subject in some cases to volume and other restrictions. As a result of lock-up agreements between certain stockholders and the Company or the Representatives of the Underwriters, the remaining approximately 13,115,250 Restricted Shares will not be available for immediate sale in the public market until the expiration of the 180 day period following the Effective Date, subject in some cases to the volume and other restrictions of Rule 144 and Rule 701 under the Securities Act. However, BancAmerica Robertson Stephens may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. Shares eligible to be sold by affiliates pursuant to Rule 144 are subject to volume and other restrictions. The Company intends to register the Common Stock to be issued pursuant to the Company's 1997 Employee Stock Purchase Plan on the Effective Date, and intends to register all of the shares of Common Stock to be issued pursuant to the Company's other employee benefit plans approximately 90 days after the Effective Date. EFFECT OF ANTI-TAKEOVER PROVISIONS Immediately after the closing of this offering, the Company's Board of Directors will have the authority to issue up to 2,000,000 shares of Preferred Stock and to determine the price, rights, preferences and 17 privileges and restrictions, including voting rights, of those shares without any further vote or action by the Company's 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 the Company as the terms of the Preferred Stock that might be issued could potentially prohibit the Company's consummation of any merger, reorganization, sale of substantially all of its 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 the Company. Section 203 of the Delaware General Corporation Law, to which the Company is subject, restricts certain business combinations with any "interested stockholder" as defined by such statute. The statute may delay, defer or prevent a change of control of the Company. DILUTION Purchasers of the Common Stock in this offering will suffer immediate and substantial dilution of $8.12 per share in the net tangible book value of the Common Stock from the initial public offering price. To the extent that outstanding options and warrants to purchase the Common Stock are exercised, there will be further dilution. 18 USE OF PROCEEDS The net proceeds to the Company from the sale of 2,700,000 shares of Common Stock offered hereby, at an estimated offering price of $11.00 per share, are estimated to be $26,921,000 ($35,284,025 assuming the Underwriters' over- allotment option is exercised in full), after deducting the Underwriting discounts and commissions and estimated offering expenses payable by the Company. The Company currently expects that approximately $5.0 million of the net proceeds will be used to fund the expansion of the manufacturing capacity of the Company's existing manufacturing facility, that approximately $20.0 million will be used for the construction of and the purchase of equipment for a proposed new wafer fabrication facility and that the balance of the net proceeds will be used for working capital and other general corporate purposes. The amounts actually expended for each purpose and the timing of such expenditures may vary significantly depending on numerous factors including the amount of costs associated with the expansion of the Company's 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 introduction of new products and product enhancements and market acceptance of the Company's products. The Company believes that its available cash and cash equivalents and cash generated from operations, together with the net proceeds of this offering, will be sufficient to meet its capital requirements through the next 12 months. However, there can be no assurance that the Company will not require additional debt or equity financing prior to such time or that such additional debt or equity financing, if required, will be available upon terms acceptable to the Company, or at all. The Company may also use a portion of the proceeds for the acquisition of or investment in complementary businesses, products or technologies, although no acquisitions are currently being planned or negotiated as of the date of this Prospectus and no portion of the net proceeds has been allocated for any specific acquisition. Pending such uses, the Company intends to invest the net proceeds from this offering in short- term, interest-bearing, investment-grade securities. The Company will not receive any proceeds from the sale of the shares being offered by the Selling Stockholders. See "Risks Factors--Need For Additional Capital." DIVIDEND POLICY The Company has never declared or paid dividends on its capital stock. The Company currently anticipates that it will retain all available funds for use in its business, and does not anticipate paying any cash dividends in the foreseeable future. 19 CAPITALIZATION The following table sets forth the capitalization of the Company (i) actual as of September 30, 1997, (ii) pro forma to reflect the automatic conversion of all outstanding shares of the Company's Preferred Stock into Common Stock upon the closing of this offering and (iii) as adjusted to give effect to the receipt of the estimated net proceeds from the sale by the Company of 2,700,000 shares of Common Stock offered hereby, at an assumed initial public offering price of $11.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company. This table should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus.
SEPTEMBER 30, 1997 ------------------------------ ACTUAL PRO FORMA AS ADJUSTED ------- --------- ----------- (IN THOUSANDS) Current portion of capital lease obligations(1). $ 2,641 $ 2,641 $ 2,641 ======= ======= ======= Long-term capital lease obligations, less cur- rent portion................................... 2,096 2,096 2,096 Stockholders' equity: Preferred Stock, $.01 par value, 1,350,000 shares authorized; 1,051,294 shares issued and outstanding, actual; 2,000,000 shares au- thorized, none issued and outstanding, pro forma and as adjusted........................ 11 -- -- Common Stock, $.01 par value, 34,500,000 shares authorized; 6,392,660 shares issued and outstanding, actual; 17,101,750 shares issued and outstanding, pro forma; 60,000,000 shares authorized, 19,801,750 shares issued and outstanding, as adjusted(2).............. 64 171 198 Additional paid-in capital.................... 34,655 34,559 61,453 Deferred compensation......................... (552) (552) (552) Accumulated deficit........................... (3,559) (3,559) (3,559) Notes receivable from stockholders............ (501) (501) (501) ------- ------- ------- Total stockholders' equity................... 30,118 30,118 57,039 ------- ------- ------- Total capitalization........................ $32,214 $32,214 $59,135 ======= ======= =======
- -------- (1) See Note 6 of Notes to Consolidated Financial Statements for a description of the Company's obligations under capital leases. (2) Excludes, as of September 30, 1997: (i) 157,968 shares of Common Stock issuable upon exercise of options outstanding under the 1982 Plan at a weighted average exercise price of $0.46 per share; (ii) 2,049,309 shares of Common Stock issuable upon exercise of options outstanding under the 1992 Plan at a weighted average exercise price of $1.06 per share; (iii) 2,553,380 shares of Common Stock reserved for future issuance under the 1992 Plan; (iv) 200,000 shares of Common Stock reserved for future issuance under the Directors' Plan; (v) 400,000 shares of Common Stock reserved for issuance under the Purchase Plan; (vi) 83,807 shares issuable upon exercise of certain warrants at a weighted average exercise price of $2.91 per share; and (vii) 24,755 shares of Common Stock issuable upon the exercise of certain other outstanding options at a weighted average exercise price of $0.48 per share. See "Management --1982 Employee Incentive Stock Option Plan" and "-- 1992 Stock Option Plan" and Note 4 of Notes to Consolidated Financial Statements. 20 DILUTION The pro forma net tangible book value of the Company's Common Stock as of September 30, 1997 was approximately $30.1 million, or $1.76 per share. Pro forma net tangible book value per share represents the amount of the Company's total tangible assets less total liabilities, divided by the pro forma number of shares of Common Stock outstanding at September 30, 1997. Pro forma net tangible book value dilution per share represents the difference between the amount per share paid by purchasers of shares of Common Stock in the offering made hereby and the pro forma net tangible book value per share immediately after completion of this offering. After giving effect to the estimated net proceeds from the sale by the Company of 2,700,000 shares of Common Stock offered hereby at an assumed initial public offering price of $11.00 per share and after deducting the underwriting discounts and commissions and estimated offering expenses payable by the Company, the Company's pro forma net tangible book value at September 30, 1997 would have been $57.0 million, or $2.88 per share of Common Stock. This represents an immediate increase in net tangible book value of $1.12 per share to existing stockholders and an immediate dilution in net tangible book value of $8.12 per share to new investors purchasing shares in this offering at the assumed initial public offering price. The following table illustrates this per share dilution: Assumed initial public offering price........................... $11.00 Pro forma net tangible book value at September 30, 1997....... $1.76 Increase attributable to new investors........................ 1.12 ----- Pro forma net tangible book value after offering................ 2.88 ------ Dilution to new investors....................................... $ 8.12 ======
The following table summarizes, on a pro forma basis as of September 30, 1997, the number of shares of Common Stock purchased from the Company, the total consideration paid and the average price per share paid by the existing stockholders and by new investors purchasing shares in this offering at an assumed public offering price of $11.00 per share (before deducting underwriting discounts and commissions and estimated offering expenses):
AVERAGE SHARES PURCHASED TOTAL CONSIDERATION PRICE ------------------ ------------------- PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- ------- ----------- ------- ------- Existing stockholders......... 17,101,750 86.4% $34,957,000 54.1% $ 2.04 New investors................. 2,700,000 13.6 29,700,000 45.9 11.00 ---------- ----- ----------- ----- Total....................... 19,801,750 100.0% $64,657,000 100.0% ========== ===== =========== =====
The foregoing table excludes, as of September 30, 1997: (i) 157,968 shares of Common Stock issuable upon exercise of options outstanding under the 1982 Plan at a weighted average exercise of $0.46 per share; (ii) 2,049,309 shares of Common Stock issuable upon exercise of options outstanding under the 1992 Plan at a weighted average exercise price of $1.06 per share; (iii) 2,553,380 shares of Common Stock reserved for future issuance under the 1992 Plan; (iv) 200,000 shares of Common Stock reserved for future issuance under the Directors' Plan; (v) 400,000 shares of Common Stock reserved for issuance under the Purchase Plan; (vi) 83,807 shares of Common Stock issuable upon the exercise of certain warrants at a weighted average exercise price of $2.91 per share; and (vii) 24,755 shares issuable upon exercise of certain other outstanding options at a weighted average exercise price of $0.48 per share. See "Management -- 1982 Employee Incentive Stock Option Plan" and "-- 1992 Stock Option Plan" and Note 4 of Notes to Consolidated Financial Statements. 21 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated statements of operations data set forth below for the fiscal years ended March 31, 1995, 1996 and 1997 and the consolidated balance sheet data at March 31, 1996 and 1997 are derived from the consolidated financial statements of the Company audited by Ernst & Young LLP, independent auditors, that are included elsewhere in this Prospectus. The consolidated statements of operations data for the fiscal years ended March 31, 1993 and 1994 and the consolidated balance sheet data as of March 31, 1993, 1994 and 1995 are derived from consolidated financial statements audited by Ernst & Young LLP, which are not included in this Prospectus. The consolidated balance sheet data at September 30, 1997 and the consolidated statements of operations data for the six months ended September 30, 1996 and 1997 are derived from unaudited consolidated financial statements included elsewhere in this Prospectus. The unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation of the Company's consolidated financial position and consolidated results of operations for these periods. Operating results for the six months ended September 30, 1997 are not necessarily indicative of the results that may be expected for the entire fiscal year ending March 31, 1998. The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related Notes thereto included elsewhere in this Prospectus.
SIX MONTHS ENDED SEPTEMBER FISCAL YEAR ENDED MARCH 31, 30, ------------------------------------------- --------------- 1993 1994 1995 1996 1997 1996 1997 ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net revenues............ $38,296 $49,686 $46,950 $50,264 $57,468 $27,955 $35,208 Cost of revenues........ 20,561 29,187 27,513 34,169 30,057 15,754 16,534 ------- ------- ------- ------- ------- ------- ------- Gross profit............ 17,735 20,499 19,437 16,095 27,411 12,201 18,674 Operating expenses: Research and develop- ment.................. 8,617 9,273 10,108 8,283 7,870 3,412 6,002 Selling, general and administrative........ 7,799 9,513 10,112 11,232 12,537 5,894 6,730 ------- ------- ------- ------- ------- ------- ------- Total operating ex- penses................ 16,416 18,786 20,220 19,515 20,407 9,306 12,732 ------- ------- ------- ------- ------- ------- ------- Operating income (loss). 1,319 1,713 (783) (3,420) 7,004 2,895 5,942 Gain on contract settle- ment................... -- 9,530 -- -- -- -- -- Net interest income (ex- pense)................. (308) (464) (358) (242) (29) 24 151 ------- ------- ------- ------- ------- ------- ------- Income (loss) before provision for income taxes.................. 1,011 10,779 (1,141) (3,662) 6,975 2,919 6,093 Provision (benefit) for income taxes........... 18 575 (70) 32 659 276 159 ------- ------- ------- ------- ------- ------- ------- Net income (loss)....... $ 993 $10,204 $(1,071) $(3,694) $ 6,316 $ 2,643 $ 5,934 ======= ======= ======= ======= ======= ======= ======= Pro forma net income per share(1)............... $ 0.33 $ 0.30 ======= ======= Shares used in pro forma net income per share calculation(1) ........ 19,020 19,623 ======= =======
MARCH 31, --------------------------------------- SEPTEMBER 30, 1993 1994 1995 1996 1997 1997 ------- ------- ------- ------- ------- ------------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Working capital.......... $11,338 $19,867 $16,753 $14,030 $19,364 $18,953 Total assets............. 26,585 45,124 40,180 37,836 41,814 44,382 Long-term obligations, less current portion.... 3,632 7,493 6,516 4,447 3,192 2,096 Total stockholders' equi- ty...................... 15,523 25,829 24,805 21,512 27,743 30,118
- ------- (1) See Note 1 of Notes to Consolidated Financial Statements for an explanation of the method used to determine the number of shares used to compute the pro forma net income per share amounts. 22 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 tailors solutions to customer and market requirements by using a combination of high-frequency, mixed-signal design expertise, system-level knowledge and multiple silicon process technologies. AMCC believes that its internal bipolar and BiCMOS processes, complemented by advanced CMOS 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 systems 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. Since inception, the Company has focused primarily on the design, manufacture and sale of high-performance silicon integrated circuits ("ICs"). The Company's first significant revenues were derived from sales of high-speed application-specific integrated circuits ("ASICs") to military and ATE customers. The Company subsequently utilized its high-performance mixed-signal design and process technologies to diversify into the telecommunications and high-speed computing markets and, more recently, the data communications market. Commencing in fiscal 1992, the Company adopted a strategy in which much of its next-generation technology and products were based on a process under development with a strategic foundry partner. In fiscal 1994, the strategic partner elected to end this relationship and paid the Company $10.0 million in connection with termination of the proposed foundry relationship. In fiscal 1995, the Company redirected its strategy to concentrate on the development of application-specific standard products ("ASSPs") for the high- performance telecommunications and high-speed computing markets. As a result of the termination of the relationship with the strategic partner, decreased orders from two major customers, charges associated with reductions in the Company's work force and charges taken for excess inventories, the Company had fluctuating revenues and incurred net losses in fiscal 1995 and 1996. In fiscal 1997, the Company substantially reorganized its management team and increased its focus on becoming the leading supplier of high-performance, high-bandwidth connectivity ICs for the world's communications infrastructure. Accordingly, the Company accelerated the pace of development of new products for high-performance telecommunications and data communications markets. Following the reorganization of the Company's management team in fiscal 1997 and its renewed focus on ASSPs for the telecommunications and data communications markets, the Company returned to profitability and its revenues have increased in each of the last six fiscal quarters. The Company derives its revenues principally through product sales, which are recognized upon shipment to customers. Revenues from sales to distributors that are made under agreements allowing for price protection and right of return on products unsold by the distributor are not recognized until the distributor ships the product to its customer. The Company also derives a small portion of its revenues from non-recurring engineering contracts, which revenues are recognized using the percentage-of-completion method. All international sales are denominated in United States dollars. 23 RESULTS OF OPERATIONS The following table sets forth certain selected consolidated statements of operations data as a percentage of revenues for the periods indicated:
SIX MONTHS ENDED FISCAL YEAR SEPTEMBER ENDED MARCH 31, 30, --------------------- ------------ 1995 1996 1997 1996 1997 ----- ----- ----- ----- ----- Net revenues.............................. 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues.......................... 58.6 68.0 52.3 56.4 47.0 ----- ----- ----- ----- ----- Gross profit.............................. 41.4 32.0 47.7 43.6 53.0 Operating expenses: Research and development................ 21.5 16.5 13.7 12.2 17.0 Selling, general and administrative..... 21.6 22.3 21.8 21.1 19.1 ----- ----- ----- ----- ----- Total operating expenses.............. 43.1 38.8 35.5 33.3 36.1 ----- ----- ----- ----- ----- Operating income (loss)................... (1.7) (6.8) 12.2 10.3 16.9 Net interest income (expense)............. (0.7) (0.5) (0.1) 0.1 0.4 ----- ----- ----- ----- ----- Income (loss) before provision for income taxes.................................... (2.4) (7.3) 12.1 10.4 17.3 Provision (benefit) for income taxes...... (0.1) 0.0 1.1 0.9 0.4 ----- ----- ----- ----- ----- Net income (loss)......................... (2.3)% (7.3)% 11.0% 9.5% 16.9% ===== ===== ===== ===== =====
COMPARISON OF THE SIX MONTHS ENDED SEPTEMBER 30, 1997 TO THE SIX MONTHS ENDED SEPTEMBER 30, 1996 Net Revenues. Net revenues for the six months ended September 30, 1997 were approximately $35.2 million, representing an increase of 26% over net revenues of approximately $28.0 million for the six months ended September 30, 1996. The increase in net revenues was due primarily to an increase in revenues from communications products, reflecting unit growth in shipments of existing products, as well as the introduction of new products for these markets. Increased shipments of PCI bus products also contributed to the net revenue growth. Sales to Nortel accounted for 19% and 20% of net revenues for the six months ended September 30, 1997 and 1996, respectively. Sales outside of North America accounted for 24% and 23% of net revenues for the six months ended September 30, 1997 and 1996, respectively. Gross Margin. In addition to the costs of internal wafer fabrication and the costs of procuring wafers and finished goods from external foundries, the Company's cost of revenues includes costs associated with packaging, assembly, testing, procurement and quality assurance functions, some of which are performed by third-party vendors. Gross margin (gross profit as a percentage of revenues) was 53.0% for the six months ended September 30, 1997, as compared to 43.6% for the six months ended September 30, 1996. The increase in gross margin resulted from increased utilization of the Company's wafer fabrication facility, as well as improved manufacturing yields. The Company's gross margin is primarily impacted by factory utilization, wafer yields and product mix. 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. See "Risk Factors -- Fluctuations in Operating Results." Research and Development. Research and development ("R&D") expenses consist primarily of compensation and associated costs relating to new product development and new process development. These costs include design and process engineering costs, design tools and prototyping costs (including non- recurring 24 engineering charges from foundries) and photomask and pre-production wafer costs. R&D expenditures are expensed as incurred. R&D expenses increased to approximately $6.0 million, or 17.0% of revenues, for the six months ended September 30, 1997, from approximately $3.4 million, or 12.2% of net revenues, for the six months ended September 30, 1996. The increase in R&D expenses was due to accelerated new product and process development efforts, including additions to the Company's engineering staff and related expenses as well as increased prototyping costs. The Company expects R&D expenses in absolute dollars to increase significantly in the future due to planned increases in personnel, prototyping costs and depreciation resulting from increased capital investment for process development and design tools. Currently, R&D expenses are primarily focused on the development of products for the telecommunications and data communications markets, and the Company expects to continue this focus. Selling, General and Administrative. Selling, general and administrative ("SG&A") expenses consist primarily of compensation for sales, marketing and administrative personnel, commissions paid to third-party sales representatives and expenses associated with product promotion. SG&A expenses were approximately $6.7 million, or 19.1% of revenues, for the six months ended September 30, 1997, as compared to approximately $5.9 million, or 21.1% of net revenues, for the six months ended September 30, 1996. The increase in SG&A expenses in the six months ended September 30, 1997 primarily reflected increased commissions to third-party sales representatives and an increased provision for doubtful accounts due to the Company's expanding customer base. The decrease in SG&A expenses as a percentage of net revenues in the six months ended September 30, 1997 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 to additional staffing in its sales and marketing departments and additional expenses related to being a public company. Net Interest Income. Net interest income consists of interest income generated from the Company's cash, cash equivalents and short-term investments, net of interest expense paid on the Company's debt and capital lease obligations. Net interest income increased to $151,000 for the six months ended September 30, 1997 from $24,000 for the six months ended September 30, 1996, reflecting interest income from larger cash and short-term investment balances during the six months ended September 30, 1997 and a decrease in interest expense associated with outstanding capital lease and debt obligations. Income Taxes. The Company's estimated annual effective tax rate used for the six months ended September 30, 1997 was 2.6% due to the reduction of a valuation allowance recorded against deferred tax assets. This reduction results from the projected level of income for fiscal 1998, which makes the realization of these deferred tax assets more likely than not. The effective tax rate of 9.5% for the six months ended September 30, 1996 was a result of alternative minimum taxes ("AMT"). The Company expects its effective tax rate to be closer to statutory rates 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. Such amount is 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 six months ended September 30, 1997 was $47,000. The Company currently expects to record amortization of deferred compensation with respect to these option grants of approximately $127,000, $159,000, $159,000, $129,000 and $25,000 during the fiscal years ended March 31, 1998 (including the amount set forth above for the six months ended September 30, 1997), 1999, 2000, 2001 and 2002, respectively. YEARS ENDED MARCH 31, 1997, 1996 AND 1995 Net Revenues. Net revenues for fiscal 1997 increased to approximately $57.5 million from approximately $50.3 million in fiscal 1996 and $47.0 million in fiscal 1995. The increase in net revenues was due primarily to increases in fiscal 1997 and 1996 of revenues from sales of communications products and PCI bus products, reflecting unit growth in shipments of existing products, as well as the introduction of new products for 25 the communications market. In fiscal 1997, 1996 and 1995, sales to Nortel accounted for 20%, 20% and 17%, respectively, of net revenues. Sales to customers outside of North America accounted for 21%, 24% and 14% of net revenues in fiscal 1997, 1996 and 1995, respectively, reflecting an increase in revenues from sales to such customers, but fluctuating percentages of net revenues. The Company is focused on increasing the percentage of net revenues derived from sales to customers outside of North America. Gross Margin. Gross margin was 47.7%, 32.0% and 41.4% in fiscal 1997, 1996 and 1995, respectively. The decrease in gross margin in fiscal 1996 was attributable primarily to a decrease in the utilization of the Company's wafer fabrication facility, as well as an approximately $3.7 million charge taken for excess inventory, primarily of clock products for the high-speed computing market. In addition, decreases in average selling prices ("ASPs") for clock products also contributed to the decrease in gross margin in fiscal 1996. The increase in gross margin in fiscal 1997 resulted primarily from a significant reduction in charges related to excess inventory, as well as from increased utilization of the Company's wafer fabrication facility. See "Risk Factors -- Fluctuations in Operating Results." Research and Development. R&D expenses were approximately $7.9 million, $8.3 million and $10.1 million in fiscal 1997, 1996 and 1995, respectively. R&D expenses accounted for 13.7%, 16.5% and 21.5% of net revenues for fiscal 1997, 1996 and 1995, respectively. The decreases in R&D expenses were due to reductions in the Company's research and development engineering staff and to lower prototyping costs. During fiscal 1997, the Company began significant efforts to increase the R&D staff and to accelerate new product development efforts. These efforts resulted in higher R&D expenses during the six months ended March 31, 1997 and September 30, 1997. Selling, General and Administrative. SG&A expenses were approximately $12.5 million, $11.2 million and $10.1 million in fiscal 1997, 1996 and 1995, respectively. SG&A expenses accounted for 21.8%, 22.3% and 21.6% of revenues for fiscal 1997, 1996 and 1995, respectively. The increase in SG&A expenses in fiscal 1996 was primarily due to charges related to the turnover of executive personnel and the costs of implementing a comprehensive management information system. SG&A expenses increased in fiscal 1997 primarily due to higher compensation and product promotion expenses. Net Interest Expense. Net interest expense was $29,000, $242,000 and $358,000 in fiscal 1997, 1996 and 1995, respectively. The decreases in net interest expense were attributable primarily to decreasing levels of capital lease and debt obligations over the three-year period and to increases in interest income as a result of increasing levels of cash, cash equivalents and short-term investments. Income Taxes. The Company's effective tax rate for fiscal 1997 was 9.5%, which was comprised primarily of AMT reduced by net operating loss and research and development tax credits. The tax provision (benefit) for fiscal 1996 and 1995 were not material due to losses incurred during those fiscal years. 26 QUARTERLY RESULTS OF OPERATIONS The following table sets forth certain unaudited quarterly consolidated financial information in dollars and as a percentage of revenues for the six fiscal quarters ended September 30, 1997. The Company believes that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to state fairly the selected quarterly information when read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere herein. The operating results for any quarter are not necessarily indicative of results for any future period.
QUARTER ENDED ----------------------------------------------------- JUNE SEPT. DEC. JUNE SEPT. 30, 30, 31, MARCH 31, 30, 30, 1996 1996 1996 1997 1997 1997 ------- ------- ------- --------- ------- ------- (IN THOUSANDS) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net revenues............ $13,845 $14,110 $14,509 $15,004 $17,053 $18,155 Cost of revenues........ 7,682 8,072 7,046 7,257 8,156 8,378 ------- ------- ------- ------- ------- ------- Gross profit............ 6,163 6,038 7,463 7,747 8,897 9,777 Operating expenses: Research and develop- ment................. 1,797 1,615 2,256 2,202 2,525 3,477 Selling, general and administrative....... 2,917 2,977 3,092 3,551 3,339 3,391 ------- ------- ------- ------- ------- ------- Total operating ex- penses............. 4,714 4,592 5,348 5,753 5,864 6,868 ------- ------- ------- ------- ------- ------- Operating income........ 1,449 1,446 2,115 1,994 3,033 2,909 Net interest income (ex- pense)................. (17) 41 (19) (34) 66 85 ------- ------- ------- ------- ------- ------- Income before provisions for income taxes....... 1,432 1,487 2,096 1,960 3,099 2,994 Provision for income taxes.................. 135 141 198 185 81 78 ------- ------- ------- ------- ------- ------- Net income.............. $ 1,297 $ 1,346 $ 1,898 $ 1,775 $ 3,018 $ 2,916 ======= ======= ======= ======= ======= ======= AS A PERCENTAGE OF NET REVENUES: Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenues........ 55.5 57.2 48.6 48.4 47.8 46.1 ------- ------- ------- ------- ------- ------- Gross profit............ 44.5 42.8 51.4 51.6 52.2 53.9 Operating expenses: Research and develop- ment................. 13.0 11.4 15.5 14.7 14.8 19.2 Selling, general and administrative....... 21.1 21.1 21.3 23.6 19.6 18.7 ------- ------- ------- ------- ------- ------- Total operating ex- penses............. 34.1 32.5 36.8 38.3 34.4 37.9 ------- ------- ------- ------- ------- ------- Operating income........ 10.4 10.3 14.6 13.3 17.8 16.0 Net interest income (ex- pense)................. (0.0) 0.2 (0.1) (0.2) 0.4 0.5 ------- ------- ------- ------- ------- ------- Income before provisions for income taxes....... 10.4 10.5 14.5 13.1 18.2 16.5 Provision for income taxes.................. 1.0 1.0 1.4 1.3 0.5 0.4 ------- ------- ------- ------- ------- ------- Net income.............. 9.4% 9.5% 13.1% 11.8% 17.7% 16.1% ======= ======= ======= ======= ======= =======
The Company's net revenues have increased in each of the six quarters ended September 30, 1997, primarily due to increased unit shipments of the Company's products as well as the introduction of new products primarily for the communications market. Although gross margin has fluctuated, it generally increased over this period as increased utilization of the Company's wafer fabrication facility resulted in decreased per unit costs. The decrease in gross margin for the three months ended September 30, 1996 was principally due to a decrease in manufacturing yields during that quarter. The increase in gross margin for the three months ended December 31, 1996 and subsequent quarters was primarily due to improved yields 27 and increased utilization of the Company's wafer fabrication facility. Although R&D expenses fluctuated both in actual amounts and as a percentage of revenues, R&D expenses generally increased over this period as the Company increased its engineering staff and accelerated new product development efforts. In particular, the increase in R&D expenses for the three months ended December 31, 1996 primarily reflected increased recruiting, relocation and compensation expenses for development personnel, as well as prototyping costs related to new product development. The level of R&D expenses increased significantly again in the three months ended September 30, 1997 due to expenses associated with increases in engineering staff and to increased prototyping expenses. The Company believes R&D expenses in absolute dollars will continue to increase significantly in the future. SG&A expenses remained relatively stable over this period, except in the three months ended March 31, 1997. The increase in SG&A expenses in the three months ended March 31, 1997 reflected, in particular, expenditures for product promotion. In the three months ended September 30, 1997, costs associated with moving the Company's administration, engineering, test and assembly operations to a new facility contributed to increases in cost of revenues, SG&A and R&D expenses. The Company's quarterly 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 timing of depreciation and other expenses to be incurred by the Company in connection with the expansion of 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. See "Risk Factors -- Fluctuations in Operating Results," "-- Manufacturing Yields," "-- Risks Associated with Increasing Dependence on Telecommunications and Data Communications Markets and Increasing Dependence on Application-Specific Standard Products," "-- Risks Associated with Dependence on High-Speed Computing Market," "-- Rapid Technological Change; Necessity to Develop and Introduce New Products," "-- Manufacturing Capacity Limitations; New Production Facility," "-- Transition to New Process Technologies," "-- Customer Concentration," "-- Intense Competition," "-- Management of Growth" and "-- International Sales." LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of liquidity as of September 30, 1997 consisted of $11.4 million in cash, cash equivalents and short-term investments and a $900,000 loan commitment to finance the purchase of fabrication equipment currently expected to occur prior to the end of fiscal 1998. Working capital as of September 30, 1997 was $19.0 million compared to $19.4 million as of March 31, 1997. This decrease in working capital was primarily due to the repurchase of certain shares of the Company's Preferred Stock, offset by cash provided by operations. During the fiscal years ended March 31, 1997, 1996 and 1995 and the six months ended September 30, 1997, the Company financed its operations primarily through cash provided by operations and equipment lease financing. 28 During the six months ended September 30, 1997, the Company generated $6.9 million of cash from operating activities, compared to $6.6 million in the six months ended September 30, 1996. The increase in cash provided by operating activities was primarily due to the increase in profitability. For the fiscal years ended March 31, 1997, 1996 and 1995, net cash provided by operating activities was $11.9 million, $6.5 million and $1.4 million, respectively. Net cash provided by operating activities in fiscal 1997 primarily reflected net income before depreciation and amortization expense. Net cash provided by operating activities in fiscal 1996 differed from the net loss primarily due to adjustments for depreciation and amortization expense, a reduction in inventory levels and an increase in accounts payable and accrued liabilities. Net cash provided by operating activities in fiscal 1995 differed from the net loss primarily due to adjustments for depreciation and amortization expense and reduction of accounts receivable, partially offset by funding of increased levels of inventories and reduction of accounts payable and accrued liabilities. Capital expenditures totalled $4.1 million, $2.6 million and $6.2 million for fiscal 1997, 1996 and 1995, respectively, of which $1.2 million, $1.2 million and $3.4 million for fiscal 1997, 1996 and 1995, respectively, were financed using capital leases. During the six months ended September 30, 1997, capital expenditures totalled $4.3 million, of which approximately $282,000 was financed by capital leases. The Company intends to increase its capital expenditures for manufacturing equipment, test equipment and computer hardware and software. The Company currently plans to expand the clean room in its existing fabrication facility. The Company anticipates that the aggregate cost of this expansion and the purchase of equipment and leasehold improvements related thereto will be approximately $15.0 million, which the Company plans to finance through a combination of cash from operations, debt and lease financing and approximately $5.0 million of the net proceeds of this offering. The Company currently expects to spend approximately $4.8 million on capital expenditures in the second half of fiscal 1998, of which $2.1 million is related to the expansion. The Company also plans to initiate construction of a new six-inch wafer fabrication facility during 1999 and to complete the physical plant during 2000. The Company believes the new facility will not begin commercial production prior to late 2001. The Company estimates that the cost of the new wafer fabrication facility will be at least $60.0 million, of which approximately $25.0 million relates to the purchase of land and construction of the facility and approximately $35.0 million relates to capital equipment purchases. The Company plans to finance the new wafer fabrication facility through a combination of cash from operations, debt and lease financing and approximately $20.0 million of the net proceeds of this offering. 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. See "Risk Factors -- Manufacturing Capacity Limitations; New Production Facility," "-- Dependence on Third-Party Manufacturing and Supply Relationships" and "-- Need For Additional Capital." The Company has not raised financing from sales of equity (other than option exercises under employee stock plans) since September 1987, and as a financing strategy has used cash flow from operating activities and equipment debt and lease financing. In June 1997, the Company repurchased 172,300 shares of Preferred Stock (convertible into 2,119,435 shares of Common Stock) for approximately $3.9 million. The Company believes that the net proceeds of this offering, together with 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 assurance that such additional debt or equity financing will be available on commercially reasonable terms or at all. See "Risk Factors -- Need for Additional Capital" and "Use of Proceeds." 29 BUSINESS 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 mixed-signal design expertise, system-level knowledge and multiple silicon process technologies to offer IC products for the telecommunications markets that address the SONET/SDH and ATM transmission standards and for the data communications markets that address the Gigabit Ethernet, ATM and Fibre Channel transmission standards. The Company also leverages its technology to provide solutions for the ATE, high-speed computing and military markets. Customers of the Company include 3Com, Alcatel, Cisco Systems, Compaq, Hughes Electronics, Nortel, Sun Microsystems and Teradyne. The Company has developed multiple generations of many of its products. In the telecommunications market, the Company provides ATM and SONET/SDH physical layer transceivers and Clock Recovery and Synthesis Units for the OC-3 and OC- 12 standards, and is currently developing an OC-48 chip set. In the data communications market, the Company provides physical layer transceivers for Gigabit Ethernet and Fibre Channel applications as well as crosspoint switches for serial backplanes. In the high-speed computing market, the Company provides PCI controllers and high-frequency clock drivers and clock generators. In addition, the Company also provides high-performance, low-power ASIC products for the ATE and military markets. 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 and 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 current systems architectures inadequate. In the telecommunications 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 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 improved network reliability, while reducing maintenance and other operation costs by standardizing interoperability among equipment from different vendors. A transmission standard complementary to SONET/SDH, Asynchronous Transfer Mode ("ATM"), has emerged to optimize bandwidth utilization. ATM is a network transmission standard that packages data and reduces network delays, enabling the support of not only data traffic, but delay-sensitive voice, video and imaging applications. In the data communications market, similar bandwidth issues have arisen as the convergence of the LAN and WAN as well as the greater computational power of PCs have enabled powerful network applications such 30 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 markets for ICs were approximately $240 million in 1996 and will increase to approximately $700 million in 2000, and that the ATM markets for ICs were approximately $130 million in 1996 and will increase to approximately $700 million in 2000. The Fibre Channel and Gigabit Ethernet markets were relatively small in 1996 and Dataquest estimates that such combined markets will be approximately $300 million in 2000. 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 high- frequency, mixed-signal solutions to bridge the analog physical world and the digital computing environment. In particular, telecommunications OEMs require IC suppliers to provide solutions that minimize jitter (a measure of the stability and crispness of a signal), which degrades transmission quality over distance. Data communications products typically have substantially shorter life cycles than telecommunications products, and the rate of new product introductions is very high. Therefore, data communications OEMs specifically require IC suppliers that can provide IC solutions that accommodate these increased time-to-market demands. Furthermore, the data communications market is highly cost driven and generally involves large volumes, therefore, OEMs in this market to 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. 31 The Automated Test Equipment Industry Automated test equipment ("ATE") is used for the comprehensive testing of ICs, printed circuit boards and electronic systems. Increasing worldwide demand for ICs has led to a corresponding increase in the demand for IC test equipment. IC manufacturers continue to increase the pace of introduction of increasingly complex and higher speed ICs. Thus, ATE OEMs must provide new systems that are capable of testing ICs and electronic systems with increasingly higher frequencies and that are introduced rapidly enough to support the increased pace at which new ICs and electronic systems are being introduced. In addition, very accurate timing, utilizing precision analog verniers, is critical for the testing of today's advanced microprocessors and other ICs. Furthermore, ATE OEMs differentiate their systems and optimize speed and timing performance through the use of customized ICs. Accordingly, ATE OEMs require IC suppliers that possess the combination of application- specific integrated circuit ("ASIC") methodologies, high-performance process technologies and high-speed, mixed-signal design expertise that can deliver ICs with the requisite speeds and precision timing. Generally, ATE equipment requires ICs that operate at faster speeds and have more precise timing than the ICs being tested. This need for speed and precision timing requires that IC suppliers use high-performance processors that are similar to the high- performance processes required to service the advanced telecommunications market. Finally, ATE OEMs require IC suppliers that deliver timely solutions, enabling the OEMs to satisfy their increasingly rapid time-to-market requirements. In today's environment, there are declining numbers of IC suppliers that satisfy these requirements. The High-Speed Computing Industry Increasing worldwide demand for high-performance computing equipment has led to a corresponding increase in the demand for ICs for the high-speed computing industry. High-speed computing equipment manufacturers must deliver increased computational performance that is compatible with, and driven by rapidly increasing microprocessor speeds. The peripheral devices that communicate with the computer processor must keep pace with the processor to enable the system to deliver optimal performance. The pace of new product introductions in this industry continues to accelerate, and product life cycles continue to shorten. As a result, a premium is placed on time-to-market. High-performance computing equipment manufacturers must rely on suppliers of cost-effective, increasingly complex, standard ICs that can be designed, produced and delivered in time to meet rapidly changing market demands. AMCC SOLUTION 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 utilizing a combination of high-frequency mixed-signal design expertise, system-level knowledge and multiple process technologies. AMCC believes that its internal bipolar and BiCMOS processes, complemented by advanced CMOS processes from external foundries, enable the Company to offer high-performance, high- frequency solutions optimized for specific applications and customer requirements. By using its proven silicon-based processes and extensive design libraries, the Company is able to offer products that provide significant cost, power, performance and reliability advantages for communications systems OEMs. In addition, this enables the Company to accelerate its time-to-market as well as quickly ramp into high-volume production. The Company also leverages its technology to provide solutions for the ATE, high-speed computing and military markets. In the telecommunications market, the Company provides IC products for the SONET/SDH and ATM standards. The Company's customers in the telecommunications market include Alcatel, ECI, GPT, Nortel and SAT. In the data communications market, the Company supplies products targeted at Gigabit Ethernet, ATM and Fibre Channel applications. The Company's customers in this market include 3Com, Cabletron, Cisco Systems, Compaq, Fujikura and Vixel. In the ATE market, the Company provides high-speed products for both memory and logic testers. The Company's ATE customers include Hewlett-Packard, LTX, Schlumberger, Teradyne and Texas Instruments. Finally, in the high-speed computing market, the Company 32 supplies PCI bus controllers as well as precision timing products. The Company's customers for this market include Ericsson, Intel and NEC. The Company has developed multiple generations of many of its products and has maintained long-term relationships with many of its customers. 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 Telecommunications Markets AMCC targets key high-growth telecommunications 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 telecommunications systems OEMs. Leverage Telecommunication Capabilities in High-Bandwidth Data Communications Markets AMCC leverages its mixed-signal design expertise, process technologies and systems capabilities in telecommunications to address specific customer requirements in high-bandwidth data communications markets. The Company believes that this strategy enables it to provide data communications OEMs with cost-effective IC solutions that can be introduced and produced rapidly. The Company has targeted, in particular, Gigabit Ethernet, ATM and Fibre Channel applications. Consistent with this strategy, the Company has introduced serial backplane ICs to address the growing demand for high- bandwidth switching. Exploit Established Markets The Company believes it has developed a strong presence in specific segments of the ATE, high-speed computing and military markets, where it maintains established customer relationships and many competitive products. AMCC believes that its high-performance design expertise is directly applicable to the product requirements of these markets. Furthermore, the Company believes that its process technologies are well-suited for the ATE and military applications that are being served by a decreasing number of suppliers. AMCC believes that continued participation in these markets provides it with an opportunity for revenue diversification and stability. 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, complemented by advanced CMOS processes from external foundries, together with its mixed-signal design expertise, 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. 33 Capitalize on Established Silicon-Process Technologies to Provide Cost- Effective Solutions The Company applies its systems expertise and its mixed-signal analog 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 and benefit from the extensive semiconductor industry infrastructure devoted to the support of silicon processes. The process technologies employed by AMCC are designed to deliver high-performance products while being substantially less capital intensive than other advanced semiconductor processes. In addition, the Company's ASIC methodology enables the use of cells that have been successfully characterized and manufactured previously. As a result, the Company believes it is well-positioned to deliver products on time and to meet the rapidly increasing production requirements of its customers. Continue to Develop Internal Wafer Fabrication Capability The Company believes that the continued development of its internal bipolar and BiCMOS wafer fabrication capability provides an important competitive advantage. This capability improves the Company's ability to design and manufacture new products with short development cycles. It also gives AMCC greater control over its manufacturing process characteristics and costs, and enhances its ability to leverage existing design libraries and methodologies for future products. 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 address the needs of two primary segments of the communications market: the telecommunications market and the data communications market. The Company's products for the telecommunications and the data communications markets are designed to respond to the growing demand for high-speed networking applications for established WAN standards such as SONET/SDH and ATM and emerging 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, high-speed computing and military markets. The Company utilizes its high-performance digital and mixed-signal design expertise and systems knowledge, together with its internal bipolar and BiCMOS processes and CMOS processes from outside foundries, to design and manufacture products that are tailored to its customers' individual needs. The Company has used its design methodologies to successfully develop products ranging from ASSPs designed for industry-wide applications, to ASICs that are custom solutions for specific customer applications. These complementary products enable the Company to provide optimal solutions for its customers' applications. For example, the earlier generation of the Company's standard SONET products used ASIC platforms for quick time-to-market. Recently, the Company used the S2052, its ASSP designed for the Gigabit Ethernet market, as a platform to develop its S2053 and S2054 products, two customer-specific devices that will eventually become standard products. As the Company develops special macros such as Phase Locked Loops ("PLLs") to support a customers' application needs, they become part of the Company's ASIC library, which in turn can be used for other ASICs or ASSPs. The Company believes that it has a particularly strong competence in the design of high- speed, low-jitter PLLs, which are key elements in its mixed-signal transceivers and precision timing products. AMCC's products for SONET/SDH, ATM, Gigabit Ethernet and Fibre Channel applications are primarily focused on very high-speed digital and mixed-signal circuits called physical layer circuits. These circuits consist of a transmitter and receiver that, when integrated, is called a transceiver chip. Most of these circuits are very high-speed, mixed-signal circuits that convert parallel digital inputs into a single analog bit stream that is up to 20 times faster than the original signal. The diagram below illustrates the manner in which a physical layer circuit takes parallel digital data from an overhead processor clocked at speeds of up to 33 MHz and converts it into high-speed digital signals with clock rates of up to 125 MHz. This digital data is 34 then converted into an analog/serial data stream for transmission at clock speeds of up to 1.25 GHz, representing a tenfold increase in speed, to an optical transmitter or other physical media interfaces. The diagram also illustrates the manner in which a high-speed analog serial data stream from an optical receiver is converted into lower speed parallel digital data for transmission to an overhead processor. [Diagram labeled "Figure 1: SONET/SDH, GIGABIT ETHERNET FUNCTIONAL BLOCK DIAGRAM" is comprised of headings, boxes and arrows. The headings "Slow Speed Digital," "High Speed Digital Interface" and "High Speed Digital Analog Interface" appear from left to right across the top of the diagram, below which the staggered headings "Overhead Processor," "Physical Interface" and "Physical Media Interface" appear. Directly below the heading "Overhead Processor" is a rectangular box labeled "Processing Unit" that is connected to a parallel box labeled "Digital I/O" by a line labeled 33 Mhz. The upper half of this box is connected, by several arrows pointing to the right, to a third rectangular box labeled "Transmitter." The "Transmitter" box is connected by a line labeled "Up to 1250 MHz" to a rectangular box labeled "Optical Transmitter." Below the "Optical Transmitter" box is an identical box labeled "Optical Receiver," which, in turn, is connected by an arrow pointing to the left to a box labeled "Receiver." The "Receiver" box is connected by several arrows pointing to the left, to the "Digital I/O" box. Below these arrows, in the center of the diagram, is the heading "AMCC Products." The headings "Digital," "Mixed Signal" and "Analog" appear from left to right across the bottom of the diagram.] FIGURE 1: SONET/SDH, GIGABIT ETHERNET FUNCTIONAL BLOCK DIAGRAM Telecommunications Products The following table describes the Company's telecommunications products:
DATE OF PRODUCTION PRODUCTS RELEASE(1) APPLICATION - ------------------------------------------------------------------------------- S3005/6 June 1993 ATM physical layer transceiver products for OC-3 S3020/21 December 1994 (155 Mbps) and/or OC-12 (622 Mbps). - ------------------------------------------------------------------------------- S3015/16 March 1995 ATM/E-4 & STM-1 physical layer transmitter/receiver pair (155 Mbps). - ------------------------------------------------------------------------------- S3017/18 June 1995 SONET/SDH physical layer transceiver products for OC-3 S3028 January 1997 (155 Mbps) and/or OC-12 (622 Mbps). - ------------------------------------------------------------------------------- S3014/25 December 1993 Clock Recovery and Synthesis Units for SONET/ATM S3026/27 March 1997 Modules for OC-3 (155 Mbps) and/or OC- 12 (622 Mbps).
(1) The date of production release is the date that the particular product is available for volume shipment to customers. Engineering samples of these products are available prior to volume shipment to customers. AMCC introduced its first generation OC-3 (155 Mbps) physical layer products in 1993. The Company has since developed two additional generations of these products, each integrating greater functionality on each chip while improving jitter performance. "Jitter" is a measure of the degradation in the quality of the signal being transmitted or received. Jitter can be caused by the presence of noise in the system and increases with the distance over which the signal is transmitted. Jitter is usually controlled by special analog circuit techniques that separate the noise in the system from the valid data. Low jitter devices enable the system designer to transmit the signal over longer distances or use less expensive optical devices thus reducing the 35 overall system cost. 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 +5V optical modules. The Company's third generation physical layer product, the S3028, is a single chip transceiver designed to be compatible with the system needs of optical links. 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 has under development additional ATM physical layer transceiver products compatible with the OC-3 and OC-12 standard, as well as additional SONET/SDH physical layer transceiver products for OC-12 and OC-48 applications. AMCC's products for the OC-12 (622 Mbps) standard are highly integrated products that consist of parallel-to-serial converters ("Mux"), serial-to- parallel converters ("DeMux"), transmit and receive Phase Locked Loops ("PLLs"), Clock Synthesis Units ("CSU") and Clock Recovery Units ("CRU") with low power dissipation and low output jitter. The superior jitter performance of these products enables customers to use less expensive optical components. The Company has also successfully integrated five PLLs on a single product at 155 Mbps. The power dissipation of this multichannel device is less than 1 watt (less than 200 milliwatt per PLL). All of the Company's telecommunications devices are supported with evaluation boards and design aids for easy implementation by engineers with limited knowledge of high performance circuit layout techniques. The Company's Micropower bipolar standard cell ASIC products are well-suited for high performance telecommunications applications that require up to 20,000 equivalent gates, a high-speed digital interface, low jitter, and PLL macros operating at speeds of up to 2.5 GHz. The Company also uses its Micropower technology for its ASSPs for the SONET/SDH market. Current customers for the Company's telecommunications products include Alcatel, ECI, Fujitsu, GPT, Nortel and SAT. The Company has achieved design wins for its ASIC and ASSP products with certain other customers in the telecommunications market, including DSC Communications, IBM, NEC and Nokia. There can be no assurance that these design wins will result in volume shipments to any of such customers. Sales to Nortel accounted for 17%, 20%, 20% and 19%, of the Company's net revenues in fiscal 1995, 1996, 1997 and for the six months ended September 30, 1997, respectively. No other customer represented greater than 10% of the Company's net revenues during such periods. Data Communications Products The following table describes the Company's data communications products:
DATE OF PRODUCTION PRODUCTS RELEASE(1) APPLICATION - -------------------------------------------------------------------------------- S2046/47................ October 1996 Transceivers/physical layer ICs for Gigabit Ethernet S2052................... June 1997 backbone and Fibre Channel. - -------------------------------------------------------------------------------- S2036................... February 1995 Serial chip sets, GLM Transceivers for Fibre S2042/43................ August 1996 Channel (1.0625 Gbps, 533 and 265 Mbps) and S2044/45................ August 1996 Redundant Array of Independent Disks ("RAID") drives. - -------------------------------------------------------------------------------- S2016................... October 1995 High density switches, physical layer ICs, multi-port S2024................... September 1995 crosspoint switches and transceivers for backplanes S2025................... May 1996 in ISP networks. S2052................... June 1997 S2042/43................ August 1996
(1) The date of production release is the date that the particular product is available for volume shipment to customers. Engineering samples of these products are available prior to volume shipment to customers. 36 LAN Products. AMCC introduced its first generation of data communications physical layer devices in 1995. The Company has since developed two additional generations of products that support both +5V and +3.3V applications. The Company's first two generations of physical layer devices consisted of transmitter/receiver pairs with 10-bit interfaces or industry-standard 20-bit interfaces for Giga-Link Modules ("GLM") and open fiber control for the Fibre Channel standard. The Company's most recent data communications IC product, the S2052, is the industry's only single chip transceiver that supports both the Fibre Channel and Gigabit Ethernet transmission standards. This product is compatible with the Fibre Channel pin-out configuration and is capable of directly driving fiber optic or twinaxial cables. Some of the Company's customers also use derivatives of the S2052 for their specific application needs. All of the Company's data communications IC products are supported with evaluation boards and design aids for easy implementation by engineers with limited knowledge of high performance circuit layout techniques. The Company has under development additional physical layer ICs for Gigabit Ethernet and Fibre Channel applications. 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. Data communications system designers use three different backplane architectures. All of these architectures use serializer and deserializer chips such as the Company's S2502 and S2042/43 chip sets and one of these architectures uses crosspoint switches. Based upon the system design, 16-bit or 32-bit crosspoint switches are currently required and, in the future, 64- bit crosspoint switches may be required. AMCC introduced its first generation of crosspoint based serial backplane products in 1995. These products included 16-bit and 32-bit crosspoint switches with fast reconfiguration time and the S2042/43 serializer/deserializer pair with fast acquisition time. The Company currently offers its second generation 32-bit crosspoint switch and the S2502 single chip serializer/deserializer, as a serial backplane solution. The Company has under development additional multi-port products for backplane applications. Current customers of the Company's IC products in the data communications market include 3Com, Cabletron Systems, Compaq, Digital Equipment Corporation, Fujikura and Vixel. The Company has achieved design wins with certain other customers in this market, including Adaptec, Cisco Systems, FORE Systems and Sun Microsystems. There can be no assurance that these design wins will result in volume shipments to any of such customers. 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 and Teradyne. The Company has achieved design wins with Teradyne and Texas Instruments for circuits using these products. There can be no assurance that these design wins will result in volume shipments to any of such customers. 37 High-Speed Computing Products The following table describes the Company's high-speed computing products:
DATE OF PRODUCTION PRODUCT FAMILY RELEASE(1) APPLICATION - ------------------------------------------------------------------------------- S5933................... March 1997 PCI controllers. SC3000 Series........... 1992-96 Clock drivers for servers. SC4400 Series........... 1992-96 Clock generators for servers. S4506................... January 1997 250 MHz Clock generator for Rambus-based systems. S4507................... June 1997 300 MHz Clock generator for Rambus-based systems.
(1) The date of production release is the date that the particular product is available for volume shipment to customers. Engineering samples of these products are available prior to volume shipment to customers. AMCC offers two product lines that address the high-speed computing market. The S5933 is a standard master/slave PCI controller chip that is the first in the Company's line of PCI controller chips. Each of the Company's high-speed computing devices is supported with a comprehensive development kit 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. AMCC's second line of high-speed computing products consists of clocking devices that use the Company's PLL technology for precision clock generation for applications in the workstation, telecommunications and data communications markets. AMCC's 250 MHz and 300 MHz clock generators are being used in Rambus-based systems. The Company's customers with Rambus-based systems also include Chromatic Research, Gateway 2000, LG Semiconductor, Micron Electronics, NEC and STB. The Company has under development additional PCI controller chips. Military The Company introduced its Q20000 family gate array family of ASIC products in 1991. These devices are well suited for military applications and as well as replacements for ECLinPSTM logic from Motorola. The Company sells ASICs to military customers such as Hughes Electronics, Northrop Grumman, Raytheon, Rockwell International and Texas Instruments. TECHNOLOGY The Company utilizes its technological and design expertise to solve the unique problems of high-speed 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 telecommunications and data communications systems, proven ASIC design methodologies and libraries, and high-performance semiconductor manufacturing and packaging expertise. 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 38 chip. For example, the Company has under development 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. The Company believes that one of its primary skills is its ability to integrate increasingly complex analog functions with high-speed digital logic on a single chip. The Company also applies this expertise, developed using bipolar process technology, to IC designs on CMOS processes. Systems and Architecture Expertise AMCC believes that its systems architects, design engineers and technical marketing and applications engineers have a thorough understanding of the telecommunications and data communications systems for which the Company designs and builds ASSPs. 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 design its IC products to provide the most cost-effective and performance-optimized solution available using proven process technologies. For example, in its IC design for OC-48 applications, AMCC applied its systems knowledge and mixed- signal design expertise to partition the solution into bipolar and high-speed CMOS chips, which enabled AMCC to offer a substantially lower power alternative and provide the customer with added flexibility in its future design plans. Design Methodology The Company believes that its extensive experience in the use of ASIC design methodologies (gate arrays and standard cells), enables its designers to accelerate the design of new standard products. The Company also has extensive experience in using ASIC methodologies in collaborative product development efforts with its customers. The Company uses extensive libraries of analog and digital blocks that have been well characterized and previously used, which the Company believes decreases design costs and cycle time and minimizes any final redesign that may be required once the circuit is implemented in silicon. The Company's design methodology utilizes advanced computer aided design ("CAD") tools for each of the following phases of the implementation process: design capture, logic synthesis, simulation, physical layout and chip composition and verification. AMCC uses industry-standard CAD tool sets whenever possible, but augments these tool sets with certain proprietary tools that enable its designers to optimize mixed-signal performance at very high frequencies. Industry standard Verilog/VHDL models, developed at the behavioral and the gate level, are given to key customers for system level simulation and verification, and feedback from these customers is used to finalize the Company's device designs to ensure that AMCC's devices will interface appropriately with the OEM's system. The Company believes that this process results in shortened design cycle time and greater first-time correctness of production-worthy devices. 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. Bipolar processes are widely recognized as the technology of choice for circuits that require high-speed, analog-intensive circuitry with low to moderate levels of density (number of gates or functions per chip). Nevertheless, the Company believes that the number of companies possessing this advanced bipolar process capability and applying it to the markets targeted by AMCC is limited. 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. The Company believes that its bipolar-based processes are the optimal choice for the performance (speed, timing and stability), power and cost trade-offs that must be made in providing the mixed-signal ICs required by its targeted markets. 39 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. RESEARCH AND DEVELOPMENT AMCC's research and development expertise and efforts are focused on the development of high-performance, mixed-signal ASSPs for advanced communications applications, as well as ASIC products and methodologies for communications and ATE applications. The Company also focuses on the development of silicon wafer fabrication processes that are optimized for these applications. Product Development The Company's product development is focused on building high-performance, analog-intensive design expertise that is incorporated into well-documented blocks that can be reused by AMCC's design group 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. AMCC is consistently seeking to add engineers with high-performance, mixed-signal experience in both its bipolar and CMOS design groups. 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. 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. These new processes are being designed to provide higher transistor speeds and improved parasitics to address higher frequency communications requirements, as well as the need to constantly improve jitter performance in the circuits, while maintaining low power dissipation and enabling high yields in volume production. 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 processes required by certain of AMCC's products. The Company is also developing high-performance packages for its products in collaboration with its packaging suppliers and its customers. The Company's research and development expenses in fiscal years 1995, 1996, 1997 and the six months ended September 30, 1997 were $10.1, $8.3, $7.9 and $6.0 million, respectively, which were 21.5%, 16.5%, 13.7% and 17.0%, respectively, of revenues for such periods. The Company has 86 employees engaged in engineering and product development related activities. MANUFACTURING Wafer Fabrication AMCC manufactures products at its four-inch wafer fabrication facility in San Diego, California in a 7,600 square foot clean room. The Company is currently expanding the clean room by approximately 600 square feet to accommodate new equipment that will expand capacity and will be used for process 40 development. 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. See "Risk Factors -- Manufacturing Yields" and "Business -- Technology." The Company is currently in the initial stages of planning the construction of a new six-inch wafer fabrication facility that it believes will be located in San Diego, California. AMCC believes that it will need such a facility to be operational in approximately four years in order to support the Company's growth and to build certain new products. The Company currently plans to acquire or acquire rights to a site for this new facility by the end of 1998. AMCC currently utilizes four outside foundries, AMI Semiconductor ("AMI"), IBM, Kawasaki CSI Japan ("Kawasaki") and Taiwan Semiconductor Manufacturing Corporation ("TSMC") for the production of certain products designed on CMOS processes. The Company does not plan to fabricate its own CMOS wafers. Most of the Company's PCI Bus products are currently produced by AMI on a five-inch CMOS process. Certain of the Company's other PCI Bus products are being designed to be produced in Japan by Kawasaki on a six-inch CMOS process. Additionally, certain of AMCC's products are being produced by TSMC on six-inch CMOS and BiCMOS processes. Some of the Company's products are being designed to be produced by IBM on eight-inch CMOS processes. Although the Company has a long term agreement with IBM that ensures that AMCC will be able to purchase certain minimum quantities of wafers through March 2000, the Company 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. See "Risk Factors -- Dependence on Third-Party Manufacturing and Supply Relationships." Components and Raw Materials AMCC purchases all of its "raw" silicon wafers from Wacker Siltronic Corporation ("WSC"). While most silicon wafers now being supplied to the semiconductor industry are larger than four inches, AMCC believes that WSC 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 ASAT. See "Risk Factors -- Dependence on Third-Party Manufacturing and Supply Relationships." 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. See "Risk Factors -- Dependence on Third-Party Manufacturing and Supply Relationships." 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. 41 The Company has a total of 12 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 20 independent manufacturers representatives and one distributor. The Company sells its products through 11 distributors in Europe and eight distributors throughout the rest of the world. In fiscal 1996 and 1997 and during the six months ended September 30, 1997, approximately 24%, 21% 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, Massachusetts; Raleigh, North Carolina; San Clemente, California; and Plano, Texas. PROPRIETARY RIGHTS The Company relies in part on patents to protect its intellectual property. In the United States, the Company has been issued 13 patents, which principally cover certain aspects of the design and architecture of the Company's IC products. In addition, the Company has three patent applications pending in the United States Patent and Trademark Office (the "PTO"), and have expiration dates ranging from 2004 to 2009. 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 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. The Company also relies on a combination of mask work protection, trademarks, copyrights, trade secret laws, employee and third-party nondisclosure agreements and licensing arrangements to protect its intellectual property. 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. In March 1997, the Company received a written notice from legal counsel for Dr. Chou Li asserting that the Company manufactures certain of its products in ways that appear to such counsel to infringe a United States patent held by Dr. Li (the"Li Patent"). After a review of its technology in light of such assertion, the Company believes that the Company's processes do not infringe any of the claims of this patent. However, there can be no assurance that Dr. Li will not file a lawsuit against the Company or that the Company would prevail in any such litigation. Any litigation relating to the intellectual property rights of third parties, including, but not limited to the Li Patent, whether or not determined in the Company's favor or settled by the Company, would at a minimum be costly and could divert the efforts and attention of the Company's management and technical personnel, which could have a material adverse effect on the Company's business, financial condition or operating results. In the event 42 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. See "Risk Factors--Uncertainty Regarding Patents and Protection of Proprietary Rights." 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 telecommunications, data 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. See "-- Risks Associated with Dependence on High-Speed Computing Market." In the telecommunications and data communications markets, the Company competes primarily against GaAs-based companies such as Giga, TriQuint and Vitesse, and bipolar silicon-based products from companies such as Hewlett- Packard, Maxim and Sony. In certain circumstances, most notably with respect to ASICs supplied to Northern Telecom, 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 against companies such as Chrontel and PLX. 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 telecommunications and data communications markets, would have a material adverse effect on the Company's business, financial condition and results of operations. See "Risk Factors--Intense Competition" and "Risks Associated with Dependence on Telecommunications and Data Communications Markets and Increasing Dependence on Application-Specific Standard Products." 43 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. LEGAL PROCEEDINGS From time to time, the Company may be involved in litigation relating to claims arising out of its operations in the normal course of business. As of the date of this Prospectus, 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. FACILITIES The Company's executive offices, research and development 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 1998, but provides the Company with options to extend the lease for up to two additional five year periods. The Company leases additional space for sales offices in Burlington, Massachusetts; Los Angeles, California; Plano, Texas; Raleigh, North Carolina and San Jose, California. EMPLOYEES As of September 30, 1997, the Company had 287 employees: 29 in administration, 86 in engineering and product development, 135 in operations and 37 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. 44 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The executive officers and directors of the Company, and their ages as of September 30, 1997, are as follows:
NAME AGE POSITION ------------------------ --- ------------------------------------------------- David M. Rickey......... 41 President, Chief Executive Officer and Director Joel O. Holliday........ 58 Vice President, Finance and Administration, Treasurer, Chief Financial Officer and Secretary Thomas L. Tullie........ 33 Vice President, Sales Anil K. Bedi............ 47 Vice President, Marketing Laszlo V. Gal........... 49 Vice President, Engineering Roger A. Smullen, Sr. 61 Chairman of the Board of Directors, (1).................... Acting Vice President, Operations William K. Bowes, 71 Director Jr.(1)................. Franklin P. Johnson, 69 Director Jr.(1)(2).............. Arthur B. Stabenow(2)... 58 Director R. Clive Ghest(2)....... 60 Director
- ------- (1) Member of Audit Committee (2) Member of Compensation Committee 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 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. Joel O. Holliday has served as the Vice President, Finance and Administration, Treasurer, Chief Financial Officer and Secretary of the Company since November 1981. 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. Thomas L. Tullie joined the Company as Vice President, Sales in 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. Anil K. Bedi joined the Company in August 1996 as Vice President, Marketing. Prior to joining the Company, Mr. Bedi worked at Philips Semiconductor from October 1993 to July 1996, where he served as Director of Strategic Marketing and General Manager of the Mass Storage Product Group. Prior to joining Philips Semiconductor, from 1984 to 1993 Mr. Bedi served in senior marketing and management positions at Oki Semiconductor and Gazelle and TriQuint Semiconductor (two GaAs-based semiconductor companies). Mr. Bedi has also held marketing and sales positions at Xerox Corporation and National Semiconductor. Mr. Bedi earned his B.S.E.E. and M.S.E.E. degrees from the University of Wisconsin and his M.B.A. from the University of Utah. Laszlo V. Gal joined the Company in January 1997 as Vice President, Engineering. From September 1994 to December 1996, he served in various senior management positions, including Director of Product Development at Motorola, Inc. Mr. Gal served as the manager of IC Designs at Burroughs/Unisys from 1983 to 1994 and worked as a staff scientist at the IBM Research Center from 1981 to 1982. From 1979 to 1981 Mr. Gal was a member of the technical staff at Rockwell Corporation, where he worked on GaAs development. Mr. Gal was educated at the 45 Budapest Technical University in Hungary, where he received a B.S. and M.S. and Ph.D in Electrical Engineering. He holds 12 U.S. patents in VLSI design and applications. Roger A. Smullen, Sr. has served as the Chairman of the Company's Board of Directors since October 1982. Mr. Smullen has served as Acting Vice President, Operations of the Company since August 1997. 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. He holds a B.S. in mechanical engineering from the University of Minnesota. William K. Bowes, Jr. has served as a director of the Company since April 1980. He has been a general partner of U.S. Venture Partners, a venture capital investment entity, since July 1981. Mr. Bowes serves as a director of Amgen, Inc., XOMA Corporation and several privately-held U.S. Venture Partners portfolio companies. Mr. Bowes holds a B.A. from Stanford University and an M.B.A. from Harvard Business School. Franklin P. Johnson, Jr. has served as a director of the Company since April 1980. He is the general partner of Asset Management Partners, a venture capital partnership. In addition, Mr. Johnson is a general partner of the general partner of Asset Management Associates, a venture capital limited partnership. Mr. Johnson has been a venture capital investor for more than five years. Mr. Johnson is also Chairman of the Board of Boole and Babbage, Inc., and a director of Amgen, Inc. and IDEC Pharmaceuticals Corporation. Mr. Johnson holds a B.S. from Stanford University and an M.B.A. from Harvard Business School. Arthur B. Stabenow has served as a director of the Company since July 1988. Mr. Stabenow has been Chairman, President and Chief Executive Officer of Micro Linear Corporation, a manufacturer of integrated circuits, since April 1986. Mr. Stabenow has over 35 years of experience in the semiconductor industry. From January 1979 to March 1986, he was employed as a vice president and general manager at National Semiconductor Corporation. Mr. Stabenow is currently a director of Zoran, Inc. and Micro Linear Corporation. Mr. Stabenow holds an M.B.A. from the University of New Haven. R. Clive Ghest has served as a director of the Company since July 1997. Since January 1997, Mr. Ghest has been a principal of Ghest Associates Consulting. Mr. Ghest was the Vice President of Business Development at Advanced Micro Devices Inc. from February 1986 to December 1996. He has more than 35 years of experience in various capacities in the computer, communications and semiconductor industries. Mr. Ghest holds an M.S.E.E. from the University of Santa Clara and an Hons. B.Sc. from the University of London. BOARD COMPOSITION The Company currently has authorized six directors. Each director is elected for a period of one year at the Company's annual meeting of stockholders and serves until the next annual meeting or until his or her successor is duly elected and qualified. The executive officers serve at the discretion of the Board of Directors. There are no family relationships among any of the directors or executive officers of the Company. BOARD COMPENSATION Except for reimbursement for reasonable travel expenses relating to attendance at Board meetings and the grant of stock options, directors are not compensated for their services as directors. Directors who are employees of the Company are eligible to participate in the Company's 1992 Stock Option Plan and, beginning in 1997, they will also be eligible to participate in the Company's 1997 Employee Stock Purchase Plan. Beginning in 1997, directors who are not employees of the Company will be eligible to participate in the Company's 1997 Directors' Stock Option Plan. See "-- 1982 Employee Incentive Stock Option Plan," " -- 1992 Stock Option Plan" and " -- 1997 Directors' Stock Option Plan." The Chairman of the Company's Board of Directors is compensated for certain services provided to the Company. See "Certain Transactions." COMMITTEES OF THE BOARD OF DIRECTORS The Company's Board of Directors has established a Compensation Committee and an Audit Committee. The Board of Directors does not maintain a Nominating Committee or a committee performing similar functions. The 46 Compensation Committee recommends salaries, incentives and other forms of compensation for directors, officers and other employees of the Company, administers (with the Board of Directors) the various incentive compensation and benefit plans (including the 1992 Plan and the 1997 Employee Stock Purchase Plan) of the Company and recommends policies relating to such incentive compensation and benefit plans. The Audit Committee reviews the need for internal auditing procedures and the adequacy of internal controls. The Audit Committee meets periodically with management and the independent auditors. The Board of Directors may also establish additional committees from time to time. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Compensation Committee of the Company's Board of Directors are currently Mr. Ghest, Mr. Johnson and Mr. Stabenow. None of these directors has at any time been an officer or employee of the Company or any subsidiary of the Company. No interlocking relationship exists between the Company's Board of Directors or Compensation Committee and the board of directors or compensation committee of any other company nor has such an interlocking relationship existed in the past. EXECUTIVE COMPENSATION The following table provides certain summary information concerning the compensation earned or paid for services rendered to the Company during the fiscal year ended March 31, 1997 by the Chief Executive Officer and each of the other four most highly compensated executive officers (the "Named Officers"), each of whose aggregate compensation during the Company's last fiscal year exceeded, or would exceed on an annualized basis, $100,000. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL ------------ COMPENSATION SECURITIES ---------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (#) COMPENSATION - --------------------------- -------- ------- ------------ ------------ David M. Rickey President and Chief Executive Officer........... $277,215(1) $61,500 -- $133,826(2) Joel O. Holliday Vice President, Finance and Administration, Treasurer, Chief Financial Officer and Secretary................... 162,208(1) 41,500 33,333 2,000(3) Roger A. Smullen Chairman of the Board of Directors and Acting Vice President, Operations....... 208,000 41,500 33,333 -- Thomas Tullie Vice President, Sales....... 124,934(1)(4) 60,500 133,333 38,863(5) Anil Bedi Vice President, Marketing... 106,346(1) 56,500 206,666 8,560(6) Laszlo Gal(7) Vice President, Engineering. 22,885(1) 46,500 206,666 8,522(8)
- -------- (1) Includes pre-tax contributions to the AMCC 401(k) Plan. (2) Includes $128,706 paid to Mr. Rickey in the form of relocation expenses, a matching contribution in the amount of $2,000 that the Company made on Mr. Rickey's behalf to the AMCC 401(k) Plan and annual premiums in the amount of $3,120 paid by the Company on a term life insurance policy. (3) Includes a matching contribution in the amount of $2,000 that the Company made on Mr. Holliday's behalf to the AMCC 401(k) Plan. (4) Includes commissions earned by Mr. Tullie in the amount of $38,396, of which $25,191 was paid to Mr. Tullie in fiscal 1997 and $13,205 was paid to Mr. Tullie in fiscal 1998. 47 (5) Includes a matching contribution in the amount of $565 that the Company made on Mr. Tullie's behalf to the AMCC 401(k) Plan and $38,298 paid to Mr. Tullie for relocation expenses. (6) Includes a matching contribution in the amount of $1,171 that the Company made on Mr. Bedi's behalf to the AMCC 401(k) Plan and $7,389 paid to Mr. Bedi for relocation expenses. (7) Mr. Gal joined the Company in January 1997, and his annualized base salary for the fiscal year ended March 31, 1997 year was $175,000. (8) Includes $8,522 paid to Mr. Gal for relocation expenses. OPTION GRANTS The following table provides certain summary information regarding stock options granted to the Named Officers during the fiscal year ended March 31, 1997. No stock appreciation rights were granted during such fiscal year. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE -------------------------------------------------- VALUE AT ASSUMED NUMBER OF PERCENT OF ANNUAL RATES OF STOCK SECURITIES TOTAL OPTIONS PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(4) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION --------------------- NAME GRANTED (#) FISCAL YEAR(2) ($/SHARE)(3) DATE 5% 10% ---- ----------- -------------- ----------- ---------- ---------- ----------- David M. Rickey......... 0 0% N/A N/A N/A N/A Joel O. Holliday........ 33,333 2.35 $0.53 07/17/2006 $ 28,505 $ 45,390 Roger A. Smullen........ 33,333 2.35 $0.53 07/17/2006 28,505 45,390 Thomas Tullie........... 133,333 9.39 $0.53 06/30/2006 114,022 181,562 Anil Bedi............... 206,666 14.55 $0.53 07/17/2006 176,735 281,420 Laszlo Gal.............. 206,666 14.55 $0.53 01/30/2007 176,735 281,420
- -------- (1) Consists of options granted pursuant to the 1992 Plan. See "-- 1992 Stock Option Plan." (2) An aggregate of 1,457,285 options to purchase shares of Common Stock of the Company were granted during fiscal year ended March 31, 1997, of which 1,420,619 shares were granted to employees. (3) The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by the rules of the SEC. There can be no assurance that the actual stock price appreciation over the ten-year option term will be at the assumed 5% and 10% levels or at any other defined level. Unless the market price of the Common Stock appreciates over the option term, no value will be realized from the option grants made to the Named Officers. (4) The exercise price and tax withholding obligations related to exercise may be paid by delivery of shares that are already owned or by offset of the underlying shares, subject to certain conditions. 48 OPTION EXERCISES AND HOLDINGS The following table provides certain summary information concerning the shares of Common Stock represented by outstanding stock options held by each of the Named Officers as of March 31, 1997. No stock appreciation rights were exercised during such fiscal year and no stock appreciation rights were outstanding at the end of such fiscal year. FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT MARCH 31, 1997(1) AT MARCH 31, 1997 ---------------------------- ---------------------------- NAME EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE(2) ---- ----------- ---------------- ----------- ---------------- David M. Rickey... 800,000 0 $ 0 $ 0 Joel O. Holliday.. 83,333 0 0 0 Roger A. Smullen.. 73,333 0 0 0 Thomas Tullie..... 133,333 0 0 0 Anil Bedi......... 206,666 0 0 0 Laszlo Gal........ 206,666 0 0 0
- -------- (1) No Named Officer exercised options during the fiscal year ended March 31, 1997. (2) Options granted under the 1982 Plan and 1992 Plan are generally immediately exercisable, but subject to a right of repurchase pursuant to the vesting schedule of each such grant. Accordingly, the table reflects those options that are exercisable, not those options that are vested. See "-- 1982 Employee Incentive Stock Option Plan" and "-- 1992 Stock Option Plan." 1982 EMPLOYEE INCENTIVE STOCK OPTION PLAN The Company's 1982 Employee Incentive Stock Option Plan (the "1982 Plan") was adopted by the Board of Directors in November 1982 and approved by the stockholders in July 1983. A total of 5,338,666 shares of Common Stock has been reserved for issuance under the 1982 Plan. The 1982 Plan expired by its own terms on November 1, 1992; however, options granted under the 1982 Plan remain outstanding as of the date of this offering. The purposes of the 1982 Plan are to encourage selected employees to accept or continue employment with the Company, to provide additional incentives to the Company's employees and to increase the interest of employees in the Company's welfare. The 1982 Plan provides for the granting to employees (including officers and employee directors) of "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). The 1982 Plan is administered by the Board of Directors, which determines the terms of options granted under the 1982 Plan, including the exercise price, number of shares subject to the option and the exercisability thereof. Subject to the discretion of the Board of Directors, options granted under the 1982 Plan generally are immediately exercisable in full and 1/5th of the shares subject to the options vest each year over the five year period measured from the grant date. Unvested shares purchased upon exercise of such options are subject to repurchase by the Company, at its option, upon an optionee's termination of employment. No options granted under the 1982 Plan are transferable by the optionee other than by will or the laws of descent and distribution, and each option is exercisable during the lifetime of the optionee only by such optionee. The exercise price of all stock options granted under the 1982 Plan must be at least equal to the fair market value of the shares subject to such options on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting rights of the Company's outstanding capital stock, the exercise price must equal at least 110% of the fair market value on the grant date. Incentive stock options granted to a participant, may not, on an aggregate basis, become exercisable for more than $100,000 (valued at the time of grant) per calendar year. No options have been granted to date at prices less than 100% of the fair market value on the date of grant. Options granted under the 1982 Plan may not have a term in excess of 49 ten years. However, all stock options granted to an optionee who, at the time of grant, owns stock representing more than 10% of the Company's outstanding capital stock, may not have a term in excess of five years. In the event of a merger of the Company with or into another corporation or a sale of substantially all of the Company's assets, the options shall become immediately exercisable or an equivalent option substituted by the successor corporation. The Plan Administrator has the discretion to accelerate the vesting of the option shares at any time. Under the 1982 Plan, as of September 30, 1997, options to purchase 4,140,173 shares of Common Stock had been exercised, options to purchase an aggregate of 157,968 shares of Common Stock were outstanding at a weighted average exercise price of $0.46 per share and no shares remain available for future grant as the 1982 Plan expired in November 1992. The Board of Directors may at any time amend, alter, suspend or discontinue the 1982 Plan as long as such action does not adversely affect any outstanding option and provided that stockholder approval shall be required for an amendment to increase the number of shares of Common Stock reserved for issuance under the 1982 Plan, extend the duration of the 1982 Plan, extend the period over which options may be exercised under the 1982 Plan or change the class of persons eligible to receive options under the 1982 Plan. 1992 STOCK OPTION PLAN The Company's 1992 Stock Option Plan (the "1992 Plan") was adopted by the Board of Directors in July 1992 and approved by the stockholders in September 1992 and subsequently amended. A total of 6,027,304 shares of Common Stock have been reserved for issuance under the Stock Plan. As of September 30, 1997, options to purchase 1,424,615 shares of Common Stock had been exercised, options to purchase a total of 2,049,309 shares at a weighted average exercise price of $1.06 per share were outstanding and 2,553,380 shares remained available for future option grants. The 1992 Plan provides for the granting to employees, including officers and directors, of incentive stock options within the meaning of Section 422 of the Code and for the granting to employees and consultants, including nonemployee directors, of nonstatutory stock options. To the extent an optionee would have the right in any calendar year to exercise for the first time one or more incentive stock options for shares having an aggregate fair market value (under all plans of the Company and determined for each share as of the date the option to purchase the shares was granted) in excess of $100,000, any such excess options shall be treated as nonstatutory stock options. If not terminated earlier, the 1992 Plan will terminate in July 2002. The 1992 Plan may be administered by the Board of Directors or a committee of the Board (the "Administrator"). The Administrator determines the terms of options granted under the 1992 Plan, including the number of shares subject to the option, exercise price, term and exercisability. The exercise price of all incentive stock options granted under the 1992 Plan must be at least equal to the fair market value of the Common Stock on the date of grant. The exercise price of any incentive stock option granted to an optionee who owns stock representing more than 10% of the total combined voting power of all classes of outstanding capital stock of the Company or any parent or subsidiary corporation of the Company (a "10% Stockholder") must equal at least 110% of the fair market value of the Common Stock on the date of grant. The exercise price of all nonstatutory stock options must equal at least 85% of the fair market value of the Common Stock on the date of grant; provided, however, that the exercise price of any nonstatutory stock option granted to a Named Executive of the Company must equal at least 100% of the fair market value of the Common Stock on the date of grant. Payment of the exercise price may be made in cash or other consideration, including promissory notes, as determined by the Administrator. The Plan Administrator has the discretion to implement one or more repricing programs whereby outstanding options under the 1992 Plan with exercise prices above the current market price of the Common Stock will be cancelled, and new options will be granted in replacement with an exercise price based on such current market value. 50 The Administrator determines the term of options, which may not exceed 10 years (5 years in the case of an incentive stock option granted to a 10% Stockholder). No option may be transferred by the optionee other than by will or the laws of descent or distribution. Each option may be exercised during the lifetime of the optionee only by such optionee. The Administrator determines when options become exercisable. Subject to the discretion of the Board of Directors, options granted under the 1992 Plan generally are immediately exercisable in full, and (i) for the initial option grant to each optionee (the "Initial Option"), 1/4th of the number of such shares subject to the option generally vest as of the one year anniversary of the vesting commencement date and 1/48th of the remainder vest at the end of each month thereafter; and (ii) for option grants subsequent to the Initial Option, 1/48th of the number of such shares subject to the option generally vest at the end of each month after the vesting commencement date. In the event of the merger of the Company with another corporation, in which the Company is not the surviving entity, then each option shall immediately vest as to one year of additional vesting. Each option may be thereafter assumed or an equivalent option substituted by the successor corporation, otherwise the options will terminate. The Administrator has the authority to amend or terminate the 1992 Plan as long as such action does not adversely affect any outstanding option and provided that, to the extent necessary and desirable to comply with Rule 16b-3 under the Securities Exchange Act of 1934, as amended, (the "Exchange Act") or with Section 162(m) or 422 of the Code (or any other applicable law or regulation, including the requirements of the NASD or an established stock exchange), the Company shall obtain stockholder approval of any amendment to the 1992 Plan in such a manner and to such a degree as required. 1997 DIRECTORS' STOCK OPTION PLAN The Company's 1997 Directors' Stock Option Plan (the "Directors' Plan") was adopted by the Board of Directors in October 1997, subject to stockholder approval. A total of 200,000 shares of Common Stock has been reserved for issuance under the Directors' Plan. The Directors' Plan provides for the grant of nonstatutory stock options to nonemployee directors of the Company. The Directors' Plan is designed to work automatically, without administration; however, to the extent administration is necessary, it will be provided by the Board of Directors. To the extent they arise, it is expected that conflicts of interest will be addressed by abstention of any interested director from both deliberations and voting regarding matters in which such director has a personal interest. The Directors' Plan provides that each person who is or becomes a nonemployee director of the Company will be granted a nonstatutory stock option to purchase 12,500 shares of Common Stock (the "First Option") on the date on which the optionee first becomes a nonemployee director of the Company. Thereafter, on April 1 each year (starting in 2000 for nonemployee directors who are serving as directors as of the date of the closing of this offering), each nonemployee director of the Company will be granted an option to purchase 12,500 shares of Common Stock (a "Subsequent Option") if, on such date, he or she has served on the Company's Board of Directors for at least six months. The Directors' Plan sets neither a maximum nor a minimum number of shares for which options may be granted to any one nonemployee director, but does specify the number of shares that may be included in any grant and the method of making a grant. No option granted under the Directors' Plan is transferable by the optionee other than by will or the laws of descent or distribution or pursuant to a qualified domestic relations order, and each option is exercisable, during the lifetime of the optionee, only by such optionee. The Directors' Plan provides that the First Option shall become exercisable in installments as to 1/12th of the total number of shares subject to the First Option on each monthly anniversary of the date of grant of the First Option. Each Subsequent Option shall become exercisable in installments as to 1/12th of the total number of shares subject to the Subsequent Option on each monthly anniversary of the grant date of that Subsequent Option. If a nonemployee Director ceases to serve as a Director for any reason other than death or disability, he or she may, but only within 90 days after the date he or she ceases to be a Director of the Company, exercise options granted under the Directors' Plan to the extent that he or she was entitled to exercise it at 51 the date of such termination. To the extent that he or she was not entitled to exercise any such option at the date of such termination, or if he or she does not exercise such option (which he or she was entitled to exercise) within such 90 day period, such option shall terminate. The exercise price of all stock options granted under the Directors' Plan shall be equal to the fair market value of a share of the Common Stock on the grant date of the option. Options granted under the Directors' Plan have a term of ten years. In the event of the dissolution or liquidation of the Company, a sale of all or substantially all of the assets of the Company, the merger of the Company with or into another corporation or any other reorganization of the Company in which more than 50% of the shares of the Company entitled to vote are exchanged, each outstanding option will become exercisable for all the option shares as fully vested shares immediately prior to the effectiveness of such dissolution, liquidation, sale, merger or reorganization, at the end of which time the option shall terminate, unless the option is assumed by the corporation succeeding the Company or acquiring its business by reason of such dissolution, liquidation, sale, merger or reorganization. The Board of Directors may amend or terminate the Directors' Plan; provided, however, that no such action may adversely affect any outstanding option. If not terminated earlier, the Directors' Plan will have a term of ten years. 1997 EMPLOYEE STOCK PURCHASE PLAN The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors in September 1997, subject to stockholder approval. A total of 400,000 shares of Common Stock are reserved for issuance under the Purchase Plan. The Purchase Plan, which is intended to qualify under Section 423 of the Code, will be implemented by an offering periods of 24 months duration with new offering periods (other than the first offering period) commencing on or about February 1 and August 1 of each year. Each offering period will consist of four consecutive purchase periods of six months duration, with the last day of each period being designated a purchase date. However, the first offering period is expected to commence on the date of the Offering and continue through January 31, 2000, with the first purchase date occurring on July 31, 1998, and subsequent purchase dates to occur every six months thereafter). The Purchase Plan will be administered by the Compensation Committee (comprised of Messrs. Ghest, Johnson and Stabenow, outside directors of the Company who are not eligible to participate in the Purchase Plan). Employees (including officers and employee directors) of the Company, or of any majority-owned subsidiary designated by the Board, are eligible to participate in the Purchase Plan if they are employed by the Company or any such subsidiary for at least 20 hours per week and more than five months per year. The Purchase Plan permits eligible employees to purchase Common Stock through payroll deductions, which may not exceed 20% of an employee's compensation, at a price equal to the lower of 85% of the fair market value of the Company's Common Stock at the beginning of the offering period or the purchase date. If the fair market value of the Common Stock on a purchase date is less than the fair market value at the beginning of the Offering period, a new 24-month offering period will automatically begin on the first business day following the purchase date with a new fair market value. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with the Company. If not terminated earlier, the Purchase Plan will have a term of 20 years. The Purchase Plan provides that in the event of a merger of the Company with or into another corporation or a sale of all or substantially all of the Company's assets, each right to purchase stock under the Purchase Plan will be assumed or an equivalent right substituted by the successor corporation unless the Board of Directors shortens the offering period so that employees' rights to purchase stock under the Purchase Plan are exercised prior to the merger or sale of assets. The Board of Directors has the power to amend or terminate the Purchase Plan as long as such action does not adversely affect any outstanding rights to purchase stock thereunder. 401(K) 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 service. The Retirement 52 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. During the years ended March 31, 1997, 1996 and 1995, the Company contributed $318,000, $182,000 and $116,000, respectively. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS As permitted by the Delaware General Corporation Law (the "Delaware Law"), the Company has included in its Restated Certificate of Incorporation a provision to eliminate the personal liability of its officers and directors for monetary damages for breach or alleged breach of their fiduciary duties as officers or directors, respectively, subject to certain exceptions. In addition, the Company's Bylaws provide that the Company is required to indemnify its officers and directors under certain circumstances, including those circumstances in which indemnification would otherwise be discretionary, and the Company is required to advance expenses to its officers and directors as incurred in connection with proceedings against them for which they may be indemnified. The Company has entered into indemnification agreements with its officers and directors containing provisions that are in some respects broader than the specific indemnification provisions contained in the Delaware Law. The indemnification agreements require the Company, among other things, to indemnify such officers and directors against certain liabilities that may arise by reason of their status or service as officers and directors (other than liabilities arising from willful misconduct of a culpable nature), to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified, and to obtain directors' and officers' insurance if available on reasonable terms. The Company has also obtained directors' and officers' liability insurance. The Company believes that its charter provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. 53 CERTAIN TRANSACTIONS In January 1996, the Company entered into a letter agreement with David Rickey, the Company's President and Chief Executive Officer. This agreement entitles Mr. Rickey to a salary of $275,000 per year and term life insurance purchased by the Company for the benefit of Mr. Rickey's estate. Pursuant to the terms of the agreement, if the Company enters into certain change-of- control transactions, the vesting of Mr. Rickey's options to purchase shares of the Company's Common Stock will accelerate. In addition, the agreement provides that if the Company is acquired and the per share value of the Company's Common Stock is less than $3.00 per share, the Company will compensate Mr. Rickey for the difference between $3.00 per share and the per share merger or sale price determined by the Company's Board of Directors. The letter agreement provides that Mr. Rickey's employment is at will and terminable by the Company or Mr. Rickey for any reason, with or without cause, and with or without notice. In February 1996, the Company entered into a loan arrangement with Mr. Rickey, pursuant to which the Company loaned to Mr. Rickey $150,000 ("Note No. 1") and $53,000 ("Note No. 2") at an annual interest rate of 5.32%. In May 1996, the Company entered into a loan arrangement with Mr. Rickey pursuant to which the Company loaned $750,000 ("Note No. 3") to Mr. Rickey at an interest rate of 5.76% per annum compounded annually. The loan is evidenced by a non- recourse promissory note, which is secured by 46,500 shares of Common Stock of Advanced Micro Devices. In April 1997, Mr. Rickey repaid approximately $190,639 of the principal and accrued interest on Note No. 1 and Note No. 2, and Mr. Rickey delivered a full recourse, unsecured promissory note with a principal amount of $12,392 and an interest rate of 5.91% per annum in cancellation of Note No. 1 and Note No. 2. In July 1997, Mr. Rickey exercised stock options granted under the 1992 Plan. In payment of the purchase price for the exercised shares, Mr. Rickey delivered promissory notes in principal amounts of approximately $400,000, $20,000 and $35,000 bearing interest at rates of 5.98%, 5.98% and 6.54%, respectively. The notes and accrued interest thereon are payable in full in February 2000, February 2000 and April 2001, respectively. The Company has entered into indemnification agreements with its officers and directors containing provisions that may require the Company, among other things, to indemnify its officers and directors against certain liabilities that may arise by reason of their status or service as officers or directors (other than liabilities arising from willful misconduct of a culpable nature) and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. For a description of limitations of liability and certain indemnification arrangements with respect to the Company's directors and officers, see "Management -- Limitation of Liability and Indemnification Matters." Certain stockholders are entitled to certain registration rights in respect of the Common Stock issued or issuable upon conversion thereof. See "Description of Capital Stock -- Registration Rights of Certain Holders." For a description of compensation of officers and directors of the Company and the eligibility of officers and directors of the Company to participate in the Company's employee benefit plans, see "Management --Board Compensation" and "-- Executive Compensation." The Company believes that all of the transactions set forth above were made on terms no less favorable to the Company than could have been obtained from unaffiliated third parties. All future transactions, including loans, between the Company and its officers, directors, principal stockholders and affiliates will be approved by a majority of the Board of Directors, including a majority of the independent and disinterested outside directors on the Board of Directors, and will be on terms no less favorable to the Company than could be obtained from unaffiliated third parties. 54 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of September 30, 1997 and as adjusted to reflect the sale of the Common Stock offered by the Company pursuant to this Prospectus and conversion of all outstanding shares of Preferred Stock into shares of Common Stock by (i) each of the Company's directors and Named Officers, (ii) all directors and executive officers as a group and (iii) each person who is known by the Company to own beneficially more than 5% of the Company's Common Stock.
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY PRIOR TO OFFERING(1) OWNED AFTER OFFERING(1) -------------------- NUMBER OF ----------------------- NUMBER PERCENT(2) SHARES OFFERED NUMBER PERCENT(2) --------- ---------- -------------- ------------- ------------- David M. Rickey (3)..... 893,332 5.22% -- 893,332 4.51% Joel O. Holliday (4).... 505,261 2.94 -- 505,261 2.54 Roger A. Smullen (5).... 577,412 3.37 -- 577,412 2.96 Thomas Tullie (6)....... 166,665 * -- 166,665 * Anil K. Bedi (7)........ 226,666 1.31 -- 226,666 1.13 Laszlo V. Gal (8)....... 213,332 1.23 -- 213,332 1.07 William K. Bowes, Jr., including shares held by affiliates of U.S. Venture Partners (9)... 953,427 5.55 -- 830,224 4.18 Franklin P. Johnson, Jr., including shares held by Asset Manage- ment Partners and Asset Management Associates (10)................... 604,329 3.73 -- 640,329 3.22 Arthur B. Stabenow (11). 86,663 * -- 86,663 * R. Clive Ghest (12)..... 50,000 * -- 50,000 * Sequoia Capital (13).... 1,199,992 7.02 -- 1,199,992 6.06 3000 Sand Hill Road Menlo Park, CA 94025 U.S. Venture Partners (14)................... 884,194 5.17 123,203 760,991 3.84 2180 Sand Hill Road Menlo Park, CA 94025 Albert J. Martinez (15). 709,996 4.15 354,998 354,998 1.79 1366 Via Alta Del Mar, CA 92014 Harrison Capital, Inc. . 277,879 1.62 277,879 -- -- 2000 Westchester Ave. White Plains, NY 10650 Lumberman's Mutual Casualty Company (16).. 255,519 1.49 255,519 -- -- c/o Zurich Investment Management, Inc., 222 S. Riverside Plaza Chicago, IL 60606 Funds affiliated with Venture Capital Fund of America (17)........... 206,558 1.33 206,558 -- -- Additional Selling Stockholders (93 stockholders), each holding less than 1.0% of the Common Stock prior to this offering (18).......... 2,330,221 13.62 1,531,843 798,378 4.03 All directors and execu- tive officers as a group (10 persons) (19)................... 4,277,087 24.92 123,203 4,153,884 21.00
55 - ------- *Less than 1% of the outstanding shares (1) Assumes no exercise of the Underwriters' over-allotment option. Except pursuant to applicable community property laws or as indicated in the footnotes to this table, to the Company's knowledge, each stockholder identified in the table possesses sole voting and investment power with respect to all shares of Common Stock shown as beneficially owned by such stockholder. (2) Applicable percentage of ownership for each stockholder is based on 17,101,750 shares of Common Stock outstanding as of September 30, 1997. Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and investment power with respect to the shares. In computing the shares beneficially owned by a person and the percentage of ownership of that person, shares of Common Stock subject to options held by that person that are currently exercisable or exercisable within 60 days of September 30, 1997 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of each other person. (3) Includes 398,333 shares which are no longer subject to repurchase by the Company. (4) Includes 321,931 shares held in the name of Joel O. Holliday and Rosanne R. Holliday, Co-Trustees of the Joel O. Holliday Family Trust dated April 1, 1985 and 66,666 shares held in the name of the Holliday Children 1985 Trust. Includes 55,556 shares of Common Stock issuable upon the exercise of immediately exercisable options which are subject to repurchase rights, of which 4,166 shares are no longer subject to repurchase by the Company. (5) Includes 20,000 shares of Common Stock issuable upon the exercise of immediately exercisable options. Such shares are no longer subject to repurchase by the Company. (6) Includes 48,611 shares which are no longer subject to repurchase by the Company. (7) Represents Common Stock issuable upon the exercise immediately exercisable options which are subject to repurchase rights, of which 58,472 shares are no longer subject to repurchase by the Company. (8) Represents Common Stock issuable upon the exercise immediately exercisable options which are subject to repurchase rights, of which 833 shares are no longer subject to repurchase by the Company. (9) William K. Bowes, Jr., a director of the Company, holds 5,901 shares of Common Stock directly. In addition, Mr. Bowes holds immediately exercisable options to purchase 63,332 shares of Common Stock which are subject to repurchase rights, of which 23,054 shares, are no longer subject to repurchase by the Company. In addition, Mr. Bowes is a partner of the general partner of U.S. Venture Partners, which holds 380,039 shares; U.S. Venture Partners III which holds 327,616 shares; Second Ventures, L.P. which holds 53,336 shares; and U.S. Ventures, S.A. which holds 123,203 shares. Mr. Bowes disclaims beneficial ownership of the shares held by U.S. Venture Partners, U.S. Venture Partners III, Second Ventures, L.P. and U.S. Ventures, S.A. except to the extent of his pecuniary interest therein. See Note 14. (10) Includes 63,332 shares of Common Stock issuable upon the exercise of immediately exercisable options which are subject to repurchase rights, of which 23,054 shares are no longer subject to repurchase by the Company. Mr. Johnson is the general partner of Asset Management Partners, which holds 226,380 shares. In addition, Mr. Johnson is a general partner of AMC Partners, a general partner of Asset Management Associates, which holds 350,617 shares. Mr. Johnson disclaims beneficial ownership with respect to the shares held by Asset Management Partners and Asset Management Associates except to the extent of his pecuniary interest therein. (11) Includes 31,777 shares which are no longer subject to repurchase by the Company. (12) Represents shares of Common Stock issuable upon exercise of immediately exercisable options which are subject to repurchase rights, of which 5,555 shares are no longer subject to repurchase by the Company. (13) Includes 1,142,856 shares held by Sequoia Capital Growth Fund and 57,136 shares held by Sequoia Technology Partners III. (14) Includes 380,039 shares held by U.S. Venture Partners, 327,616 shares held by U.S. Venture Partners III, 53,336 shares held by Second Ventures L.P. and 123,203 shares held by U.S. Ventures, S.A. William K. Bowes, Jr., a director of the Company, is a general partner of the general partner of each of these 56 partnerships. Mr. Bowes disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. See Note 9. (15) All of these shares represent shares held in the name of Albert J. Martinez and S. Gay Hugo-Martinez, Co-Trustees for the Martinez Family Trust dated August 26, 1992. (16) Zurich Investment Management, Inc. (with Zurich Kemper Investments, Inc. as sub-advisor) acts as investment manager to Lumberman's Mutual Casualty Insurance Company, American Manufacturer's Mutual Insurance Company and American Motorists Insurance Company and in such capacity may be deemed to be the beneficial owner of the shares held by such entities. American Manufacturer's Mutual Insurance Company and American Motorist's Insurance Company, each of which beneficially owns less than 1.0% of the Company's outstanding Common Stock prior to this offering, are each selling 28,567 shares of Common Stock in the offering. After the offering, each such entity will no longer hold shares of the Company's Common Stock. (17) Includes 150,270 shares held by VCFA Investment II, Ltd. and 56,288 shares held by VCFA Investment Secondaries, Ltd. (18) Consists of 93 Stockholders, each of which beneficially owns less than 1.0% of the Company's outstanding Common Stock prior to the offering. (19) Includes 1,461,191 shares held by entities affiliated with certain directors as described in Notes 9, 10 and 11. Also includes 135,134 shares subject to immediately exercisable options and for which the repurchase rights have lapsed. 57 DESCRIPTION OF CAPITAL STOCK Upon the completion of this Offering, the authorized capital stock of the Company will consist of 60,000,000 shares of Common Stock, $.01 par value, and 2,000,000 shares of undesignated Preferred Stock, $.01 par value, after giving effect to the amendment of the Company's Certificate of Incorporation to delete references to the Series 1 Preferred Stock, Series 2 Preferred Stock and Series 3 Preferred Stock, which will occur upon conversion of such Preferred Stock into Common Stock upon the closing of this offering. COMMON STOCK As of September 30, 1997, there were 17,101,750 shares of Common Stock outstanding (as adjusted to reflect the conversion of all outstanding shares of Series 1 Preferred Stock, Series 2 Preferred Stock and Series 3 Preferred Stock into Common Stock upon the completion of this offering), held of record by 877 stockholders, and options to purchase an aggregate of 2,232,032 shares of Common Stock were also outstanding. There will be 19,801,750 shares of Common Stock outstanding (assuming no exercise of the Underwriter's overallotment option) after giving effect to the sale of the shares of Common Stock to the public offered hereby. The holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Subject to preferential rights with respect to any outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of liquidation, dissolution or winding up of the Company, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and satisfaction of preferential rights of any outstanding Preferred Stock. The Common Stock has no preemptive or conversion rights or other subscription rights. The outstanding shares of Common Stock are, and the shares of Common Stock to be issued upon completion of this offering will be, fully paid and non- assessable. PREFERRED STOCK Upon the closing of the offering, all outstanding shares of Preferred Stock will automatically be converted into Common Stock. Thereafter, the Board of Directors is authorized to issue Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions 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 or the designation of such series, without further vote or action by the stockholders. The issuance of Preferred Stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders. The issuance of Preferred Stock with voting and conversion rights may adversely affect the voting power of the holders of Common Stock, including voting rights, of the holders of Common Stock. In certain circumstances, such issuance could have the effect of decreasing the market price of the Common Stock. As of the closing of the offering, no shares of Preferred Stock will be outstanding and the Company currently has no plans to issue any shares of Preferred Stock. REGISTRATION RIGHTS Upon the closing of the offering, the holders of 10,709,090 shares of Common Stock (the "Registrable Securities"), and 83,807 shares issuable pursuant to the exercise of certain warrants to purchase Common Stock, or their transferees are entitled to certain rights with respect to the registration of such shares under the Securities Act. These rights are provided under the terms of agreements between the Company and the 58 holders of the Registrable Securities. Subject to certain limitations in the agreement, the holders of at least 40% of the Registrable Securities (the "Initiating Holders") may require, on two occasions after the closing of the offering, that the Company use its best efforts to register the Registrable Securities for public resale provided that a minimum of $5,000,000 in Common Stock must be sold by the Initial Holders in such public resale. If the Company registers any of its Common Stock either for its own account or for the account of other security holders, the holders of Registrable Securities are entitled to include their shares of Common Stock in such registration, subject to the ability of the underwriters to limit the number of shares included in the Offering. The holders of Registrable Securities may also require the Company to register all or a portion of their Registrable Securities on Form S-3 when use of such form becomes available to the Company. All registration expenses must be borne by the Company and all selling expenses relating to the Registrable Securities must be borne by the holders of the securities being registered. WARRANTS As of September 30, 1997 the Company had outstanding warrants to purchase 83,807 shares of Common Stock. Of these, warrants exercisable for an aggregate of 64,760 shares of Common Stock have an exercise price of $3.00 per share. Each of these warrants will terminate, if not exercised, five years from the date of the closing of this Offering and under the terms of these warrants, the Company may require the holders of these warrants to exercise such warrants immediately prior to the closing of this offering. The Company has also issued a warrant exercisable for 19,047 shares of Common Stock at an exercise price of $2.63 per share. This warrant will terminate, if not exercised, five years from the date of the closing of this offering. TRANSFER AGENT AND REGISTRAR The name and address of transfer agent and registrar for the Company's Common Stock is Harris Trust Company of California, 601 South Figueroa St., Ste. 4900, Los Angeles, California, 90017. Its telephone number at that address is (213) 239-0671. LISTING The Company has applied to list its Common Stock on the Nasdaq National Market under the trading symbol AMCC. The Company has not applied to list its Common Stock on any other exchange. See "Risk Factors--Absence of Prior Public Market and Possible Volatility of Stock Price." 59 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no market for the Common Stock of the Company. Future sales of substantial amounts of Common Stock in the public market could adversely affect prevailing market prices. Furthermore, since a limited number of shares will be available for sale shortly after this offering because of certain contractual and legal restrictions on resale (as described below), sales of substantial amounts of Common Stock of the Company in the public market after the restrictions lapse could adversely affect the prevailing market price and the ability of the Company to raise equity capital in the future. Upon completion of the offering, the Company will have outstanding 19,801,750 shares of Common Stock (assuming no exercise of the Underwriters' over-allotment option and no exercise of options outstanding under the Company's 1982 Plan and 1992 Plan or warrants outstanding or other options outstanding after September 30, 1997). Of these shares, the 5,450,000 shares sold in the offering (plus any shares issued upon exercise of the Underwriters' over-allotment option) will be freely tradeable without restriction under the Securities Act, unless purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act. The remaining 14,351,750 shares of Common Stock outstanding are "restricted securities" within the meaning of Rule 144 under the Securities Act ("Restricted Shares"). Restricted Shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rules 144, 144(k) or 701 promulgated under the Securities Act, which are summarized below. Sales of the Restricted Shares in the public market, or the availability of such shares for sale, could adversely affect the market price of the Common Stock. The holders of approximately 13,115,250 shares of Common Stock, including officers and directors of the Company have entered into lock-up agreements (the "Lock-Up Agreements") with the Company or the Representatives of the Underwriters generally providing that they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of the shares of Common Stock of the Company or any securities exercisable for or convertible into the Company's Common Stock owned by them for a period of 180 days after the effective date of the registration statement filed pursuant to this offering (the "Effective Date"), without the prior written consent of BancAmerica Robertson Stephens, the designated representative of the Underwriters. As a result of these contractual restrictions, notwithstanding possible earlier eligibility for sale under the provisions of Rules 144 (as described below), 144(k) and 701, shares subject to Lock-Up Agreements will not be saleable until such agreements expire or are waived by the designated Underwriters' representative. Taking into account the Lock-Up Agreements, and assuming the designated Underwriters' representative does not release stockholders from these agreements, the following shares will be eligible for sale in the public market at the following times: beginning on the Effective Date, only the shares sold in the offering and approximately 665,000 shares pursuant to Rule 144(k) ,will be immediately available for sale in the public market; beginning 90 days after the Effective Date, approximately 571,500 shares will be eligible for sale pursuant to Rule 144(k); and beginning 180 days after the Effective Date approximately 13,115,250 shares will be freely tradeable, subject in some cases to the volume and other restrictions of Rule 144. In general, under Rule 144 as currently in effect, and beginning after the expiration of the Lock-Up Period, a person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: (i) one percent of the number of shares of Common Stock then outstanding (which will equal approximately 198,000 shares immediately after the offering); or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. 60 All Company employees who acquire Common Stock pursuant to stock option grants under the 1992 Plan are restricted from selling securities of the Company until 180 days after the Effective Date. The 1982 Plan contains no such lock-up provisions. Therefore, beginning 90 days after the Effective Date, any employee, officer or director of or consultant to the Company who purchased his or her shares pursuant to the 1982 Plan and who has not entered into a Lock-Up Agreement may be entitled to rely on the resale provisions of Rule 701 to the extent that such shares were purchased after May 20, 1988. In addition, beginning 180 days after the Effective Date, any employee, officer or director of or consultant to the Company who purchased his or her shares after May 20, 1988 pursuant to options that were granted under the Company's 1982 Stock Option Plan and who has entered into a Lock-Up Agreement, or who purchased his or her shares pursuant to options that were granted under the Company's 1992 Stock Option Plan may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell such shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. In addition, the Company intends to file a registration statement under the Securities Act to register the shares of Common Stock to be issued pursuant to the Company's 1997 Employee Stock Purchase Plan on the Effective Date and to file registration statements under the Securities Act approximately 90 days after the Effective Date to register all of the shares to be issued pursuant to the Company's other employee benefit plans. As a result, any options exercised under the 1992 Plan or any other benefit plan after the effectiveness of such registration statement will also be freely tradeable in the public market, except that shares held by affiliates will still be subject to the volume limitation, manner of sale, notice and public information requirements of Rule 144 unless otherwise resaleable under Rule 701. As of September 30, 1997, there were outstanding options for the purchase of 2,232,032 shares, of which options for 2,232,032 shares were exercisable, subject in certain cases to repurchase rights of the Company. No shares have been issued to date under the Company's Purchase Plan or Directors Plan. See "Risk Factors -- Shares Eligible for Future Sale," "Management -- 1982 Employee Incentive Stock Option Plan," "-- 1992 Stock Option Plan" and "-- 1997 Employee Stock Purchase Plan" and "Description of Capital Stock -- Registration Rights." 61 UNDERWRITING The Underwriters named below, acting through their representatives, BancAmerica Robertson Stephens, NationsBanc Montgomery Securities, Inc. and Cowen & Company (the "Representatives"), have severally agreed, subject to the terms and conditions of the Underwriting Agreement, to purchase from the Company and the Selling Stockholders the number of shares of Common Stock set forth opposite their respective names below. The Underwriters are committed to purchase and pay for all such shares if any are purchased.
NUMBER UNDERWRITER OF SHARES ----------- --------- BancAmerica Robertson Stephens..................................... NationsBanc Montgomery Securities, Inc............................. Cowen & Company ................................................... --------- Total............................................................ 5,450,000 =========
The Representatives have advised the Company and the Selling Stockholders that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price, less a concession of not more than $ per share, of which $ per share may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the Representatives. No such reduction shall change the amount of proceeds to be received by the Company as set forth on the cover page of this Prospectus. The Company has granted to the Underwriters an option, exercisable during the 30-day period after the date of this Prospectus, to purchase up to an additional 817,500 shares of Common Stock at the same price per share as the Company and the Selling Stockholders receive for the 5,450,000 shares that the Underwriters have agreed to purchase. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage of such additional shares that the number of shares of Common Stock to be purchased by it shown in the above table represents as a percentage of the 5,450,000 shares offered hereby. If purchased, such additional shares will be sold by the Underwriters on the same terms as those on which the 5,450,000 shares are being sold. The Company will be obligated, pursuant to the option, to sell shares to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of shares of Common Stock offered hereby. The Underwriting Agreement contains covenants of indemnity among the Underwriters, the Company and the Selling Stockholders against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended, and liability arising from breaches of representations and warranties contained in the Underwriting Agreement. Pursuant to the terms of lock-up agreements, the holders of 13,115,250 shares of the Company's Common Stock, including the officers and directors have agreed with the Company or the Representatives that, until the expiration of the 180 day period following the effective date of the registration statement filed pursuant to this offering (the "Effective Date"), subject to certain limited exceptions, they will not, directly or indirectly, offer, sell, contract to sell, grant any option to purchase, pledge, or otherwise dispose of or transfer, any shares of Common Stock, or any securities convertible into or exchangeable for, or any rights to purchase or acquire, shares of Common Stock, now owned or hereafter acquired by such holders or with respect to which they have or hereafter acquire the power of disposition, without the prior written consent of BancAmerica Robertson Stephens. BancAmerica Robertson Stephens may, in its sole discretion, without notice, release all or any portion of the securities subject to lock-up agreements. See "Shares Eligible for Future Sale." Approximately 13,115,250 shares of Common Stock subject to lock-up agreements will be 62 eligible for immediate public sale following the expiration of the 180 day period following the Effective Date, subject to Rule 144. In addition, the Company has agreed that, until the expiration of the Lock-Up Period, the Company will not, without the prior written consent of BancAmerica Robertson Stephens, subject to certain exceptions, sell or otherwise dispose of any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into, exercisable for or exchangeable for shares of Common Stock other than the Company's sale of shares in this offering, the issuance of Common Stock upon the exercise of outstanding options and warrants, or the Company's grant of options and issuance of stock under existing stock option or stock purchase plans. See "Shares Eligible for Future Sale." The Representatives have advised the Company and the Selling Stockholders that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. The Representatives have advised the Company that, pursuant to Regulation M under the Securities Act, certain persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids which may have the effect of stabilizing or maintaining the market price of Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with this offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with this offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by the Representatives in a syndicate covering transaction and has therefore not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. The Underwriters have reserved for possible sale, at the initial public offering price, a maximum of 5.0% of the shares of Common Stock offered hereby for certain individuals approved by the Company and who have expressed an interest in purchasing shares of Common Stock in this offering. The number of shares available for sale to the general public will be reduced to the extent any such persons are offered and purchase such reserved shares. Any reserved shares not so purchased will be offered by the Underwriters to the general public on the same basis as other shares offered hereby. Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price for the Common Stock will be determined through negotiations among the Company, the Selling Stockholders and the Representatives. The material factors to be considered in such negotiations are prevailing market conditions, certain financial information of the Company for recent periods, market valuations of other companies that the Company, the Selling Stockholders and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development, the Company's management and other factors deemed relevant. The estimated initial public offering price range set forth on the cover of this preliminary prospectus is subject to change as a result of market conditions and other factors. There can be no assurance that an active or orderly trading market will develop for the Common Stock or that the Common Stock will trade in the public market subsequent to this offering at or above the initial trading price. See "Risk Factors -- Absence of Prior Market and Possible Volatility of Stock Price" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 63 LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Venture Law Group, A Professional Corporation, Menlo Park, California. Certain legal matters in connection with this Offering will be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California. EXPERTS The consolidated financial statements of Applied Micro Circuits Corporation at March 31, 1996 and 1997, and for each of the three years in the period ended March 31, 1997, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission, a Registration Statement on Form S-1 (together with all amendments, schedules and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Common Stock offered hereby, reference is made to the Registration Statement. Statements made in this Prospectus as to the contents of any contract, agreement or other document are not necessarily complete; with respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference. The Registration Statement and the exhibits thereto may be inspected, without charge, at the public reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices at 500 West Madison Street, Chicago, IL 60661, and 7 World Trade Center, New York, New York 10048. Copies of such material can also be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Registration Statement and the exhibits thereto may also be accessed through the EDGAR terminals in the Commission's public reference facilities in Washington, D.C. or through the World Wide Web at http://www.sec.gov. 64 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS APPLIED MICRO CIRCUITS CORPORATION
PAGE ---- Report of Ernst & Young LLP, Independent Auditors......................... F-2 Consolidated Balance Sheets as of March 31, 1996 and 1997 and September 30, 1997 (Unaudited)..................................................... F-3 Consolidated Statements of Operations for each of the three years in the period ended March 31, 1997 and for the six months ended September 30, 1996 and 1997 (Unaudited)................................................ F-4 Consolidated Statements of Stockholders' Equity for each of the three years in the period ended March 31, 1997 and for the six months ended September 30, 1997 (Unaudited)........................................... F-5 Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 1997 and for the six months ended September 30, 1996 and 1997 (Unaudited)................................................ F-6 Notes to Consolidated Financial Statements................................ F-7
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, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with 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, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP San Diego, California April 25, 1997, except for Note 11, as to which the date is October , 1997 - ------------------------------------------------------------------------------- The foregoing report is in the form that will be signed upon completion of certain events as described in Note 11 to the consolidated financial statements. /s/ ERNST & YOUNG LLP San Diego, California October 7, 1997 F-2 APPLIED MICRO CIRCUITS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA STOCKHOLDERS' EQUITY AT MARCH 31, SEPTEMBER 30, SEPTEMBER 30, ----------------- ------------- ------------- 1996 1997 1997 1997 -------- ------- ------------- ------------- (Unaudited) (Unaudited) ASSETS Current assets: Cash and cash equivalents..... $ 4,277 $ 5,488 $ 2,041 Short-term investments -- available-for-sale 4,541 8,109 9,361 Accounts receivable, net of allowance for doubtful ac- counts of $90 and $200 at March 31, 1996 and 1997, re- spectively, and $350 at Sep- tember 30, 1997 (unaudited).. 9,476 8,418 9,809 Inventories................... 6,836 7,530 7,961 Deferred income taxes......... -- -- 1,096 Other current assets.......... 777 698 853 -------- ------- ------- Total current assets......... 25,907 30,243 31,121 Notes receivable from officer and employees.................. -- 803 934 Property and equipment, net..... 11,929 10,768 12,327 -------- ------- ------- Total assets................... $ 37,836 $41,814 $44,382 ======== ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.............. $ 3,981 $ 2,428 $ 4,730 Accrued payroll and related expenses..................... 1,291 3,102 2,647 Other accrued liabilities..... 2,130 1,881 1,221 Deferred revenue.............. 831 806 929 Current portion of long-term debt......................... 582 37 -- Current portion of capital lease obligations............ 3,062 2,625 2,641 -------- ------- ------- Total current liabilities.... 11,877 10,879 12,168 Long-term debt, less current portion........................ 37 -- -- Long-term capital lease obliga- tions, less current portion.... 4,410 3,192 2,096 Commitments and contingencies (Notes 6 and 10) Stockholders' equity: Preferred Stock, $0.01 par value: 2,000,000 shares authorized pro forma, none issued and outstanding pro forma Convertible preferred stock, $0.01 par value: Authorized shares -- 1,350,000................... Issued and outstanding shares -- 1,223,594 at March 31, 1996 and 1997 and 1,051,294 at September 30, 1997 (unaudited) (none pro forma, unaudited)............ Liquidation value -- $25,695 at March 31, 1996 and 1997 and $22,077 at September 30, 1997 (unaudited)............. 12 12 11 $ -- Common stock, $0.01 par value: Authorized shares -- 34,500,000.................. Issued and outstanding shares -- 4,968,316 and 5,025,357 at March 31, 1996 and 1997, respectively, and 6,392,660 at September 30, 1997, (unaudited) (17,101,750 pro forma, unaudited)........ 49 50 64 171 Additional paid-in capital.... 36,971 36,974 34,655 34,559 Deferred compensation......... -- -- (552) (552) Accumulated deficit........... (15,444) (9,235) (3,559) (3,559) Notes receivable from stock- holders...................... (76) (58) (501) (501) -------- ------- ------- ------- Total stockholders' equity... 21,512 27,743 30,118 $30,118 -------- ------- ------- ======= Total liabilities and stock- holders' equity............... $ 37,836 $41,814 $44,382 ======== ======= =======
See accompanying notes. F-3 APPLIED MICRO CIRCUITS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, ------------------------- --------------- 1995 1996 1997 1996 1997 ------- ------- ------- ------- ------- (Unaudited) Net revenues........................ $46,950 $50,264 $57,468 $27,955 $35,208 Cost of revenues.................... 27,513 34,169 30,057 15,754 16,534 ------- ------- ------- ------- ------- Gross profit........................ 19,437 16,095 27,411 12,201 18,674 Operating expenses: Research and development.......... 10,108 8,283 7,870 3,412 6,002 Selling, general and administra- tive............................. 10,112 11,232 12,537 5,894 6,730 ------- ------- ------- ------- ------- Total operating expenses........ 20,220 19,515 20,407 9,306 12,732 ------- ------- ------- ------- ------- Operating income (loss)............. (783) (3,420) 7,004 2,895 5,942 Interest income (expense), net...... (358) (242) (29) 24 151 ------- ------- ------- ------- ------- Income (loss) before income taxes... (1,141) (3,662) 6,975 2,919 6,093 Provision (benefit) for income tax- es................................. (70) 32 659 276 159 ------- ------- ------- ------- ------- Net income (loss)................... $(1,071) $(3,694) $ 6,316 $ 2,643 $ 5,934 ======= ======= ======= ======= ======= Pro forma net income per share...... $ 0.33 $ 0.30 ======= ======= Shares used in pro forma net income per share calculation.............. 19,020 19,623 ======= =======
See accompanying notes. F-4 APPLIED MICRO CIRCUITS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
CONVERTIBLE NOTES PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE TOTAL ----------------- ----------------- PAID-IN DEFERRED ACCUMULATED FROM STOCKHOLDERS' SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT STOCKHOLDERS EQUITY --------- ------ --------- ------ ---------- ------------ ----------- ------------ ------------- Balance, March 31, 1994................. 1,223,594 $12 4,247,977 $42 $36,655 $ -- $(10,646) $(234) $25,829 Issuance of stock pursuant to exer- cise of stock op- tions.............. -- -- 204,558 2 91 -- -- -- 93 Repurchase of common stock.............. -- -- (26,278) -- (13) -- (33) -- (46) Net loss............ -- -- -- -- -- -- (1,071) -- (1,071) --------- --- --------- --- ------- ----- -------- ----- ------- Balance, March 31, 1995................. 1,223,594 12 4,426,257 44 36,733 -- (11,750) (234) 24,805 Issuance of stock pursuant to exer- cise of stock op- tions.............. -- -- 547,767 5 251 -- -- -- 256 Repurchase of common stock.............. -- -- (5,708) -- (13) -- -- -- (13) Payments on and for- giveness of notes.. -- -- -- -- -- -- -- 158 158 Net loss............ -- -- -- -- -- -- (3,694) -- (3,694) --------- --- --------- --- ------- ----- -------- ----- ------- Balance, March 31, 1996................. 1,223,594 12 4,968,316 49 36,971 -- (15,444) (76) 21,512 Issuance of stock pursuant to exer- cise of stock op- tions.............. -- -- 92,680 1 41 -- -- -- 42 Repurchase of common stock.............. -- -- (35,639) -- (38) -- (107) -- (145) Payment on notes.... -- -- -- -- -- -- -- 18 18 Net income.......... -- -- -- -- -- -- 6,316 -- 6,316 --------- --- --------- --- ------- ----- -------- ----- ------- Balance, March 31, 1997................. 1,223,594 12 5,025,357 50 36,974 -- (9,235) (58) 27,743 Issuance of stock pursuant to exer- cise of stock op- tions. (unaudited). -- -- 1,367,303 14 700 -- -- (455) 259 Payments on notes (unaudited)........ -- -- -- -- -- -- -- 12 12 Repurchase of pre- ferred stock on June 20, 1997 (unaudited)........ (172,300) (1) -- -- (3,618) -- (258) -- (3,877) Deferred compensa- tion related to stock options (unaudited)........ -- -- -- -- 599 (599) -- -- -- Amortization of de- ferred compensation (unaudited)........ -- -- -- -- -- 47 -- -- 47 Net income (unau- dited)............. -- -- -- -- -- -- 5,934 -- 5,934 --------- --- --------- --- ------- ----- -------- ----- ------- Balance at September 30, 1997 (unaudited). 1,051,294 $11 6,392,660 $64 $34,655 $(552) $ (3,559) $(501) $30,118 ========= === ========= === ======= ===== ======== ===== =======
See accompanying notes. F-5 APPLIED MICRO CIRCUITS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, ------------------------- -------------- 1995 1996 1997 1996 1997 ------- ------- ------- ------ ------ (Unaudited) Operating activities Net income (loss).................. $(1,071) $(3,694) $ 6,316 $2,643 $5,934 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization...... 5,092 5,311 5,185 2,744 2,731 Amortization of deferred compensa- tion.............................. -- -- -- -- 47 Loss on debt forgiveness........... -- 150 -- -- -- Changes in assets and liabilities: Accounts receivable............... 2,021 (594) 1,058 569 (1,391) Inventories....................... (1,085) 1,887 (694) 789 (431) Other current assets.............. (224) 117 79 120 (155) Accounts payable.................. (2,079) 1,853 (1,553) (840) 2,302 Accrued payroll and other accrued liabilities...................... (1,290) 1,047 1,562 558 (1,115) Deferred income taxes............. -- -- -- -- (1,096) Deferred revenue.................. 30 416 (25) 48 123 ------- ------- ------- ------ ------ Net cash provided by operating activities...................... 1,394 6,493 11,928 6,631 6,949 Investing activities Proceeds from sales and maturities of short-term investments......... 1,500 11,238 7,944 3,466 6,463 Purchase of short-term investments. (1,677) (10,859) (11,512) (5,073) (7,715) Notes receivable from officer and employees......................... -- -- (803) (803) (131) Purchase of property and equipment. (2,761) (1,427) (2,855) (948) (4,008) ------- ------- ------- ------ ------ Net cash used for investing ac- tivities........................ (2,938) (1,048) (7,226) (3,358) (5,391) Financing activities Proceeds from issuance of common stock............................. 93 256 42 15 259 Repurchase of common stock......... (46) (13) (145) -- -- Repurchase of preferred stock...... -- -- -- -- (3,877) Payments on notes receivable from stockholders...................... -- 8 18 18 12 Payments on capital lease obliga- tions............................. (3,224) (2,750) (2,824) (1,789) (1,362) Payments on long-term debt......... (800) (864) (582) (337) (37) ------- ------- ------- ------ ------ Net cash used for financing ac- tivities........................ (3,977) (3,363) (3,491) (2,093) (5,005) ------- ------- ------- ------ ------ Net increase (decrease) in cash and cash equivalents............ (5,521) 2,082 1,211 1,180 (3,447) Cash and cash equivalents at begin- ning of period..................... 7,716 2,195 4,277 4,277 5,488 ------- ------- ------- ------ ------ Cash and cash equivalents at end of period............................. $ 2,195 $ 4,277 $ 5,488 $5,457 $2,041 ======= ======= ======= ====== ====== Supplemental disclosure of cash flow information: Cash paid for: Interest........................... $ 799 $ 715 $ 656 $ 286 $ 261 ======= ======= ======= ====== ====== Income taxes....................... $ 48 $ 48 $ 770 $ 271 $1,700 ======= ======= ======= ====== ======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations of approximately $3.4 million, $1.2 million and $1.2 million were incurred during fiscal years 1995, 1996 and 1997, respectively, and $215,000 and $282,000 during the six month periods ended September 30, 1996 and 1997, respectively. During the six months ended September 30, 1997, notes were received for the exercise of stock options totalling $455,000. See accompanying notes. F-6 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business AMCC 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 the accounts of the Company and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated in consolidation. Interim Financial Information (Unaudited) The accompanying financial statements at September 30, 1997 and for the six months ended September 30, 1996 and 1997 are unaudited but include all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are necessary for a fair statement of the financial position and the operating results and cash flows for the interim date and periods presented. Results for the interim period ended September 30, 1997 are not necessarily indicative of results for the entire year or future periods. Cash, Cash Equivalents and Short-Term Investments Cash and cash equivalents consist of highly liquid debt instruments with original maturities of three months or less at date of acquisition, or money market type funds. 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 estimated fair value of each investment security approximates cost and, therefore, no unrealized gains or losses existed as of March 31, 1997 and 1996 or at September 30, 1997. The following is a summary of available-for-sale securities (in thousands):
MARCH 31, ------------- 1996 1997 ------ ------ U.S. treasury securities and obligations of U.S. government agencies.................................................. $2,502 $4,189 U.S. corporate debt securities............................. 1,743 3,628 Other...................................................... 296 292 ------ ------ $4,541 $8,109 ====== ======
Available-for-sale securities at March 31, 1997 by contractual maturity are as follows (in thousands): Due in one year or less............................................ $5,005 Due after one year through two years............................... 3,104 ------ $8,109 ======
F-7 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) 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. The Company 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 to 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 shorter of the useful life of the asset or the lease term. Property and equipment under capital leases are recorded at the net present value of the minimum lease payments and are amortized over the shorter of the useful life of the assets or the lease term. Leased assets purchased at the expiration of the lease term are capitalized at acquisition cost. Impairment of Long-Lived Assets On April 1, 1996, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. The adoption of SFAS No. 121 did not impact the financial position or results of operations of the Company. Advertising Cost Advertising costs are expensed as incurred. F-8 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) 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 made under agreements allowing for price protection and right of return on products unsold by the distributor are deferred until the distributor ships the product to its customer. 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 the margin on shipments of products to distributors that will be recognized when the distributors ship the products to their customers and billings in excess of costs 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 Statement of Financial Accounting Standards 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. As a result, deferred compensation is recorded for the excess of the fair value of stock on the date of the option grant, over the exercise price of the option. The deferred compensation is amortized over the vesting period of the option. Reclassification Certain prior period amounts have been reclassified to conform with the current period presentation. Pro Forma Net Income Per Share and Unaudited Pro Forma Stockholders' Equity Pro forma net income per share is computed using the weighted average number of shares of common stock and common stock equivalents outstanding during the periods presented. Common stock equivalents result from outstanding convertible preferred stock and options and warrants to purchase common stock. The Securities and Exchange Commission requires stock issued during the twelve months immediately preceding the initial public offering, plus the number of equivalent shares of common stock granted or issued during the same period, be included in the calculation of shares used in computing net income per share as if these shares were outstanding for all periods presented (using the treasury stock method and the assumed initial public offering price). F-9 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) As discussed in Note 4, at September 30, 1997, the Company has 1,051,294 shares of convertible preferred stock which is convertible into a total of 10,709,090 shares of common stock, assuming no antidilution adjustments are necessary. Upon the consummation of the offering contemplated by this Prospectus, all of the convertible preferred stock will be converted into common stock. Unaudited pro forma stockholders' equity as of September 30, 1997 is adjusted for the conversion of preferred stock into common stock. Recently Issued Accounting Standards In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, Earnings per Share, which is required to be adopted on March 31, 1998. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The application of the statement to the six month period ended September 30, 1997 would result in primary pro forma earnings per share of $0.33 compared to $0.30 as reported. The impact on fully diluted earnings per share has not been determined. 2. CERTAIN FINANCIAL STATEMENT INFORMATION
MARCH 31, ------------------ SEPTEMBER 30, 1996 1997 1997 -------- -------- ------------- Inventories (in thousands): Finished goods.......................... $ 2,631 $ 1,076 $ 2,648 Work in process......................... 2,651 4,279 4,172 Raw materials........................... 1,554 2,175 1,141 -------- -------- -------- $ 6,836 $ 7,530 $ 7,961 ======== ======== ======== Property and equipment (in thousands): Machinery and equipment................. $ 19,168 $ 21,211 $ 21,272 Leasehold improvements.................. 5,588 5,789 6,538 Computers, office furniture and equip- ment................................... 11,396 11,701 13,930 -------- -------- -------- 36,152 38,701 41,740 Less accumulated depreciation and amorti- zation................................... (24,223) (27,933) (29,413) -------- -------- -------- $ 11,929 $ 10,768 $ 12,327 ======== ======== ========
The cost and accumulated amortization of machinery and equipment under capital leases at March 31, 1997 were approximately $12.2 million and $7.3 million, respectively ($14.9 million and $7.8 million, at March 31, 1996). Amortization of assets held under capital leases is included with depreciation expense. During the years ended March 31, 1995, 1996 and 1997 and the six month periods ended September 30, 1996 and 1997 the Company earned interest income of $441,000, $473,000, $627,000, $283,000 and $411,000, respectively, and incurred interest expense of $799,000, $715,000, $656,000, $259,000 and $260,000, respectively. F-10 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) 3. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
MARCH 31 ------------ 1996 1997 ----- ----- Notes payable with interest rates ranging from 8.3% to 10.5%, paid in January 1997........................................ $ 162 $ -- 10.0% notes payable, paid in April 1997...................... 457 37 ----- ----- 619 37 Less current portion......................................... (582) (37) ----- ----- $ 37 $ -- ===== =====
4. STOCKHOLDERS' EQUITY Convertible Preferred Stock A summary of the shares of convertible preferred stock issued and outstanding at March 31, and September 30, 1997 is as follows (in thousands, except share data):
MARCH 31, 1997 SEPTEMBER 30, 1997 ----------------------------- ----------------------- SHARES PREFERENCE SHARES PREFERENCE PAR ISSUED AND IN ISSUED AND IN VALUE OUTSTANDING LIQUIDATION OUTSTANDING LIQUIDATION ----- ----------- ----------- ----------- ----------- Series 1.............. $ 4 408,692 $ 8,582 312,803 $ 6,569 Series 2.............. 2 238,096 5,000 211,040 4,432 Series 3.............. 6 576,806 12,113 527,451 11,076 --- --------- ------- --------- ------- Total............... $12 1,223,594 $25,695 1,051,294 $22,077 === ========= ======= ========= =======
Each share of Series 1, 2 and 3 preferred stock is convertible at the option of the holder into approximately 16, 7.0 and 8 shares of common stock, respectively, subject to certain anti-dilution adjustments. The Series 1, 2 and 3 preferred shares may be redeemed upon approval of the Company's Board of Directors and only with the vote of 60% of the outstanding preferred stock at a redemption price of $23.10 per share. Conversion is automatic immediately upon the closing of an underwritten public offering in which aggregate gross proceeds equal or exceed $10 million and the price per share is not less than $6.30. Each share of preferred stock is entitled to one vote for each share of common stock into which it would convert. No dividends may be paid to common stockholders unless equivalent dividends are paid to preferred stockholders. Additionally, the preferred stockholders have certain rights of first refusal on any new securities offering (other than certain securities issued to employees), which rights of first refusal terminate upon completion of the Company's initial public offering, and certain registration rights. F-11 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) Stock Options The Company's 1992 Stock Option Plan provides for the granting of incentive 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 as determined by the Company's Board of Directors. In addition, certain officers and directors have been granted nonqualified stock options. The Company's 1982 Employee Incentive Stock Option Plan expired in 1992, however, options to purchase an aggregate of 157,968 shares of common stock remain outstanding as of September 30, 1997. Options under both plans expire not more than ten years from the date of grant and are immediately exercisable after the date of grant but are subject to certain repurchase rights by the Company until such ownership rights have vested. Vesting generally occurs over four years. At March 31, 1997 and September 30, 1997, 267 shares and 655,483 shares of common stock were subject to repurchase, respectively. Pursuant to an executive employment agreement 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 aggregate $455,000 at interest rates between 5.98% and 6.54% which are due at the earlier of February 12, 2000 ($420,000) and April 9, 2001 ($35,000) or the termination of employment. Certain other option agreements provide for the exercise of stock options with long-term promissory notes. These notes bear interest at rates ranging from 5.32% to 5.91%, are payable at the earlier of termination of employment or January 1998 and are secured by the shares of common stock purchased with the notes. The effect of applying the minimum value method of SFAS 123 to options granted to employees in fiscal year 1997 and 1996 did not result in a pro forma net income (loss) for either period that is materially different from historical reported amounts. Therefore, such pro forma information is not presented herein. The minimum value method was applied using the following weighted average assumptions for fiscal year 1997 and 1996, respectively: risk free interest rate of 6.20% and 6.15%; an expected option life of four years; and no annual dividends. Future pro forma results of operations under SFAS 123 may be materially different from actual reported amounts. F-12 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) A summary of the Company's stock option activity, including those issued outside of the plans, and related information are as follows:
MARCH 31, -------------------------------------------------------------- 1995 1996 1997 SEPTEMBER 30, 1997 -------------------- -------------------- -------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ------- --------- --------- --------- --------- --------- ---------- --------- Outstanding at beginning of period.............. 1,911,566 $0.48 1,633,054 $0.50 1,690,160 $0.51 2,842,293 $0.51 Granted............... 195,332 0.53 1,017,000 0.53 1,457,333 0.53 1,001,812 2.23 Exercised............. (204,558) 0.45 (547,767) 0.47 (92,680) 0.45 (1,367,303) 0.52 Forfeited............. (269,286) 0.50 (412,127) 0.51 (212,520) 0.53 (244,770) 0.52 --------- ----- --------- ----- --------- ----- ---------- ----- Outstanding at end of period................. 1,633,054 $0.50 1,690,160 $0.51 2,842,293 $0.51 2,232,032 $1.01 ========= ===== ========= ===== ========= ===== ========== ===== Vested at end of period. 917,449 $0.48 349,337 $0.51 851,764 $0.51 641,432 $0.51 ========= ===== ========= ===== ========= ===== ========== ===== Weighted-average fair value of options granted during the period................. $0.12 $0.15 ===== =====
The weighted-average remaining contractual life of the options outstanding at March 31, 1997 is 8.4 years. Exercise prices of all options outstanding as of March 31, 1997 range from $0.45 to $0.53. The weighted-average remaining contractual life of the vested options is 6.5 years as of March 31, 1997. The range of exercise prices for options outstanding as of September 30, 1997 was $0.45 to $8.25 per share. Through September 30, 1997, the Company recorded deferred compensation expense for the difference between the exercise price and the deemed 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 first and second quarters of fiscal 1998. This deferred compensation aggregates to $599,000, which will be amortized over the four year vesting period of the related options. Warrants In connection with certain notes payable secured by equipment, capital leases for equipment and revolving lines of credit issued in 1989 and 1990, the Company has outstanding warrants to purchase 83,807 shares of common stock at $2.63 to $3.00 per share, subject to certain anti-dilution adjustments and adjustments in the event of certain mergers or acquisitions. No value was placed on the warrants at the time of issuance as it was deemed to be immaterial. These warrants expire not more than ten years from date of grant or five years after the Company's initial public offering, whichever is later. F-13 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) Common Shares Reserved for Future Issuance At September 30, 1997, shares of the Company's common stock are reserved for issuance upon the conversion or exercise of the following equity instruments (unaudited): Conversion of preferred stock..................................... 10,709,090 Stock options: Issued and outstanding.......................................... 2,232,032 Authorized for future grants.................................... 353,380 ---------- 2,585,412 Warrants.......................................................... 83,807 ---------- 13,378,309 ==========
5. INCOME TAXES The provision (benefit) for income taxes consists of the following (in thousands):
YEAR ENDED MARCH 31, ----------------------- 1995 1996 1997 ----- ------- ------- CURRENT Federal............................................... $ -- $ 27 $ 380 State................................................. (70) 5 279 ----- ------- ------- $ (70) $ 32 $ 659 ===== ======= ======= The provision (credit) for income taxes reconciles to the amount computed by applying the federal statutory rate (35%) to income before income taxes as follows (in thousands): YEAR ENDED MARCH 31, ----------------------- 1995 1996 1997 ----- ------- ------- Tax at federal statutory rate......................... $(399) $(1,282) $ 2,441 Net operating loss without benefit.................... 399 1,282 -- Utilization of net operating loss and research and de- velopment tax credit carryforwards................... -- -- (2,061) State taxes, net of federal benefit and credits....... (70) 5 279 Federal alternative minimum tax....................... -- 27 -- ----- ------- ------- $ (70) $ 32 $ 659 ===== ======= =======
F-14 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) Significant components of the Company's deferred tax assets and liabilities for federal and state income taxes as of March 31, 1997 and 1996 are as shown below. As of March 31, 1997, a valuation allowance had been recognized to offset the deferred tax assets as realization of such assets was uncertain. The estimated annualized effective tax rate for fiscal 1998, which was used to determine the provision for the six month period ended September 30, 1997, is computed based on the Company's projected 1998 income which will allow for a full reduction of the valuation allowance and realization of the deferred tax asset.
MARCH 31, ---------------- 1996 1997 ---- ------- Deferred tax assets (in thousands): Reserves................................................... $ 2,512 $ 2,233 Capitalization of inventory and research and development costs..................................................... 334 226 Research and development credit carryforwards.............. 2,405 1,667 Depreciation and amortization.............................. 335 200 Net operating loss carryforwards........................... 2,102 -- Other credit carryforwards................................. 886 768 ------- ------- Subtotal..................................................... 8,574 5,094 Valuation allowance.......................................... (8,574) (5,094) ------- ------- Net deferred taxes........................................... $ -- $ -- ======= =======
At March 31, 1997, the Company has federal alternative minimum tax, investment and research and development tax credit carryforwards of approximately $366,000, $270,000 and $1.6 million, respectively, which will begin to expire in 1998 unless previously utilized. Under Internal Revenue Code Section 382, the Company's use of its tax credit carryforwards could be limited in the event of certain cumulative changes in the Company's stock ownership. For the six months ended September 30, 1996 and 1997, income taxes have been provided based on the estimated annual effective tax rate applied to pre tax income for the interim period. 6. LEASE COMMITMENTS The Company leases its present manufacturing facilities under a long-term operating lease expiring in March 1998. The lease expiring is renewable for up to ten years. This lease requires the Company to pay property taxes and incidental maintenance expenses and contain escalation clauses based upon increases in the Consumer Price Index. In September 1997, the Company moved into a new administration and manufacturing facility which is leased under a long-term operating lease. This lease expires in September 2007, requires the Company to pay property taxes and incidental maintenance expenses and is renewable for up to ten years. The lease provides for defined rent increases over the term of the lease. F-15 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) Annual future minimum lease payments, including machinery and equipment under capital leases and the Company's commitment relating to its new administration and manufacturing facility, as of March 31, 1997 are as follows (in thousands):
OPERATING CAPITAL FISCAL YEAR ENDING MARCH 31, LEASES LEASES ---------------------------- --------- ------- 1998..................................................... $1,037 $2,980 1999..................................................... 848 2,170 2000..................................................... 848 759 2001..................................................... 870 320 2002..................................................... 889 225 Thereafter............................................... 5,070 -- ------ ------ Total minimum lease payments........................... $9,562 6,454 ====== Less amount representing interest......................... 637 ------ Present value of remaining minimum capital lease payments (including current portion of $2,625).................... $5,817 ======
Rent expense (including short-term leases and net of sublease income) for the years ended March 31, 1995, 1996 and 1997 was $1.7 million, $2.3 million and $1.2 million, respectively. Rent expense for the six months ended September 30, 1996 and 1997 was $600,000 and $573,000, respectively. Included in the 1996 rent expense is an accrual of $565,000 for losses on facilities for which sublease income was expected to be less than the remaining minimum lease payments. Sublease income was $16,000, $0 and $208,000 for the years ended March 31, 1995 1996 and 1997, respectively. 7. RELATED PARTY TRANSACTIONS As of March 31, 1996, the Company had advanced $203,000 to an officer of the Company. During 1997, an additional $750,000 was advanced to this officer and $150,000 of the advances made during 1996 were repaid. Notes were received by the Company providing for interest on the balance at rates from 5.32% to 5.76%. Principal and interest under the notes are due on or before February 28, 1999 and $750,000 of the balance is secured by marketable securities owned by the officer. 8. 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 totalled $116,000, $182,000 and $318,000 for the years ended March 31, 1995, 1996 and 1997, respectively, and $157,000 and $180,000 for the six months ended September 30, 1996 and 1997, respectively. F-16 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) 9. SIGNIFICANT CUSTOMER AND GEOGRAPHIC INFORMATION During the years ended March 31, 1995, 1996 and 1997 and the six month periods ended September 30, 1996 and 1997, 17%, 20% and 20% and 20% and 19%, respectively, of net revenues were from one customer. No other customer accounted for more than 10% of revenues in any period. Revenue by geographic region for the years ended March 31, 1995, 1996 and 1997, and the six months ended September 30, 1996 and 1997 were as follows (in thousands):
SIX MONTHS ENDED SEPTEMBER YEAR ENDED MARCH 31, 30, ----------------------- --------------- 1995 1996 1997 1996 1997 ------- ------- ------- ------- ------- Net revenues: United States...................... $32,554 $28,134 $34,424 $15,682 $20,857 Canada............................. 8,030 10,116 10,943 5,727 5,866 Europe and Israel.................. 4,075 6,525 8,216 4,466 6,373 Asia............................... 2,291 5,489 3,885 2,080 2,112 ------- ------- ------- ------- ------- Total............................ $46,950 $50,264 $57,468 $27,955 $35,208 ======= ======= ======= ======= =======
10. CONTINGENCIES The Company is party to various legal actions arising in the normal course of business. 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 results of operations. 11. SUBSEQUENT EVENTS Repurchase of Convertible Preferred Stock On April 24, 1997 the Board authorized the Company to repurchase up to $4 million of convertible preferred stock, with priority given to the holders of convertible preferred stock that submit 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. Stock Split and Increase in Shares Authorized On October 6, 1997, the Board of Directors authorized, subject to stockholder approval, a two for three reverse stock split of all outstanding common stock. All share and per share amounts and stock option data have been restated to retroactively reflect a stock split. Additionally, on October 6, 1997, the Board of Directors modified, subject to the closing of the public offering and stockholder approval, the Company's capital structure to authorize 60 million shares of common stock, ($0.01 par value) and 2 million shares of preferred stock ($0.01 par value) the shares reserved for issuance under the 1992 Stock Option Plan were increased by 2.2 million shares. F-17 APPLIED MICRO CIRCUITS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED (INFORMATION PERTAINING TO SEPTEMBER 30, 1997 AND THE SIX-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 IS UNAUDITED) 1997 Employee Stock Purchase Plan The Company's 1997 Employee Stock Purchase Plan (the "1997 Purchase Plan") was adopted by the Board of Directors on October 6, 1997, subject to stockholder approval. A total of 400,000 shares of Common Stock are reserved for issuance under the 1997 Purchase Plan. 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, subject to stockholder approval. 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. Preferred Stock On October 6, 1997, the Board of Directors adopted, subject to shareholder approval, an amendment to the Certificate of Incorporation to allow, upon the closing of the initial public offering, 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 restrictions 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 or the designation of such series, without further vote or action by the stockholders. F-18 High-Speed Computing Products AMCC's S5933 is used for DVD, communications and industrial computer applications. [Picture of AMCC integrated circuits, a computer keyboard, a CD-ROM, a digital video disk and a computer.] Automated Test Equipment [Picture of a man working on a computer.] [Picture of wafer in the process of being manufactured.] Teradyne high-speed logic and mixed-signal testers use AMCC's Micropower ASICs with high-precision timing elements. [Picture of a Teradyne high-speed logic and mixed-signal tester, a computer and an integrated circuit.] (22)[Picture of fiber optic cables.] (23)[Picture of fiber optic cables.] (24)[Picture of AMCC integrated circuits and wafers.] PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee and the Nasdaq National Market listing fee.
AMOUNT TO BE PAID ---------- SEC registration fee.......................................... $ NASD filing fee............................................... 6,020 Nasdaq National Market listing fee............................ 50,000 Printing and engraving expenses............................... 100,000 Legal fees and expenses....................................... 300,000 Accounting fees and expenses.................................. 185,000 Blue Sky qualification fees and expenses...................... 5,000 Transfer Agent and Registrar fees............................. 10,000 Miscellaneous fees and expenses............................... -------- Total....................................................... $700,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law (the "Delaware Law") authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933, as amended (the "Securities Act"). Article Seven of the Company's Certificate of Incorporation (Exhibit 3.2 hereto) and Article [VI] of the Company's Bylaws (Exhibit 3.3 hereto) provide for indemnification of the Company's directors, officers, employees and other agents to the maximum extent permitted by Delaware Law. In addition, the Company has entered into Indemnification Agreements (Exhibit 10.1 hereto) with its officers and directors. The Underwriting Agreement (Exhibit 1.1) also provides for cross-indemnification among the Company, the Selling Stockholders and the Underwriters with respect to certain matters, including matters arising under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES As of September 30, 1997, the Company has issued 7,772,065 options to purchase Common Stock of the Company with a weighted average price of $0.68 to a number of employees and directors of and consultants to the Company. To date, 5,564,788 of such options have been exercised and 5,564,788 shares of Common Stock have been issued pursuant to such exercises. The issuances of the above securities were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of such Securities Act as transactions by an issuer not involving any public offering. In addition, certain issuances described in Item 4 were deemed exempt from registration under the Securities Act in reliance upon Rule 701 promulgated under the Securities Act. The recipients of securities in each such transaction 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 share certificates and warrants issued in such transactions. All recipients had adequate access, through their relationships with the Company, to information about the Company. II-1 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
NUMBER DESCRIPTION ------ ----------- 1.1 Form of Underwriting Agreement (subject to negotiation). 3.1 Amended and Restated Certificate of Incorporation of the Company. 3.2 Form of Amended and Restated Certificate of Incorporation of the Company (to be filed with the Delaware Secretary of State upon the closing of the Offering). 3.3 Amended and Restated Bylaws of the Company. 3.4 Form of Amended and Restated Bylaws of the Company (to be filed with the Delaware Secretary of State upon the closing of the Offering). 4.1* Specimen Stock Certificate. 5.1* Opinion of Venture Law Group regarding the legality of the Common Stock being registered. 10.1 Form of Indemnification Agreement between the Company and each of its Officers and Directors. 10.2 1982 Employee Incentive Stock Option Plan, as amended, and form of Option Agreement. 10.3 1992 Stock Option Plan as proposed to be amended, and form of Option Agreement. 10.4 1997 Employee Stock Purchase Plan and form of Subscription Agreement. 10.5 1997 Directors' Stock Option Plan and form of Option Agreement. 10.6 401(k) Plan, effective April 1, 1985 and form of Enrollment Agreement. 10.7 Convertible Preferred Stock, Series 1 and Series 2, Purchase Agreement, dated December 8, 1983. 10.8 Convertible Preferred Stock Series 3 Purchase Agreement, dated September 16, 1987. 10.9 Industrial Real Estate Lease, dated October 29, 1996 between the Registrant and ADI Mesa Partners-AMCC, L.P. (the Sequence Drive Lease). 10.10 Industrial Real Estate Lease, dated April 8, 1992 between the Registrant and Mira Mesa Business Park (the Oberlin Drive Lease). 10.11 Security Agreements, dated January 30, 1992 by and between the Registrant and Roger Smullen. 10.12 Promissory Notes, dated January 30, 1992, as amended, by and between the Registrant and Roger Smullen. 10.13 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 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** Patent License Agreement, dated January 1, 1988, as amended by and between Registrant and Motorola, Inc. 10.16** Patent License Agreement, dated March 1, 1991, as amended, by and between Registrant and International Business Machines Corporation. 10.17** Patent License Agreement, dated June 1, 1997 by and between Registrant and International Business Machines Corporation. 10.18 Letter Agreement, dated January 30, 1996 by and between the Registrant and David Rickey. 10.19** Patent License Agreement, dated October 19, 1992, as amended by and between Registrant and Alcatel Network Systems, Inc. 11.1 Computation of Pro Forma Earnings Per Share.
II-2
NUMBER DESCRIPTION ------ ----------- 23.1 Consent of Independent Auditors (see page II-5) 23.2* Consent of Counsel (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-4) 27.1 Financial Data Schedules
- -------- * To be supplied by amendment. ** Confidential treatment requested as to certain portions of this Exhibit. (b) Financial Statement Schedules Schedule II--Valuation and Qualifying Accounts 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. ITEM 17. UNDERTAKINGS The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the Offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of San Diego, State of California on October 9, 1997. APPLIED MICRO CIRCUITS CORPORATION /s/ David M. Rickey By: _________________________________ DAVID M. RICKEY PRESIDENT AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints, jointly and severally, David M. Rickey and Joel O. Holliday, and each of them, as his attorney-in-fact, with full power of substitution, for him in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and any and all Registration Statements filed pursuant to Rule 462 under the Securities Act of 1933, as amended, in connection with or related to the Offering contemplated by this Registration Statement and its amendments, if any, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorney to any and all amendments to said Registration Statement. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE --------- ----- ---- /s/ David M. Rickey President and Chief October 9, 1997 ____________________________________ Executive Officer DAVID M. RICKEY /s/ Joel O. Holliday Chief Financial Officer October 9, 1997 ____________________________________ JOEL O. HOLLIDAY /s/ Roger A. Smullen, Sr. Director and Chairman of the October 9, 1997 ____________________________________ Board of Directors ROGER A. SMULLEN, SR. /s/ William K. Bowes, Jr. Director October 9, 1997 ____________________________________ WILLIAM K. BOWES, JR. /s/ R. Clive Ghest Director October 9, 1997 ____________________________________ R. CLIVE GHEST /s/ Franklin P. Johnson, Jr. Director October 9, 1997 ____________________________________ FRANKLIN P. JOHNSON, JR. /s/ Arthur B. Stabenow Director October 9, 1997 ____________________________________ ARTHUR B. STABENOW
II-4 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Selected Consolidated Financial Data" and "Experts" and to the use of our report dated April 25, 1997 (except Note 11, as to which the date is October 7, 1997) in this Registration Statement on Form S-1 and related Prospectus of Applied Micro Circuits Corporation for the registration of shares of its common stock. Our audits also included the financial statement schedule of Applied Micro Circuits Corporation for the three years ended March 31, 1997 listed in Item 16(b). This schedule is the responsibility of Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP San Diego, California October , 1997 - ------------------------------------------------------------------------------- The foregoing is in the form that will be signed upon the completion of certain events as described in Note 11 to the consolidated financial statements. /s/ ERNST & YOUNG LLP San Diego, California October 8, 1997 II-5 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS) - --------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E - ------------------------------------- ---------- --------------------- ----------- ------ ADDITIONS --------- (1) (2) CHARGED CHARGED BALANCE AT TO COSTS TO OTHER BALANCE BEGINNING AND ACCOUNTS- DEDUCTIONS- AT END DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD - ----------------------------------------------------------------------------------------------------- Six Months Ended September 30, 1997: $200 $154 $ -- $ 4 $350 Allowance for doubtful accounts - ----------------------------------------------------------------------------------------------------- Year ended March 31, 1997: $ 90 $198 $ 88 $ -- $200 Allowance for doubtful accounts - ----------------------------------------------------------------------------------------------------- Year ended March 31, 1996: $115 $ -- $ -- $ 25 $ 90 Allowance for doubtful accounts - ----------------------------------------------------------------------------------------------------- Year ended March 31, 1995 $ 60 $ 81 $ -- $ 26 $115 Allowance for doubtful accounts
- -------------------------------------------------------------------------------- EXHIBIT INDEX
NUMBER DESCRIPTION ------ ----------- 1.1 Form of Underwriting Agreement (subject to negotiation). 3.1 Amended and Restated Certificate of Incorporation of the Company. 3.2 Form of Amended and Restated Certificate of Incorporation of the Company (to be filed with the Delaware Secretary of State upon the closing of the Offering). 3.3 Amended and Restated Bylaws of the Company. 3.4 Form of Amended and Restated Bylaws of the Company (to be effective upon the closing of the offering). 4.1* Specimen Stock Certificate. 5.1* Opinion of Venture Law Group regarding the legality of the Common Stock being registered. 10.1 Form of Indemnification Agreement between the Company and each of its Officers and Directors. 10.2 1982 Employee Incentive Stock Option Plan, as amended, and form of Option Agreement. 10.3 1992 Stock Option Plan as amended, and form of Option Agreement. 10.4 1997 Employee Stock Purchase Plan and form of Subscription Agreement. 10.5 1997 Directors' Stock Option Plan and form of Option Agreement. 10.6 401(k) Plan, effective April 1, 1985 and form of Enrollment Agreement. 10.7 Convertible Preferred Stock, Series 1 and Series 2, Purchase Agreement, dated December 8, 1983. 10.8 Convertible Preferred Stock Series 3 Purchase Agreement, dated September 16, 1987. 10.9 Industrial Real Estate Lease, dated October 29, 1996 between the Registrant and ADI Mesa Partners-AMCC, L.P. (the Sequence Drive Lease). 10.10 Industrial Real Estate Lease, dated April 8, 1992 between the Registrant and Mira Mesa Business Park (the Oberlin Drive Lease). 10.11 Security Agreements, dated January 30, 1992 by and between the Registrant and Roger Smullen. 10.12 Promissory Notes, dated January 30, 1992, as amended, by and between the Registrant and Roger Smullen. 10.13 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 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** Patent License Agreement, dated January 1, 1988, as amended by and between Registrant and Motorola, Inc. 10.16** Patent License Agreement, dated March 1, 1991, as amended, by and between Registrant and International Business Machines Corporation. 10.17** Patent License Agreement, dated June 1, 1997 by and between Registrant and International Business Machines Corporation. 10.18 Letter Agreement, dated January 30, 1996 by and between the Registrant and David Rickey. 10.19** Patent License Agreement, dated October 19, 1992, as amended by and between Registrant and Alcatel Network Systems, Inc. 11.1 Computation of Pro Forma Earnings Per Share. 23.1 Consent of Independent Auditors (see page II-5) 23.2* Consent of Counsel (included in Exhibit 5.1) 24.1 Power of Attorney (see page II-4) 27.1 Financial Data Schedules
- -------- * To be supplied by amendment. ** Confidential treatment requested as to certain portions of this Exhibit. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 [SUBJECT TO NEGOTIATION] 5,450,000 SHARES/1/ APPLIED MICRO CIRCUITS CORPORATION COMMON STOCK UNDERWRITING AGREEMENT ---------------------- November __, 1997 ROBERTSON, STEPHENS & COMPANY LLC As Representatives of the several Underwriters c/o Robertson, Stephens & Company LLC 555 California Street Suite 2600 San Francisco, California 94104 Ladies/Gentlemen: Applied Micro Circuits Corporation, a Delaware corporation (the "Company"), and certain stockholders of the Company named in Schedule B hereto (hereafter called the "Selling Stockholders") address you as the Representatives of each of the persons, firms and corporations listed in Schedule A hereto (herein collectively called the "Underwriters") and hereby confirm their respective agreements with the several Underwriters as follows: 1. Description of Shares. The Company proposes to issue and sell --------------------- 2,700,000 shares of its authorized and unissued Common Stock, $0.01 par value, to the several Underwriters. The Selling Stockholders, acting severally and not jointly, propose to sell an aggregate of 2,750,000 shares of the Company's authorized and outstanding Common Stock, $0.01 par value, to the several Underwriters. The 2,700,000 shares of Common Stock, $0.01 par value, of the Company to be sold by the Company are hereinafter called the "Company Shares" and the 2,750,000 shares of Common Stock, $0.01 par value, to be sold by the Selling Stockholders are hereinafter called the "Selling Stockholder Shares." The Company Shares and the Selling Stockholder Shares are hereinafter collectively referred to as the "Firm Shares." The Company also proposes to grant to the Underwriters an option to purchase up to 817,500 additional shares of the Company's Common Stock, $0.01 par value (the "Option Shares"), as provided in Section 7 hereof. As used in this Agreement, the term "Shares" shall include the Firm Shares and the Option Shares. All shares of Common Stock, $0.01 par value, of the Company to be outstanding after giving effect to the sales contemplated hereby, including the Shares, are hereinafter referred to as "Common Stock." 2. Representations, Warranties and Agreements of the Company. --------------------------------------------------------- ] I. The Company/2/ represents and warrants to and agrees with each Underwriter that: _____________________________________ /1/ Plus an option to purchase up to 817,500 additional shares from the Company to cover over-allotments. /2/ In Primary/Secondary Offerings and Secondary Offerings consider whether certain Selling Shareholders should also give some or all of the representations and warranties contained in this Section 2.I. (a) A registration statement on Form S-1 (File No. 33- _____) with respect to the Shares, including a prospectus subject to completion, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the applicable rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Act and has been filed with the Commission; such amendments to such registration statement, such amended prospectuses subject to completion and such abbreviated registration statements pursuant to Rule 462(b) of the Rules and Regulations as may have been required prior to the date hereof have been similarly prepared and filed with the Commission; and the Company will file such additional amendments to such registration statement, such amended prospectuses subject to completion and such abbreviated registration statements as may hereafter be required. Copies of such registration statement and amendments, of each related prospectus subject to completion (the "Preliminary Prospectuses"), including all documents incorporated by reference therein, and of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations have been delivered to you. If the registration statement relating to the Shares has been declared effective under the Act by the Commission, the Company will prepare and promptly file with the Commission the information omitted from the registration statement pursuant to Rule 430A(a) or, if Robertson, Stephens & Company LLC, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the information required to be included in any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to the registration statement (including a final form of prospectus). If the registration statement relating to the Shares has not been declared effective under the Act by the Commission, the Company will prepare and promptly file an amendment to the registration statement, including a final form of prospectus, or, if Robertson, Stephens & Company LLC, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the information required to be included in any term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations. The term "Registration Statement" as used in this Agreement shall mean such registration statement, including financial statements, schedules and exhibits, in the form in which it became or becomes, as the case may be, effective (including, if the Company omitted information from the registration statement pursuant to Rule 430A(a) or files a term sheet pursuant to Rule 434 of the Rules and Regulations, the information deemed to be a part of the registration statement at the time it became effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations) and, in the event of any amendment thereto or the filing of any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations relating thereto after the effective date of such registration statement, shall also mean (from and after the effectiveness of such amendment or the filing of such abbreviated registration statement) such registration statement as so amended, together with any such abbreviated registration statement. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Shares as included in such Registration Statement at the time it becomes effective (including, if the Company omitted information from the Registration Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations); provided, -------- however, that if in reliance on Rule 434 of the Rules and Regulations and with - ------- the consent of Robertson, Stephens & Company LLC, on behalf of the several Underwriters, the Company shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus subject to completion" (as defined in Rule 434(g) of the Rules and Regulations) last provided to the Underwriters by the Company and circulated by the Underwriters to all prospective purchasers of the Shares (including the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 434(d) of the Rules and Regulations). Notwithstanding the foregoing, if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares that differs from the prospectus referred to in the immediately preceding sentence (whether or not such revised prospectus is required to be filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriters for such use. If in reliance on Rule 434 of the Rules and Regulations and with the consent of Robertson, Stephens & Company LLC, on behalf of the several Underwriters, the Company shall have provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that 2. a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the Prospectus and the term sheet, together, will not be materially different from the prospectus in the Registration Statement. (b) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus or instituted proceedings for that purpose, and each such Preliminary Prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date (hereinafter defined) and on any later date on which Option Shares are to be purchased, (i) the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained and will contain all material information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, (ii) the Registration Statement, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (iii) the Prospectus, and any amendments or supplements thereto, did not and will not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that none of the representations and -------- ------- warranties contained in this subparagraph (b) shall apply to information contained in or omitted from the Registration Statement or Prospectus, or any amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter specifically for use in the preparation thereof. (c) Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation with full power and authority (corporate and other) to own, lease and operate its properties and conduct its business as described in the Prospectus; the Company owns all of the outstanding capital stock of its subsidiaries free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; each of the Company and its subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise; no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification; each of the Company and its subsidiaries is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect; neither the Company nor any of its subsidiaries is in violation of its respective charter or bylaws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness, or in any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective properties may be bound; and neither the Company nor any of its subsidiaries is in material violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or over their respective properties of which it has knowledge. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than AMCC (Barbados) Ltd. (d) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement on the part of the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other 3. similar laws relating to or affecting creditors' rights generally or by general equitable principles; the performance of this Agreement and the consummation of the transactions herein contemplated will not result in a material breach or violation of any of the terms and provisions of, or constitute a default under, (i) any bond, debenture, note or other evidence of indebtedness, or under any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of its subsidiaries or their respective properties may be bound, (ii) the charter or bylaws of the Company or any of its subsidiaries, or (iii) any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or over their respective properties. No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or over their respective properties is required for the execution and delivery of this Agreement and the consummation by the Company or any of its subsidiaries of the transactions herein contemplated, except such as may be required under the Act, or under state or other securities or Blue Sky laws, all of which requirements have been satisfied in all material respects. (e) There is not any pending or, to the best of the Company's knowledge, threatened action, suit, claim or proceeding against the Company, any of its subsidiaries or any of their respective officers or any of their respective properties, assets or rights before any court, government or governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or over their respective officers or properties or otherwise which (i) might result in any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise or might materially and adversely affect their properties, assets or rights, (ii) might prevent consummation of the transactions contemplated hereby or (iii) is required to be disclosed in the Registration Statement or Prospectus and is not so disclosed; and there are no agreements, contracts, leases or documents of the Company or any of its subsidiaries of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement by the Act or the Rules and Regulations which have not been accurately described in all material respects in the Registration Statement or Prospectus or filed as exhibits to the Registration Statement. (f) All outstanding shares of capital stock of the Company (including the Selling Stockholder Shares) have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and the authorized and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" and conforms in all material respects to the statements relating thereto contained in the Registration Statement and the Prospectus (and such statements correctly state the substance of the instruments defining the capitalization of the Company); the Firm Shares and the Option Shares to be purchased from the Company hereunder have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and nonassessable, and will be sold free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; and no preemptive right, co-sale right, registration right, right of first refusal or other similar right of stockholders exists with respect to any of the Firm Shares or Option Shares to be purchased from the Company hereunder or the issuance and sale thereof other than those that have been expressly waived prior to the date hereof and those that will automatically expire upon and will not apply to the consummation of the transactions contemplated on the Closing Date. No further approval or authorization of any stockholder, the Board of Directors of the Company or others is required for the issuance and sale or transfer of the Shares except as may be required under the Act or under state or other securities or Blue Sky laws. All issued and outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and were not issued in violation of or subject to any preemptive right, or other rights to subscribe for or purchase shares and are owned by the Company free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest. Except as disclosed in the Prospectus and the financial statements of the Company, and the related notes thereto, included in the Prospectus, neither the Company nor any subsidiary has 4. outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (g) Ernst & Young LLP, which has examined the consolidated financial statements of the Company, together with the related schedules and notes, as of March 31, 1995, 1996 and 1997 and for each of the years in the three (3) years ended March 31, 1997 filed with the Commission as a part of the Registration Statement, which are included in the Prospectus, are independent accountants within the meaning of the Act and the Rules and Regulations; the audited consolidated financial statements of the Company, together with the related schedules and notes, and the unaudited consolidated financial information, forming part of the Registration Statement and Prospectus, fairly present the financial position and the results of operations of the Company and its subsidiaries at the respective dates and for the respective periods to which they apply; and all audited consolidated financial statements of the Company, together with the related schedules and notes, and the unaudited consolidated financial information, filed with the Commission as part of the Registration Statement, have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as may be otherwise stated therein. The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (h) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (i) any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise, (ii) any transaction that is material to the Company and its subsidiaries considered as one enterprise, except transactions entered into in the ordinary course of business, (iii) any obligation, direct or contingent, that is material to the Company and its subsidiaries considered as one enterprise, incurred by the Company or its subsidiaries, except obligations incurred in the ordinary course of business, (iv) any change in the capital stock or outstanding indebtedness of the Company or any of its subsidiaries that is material to the Company and its subsidiaries considered as one enterprise, (v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its subsidiaries, or (vi) any loss or damage (whether or not insured) to the property of the Company or any of its subsidiaries which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. (i) Except as set forth in the Registration Statement and Prospectus, (i) each of the Company and its subsidiaries has good and marketable title to all properties and assets described in the Registration Statement and Prospectus as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest, other than such as would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise, (ii) the agreements to which the Company or any of its subsidiaries is a party described in the Registration Statement and Prospectus are valid agreements, enforceable by the Company and its subsidiaries (as applicable), except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles and, to the best of the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default under any of such agreements, and (iii) each of the Company and its subsidiaries has valid and enforceable leases for all properties described in the Registration Statement and Prospectus as leased by it, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. Except 5. as set forth in the Registration Statement and Prospectus, the Company owns or leases all such properties as are necessary to its operations as now conducted or as proposed to be conducted. (j) The Company and its subsidiaries have timely filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes shown thereon as due, and there is no tax deficiency that has been or, to the best of the Company's knowledge, might be asserted against the Company or any of its subsidiaries that might have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise; and all tax liabilities are adequately provided for on the books of the Company and its subsidiaries. (k) The Company and its subsidiaries maintain insurance with insurers of recognized financial responsibility of the types and in the amounts generally deemed adequate for their respective businesses and consistent with insurance coverage maintained by similar companies in similar businesses, including, but not limited to, insurance covering real and personal property owned or leased by the Company or its subsidiaries against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect; neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor any such subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. (l) To the best of Company's knowledge, no labor disturbance by the employees of the Company or any of its subsidiaries exists or is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, subassemblers, [value added resellers], subcontractors, original equipment manufacturers, [authorized dealers], external foundries or international distributors that might be expected to result in a material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. No collective bargaining agreement exists with any of the Company's employees and, to the best of the Company's knowledge, no such agreement is imminent. (m) Each of the Company and its subsidiaries owns or possesses adequate rights to use all patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names and copyrights which are necessary to conduct its businesses as described in the Registration Statement and Prospectus; the expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise; the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights; and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. (n) The Common Stock has been approved for quotation on The Nasdaq National Market, subject to official notice of issuance. (o) The Company has been advised concerning the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and has in the past conducted, and intends in the future to conduct, its affairs in such a manner as to ensure that it will not become an "investment company" 6. or a company "controlled" by an "investment company" within the meaning of the 1940 Act and such rules and regulations. (p) The Company has not distributed and will not distribute prior to the later of (i) the Closing Date, or any date on which Option Shares are to be purchased, as the case may be, and (ii) completion of the distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any Preliminary Prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Act. (q) Neither the Company nor any of its subsidiaries has at any time during the last five (5) years (i) made any unlawful contribution to any candidate for foreign office or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (r) The Company has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (s) Each officer and director of the Company, each Selling Stockholder and each beneficial owner of 5,700 or more shares of Common Stock has agreed in writing that such person will not, for a period equal to the greater of (i) 180 days from the date that the Registration Statement is declared effective by the Commission or (ii) three (3) days after the public release of the Company's earnings for the fiscal period ending on or immediately prior to the completion of such 180-day period (the "Lock-up Period"), offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to (collectively, a "Disposition") any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock (collectively, "Securities") now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or stockholders of such person, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of Robertson, Stephens & Company LLC. The foregoing restriction has been expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Furthermore, such person has also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of the Company and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the agreements pursuant to which its officers, directors and stockholders have agreed to such or similar restrictions (the "Lock-up Agreements") presently in effect or effected hereby. The Company hereby represents and warrants that it will not release any of its officers, directors or other stockholders from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of Robertson, Stephens & Company LLC. (t) Except as set forth in the Registration Statement and Prospectus, (i) the Company is in compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") which are applicable to its business, (ii) the Company has received no notice from any governmental authority or third party of an asserted claim under 7. Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus, (iii) the Company will not be required to make future material capital expenditures to comply with Environmental Laws and (iv) no property which is owned, leased or occupied by the Company has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. (S) 9601, et -- seq.), or otherwise designated as a contaminated site under applicable state or - ---- local law. (u) The Company and each of its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets, (iii) access to assets is permitted only in accordance with management's general or specific authorization, and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (v) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of the members of the families of any of them, except as disclosed in the Registration Statement and the Prospectus. II. Each Selling Stockholder, severally and not jointly, represents and warrants to and agrees with each Underwriter and the Company that: (a) Such Selling Stockholder now has and on the Closing Date will have valid marketable title to the Shares to be sold by such Selling Stockholder, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than pursuant to this Agreement; and upon delivery of such Shares hereunder and payment of the purchase price as herein contemplated, each of the Underwriters will obtain valid marketable title to the Shares purchased by it from such Selling Stockholder, free and clear of any pledge, lien, security interest pertaining to such Selling Stockholder or such Selling Stockholder's property, encumbrance, claim or equitable interest, including any liability for estate or inheritance taxes, or any liability to or claims of any creditor, devisee, legatee or beneficiary of such Selling Stockholder. (b) Such Selling Stockholder has duly authorized (if applicable), executed and delivered, in the form heretofore furnished to the Representatives, an irrevocable Power of Attorney (the "Power of Attorney") appointing David M. Rickey and Joel O. Holliday as attorneys-in-fact (collectively, the "Attorneys" and individually, an "Attorney") and a Letter of Transmittal and Custody Agreement (the "Custody Agreement") with Harris Trust, as custodian (the "Custodian"); each of the Power of Attorney and the Custody Agreement constitutes a valid and binding agreement on the part of such Selling Stockholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; and each of such Selling Stockholder's Attorneys, acting alone, is authorized to execute and deliver this Agreement and the certificate referred to in Section 6(h) hereof on behalf of such Selling Stockholder, to determine the purchase price to be paid by the several Underwriters to such Selling Stockholder as provided in Section 3 hereof, to authorize the delivery of the Selling Stockholder Shares under this Agreement and to duly endorse (in blank or otherwise) the certificate or certificates representing such Shares or a stock power or powers with respect thereto, to accept payment therefor, and otherwise to act on behalf of such Selling Stockholder in connection with this Agreement. (c) All consents, approvals, authorizations and orders required for the execution and delivery by such Selling Stockholder of the Power of Attorney and the Custody Agreement, the execution and delivery by or on behalf of such Selling Stockholder of this Agreement and the sale and delivery of the Selling Stockholder Shares under this Agreement (other than, at the time of the execution hereof (if the Registration Statement has not yet been declared effective by the Commission), the issuance of the order of the Commission 8. declaring the Registration Statement effective and such consents, approvals, authorizations or orders as may be necessary under state or other securities or Blue Sky laws) have been obtained and are in full force and effect; such Selling Stockholder, if other than a natural person, has been duly organized and is validly existing in good standing under the laws of the jurisdiction of its organization as the type of entity that it purports to be; and such Selling Stockholder has full legal right, power and authority to enter into and perform its obligations under this Agreement and such Power of Attorney and Custody Agreement, and to sell, assign, transfer and deliver the Shares to be sold by such Selling Stockholder under this Agreement. (d) Such Selling Stockholder will not, during the Lock-up Period, effect the Disposition of any Securities now owned or hereafter acquired directly by such Selling Stockholder or with respect to which such Selling Stockholder has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or stockholders of such Selling Stockholder, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of Robertson, Stephens & Company LLC. The foregoing restriction is expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than the Selling Stockholder. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Such Selling Stockholder also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the securities held by such Selling Stockholder except in compliance with this restriction. (e) Certificates in negotiable form for all Shares to be sold by such Selling Stockholder under this Agreement, together with a stock power or powers duly endorsed in blank by such Selling Stockholder, have been placed in custody with the Custodian for the purpose of effecting delivery hereunder. (f) This Agreement has been duly authorized by each Selling Stockholder that is not a natural person and has been duly executed and delivered by or on behalf of such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; and the performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of or constitute a default under any bond, debenture, note or other evidence of indebtedness, or under any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder, or any Selling Stockholder Shares hereunder, may be bound or, to the best of such Selling Stockholders' knowledge, result in any violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over such Selling Stockholder or over the properties of such Selling Stockholder, or, if such Selling Stockholder is other than a natural person, result in any violation of any provisions of the charter, bylaws or other organizational documents of such Selling Stockholder. (g) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (h) Such Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Shares. 9. (i) All information furnished by or on behalf of such Selling Stockholder relating to such Selling Stockholder and the Selling Stockholder Shares that is contained in the representations and warranties of such Selling Stockholder in such Selling Stockholder's Power of Attorney or set forth in the Registration Statement or the Prospectus is, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date, was or will be, true, correct and complete, and does not, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date (hereinafter defined) will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make such information not misleading. (j) Such Selling Stockholder will review the Prospectus and will comply with all agreements and satisfy all conditions on its part to be complied with or satisfied pursuant to this Agreement on or prior to the Closing Date, and will advise one of its Attorneys and Robertson, Stephens & Company LLC prior to the Closing Date if any statement to be made on behalf of such Selling Stockholder in the certificate contemplated by Section 6(h) would be inaccurate if made as of the Closing Date. (k) Such Selling Stockholder does not have, or has waived prior to the date hereof, any preemptive right, co-sale right or right of first refusal or other similar right to purchase any of the Shares that are to be sold by the Company or any of the other Selling Stockholders to the Underwriters pursuant to this Agreement; such Selling Stockholder does not have, or has waived prior to the date hereof, any registration right or other similar right to participate in the offering made by the Prospectus, other than such rights of participation as have been satisfied by the participation of such Selling Stockholder in the transactions to which this Agreement relates in accordance with the terms of this Agreement; and such Selling Stockholder does not own any warrants, options or similar rights to acquire, and does not have any right or arrangement to acquire, any capital stock, rights, warrants, options or other securities from the Company, other than those described in the Registration Statement and the Prospectus. (l) Such Selling Stockholder is not aware (without having conducted any investigation or inquiry) that any of the representations and warranties of the Company set forth in Section 2.I. above is untrue or inaccurate in any material respect./3/ 3. Purchase, Sale and Delivery of Shares. On the basis of the ------------------------------------- representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company and the Selling Stockholders agrees, severally and not jointly, to sell to the Underwriters, and each Underwriter agrees, severally and not jointly, to purchase from the Company and the Selling Stockholders, respectively, at a purchase price of $[10-12] per share, the respective number of Firm Shares as hereinafter set forth and Selling Stockholder Shares set forth opposite the names of the Company and the Selling Stockholders in Schedule B hereto. The obligation of each Underwriter to the Company and to each Selling Stockholder shall be to purchase from the Company or such Selling Stockholder that number of Company Shares or Selling Stockholder Shares, as the case may be, which (as nearly as practicable, as determined by you) is in the same proportion to the number of Company Shares or Selling Stockholder Shares, as the case may be, set forth opposite the name of the Company or such Selling Stockholder in Schedule B hereto as the number of Firm Shares which is set forth opposite the name of such Underwriter in Schedule A hereto (subject to adjustment as provided in Section 10) is to the total number of Firm Shares to be purchased by all the Underwriters under this Agreement. The certificates in negotiable form for the Selling Stockholder Shares have been placed in custody (for delivery under this Agreement) under the Custody Agreement. Each Selling Stockholder agrees that the certificates for the Selling Stockholder Shares of such Selling Stockholder so held in custody are subject to the interests of the Underwriters hereunder, that the arrangements made by such Selling Stockholder for such custody, ____________________________________ /3/ Consider removing parenthetical for selling shareholders who are officers or directors of the issuer. 10. including the Power of Attorney is to that extent irrevocable and that the obligations of such Selling Stockholder hereunder shall not be terminated by the act of such Selling Stockholder or by operation of law, whether by the death or incapacity of such Selling Stockholder or the occurrence of any other event, except as specifically provided herein or in the Custody Agreement. If any Selling Stockholder should die or be incapacitated, or if any other such event should occur, before the delivery of the certificates for the Selling Stockholder Shares hereunder, the Selling Stockholder Shares to be sold by such Selling Stockholder shall, except as specifically provided herein or in the Custody Agreement, be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such death, incapacity or other event had not occurred, regardless of whether the Custodian shall have received notice of such death or other event. Delivery of definitive certificates for the Firm Shares to be purchased by the Underwriters pursuant to this Section 3 shall be made against payment of the purchase price therefor by the several Underwriters by certified or official bank check or checks drawn in next-day funds, payable to the order of the Company with regard to the Shares being purchased from the Company, and to the order of the Custodian for the respective accounts of the Selling Stockholders with regard to the Shares being purchased from such Selling Stockholders (and the Company and such Selling Stockholders agree not to deposit and to cause the Custodian not to deposit any such check in the bank on which it is drawn, and not to take any other action with the purpose or effect of receiving immediately available funds, until the business day following the date of its delivery to the Company or the Custodian, as the case may be, and, in the event of any breach of the foregoing, the Company or the Selling Stockholders, as the case may be, shall reimburse the Underwriters for the interest lost and any other expenses borne by them by reason of such breach), at the offices of Venture Law Group, 2800 Sand Hill Road, Menlo Park, California 94025 (or at such other place as may be agreed upon among the Representatives and the Company and the Attorneys), at 7:00 A.M., San Francisco time (a) on the third (3rd) full business day following the first day that Shares are traded, (b) if this Agreement is executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th) full business day following the day that this Agreement is executed and delivered or (c) at such other time and date not later than seven (7) full business days following the first day that Shares are traded as the Representatives and the Company and the Attorneys may determine (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 10 hereof), such time and date of payment and delivery being herein called the "Closing Date;" provided, however, that if the Company has not made -------- ------- available to the Representatives copies of the Prospectus within the time provided in Section 4(d) hereof, the Representatives may, in their sole discretion, postpone the Closing Date until no later than two (2) full business days following delivery of copies of the Prospectus to the Representatives. The certificates for the Firm Shares to be so delivered will be made available to you at such office or such other location including, without limitation, in New York City, as you may reasonably request for checking at least one (1) full business day prior to the Closing Date and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to the Closing Date. If the Representatives so elect, delivery of the Firm Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the Closing Date for the Firm Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. After the Registration Statement becomes effective, the several Underwriters intend to make an initial public offering (as such term is described in Section 11 hereof) of the Firm Shares at an initial public offering price of $[10-12] per share. After the initial public offering, the several Underwriters may, in their discretion, vary the public offering price. The information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), on the inside front cover concerning stabilization and over-allotment by the Underwriters, and under the second and seventh paragraphs under the caption "Underwriting" in any Preliminary 11. Prospectus and in the Prospectus constitutes the only information furnished by the Underwriters to the Company for inclusion in any Preliminary Prospectus, the Prospectus or the Registration Statement, and you, on behalf of the respective Underwriters, represent and warrant to the Company and the Selling Shareholders that the statements made therein do not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 4. Further Agreements of the Company. The Company agrees with the --------------------------------- several Underwriters that: (a) The Company will use its best efforts to cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective as promptly as possible; the Company will use its best efforts to cause any abbreviated registration statement pursuant to Rule 462(b) of the Rules and Regulations as may be required subsequent to the date the Registration Statement is declared effective to become effective as promptly as possible; the Company will notify you, promptly after it shall receive notice thereof, of the time when the Registration Statement, any subsequent amendment to the Registration Statement or any abbreviated registration statement has become effective or any supplement to the Prospectus has been filed; if the Company omitted information from the Registration Statement at the time it was originally declared effective in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus contains such information and has been filed, within the time period prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to such Registration Statement as originally declared effective which is declared effective by the Commission; if the Company files a term sheet pursuant to Rule 434 of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus and term sheet meeting the requirements of Rule 434(b) or (c), as applicable, of the Rules and Regulations, have been filed, within the time period prescribed, with the Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of the final form of Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it will provide evidence satisfactory to you that the Prospectus contains such information and has been filed with the Commission within the time period prescribed; it will notify you promptly of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; promptly upon your request, it will prepare and file with the Commission any amendments or supplements to the Registration Statement or Prospectus which, in the opinion of counsel for the several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in connection with the distribution of the Shares by the Underwriters; it will promptly prepare and file with the Commission, and promptly notify you of the filing of, any amendments or supplements to the Registration Statement or Prospectus which may be necessary to correct any statements or omissions, if, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event shall have occurred as a result of which the Prospectus or any other prospectus relating to the Shares as then in effect would include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; in case any Underwriter is required to deliver a prospectus nine (9) months or more after the effective date of the Registration Statement in connection with the sale of the Shares, it will prepare promptly upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act; and it will file no amendment or supplement to the Registration Statement or Prospectus which shall not previously have been submitted to you a reasonable time prior to the proposed filing thereof or to which you shall reasonably object in writing, subject, however, to compliance with the Act and the Rules and Regulations and the provisions of this Agreement. (b) The Company will advise you, promptly after it shall receive notice or obtain knowledge, of the issuance of any stop order by the Commission suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceeding for that purpose; and it will promptly use its best efforts 12. to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued. (c) The Company will use its best efforts to qualify the Shares for offering and sale under the securities laws of such jurisdictions as you may designate and to continue such qualifications in effect for so long as may be required for purposes of the distribution of the Shares, except that the Company shall not be required in connection therewith or as a condition thereof to qualify as a foreign corporation or to execute a general consent to service of process in any jurisdiction in which it is not otherwise required to be so qualified or to so execute a general consent to service of process. In each jurisdiction in which the Shares shall have been qualified as above provided, the Company will make and file such statements and reports in each year as are or may be required by the laws of such jurisdiction. (d) The Company will furnish to you, as soon as available, and, in the case of the Prospectus and any term sheet or abbreviated term sheet under Rule 434, in no event later than the first (1st) full business day following the first day that Shares are traded, copies of the Registration Statement (three of which will be signed and which will include all exhibits), each Preliminary Prospectus, the Prospectus and any amendments or supplements to such documents, including any prospectus prepared to permit compliance with Section 10(a)(3) of the Act, all in such quantities as you may from time to time reasonably request. Notwithstanding the foregoing, if Robertson, Stephens & Company LLC, on behalf of the several Underwriters, shall agree to the utilization of Rule 434 of the Rules and Regulations, the Company shall provide to you copies of a Preliminary Prospectus updated in all respects through the date specified by you in such quantities as you may from time to time reasonably request. (e) The Company will make generally available to its securityholders as soon as practicable, but in any event not later than the forty-fifth (45th) day following the end of the fiscal quarter first occurring after the first anniversary of the effective date of the Registration Statement, an earnings statement (which will be in reasonable detail but need not be audited) complying with the provisions of Section 11(a) of the Act and covering a twelve (12) month period beginning after the effective date of the Registration Statement. (f) During a period of five (5) years after the date hereof, the Company will furnish to its stockholders as soon as practicable after the end of each respective period, annual reports (including financial statements audited by independent certified public accountants) and unaudited quarterly reports of operations for each of the first three quarters of the fiscal year, and will furnish to you and the other several Underwriters hereunder, upon request (i) concurrently with furnishing such reports to its stockholders, statements of operations of the Company for each of the first three (3) quarters in the form furnished to the Company's stockholders, (ii) concurrently with furnishing to its stockholders, a balance sheet of the Company as of the end of such fiscal year, together with statements of operations, of stockholders' equity, and of cash flows of the Company for such fiscal year, accompanied by a copy of the certificate or report thereon of independent certified public accountants, (iii) as soon as they are available, copies of all reports (financial or other) mailed to stockholders, (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the National Association of Securities Dealers, Inc. ("NASD"), (v) every material press release and every material news item or article in respect of the Company or its affairs which was generally released to stockholders or prepared by the Company or any of its subsidiaries, and (vi) any additional information of a public nature concerning the Company or its subsidiaries, or its business which you may reasonably request. During such five (5) year period, if the Company shall have active subsidiaries, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and its subsidiaries are consolidated, and shall be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (g) The Company will apply the net proceeds from the sale of the Shares being sold by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. 13. (h) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. (i) The Company will file Form SR in conformity with the requirements of the Act and the Rules and Regulations. (j) If the transactions contemplated hereby are not consummated by reason of any failure, refusal or inability on the part of the Company or any Selling Stockholder to perform any agreement on their respective parts to be performed hereunder or to fulfill any condition of the Underwriters' obligations hereunder, or if the Company shall terminate this Agreement pursuant to Section 11(a) hereof, or if the Underwriters shall terminate this Agreement pursuant to Section 11(b)(i), the Company will reimburse the several Underwriters for all out-of-pocket expenses (including fees and disbursements of Underwriters' Counsel) incurred by the Underwriters in investigating or preparing to market or marketing the Shares. (k) If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (l) During the Lock-up Period, the Company will not, without the prior written consent of Robertson Stephens & Company LLC, effect the Disposition of, directly or indirectly, any Securities other than the sale of the Firm Shares and the Option Shares to be sold by the Company hereunder and the Company's issuance of options or Common Stock under the Company's presently authorized 1992 Stock Option Plan, 1997 Directors' Stock Option Plan and 1997 Employee Stock Purchase Plan (collectively, the "Stock Plans"). (m) During a period of ninety (90) days from the effective date of the Registration Statement, the Company will not file a registration statement registering shares under the Stock Plans or other employee benefit plan. 5. Expenses. -------- (a) The Company and the Selling Stockholders agree with each Underwriter that: i) The Company and the Selling Stockholders will pay and bear all costs and expenses in connection with the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus and any amendments or supplements thereto; the printing of this Agreement, the Agreement Among Underwriters, the Selected Dealer Agreement, the Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the Underwriters' Questionnaire and Power of Attorney, and any instruments related to any of the foregoing; the issuance and delivery of the Shares hereunder to the several Underwriters, including transfer taxes, if any, the cost of all certificates representing the Shares and transfer agents' and registrars' fees; the fees and disbursements of counsel for the Company; all fees and other charges of the Company's independent certified public accountants; the cost of furnishing to the several Underwriters copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectus and the Prospectus and any amendments or supplements to any of the foregoing; NASD filing fees and the cost of qualifying the Shares under the laws of such jurisdictions as you may designate (including filing fees and fees and disbursements of Underwriters' Counsel in connection with such NASD filings and Blue Sky qualifications); and all other expenses directly incurred by the Company and the Selling Stockholders in connection with the performance of their obligations hereunder. Any additional expenses incurred as a result of 14. the sale of the Shares by the Selling Stockholders will be borne collectively by the Company and the Selling Stockholders. The provisions of this Section 5(a)(i) are intended to relieve the Underwriters from the payment of the expenses and costs which the Selling Stockholders and the Company hereby agree to pay, but shall not affect any agreement which the Selling Stockholders and the Company may make, or may have made, for the sharing of any of such expenses and costs. Such agreements shall not impair the obligations of the Company and the Selling Stockholders hereunder to the several Underwriters. ii) In addition to its other obligations under Section 8(a) hereof, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(a) hereof, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Company together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) listed from time to time in The Wall Street Journal which represents the base rate on corporate loans posted by a substantial majority of the nation's thirty (30) largest banks (the "Prime Rate"). Any such interim reimbursement payments which are not made to the Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. iii) In addition to their other obligations under Section 8(b) hereof, each Selling Stockholder agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(b) hereof relating to such Selling Stockholder, it will reimburse the Underwriters on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of such Selling Stockholder's obligation to reimburse the Underwriters for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriters shall promptly return such payment to the Selling Stockholders, together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Underwriters within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (b) In addition to their other obligations under Section 8(c) hereof, the Underwriters severally and not jointly agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding described in Section 8(c) hereof, they will reimburse the Company and each Selling Stockholder on a monthly basis for all reasonable legal or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Underwriters' obligation to reimburse the Company and each such Selling Stockholder for such expenses and the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Company and each such Selling Stockholder shall promptly return such payment to the Underwriters together with interest, compounded daily, determined on the basis of the Prime Rate. Any such interim reimbursement payments which are not made to the Company and each such Selling Stockholder within thirty (30) days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. (c) It is agreed that any controversy arising out of the operation of the interim reimbursement arrangements set forth in Sections 5(a)(ii), 5(a)(iii) and 5(b) hereof, including the amounts of any requested reimbursement payments, the method of determining such amounts and the basis on which such amounts 15. shall be apportioned among the reimbursing parties, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. In the event the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to said demand or notice is authorized to do so. Any such arbitration will be limited to the operation of the interim reimbursement provisions contained in Sections 5(a)(ii), 5(a)(iii) and 5(b) hereof and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for expenses which is created by the provisions of Sections 8(a), 8(b) and 8(c) hereof or the obligation to contribute to expenses which is created by the provisions of Section 8(e) hereof. 6. Conditions of Underwriters' Obligations. The obligations of the --------------------------------------- several Underwriters to purchase and pay for the Shares as provided herein shall be subject to the accuracy, as of the date hereof and the Closing Date and any later date on which Option Shares are to be purchased, as the case may be, of the representations and warranties of the Company and the Selling Stockholders herein, to the performance by the Company and the Selling Stockholders of their respective obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 2:00 P.M., San Francisco time, on the date following the date of this Agreement, or such later date as shall be consented to in writing by you; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company, any Selling Stockholder or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of Underwriters' Counsel. (b) All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) Subsequent to the execution and delivery of this Agreement and prior to the Closing Date, or any later date on which Option Shares are to be purchased, as the case may be, there shall not have been any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus; and (d) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, the following opinion of counsel for the Company and the Selling Stockholders, dated the Closing Date or such later date on which Option Shares are to be purchased addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters, to the effect that subject to negotiation: 16. [OPINION SUBJECT TO NEGOTIATION] i) The Company and each Significant Subsidiary/4/ (as that term is defined in Regulation S-X of the Act) has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation; ii) The Company and each Significant Subsidiary has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; iii) The Company and each Significant Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction, if any, in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company and its subsidiaries considered as one enterprise. To such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity other than AMCC (Barbados) Ltd.; iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein, the issued and outstanding shares of capital stock of the Company (including the Selling Stockholder Shares) have been duly and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right; v) All issued and outstanding shares of capital stock of each Significant Subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, have not been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right and are owned by the Company free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest; vi) The Firm Shares or the Option Shares, as the case may be, to be issued by the Company pursuant to the terms of this Agreement have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and nonassessable, and will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right. vii) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold by it hereunder; viii) This Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by you, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except insofar as indemnification provisions may be limited by applicable law and except as enforceability may be limited by ___________________ /4/ Legal opinion shall be limited to subsidiaries that are significant within the meaning of Item 3-01 of Regulation S-X, unless a subsidiary is otherwise of particular importance to the Company (e.g. limited revenues or assets but holds proprietary information valuable to the Company). 17. [OPINION SUBJECT TO NEGOTIATION] bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles; ix) The Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; x) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements (including supporting schedules) and financial data derived therefrom as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations; xi) The information in the Prospectus under the caption "Description of Capital Stock," to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is a fair summary of such matters and conclusions; and the forms of certificates evidencing the Common Stock and filed as exhibits to the Registration Statement comply with Delaware law; xii) The description in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of statutes are accurate and fairly present the information required to be presented by the Act and the applicable Rules and Regulations; xiii) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which are not described or referred to therein or filed as required; xiv) The performance of this Agreement and the consummation of the transactions herein contemplated (other than performance of the Company's indemnification obligations hereunder, concerning which no opinion need be expressed) will not (a) result in any violation of the Company's charter or bylaws or (b) to such counsel's knowledge, result in a material breach or violation of any of the terms and provisions of, or constitute a default under, any bond, debenture, note or other evidence of indebtedness, or any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument known to such counsel to which the Company is a party or by which its properties are bound, or any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations; xv) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except such as have been obtained under the Act or such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Shares by the Underwriters; xvi) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company or any of its subsidiaries of a character 18. [OPINION SUBJECT TO NEGOTIATION] required to be disclosed in the Registration Statement or the Prospectus by the Act or the Rules and Regulations, other than those described therein; xvii) To such counsel's knowledge, neither the Company nor any of its subsidiaries is presently (a) in material violation of its respective charter or bylaws, or (b) in material breach of any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries, or over any of their properties or operations; and xviii) To such counsel's knowledge, except as set forth in the Registration Statement and Prospectus, no holders of Common Stock or other securities of the Company have registration rights with respect to securities of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having rights known to such counsel to registration of such shares of Common Stock or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement or have included securities in the Registration Statement pursuant to the exercise of and in full satisfaction of such rights; xix) Each Selling Stockholder which is not a natural person has full right, power and authority to enter into and to perform its obligations under the Power of Attorney and Custody Agreement to be executed and delivered by it in connection with the transactions contemplated herein; the Power of Attorney and Custody Agreement of each Selling Stockholder that is not a natural person has been duly authorized by such Selling Stockholder; the Power of Attorney and Custody Agreement of each Selling Stockholder has been duly executed and delivered by or on behalf of such Selling Stockholder; and the Power of Attorney and Custody Agreement of each Selling Stockholder constitutes the valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles; xx) Each of the Selling Stockholders has full right, power and authority to enter into and to perform its obligations under this Agreement and to sell, transfer, assign and deliver the Shares to be sold by such Selling Stockholder hereunder; xxi) This Agreement has been duly authorized by each Selling Stockholder that is not a natural person and has been duly executed and delivered by or on behalf of each Selling Stockholder; and xxii) Upon the delivery of and payment for the Shares as contemplated in this Agreement, each of the Underwriters will receive valid marketable title to the Shares purchased by it from such Selling Stockholder, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest. In rendering such opinion, such counsel may assume that the Underwriters are without notice of any defect in the title of the Shares being purchased from the Selling Stockholders. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness 19. [SUBJECT TO NEGOTIATION] of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased, the Registration Statement and any amendment or supplement thereto (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or any later date on which the Option Shares are to be purchased, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or the State of California and Delaware upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company, the Selling Stockholders or officers of the Selling Stockholders (when the Selling Stockholder is not a natural person), and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, as Representatives of the Underwriters, and to Underwriters' Counsel. (e) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, an opinion of [Penny & Edmonds], special patent counsel to the Company, dated the Closing Date and on any later date on which Option Shares are to be purchased, to the effect that [subject to negotiation]: i) The Company is listed in the records of the United States Patent and Trademark Office ("PTO") as the holder of record of the patent applications listed in Exhibit A to such opinion (the "Patent Applications"), and such counsel shall state that number of such Patent Applications, listed on Exhibit B to such opinion (the "Patents"), which have been allowed or indicated as containing allowable subject matters. Written assignments to the Company of all ownership interests in the Patent Applications have been duly authorized, executed and delivered by all of the inventors in accordance with their terms. There is no claim of any party other than the Company to any ownership interest or lien with respect to any of the Patent Applications; ii) other than in connection with assertions or inquiries made by patent office examiners in the ordinary course of the prosecution of the Company's Patent Applications and except as set forth on Exhibit C to such opinion, there is not pending or threatened in writing any action, suit, proceeding or claim by others (A) challenging the validity or scope of the Patent Applications held by or licensed to the Company, or (B) asserting that any third party patent is infringed by the activities of the Company described in the Prospectus or by the manufacture, use or sale of any of the Company's products or other items made and used according to the Patent Applications held by or licensed to the Company; iii) except as set forth on Exhibit C hereto, there is not pending or threatened in writing any action, suit, proceeding or claim by the Company asserting infringement on the part of any third party of the Patent Applications; iv) the statements in the Prospectus under the captions "Risk Factors -- Uncertainty Regarding Patents and Protection of Proprietary Rights" and "Business -- Proprietary Rights," (collectively, the "Intellectual Property Portion") insofar as such statements relate to the Patent Applications or any legal matters, documents and proceedings relating thereto, fairly and accurately present the 20. [OPINION SUBJECT TO NEGOTIATION] information called for with respect to such legal matters, documents and proceedings and fairly and accurately summarize the matters referred to therein; v) Nothing has come to the attention of such counsel that has caused it to believe that the information contained in the Intellectual Property Portion of the Registration Statement, at the time the Registration Statement became effective, or the Prospectus, as of its date and as of the Closing Date or on any later date on which Option Shares are to be purchased, as the case may be, contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein not misleading or that the information in such sections of any amendment or supplement to the Prospectus, as of its respective date, and as of the Closing Date or on any later date on which Option Shares are to be purchased, as the case may be, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (f) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, an opinion of Brobeck, Phleger & Harrison LLP in form and substance satisfactory to you, with respect to the sufficiency of all such corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby as you may reasonably require, and the Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (g) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a letter from Ernst & Young LLP addressed to the Underwriters, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations and based upon the procedures described in such letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than five (5) business days prior to the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from Ernst & Young LLP shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations, (ii) set forth their opinion with respect to their examination of the consolidated balance sheet of the Company as of March 31, 1997 and related consolidated statements of operations, stockholders' equity, and cash flows for the twelve (12) months ended March 31, 1997, (iii) state that Ernst & Young LLP has performed the procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim financial information and providing the report of Ernst & Young LLP as described in SAS 71 on the financial statements for each of the six month periods ended September 30, 1997 and 1996 (the "Interim Financial Statements"), (iv) state that in the course of such review, nothing came to their attention that leads them to believe that any material modifications need to be made to any of the Interim Financial Statements in order for them to be in compliance with generally accepted accounting principles consistently applied across the periods presented, and (v) address other matters agreed upon by Ernst & Young LLP and you. In addition, you shall have received from Ernst & Young LLP a letter addressed to the Company and made available to you for the use of the Underwriters stating that their review of the Company's system of internal accounting 21. controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's consolidated financial statements as of March 31, 1997, did not disclose any weaknesses in internal controls that they considered to be material weaknesses. (h) You shall have received on the Closing Date and on any later date on which Option Shares are to be purchased, as the case may be, a certificate of the Company, dated the Closing Date or such later date on which Option Shares are to be purchased, as the case may be, signed by the Chief Executive Officer and Chief Financial Officer of the Company, to the effect that, and you shall be satisfied that: i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Closing Date or any later date on which Option Shares are to be purchased, as the case may be; ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained all material information required to be included therein by the Act and the Rules and Regulations and in all material respects conformed to the requirements of the Act and the Rules and Regulations, the Registration Statement, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, the Prospectus, and any amendment or supplement thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; and iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (a) any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise, (b) any transaction that is material to the Company and its subsidiaries considered as one enterprise, except transactions entered into in the ordinary course of business, (c) any obligation, direct or contingent, that is material to the Company and its subsidiaries considered as one enterprise, incurred by the Company or its subsidiaries, except obligations incurred in the ordinary course of business, (d) any change in the capital stock or outstanding indebtedness of the Company or any of its subsidiaries that is material to the Company and its subsidiaries considered as one enterprise, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its subsidiaries, or (f) any loss or damage (whether or not insured) to the property of the Company or any of its subsidiaries which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise. 22. 7. You shall be satisfied that, and you shall have received a certificate, dated the Closing Date from the Attorneys for each Selling Stockholder to the effect that, as of the Closing Date, they have not been informed that: (a) The representations and warranties made by such Selling Stockholder herein are not true or correct in any material respect on the Closing Date; or (b) Such Selling Stockholder has not complied with any obligation or satisfied any condition which is required to be performed or satisfied on the part of such Selling Stockholder at or prior to the Closing Date. 8. The Company shall have obtained and delivered to you an agreement from each officer and director of the Company, each Selling Stockholder and each beneficial owner of 5,700 or more shares of Common Stock in writing prior to the date hereof that such person will not, during the Lock-up Period, effect the Disposition of any Securities now owned or hereafter acquired directly by such person or with respect to which such person has or hereafter acquires the power of disposition, otherwise than (i) as a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) as a distribution to partners or stockholders of such person, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, or (iii) with the prior written consent of Robertson, Stephens & Company LLC. The foregoing restriction shall have been expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than such holder. Such prohibited hedging or other transactions would including, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. Furthermore, such person will have also agreed and consented to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by such person except in compliance with this restriction. 9. Option Shares. ------------- (a) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants to the several Underwriters, for the purpose of covering over-allotments in connection with the distribution and sale of the Firm Shares only, a nontransferable option to purchase up to an aggregate of 817,500 Option Shares at the purchase price per share for the Firm Shares set forth in Section 3 hereof. Such option may be exercised by the Representatives on behalf of the several Underwriters on one (1) or more occasions in whole or in part during the period of thirty (30) days after the date on which the Firm Shares are initially offered to the public, by giving written notice to the Company. The number of Option Shares to be purchased by each Underwriter upon the exercise of such option shall be the same proportion of the total number of Option Shares to be purchased by the several Underwriters pursuant to the exercise of such option as the number of Firm Shares purchased by such Underwriter (set forth in Schedule A hereto) bears to the total number of Firm Shares purchased by the several Underwriters (set forth in Schedule A hereto), adjusted by the Representatives in such manner as to avoid fractional shares. Delivery of definitive certificates for the Option Shares to be purchased by the several Underwriters pursuant to the exercise of the option granted by this Section 7 shall be made against payment of the purchase price therefor by the several Underwriters by certified or official bank check or checks drawn in next-day funds, payable to the order of the Company (and the Company agrees not to deposit any such check in the bank on which it is drawn, and not to take any other action with the purpose or effect of receiving immediately available funds, until the business day following the date of its delivery to the Company). In the event of any breach of the foregoing, the Company shall reimburse the Underwriters for the interest lost and any other expenses borne by them by reason of such breach. Such delivery and payment shall take place at the offices of Venture Law Group, 2800 23. Sand Hill Road, Menlo Park, California 94025 or at such other place as may be agreed upon among the Representatives and the Company (i) on the Closing Date, if written notice of the exercise of such option is received by the Company at least two (2) full business days prior to the Closing Date, or (ii) on a date which shall not be later than the third (3rd) full business day following the date the Company receives written notice of the exercise of such option, if such notice is received by the Company less than two (2) full business days prior to the Closing Date. The certificates for the Option Shares to be so delivered will be made available to you at such office or such other location including, without limitation, in New York City, as you may reasonably request for checking at least one (1) full business day prior to the date of payment and delivery and will be in such names and denominations as you may request, such request to be made at least two (2) full business days prior to such date of payment and delivery. If the Representatives so elect, delivery of the Option Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. It is understood that you, individually, and not as the Representatives of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by you prior to the date of payment and delivery for the Option Shares to be purchased by such Underwriter or Underwriters. Any such payment by you shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. (b) Upon exercise of any option provided for in Section 7(a) hereof, the obligations of the several Underwriters to purchase such Option Shares will be subject (as of the date hereof and as of the date of payment and delivery for such Option Shares) to the accuracy of and compliance with the representations, warranties and agreements of the Company herein, to the accuracy of the statements of the Company and officers of the Company made pursuant to the provisions hereof, to the performance by the Company of its obligations hereunder, to the conditions set forth in Section 6 hereof, and to the condition that all proceedings taken at or prior to the payment date in connection with the sale and transfer of such Option Shares shall be satisfactory in form and substance to you and to Underwriters' Counsel, and you shall have been furnished with all such documents, certificates and opinions as you may request in order to evidence the accuracy and completeness of any of the representations, warranties or statements, the performance of any of the covenants or agreements of the Company or the satisfaction of any of the conditions herein contained. (c) The Company and the Selling Stockholders shall have furnished to you such further certificates and documents as you shall reasonably request (including certificates of officers of the Company, the Selling Stockholders or officers of the Selling Stockholders (when the Selling Stockholder is not a natural person) as to the accuracy of the representations and warranties of the Company and the Selling Stockholders herein, as to the performance by the Company and the Selling Stockholders of their respective obligations hereunder and as to the other conditions concurrent and precedent to the obligations of the Underwriters hereunder. All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory to Underwriters' Counsel. The Company and the Selling Stockholders will furnish you with such number of conformed copies of such opinions, certificates, letters and documents as you shall reasonably request. 10. Indemnification and Contribution. -------------------------------- (a) The Company agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject (including, without limitation, in its capacity as an Underwriter or as a "qualified independent underwriter" within the meaning of Schedule E of the Bylaws of the NASD), under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of the Company herein contained, (ii) any 24. untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the -------- ------- Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such Preliminary Prospectus or the Prospectus, or any such amendment or supplement thereto, in reliance upon, and in conformity with, written information relating to any Underwriter furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof and, provided further, that the indemnity agreement provided -------- ------- in this Section 8(a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person within the time required by the Act and the Rules and Regulations, unless such failure is the result of noncompliance by the Company with Section 4(d) hereof. The indemnity agreement in this Section 8(a) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which the Company may otherwise have. (b) Each Selling Stockholder, severally and not jointly, agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject (including, without limitation, in its capacity as an Underwriter or as a "qualified independent underwriter" within the meaning of Schedule E or the Bylaws of the NASD) under the Act, the Exchange Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of such Selling Stockholder herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(b) to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or such Underwriter by such Selling Stockholder, directly or through such Selling Stockholder's representatives, specifically for use in the preparation thereof, and agrees to reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement -------- ------- provided in this Section 8(b) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, damages, liabilities or actions based upon any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected had not been sent or given to such person within the time required by the Act and the Rules and Regulations, unless such failure is the result of noncompliance by the Company with Section 4(d) hereof. 25. The indemnity agreement in this Section 8(b) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which such Selling Stockholder may otherwise have. (c) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company and each Selling Stockholder against any losses, claims, damages or liabilities, joint or several, to which the Company or such Selling Stockholder may become subject under the Act or otherwise, specifically including, but not limited to, losses, claims, damages or liabilities (or actions in respect thereof) arising out of or based upon (i) any breach of any representation, warranty, agreement or covenant of such Underwriter herein contained, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or the omission or alleged omission to state therein a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in the case of subparagraphs (ii) and (iii) of this Section 8(c) to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter, directly or through you, specifically for use in the preparation thereof, and agrees to reimburse the Company and each such Selling Stockholder for any legal or other expenses reasonably incurred by the Company and each such Selling Stockholder in connection with investigating or defending any such loss, claim, damage, liability or action. The indemnity agreement in this Section 8(c) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each officer of the Company who signed the Registration Statement and each director of the Company, each Selling Stockholder and each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Act or the Exchange Act. This indemnity agreement shall be in addition to any liabilities which each Underwriter may otherwise have. (d) Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against any indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 8. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it shall elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any such action -------- ------- include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with appropriate local counsel) approved by the indemnifying party representing all the indemnified parties under Section 8(a), 8(b) or 8(c) hereof who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action or (iii) the indemnifying 26. party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved the terms of such settlement; provided -------- that such consent shall not be unreasonably withheld. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnification could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on all claims that are the subject matter of such proceeding. (e) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this Section 8 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 8 provides for indemnification in such case, all the parties hereto shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that, except as set forth in Section 8(f) hereof, the Underwriters severally and not jointly are responsible pro rata for the portion represented by the percentage that the underwriting discount bears to the initial public offering price, and the Company and the Selling Stockholders are responsible for the remaining portion, provided, however, that (i) no Underwriter shall be required to contribute any - -------- ------- amount in excess of the amount by which the underwriting discount applicable to the Shares purchased by such Underwriter exceeds the amount of damages which such Underwriter has otherwise required to pay and (ii) no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. The contribution agreement in this Section 8(e) shall extend upon the same terms and conditions to, and shall inure to the benefit of, each person, if any, who controls any Underwriter, the Company or any Selling Stockholder within the meaning of the Act or the Exchange Act and each officer of the Company who signed the Registration Statement and each director of the Company. (f) The liability of each Selling Stockholder under the representations, warranties and agreements contained herein and under the indemnity agreements contained in the provisions of this Section 8 shall be limited to an amount equal to the initial public offering price of the Selling Stockholder Shares sold by such Selling Stockholder to the Underwriters minus the amount of the underwriting discount paid thereon to the Underwriters by such Selling Stockholder. The Company and such Selling Stockholders may agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible. (g) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 8, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 8 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Act and the Exchange Act. 11. Representations, Warranties, Covenants and Agreements to Survive ---------------------------------------------------------------- Delivery. All representations, warranties, covenants and agreements of the - -------- Company, the Selling Stockholders and the Underwriters herein or in certificates delivered pursuant hereto, and the indemnity and contribution agreements contained in Section 8 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter within the meaning of the Act or the Exchange Act, or by or on behalf of the Company or any Selling Stockholder, or any of their officers, directors or controlling persons within the meaning of the Act or the Exchange Act, and shall survive the delivery of the Shares to the several Underwriters hereunder or termination of this Agreement. 27. 12. Substitution of Underwriters. If any Underwriter or Underwriters ---------------------------- shall fail to take up and pay for the number of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder upon tender of such Firm Shares in accordance with the terms hereof, and if the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters so agreed but failed to purchase does not exceed 10% of the Firm Shares, the remaining Underwriters shall be obligated, severally in proportion to their respective commitments hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter or Underwriters. If any Underwriter or Underwriters so defaults and the aggregate number of Firm Shares which such defaulting Underwriter or Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining Underwriters shall have the right, but shall not be obligated, to take up and pay for (in such proportions as may be agreed upon among them) the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If such remaining Underwriters do not, at the Closing Date, take up and pay for the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase, the Closing Date shall be postponed for twenty- four (24) hours to allow the several Underwriters the privilege of substituting within twenty-four (24) hours (including non-business hours) another underwriter or underwriters (which may include any nondefaulting Underwriter) satisfactory to the Company. If no such underwriter or underwriters shall have been substituted as aforesaid by such postponed Closing Date, the Closing Date may, at the option of the Company, be postponed for a further twenty-four (24) hours, if necessary, to allow the Company the privilege of finding another underwriter or underwriters, satisfactory to you, to purchase the Firm Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If it shall be arranged for the remaining Underwriters or substituted underwriter or underwriters to take up the Firm Shares of the defaulting Underwriter or Underwriters as provided in this Section 10, (i) the Company shall have the right to postpone the time of delivery for a period of not more than seven (7) full business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement, supplements to the Prospectus or other such documents which may thereby be made necessary, and (ii) the respective number of Firm Shares to be purchased by the remaining Underwriters and substituted underwriter or underwriters shall be taken as the basis of their underwriting obligation. If the remaining Underwriters shall not take up and pay for all such Firm Shares so agreed to be purchased by the defaulting Underwriter or Underwriters or substitute another underwriter or underwriters as aforesaid and the Company shall not find or shall not elect to seek another underwriter or underwriters for such Firm Shares as aforesaid, then this Agreement shall terminate. In the event of any termination of this Agreement pursuant to the preceding paragraph of this Section 10, neither the Company nor any Selling Stockholder shall be liable to any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall have failed, otherwise than for some reason permitted under this Agreement, to purchase the number of Firm Shares agreed by such Underwriter to be purchased hereunder, which Underwriter shall remain liable to the Company, the Selling Stockholders and the other Underwriters for damages, if any, resulting from such default) be liable to the Company or any Selling Stockholder (except to the extent provided in Sections 5 and 8 hereof). The term "Underwriter" in this Agreement shall include any person substituted for an Underwriter under this Section 10. 13. Effective Date of this Agreement and Termination. ------------------------------------------------ (a) This Agreement shall become effective at the earlier of (i) 6:30 A.M., San Francisco time, on the first full business day following the effective date of the Registration Statement, or (ii) the time of the initial public offering of any of the Shares by the Underwriters after the Registration Statement becomes effective. The time of the initial public offering shall mean the time of the release by you, for publication, of the first newspaper advertisement relating to the Shares, or the time at which the Shares are first generally offered by the Underwriters to the public by letter, telephone, telegram or telecopy, whichever shall first occur. By giving notice as set forth in Section 12 before the time this Agreement becomes effective, you, as Representatives of the several 28. Underwriters, or the Company, may prevent this Agreement from becoming effective without liability of any party to any other party, except as provided in Sections 4(j), 5 and 8 hereof. (b) You, as Representatives of the several Underwriters, shall have the right to terminate this Agreement by giving notice as hereinafter specified at any time on or prior to the Closing Date or on or prior to any later date on which Option Shares are to be purchased, as the case may be, (i) if the Company or any Selling Stockholder shall have failed, refused or been unable to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled is not fulfilled, including, without limitation, any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse, or (ii) if additional material governmental restrictions, not in force and effect on the date hereof, shall have been imposed upon trading in securities generally or minimum or maximum prices shall have been generally established on the New York Stock Exchange or on the American Stock Exchange or in the over the counter market by the NASD, or trading in securities generally shall have been suspended on either such exchange or in the over the counter market by the NASD, or if a banking moratorium shall have been declared by federal, New York or California authorities, or (iii) if the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as to interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured, or (iv) if there shall have been a material adverse change in the general political or economic conditions or financial markets as in your reasonable judgment makes it inadvisable or impracticable to proceed with the offering, sale and delivery of the Shares, or (v) if there shall have been an outbreak or escalation of hostilities or of any other insurrection or armed conflict or the declaration by the United States of a national emergency which, in the reasonable opinion of the Representatives, makes it impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. In the event of termination pursuant to subparagraph (i) above, the Company shall remain obligated to pay costs and expenses pursuant to Sections 4(j), 5 and 8 hereof. Any termination pursuant to any of subparagraphs (ii) through (v) above shall be without liability of any party to any other party except as provided in Sections 5 and 8 hereof. If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 11, you shall promptly notify the Company by telephone, telecopy or telegram, in each case confirmed by letter. If the Company shall elect to prevent this Agreement from becoming effective, the Company shall promptly notify you by telephone, telecopy or telegram, in each case, confirmed by letter. 14. Notices. All notices or communications hereunder, except as ------- herein otherwise specifically provided, shall be in writing and if sent to you shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to you c/o Robertson, Stephens & Company LLC, 555 California Street, Suite 2600, San Francisco, California 94104, telecopier number (415) 781-0278, Attention: General Counsel; if sent to the Company, such notice shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to Applied Micro Circuits Corporation, 6290 Sequence Drive, San Diego, California 92121 telecopier number (619) 535-6800, Attention: David M. Rickey, Chief Executive Officer; if sent to one or more of the Selling Stockholders, such notice shall be sent mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to David M. Rickey and Joel O. Holliday, as Attorneys-in-Fact for the Selling Stockholders, at 6290 Sequence Drive, San Diego, California 92121 telecopier number (619) 535-6800. 15. Parties. This Agreement shall inure to the benefit of and be ------- binding upon the several Underwriters and the Company and the Selling Stockholders and their respective executors, administrators, successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person or entity, other than the parties hereto and their respective executors, administrators, successors and assigns, and the controlling persons within the meaning of the Act or the Exchange Act, officers and directors referred to in Section 8 hereof, any legal or equitable right, remedy or claim in respect of this Agreement or any provisions herein contained, this Agreement and all conditions and provisions hereof being intended to be and being 29. for the sole and exclusive benefit of the parties hereto and their respective executors, administrators, successors and assigns and said controlling persons and said officers and directors, and for the benefit of no other person or entity. No purchaser of any of the Shares from any Underwriter shall be construed a successor or assign by reason merely of such purchase. In all dealings with the Company and the Selling Stockholders under this Agreement, you shall act on behalf of each of the several Underwriters, and the Company and the Selling Stockholders shall be entitled to act and rely upon any statement, request, notice or agreement made or given by you jointly or by Robertson, Stephens & Company LLC on behalf of you. 16. Applicable Law. This Agreement shall be governed by, and -------------- construed in accordance with, the laws of the State of California. 17. Counterparts. This Agreement may be signed in several ------------ counterparts, each of which will constitute an original. 30. If the foregoing correctly sets forth the understanding among the Company, the Selling Stockholders and the several Underwriters, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company, the Selling Stockholders and the several Underwriters. Very truly yours, APPLIED MICRO CIRCUITS CORPORATION By ______________________________ David M. Rickey, President and Chief Executive Officer SELLING STOCKHOLDERS By ________________________________ Attorney-in-Fact for the Selling Stockholders named in Schedule B hereto Accepted as of the date first above written: ROBERTSON, STEPHENS & COMPANY LLC On their behalf and on behalf of each of the several Underwriters named in Schedule A hereto. By ROBERTSON, STEPHENS & COMPANY LLC By ROBERTSON, STEPHENS & COMPANY GROUP, L.L.C. By _________________________ Authorized Signatory 31. SCHEDULE A
Number of Firm Shares Underwriters To Be - ---------------------------------- Purchased ----------- Robertson, Stephens & Company LLC............ Montgomery Securities........................ Cowen & Company.............................. ----------- Total................................... ===========
SCHEDULE B
Number of Firm Shares To Company Be Sold ------------------- --------- Applied Micro Circuits Corporation ----------- Total........................ =========== Name of Selling Stockholder Number of [------------------------------- Selling Stockholder Shares To Be Sold ----------- ----------- Total........................ ===========
EX-3.1 3 AMENDED & RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 PAGE 1 State of Delaware Office of the Secretary of State I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED CERTIFICATE OF "APPLIED MICRO CIRCUITS CORPORATION", FILED IN THIS OFFICE ON THE TWENTIETH DAY OF MAY, A.D. 1997, AT 6 O'CLOCK P.M. A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT COUNTY RECORDER OF DEEDS FOR RECORDING. [SIGNATURE] ----------- Edward J. Freel, Secretary of State [SEAL HERE] AUTHENTICATION: 8475268 2116925 8100 DATE: 05-21-97 971165480 RESTATED CERTIFICATE OF INCORPORATION OF APPLIED MICRO CIRCUITS CORPORATION I, DAVID RICKEY, certify that: 1. I am the President of Applied Micro Circuits Corporation, a Delaware corporation (the "Corporation'). 2. The Corporation's present name is Applied Micro Circuits Corporation and the Corporation's name will not be changed by the following amendment and restatement of the Corporation's Certificate of Incorporation. 3. The Corporation's original Certificate of Incorporation was filed with the Secretary of the State of Delaware on February 6, 1987. 4. The Certificate of Incorporation of this Corporation is amended and restated to read in full as follows: 2 FIRST: Name. The name of this Corporation is Applied Micro Circuits ---- Corporation. SECOND: Registered Office. The address of the registered office of the ----------------- Corporation in the State of Delaware is 15 East North Street, in the City of Dover, County of Kent, and the name of its registered agent at that address is Incorporating Services, Ltd. THIRD: Purposes. The purpose of this Corporation is to engage in any -------- lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. FOURTH Capital Stock. -------------- A. Authorized Capital. The Corporation shall be authorized to issue two ------------------- classes of shares which shall be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation shall have authority to issue is 35,850,000 and the aggregate amount of the par value of all shares that are to have a par value shall be $358,500. The total number of shares of Common Stock which this Corporation is authorized to issue is 34,500,000, each share to have a par value of $.01. The total number of shares of Preferred Stock which this Corporation is authorized to issue is 1,350,000, each share to have a par value of $.01. FIFTH: Rights Preferences, Privileges and Restrictions of Preferred and ---------------------------------------------------------------- Common Stock. 410,000 shares of Preferred Stock are hereby designated Preferred - ------------ Stock Series 1; 300,000 shares are hereby designated Preferred Stock Series 2, and 591,964 shares are hereby designated as Preferred Stock Series 3. The rights, preferences, privileges and restrictions granted to and imposed upon the Preferred Stock Series 1, the Preferred Stock Series 2, the Preferred Stock Series 3 and the Common Stock are as follows: 1. Definitions -- ----------- For purposes of this Article Fifth, the following definitions shall apply: (a) "Board" shall mean the Board of Directors of the Corporation. (b) "Corporation" shall mean this Corporation. (c) "Original Issue Date" shall mean the date on which the first share of a series of Preferred Stock was originally issued. (d) "Preferred Stock" shall collectively refer to Preferred Stock Series 1, Preferred Stock Series 2 and Preferred Stock Series 3. (e) "Subsidiary" shall mean any Corporation at least 50% of whose outstanding voting stock shall at the time be owned directly or indirectly by the Corporation or by one or more Subsidiaries. 3 2. Dividends -- --------- The holders of the outstanding shares of Preferred Stock shall not be entitled to any dividend payments except as provided herein. The holders of the outstanding shares of Common Stock shall be entitled to receive dividends out of finds of the Corporation legally available for the declaration of dividends, as and when declared by the Board of Directors, provided that no dividend whatsoever (other than a dividend payable solely in Common Stock) shall be paid or declared, and no distribution shall be made, on any Common Stock unless the same dividends shall be paid or declared, and the same distribution shall be made, with respect to the Preferred Stock. For purposes of receipt of dividends, each share of Preferred Stock shall be treated as the number of shares of Common Stock equal to the number of shares of Common Stock into which such shares of Preferred Stock could be converted, pursuant to the provisions of paragraph 6 hereof (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), at the record date for the determination of stockholders entitled to dividends. 3. Liquidation Rights -- ------------------ (a) In the event of any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, the holders of each share of Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, before any payment or declaration and setting apart for payment of any amount shall be made in respect of the Common Stock, all amount equal to $21.00 per share. (b) If upon any liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary, the assets to be distributed to the holders of the Preferred Stock shall be insufficient to permit the payment to such stockholders of the full preferential amount aforesaid under (a), then all of the assets of the Corporation to be distributed shall be distributed ratably among the holders of the Preferred Stock in proportion to the full preferential amount each such holder is entitled to receive. (c) After the payment or distribution to the holders of the Preferred Stock of the full preferential amounts aforesaid, the holders of the Common Stock then outstanding shall be entitled to receive ratably all the assets of the Corporation. 4. Redemption -- ---------- (a) At, or at any time after, December 31, 1992, and from time to time thereafter, the Corporation may, at the option of the Board of Directors, and only with the vote or written consent of 60% of the outstanding shares of the Preferred Stock, redeem the Preferred Stock Series l, the Preferred Stock Series 2 and the Preferred Stock Series 3, or any of them, in whole or in part, as provided herein. The redemption price (hereinafter referred to as the "Redemption Price") for each share of Preferred Stock Series 1, for each share of Preferred Stock Series 2 and for each share of Preferred Stock Series 3 shall be an amount in cash equal to $23.10 per share, plus all dividends declared but unpaid with respect to such share to the Redemption Date (as defined below). In the event of the redemption of only part of the then outstanding Preferred Stock, the corporation shall 4 effect its redemption ratably among and within the series according to the number of shares held by each holder of the Preferred Stock being redeemed. (b) At least thirty (30) days and not more than sixty (60) days prior to the date fixed for any such redemption of the Preferred Stock (hereinafter referred to as the "Redemption Date"), written notice hereinafter referred to as the "Redemption Notice") shall be mailed, postage prepaid, to each holder of record of Preferred Stock at his post office address last shown on the records of the Corporation or given by the holder to the Corporation for purposes of notice. For each series of Preferred Stock, the Redemption Notice shall state: (i) Whether all or less than all of the outstanding shares of the series are to be redeemed, and the total number of shares being redeemed of the series; (ii) The number of shares of the series held by the holder that the Corporation intends to redeem; (iii) The Redemption Date and the Redemption Price for that series; (iv) The date upon which the holder's Conversion Rights (as hereinafter defined) as to such shares terminate, and (v) That the holder is to surrender to the Corporation, in the manner and at the place designated, his certificate or certificates representing the shares of the series to be redeemed. (c) On or before the Redemption Date, each holder of shares of a series of Preferred Stock to be redeemed, unless such holder has exercised his right to convert the shares as provided in paragraph 6 hereof, shall surrender the certificate or certificates representing such shares to the Corporation, in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price for such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event less than all of the shares represented by such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (d) If the Redemption Notice shall have been duly given, and if on the Redemption Date the Redemption Price is either paid or made available for payment through the deposit arrangement specified in subparagraph (e) below, then notwithstanding that the certificates evidencing any of the shares of Preferred Stock Series 1, any of the shares of Preferred Stock Series 2 or any of the shares of Preferred Stock Series 3 so called for redemption shall not have been surrendered, all rights with respect to such shares shall forthwith after the Redemption Date terminate, except only the right of the holders to receive the Redemption Price without interest upon surrender of their certificate or certificates therefor. (e) At least three (3) days prior to the Redemption Date, the Corporation shall deposit with any bank or trust company within or outside the State of Delaware, having a capital and surplus of at least $100,000,000, as a trust fund for the benefit of holders of Preferred Stock, a sum 5 equal to the aggregate Redemption Price of all shares of Preferred Stock Series 1 called for redemption and not yet redeemed, plus the aggregate Redemption Price of all shares of Preferred Stock Series 2 called for redemption and not yet redeemed, plus the aggregate Redemption Price of all shares of Preferred Stock Series 3 called for redemption and not yet redeemed, with irrevocable instructions and authority to the bank or trust company to pay, on or after the Redemption Date or prior thereto, the Redemption Price to the respective holders upon the surrender of their share certificates. All interest on the sum so deposited shall be for the account of the Corporation. From and after the date of such deposit, the shares so called for redemption shall be redeemed. The deposit shall constitute full payment of the shares to their holders, and from and after the date of the deposit the shares shall be deemed to be no longer outstanding, and the holders thereof shall cease to be stockholders with respect to such shares, and shall have no rights with respect thereto, except the rights to receive from the bank or trust company payment of the Redemption Price of the shares, without interest, upon surrender of their certificates therefor, and the right to convert such shares as provided in paragraph 6 hereof. Any funds so deposited and unclaimed at the end of one year from the Redemption Date shall be released or repaid to the Corporation, after which the holders of shares called for redemption shall be entitled to receive payment of the Redemption Price only from the Corporation. 5. Voting Rights -- ------------- (a) Except as otherwise required by law, the holder of each share of Preferred stock shall be entitled to notice of any stockholders' meeting, to vote on all matters submitted to a stockholder for a vote and shall be entitled to one vote for each share of Common Stock into which such share of Preferred Stock could be converted, pursuant to the provisions of paragraph 6 hereof (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), at the record date for the determination of stockholders entitled to vote on such matters or, if no such record date is established, at the date such vote is taken or any written consent of stockholders is solicited. (b) Except as otherwise expressly provided herein, or as required by law, the holders of shares of Preferred Stock Series 1, Preferred Stock Series 2, Preferred Stock Series 3 and Common Stock shall vote together and not as separate classes. (c) At a stockholders' meeting at which directors are to be elected, no stockholder shall be entitled to accumulate votes (i.e., cast for any one or more candidates a number of votes greater than the number of the stockholder's shares in accordance with paragraph 5(a) unless the candidates' names have been placed in nomination prior to commencement of the voting and a stockholder has given notice prior to commencement of the voting of the stockholder's intention to accumulate votes. If any stockholder has given such a notice, then every stockholder entitled to vote may accumulate votes for candidates in nomination and give one candidate a number of votes equal to the number of directors to be elected, multiplied by the number of votes to which that stockholder's shares are entitled, or distribute the stockholder's votes on the same principle among any or all of the candidates, as the stockholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. 6 6. Conversion. -- ---------- The holders of the Preferred Stock Series 1, the Preferred Stock Series 2 and the Preferred stock Series 3 shall have the following conversion rights ("Conversion Rights"): (a) Right to Convert. --- ----------------- (i) Each share of Preferred Stock shall be convertible, without the payment of any additional consideration by the holder thereof and at the option of the holder thereof, at any time after the date of issuance of such shares and on or prior to the Redemption Date, if any, as may have been fixed in any Redemption Notice, at the office of the Corporation or any transfer agent for the Preferred Stock or Common Stock, into fully paid and nonassessable shares of Common Stock, at the respective Conversion Prices (as hereafter defined) therefor in effect at the time of conversion determined as provided herein. (ii) Before any holder of Preferred Stock shall be entitled to convert the same into shares of Common Stock, he shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or of any transfer agent for the Common Stock, and shall give written notice to the Corporation at such office that he elects to convert the same and shall state therein the number of shares of Preferred Stock being converted and his name or the name or names of the nominee or nominees in which he wishes the certificate or certificates for shares of Common Stock to be issued. Thereupon the Corporation shall promptly issue and deliver at such office to such holder of Preferred Stock, or to such holder's nominee or nominees, a certificate or certificates for the number of shares of Common Stock to which he shall be entitled, together with cash in lieu of any fraction of a share. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. (b) Automatic Conversion. In addition to the Conversion rights set forth --- -------------------- in paragraph 6(a) herein, the holders of Preferred Stock shall have the following additional Conversion Rights: (i) Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Prices, immediately upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation in which the aggregate gross proceeds received by the corporation, at the public offering price, equal or exceed $10,000,000, and the public offering price per share of which equals or exceeds $4.20 per share of Common Stock (appropriately adjusted for subdivisions and combinations of shares of Common Stock). 7 Upon the occurrence of the event specified in subsection (i) of this paragraph (6)(b), the outstanding shares of the series of Preferred Stock to be converted shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or any transfer agent for the Common Stock, and the stock certificates representing the outstanding shares of the series of Preferred Stock to be converted shall be deemed to represent and consist of the Common Stock into which such Preferred Stock is deemed converted provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of the Preferred Stock being converted are either delivered to the Corporation or any transfer agent, as hereinafter provided, or the holder notifies the Corporation or any transfer agent, as hereinafter provided, that such certificates have been lost, stolen, or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. Upon the automatic conversion of the Preferred Stock, the holders of such Preferred Stock shall surrender the certificates representing such shares at the office of the Corporation or of any transfer agent for the Common Stock. Thereupon, there shall be issued and delivered to such holder, promptly at such office and in his name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock, into which the shares of the Preferred Stock surrendered were convertible on the date on which such automatic conversion occurred, together with cash in lieu of any fraction of a share. (c) Conversion Price. The Preferred Stock Series 1 shall be convertible --- ---------------- into the number of shares of Common Stock that results from dividing the Conversion Price per share in effect at the time of conversion into $21.00 for each share of Preferred Stock Series 1 being converted; the Conversion Price per share for the Preferred Stock Series 1 shall initially be $.875. The Preferred Stock Series 2 and Preferred Stock Series 3 shall be convertible into the number of shares of Common Stock that results from dividing the Conversion Price per share in effect at the time of conversion into $21.00 for each share of Preferred Stock Series 2 and each share of Preferred Stock Series 3 being converted; the Conversion Price per share of Preferred Stock Series 2 shall initially be $2.10; and the Conversion Price per share of Preferred Stock Series 3 shall initially bc $1.75. The Initial Conversion Price for each class of Preferred Stock shall be subject to adjustment from time to time as provided herein. (d) Adjustment for Stock Splits and Combinations. If the Corporation --- -------------------------------------------- shall at any time or from time to time after the Original Issue Date effect a subdivision of the outstanding Common Stock, the Conversion Prices then in effect immediately before that subdivision shall be proportionately decreased, and, conversely, if the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock the Conversion Prices then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph 6(d) shall become effective at the close of business on the date the subdivision or combination becomes effective. (e) Adjustment for Certain Dividends and Distributions. In the event the --- -------------------------------------------------- Corporation at any time, or from time to time after the Original Issue Date, shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive a dividend or other 8 distribution payable in additional shares of Common Stock, then and in each such event the Conversion Price for each series of Preferred Stock then in effect shall be decreased, in the case of such issuance, at the close of business on the date immediately prior to the date fixed for such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price for each series of Preferred Stock then in effect by a fraction: (i) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the date fixed for such issuance or the close of business on such record date, and (ii) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the date fixed for such issuance or the close of business on such record date, plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price for such series of Preferred Stock shall be recomputed accordingly as of the close of business on such record date, and thereafter the Conversion Price for such series of Preferred Stock shall be adjusted pursuant to this paragraph 6(e) as of the time of actual payment of such dividends or distributions. (f) Adjustment for Reclassification, Exchange. Or Substitution. If the --- ---------------------------------------------------------- Common Stock issuable upon the conversion of the Preferred Stock shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification, or otherwise (other than a subdivision or combination of shares or stock dividend provided for above), then and in each such event the holder of each share of Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification, or other change by holders of the number of shares of Common Stock into which such shares of Preferred Stock might have been converted immediately prior to such reorganization, reclassification, or change, all subject to further adjustment as provided herein. (g) Reorganization, Mergers. Consolidations, or Sales of Assets. If at --- ----------------------------------------------------------- any time or from time to time there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification, or exchange of shares provided for elsewhere in this paragraph 6) or a merger or consolidation of the Corporation with or into another corporation, or the sale of all or substantially all of the Corporation's properties and assets to any other person, then, as a part of such reorganization, merger, consolidation, or sale, provision shall be made so that the holders of the Preferred Stock shall thereafter be entitled to receive, upon conversion of the Preferred Stock, the number of shares of stock or other securities or property of the Corporation, or of the successor corporation resulting from such merger or consolidation or sale, to which a holder of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger, consolidation, or sale. In any such case, appropriate adjustment shall be made in the application of the provisions of this paragraph 6 with respect to the rights of the holders of the Preferred Stock 9 after the reorganization, merger, consolidation or sale to the end that the provisions of this paragraph 6 (including adjustment of the conversion Prices then in effect and the number of shares purchasable upon conversion of the Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. (h) Sale of Shares Below Conversion Price. --- -------------------------------------- (i) If at any time or from time to time after the Original Issue Date, the Corporation shall issue or sell additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock as provided in paragraph 6(e) above and other than upon a subdivision or combination of shares of Common Stock as provided in paragraph 6(d) above, for a consideration per share less than the then existing Conversion Price for a series of Preferred Stock (or, if an adjusted Conversion Price shall be in effect by reason of a previous adjustment, less than such adjusted Conversion Price), then and in each case the then Conversion Price for such series of Preferred Stock shall be reduced as of the opening of business on the date of such issue or sale, to a price determined by multiplying that Conversion Price by a fraction (i) the numerator of which shall be (A) the number of shares of Common Stock outstanding immediately prior to such issue or sale (including shares of Common Stock issuable upon conversion of any Preferred Stock or other convertible securities), plus (B) the number of shares of Common Stock that the aggregate consideration received by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at such Conversion Price, and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issue or sale (including shares of Common Stock issuable upon conversion of any Preferred Stock or other convertible securities), plus the number of such Additional Shares of Common Stock so issued. (ii) For the purpose of making any adjustment in the Conversion Price or number of shares of Common Stock purchasable on conversion of Preferred Stock as provided above, the consideration received by the Corporation for any issue or sale of securities shall, (1) to the extent it consists of cash, be computed at the net amount of cash received by the Corporation after deduction of any underwriting or similar commissions, concessions, or compensation paid or allowed by the Corporation in connection with such issue or sale; (2) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board; and (3) if Additional Shares of Common Stock, Convertible Securities (as hereinafter defined) or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Corporation for a consideration that covers both, be computed as the portion of the consideration so received that may be reasonably determined in good 10 faith by the Board to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. (iii) For the purpose of the adjustment provided in subsection (1) of this paragraph 6(h), if at any time or from time to time after the Original Issue Date the Corporation shall issue any rights or options for the purchase of, or stock or other securities convertible into, Additional Shares of Common Stock (such convertible stock or securities being hereinafter referred to as "Convertible Securities'), then, in each case, if the Effective Price (as hereinafter defined) of such rights, options or Convertible Securities shall be less than the then existing Conversion Price for a series of Preferred Stock, the Corporation shall be deemed to have issued at the time of the issuance of such rights or options or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Corporation for the issuance of such rights or options or Convertible Securities, plus, in the case of such options or rights, the minimum amounts of consideration, if any, payable to the Corporation upon exercise or conversion of such options or rights. "Effective Price" shall mean the quotient determined by dividing the total of all of such consideration by such maximum number of Additional Shares of Common Stock. No further adjustment of the Conversion Price adjusted upon the issuance of such rights, options or Convertible Securities shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such rights or options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Conversion Price adjusted upon the issuance of such rights, options, or Convertible Securities shall be readjusted to the Conversion Price that would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Corporation upon such exercise, plus the consideration, if any, actually received by the Corporation for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted plus the consideration, if any, actually received by the Corporation on the conversion of such Convertible Securities. (iv) For the purpose of the adjustment provided for in subsection (1) of this paragraph 6(h), if at any time or from time to time after the Original Issue Date the Corporation shall issue any rights or options for the purchase of Convertible Securities, then, in each such case, if the Effective Price thereof is less than the then current Conversion Price for a series of Preferred Stock, the Corporation shall be deemed to have issued at the time of the issuance of such rights or 11 options the maximum number of Additional Shares of Common Stock issuable upon conversion of the total amount of Convertible Securities covered by such rights or options and to have received as consideration for the issuance of such Additional Shares of Common Stock an amount equal to the amount of consideration, if any, received by the Corporation for the issuance of such rights or options, plus the minimum amounts of consideration, if any, payable to the Corporation upon the exercise of such rights or options plus the minimum amount of consideration, if any, payable to the Corporation upon the conversion of such Convertible Securities. "Effective Price" shall mean the quotient determined by dividing the total amount of such consideration by such maximum number of Additional Shares of Common Stock. No further adjustment of such Conversion Price adjusted upon the issuance of such rights or options shall be made as a result of the actual issuance of the Convertible Securities or upon the exercise of such rights or options or upon the actual issuance of Additional Shares of Common Stock upon the conversion of such convertible Securities. The provisions of subsection (3) above for the readjustment of such Conversion Price upon the expiration of rights or options or the rights of conversion of Convertible Securities shall apply mutatis mutandis to the rights, options and Convertible Securities referred to in this subsection (4). (i) Definition. The term "Additional Shares of Common Stock" as used --- ---------- herein shall mean all shares of Common Stock issued or deemed issued by the Corporation after the Original Issue Date, whether or not subsequently reacquired or retired by the Corporation, other than (1) shares of Common Stock issued upon conversion of the Preferred Stock and (2) up to 13,035,811 additional shares of Common Stock issued to employees, officers, directors, consultants or other persons performing services for the Corporation, pursuant to any stock offering, plan, or arrangement approved by the Board of Directors of the Corporation. (j) Certificate of Adjustment. In each case of an adjustment or --- -------------------------- readjustment of the Conversion Price for the number of shares of Common Stock or other securities issuable upon conversion of a series of Preferred Stock pursuant to this paragraph 6, the Corporation at its expense shall compute such adjustment or readjustment in accordance with the terms hereof and prepare a certificate, executed by the Chief Financial Officer of the Corporation, showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postage prepaid, to each registered holder of Preferred Stock at the holder's address as shown in the Corporation's books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based including a statement of (A) the consideration received or to be received by the Corporation for any Additional Shares of Common Stock issued or sold or deemed to have been issued or sold, (13) the Conversion Price at the time in effect for each series of Preferred Stock, and (C) the number of Additional Shares of Common Stock and the type and amount, if any, of other property which at the time would be received upon conversion of the Preferred Stock. (k) Notices of Record Date. In the event of (i) any taking by the --- ----------------------- Corporation of a record of the holders of any class or series of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution or (ii) any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation, or any transfer of all or substantially all of the assets of the Corporation, or any transfer of all or substantially all of the assets of the Corporation to any other corporation, entity or person, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Preferred Stock, at least 30 days prior to the record date 12 specified therein, a notice specifying (A) the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such dividend or distribution, (B) the date on which any such reorganization, reclassification, dissolution, liquidation, or winding up is expected to become effective, and (C) the time,if any, is to be fixed, as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such reorganization, reclassification, dissolution, liquidation or winding up. (l) Fractional Shares. No fractional shares of Common Stock shall be --- ---------------- issued upon conversion of Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to the product of such fraction multiplied by the fair market value of one share of the Corporation's Common Stock on the date of conversion, as determined in good faith by the Board. (m) Reservation of Stock Issuable Upon Conversion. The Corporation shall --- ---------------------------------------------- at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Preferred Stock, and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. (n) Notices. Any notice required by the provisions of this paragraph 6 to --- ------- be given to the holder of shares of the Preferred Stock shall be deemed given when personally delivered to such holder or five business days after the same has been deposited in the United States mail, certified or registered mail, return receipt requested, postage prepaid, and addressed to each holder of record at his address appearing on the books of the Corporation. (o) No Impairment. The Corporation will not, by amendment of its --- -------------- Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the performance of any of the terms to be observed or performed hereunder by the Corporation, but will at all times in good faith assist in the carrying out of all provisions in this paragraph 6 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Preferred Stock against impairment. 7. Restrictions ------------ (a) The Corporation shall not amend its Certificate of Incorporation without the approval, by vote or written consent, by the holders of at least 60% of the outstanding Preferred Stock if such amendment would change any of the rights, preferences, privileges of, or limitations provided for herein for the benefit of any shares of the Preferred Stock. Without limiting the generality of the preceding sentence, the Corporation will not amend its Certificate of Incorporation 13 without the approval by the holders of at least 60% of the outstanding Preferred Stock if such amendment would: (i) Reduce the amount payable to the holders of Preferred Stock upon the voluntary or involuntary liquidation, dissolution, or winding up the Corporation, or change the relative seniority of the liquidation preference of the Preferred Stock to the rights upon liquidation of the holders of any capital stock of the Corporation; (ii) Reduce the Redemption Price specified in paragraph 4 hereof; (iii) Cancel or modify the voting Rights granted to holders of Preferred Stock under paragraph 5 hereof; (iv) Cancel or modify the Conversion Rights provided for in paragraph 6 hereof. Without limiting the generality of the foregoing, any amendment which would materially and adversely affect any rights, preferences or privileges of, or limitations provided for herein for the benefit, of any particular series of Preferred stock without affecting each other series of Preferred Stock equally, shall require the approval of at least 60% of the outstanding Preferred Stock of the affected series. (b) The Corporation shall not, without the approval, by vote or written consent, by the holders of at least 60% of the outstanding Preferred Stock, merge or consolidate with or into another corporation (other than a consolidation or merger in which the Corporation is the continuing corporation and which does not result in any reclassification of, or change in, the outstanding shares of Common Stock or Preferred Stock) or sell or transfer all or substantially all of the assets of the Corporation. SIXTH: Limitation of Liability. Each director of this Corporation shall ----------------------- not be personally liable to this Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of such director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which such director derived any improper personal benefit. If the General Corporation Law of the State of Delaware is amended after the filing of this Amended and Restated Certificate of Incorporation with the Delaware Secretary of State so as to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of each director of this Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the corporation shall not adversely affect any right or protection of a director of this Corporation existing at the time of such repeal or modification. 14 SEVENTH: Management of Business. The business and affairs of this ------------------------ Corporation shall be managed by or under the direction of the Board of Directors. Elections of directors need not be by written ballot unless required by the Bylaws of this Corporation. EIGHTH: Bylaws. In furtherance and not in limitation of the powers ------ conferred by statute, the Board of Directors and the stockholders are each expressly authorized to make, repeal, alter, amend and rescind the bylaws of this Corporation. NINTH Amendments. The Corporation reserves the right to amend, alter, ---------- change or repeal any provision contained in this Amended and Restated Certificate of Incorporation and to take other corporate action to the extent and in the manner now or hereafter permitted or prescribed by the laws of the State of Delaware. All rights conferred on stockholders herein are granted subject to this reservation. 5. The foregoing Amended and Restated Certificate of Incorporation has been duly proposed by the Board of Directors and submitted by the Board of Directors to the stockholders of the Corporation in accordance with Section 245 of the General Corporation Law of the State of Delaware. 6. The foregoing Amended and Restated Certificate of Incorporation has been duly approved by the required vote of stockholders in accordance with Section 242 of the General Corporation Law of the State of Delaware. The total number of shares of Common Stock of the Corporation is 7,538,035 and the total number of shares of Preferred Stock is 1,233,594. The number of shares of Common Stock and Preferred Stock voting in favor of the Amended and Restated Certificate of Incorporation exceeded the vote required. The percentage vote required was more than 50 percent of the shares of Common Stock and Preferred Stock outstanding as of December 31, 1996, voting together as a class, more than 50 percent of the shares of Common Stock outstanding as of December 31, 1996, voting as a separate class, and 60 percent of the Preferred Stock outstanding as of December 31, 1996, voting as a separate class. 15 IN WITNESS WHEREOF, I, the undersigned, under penalty of perjury, declare and certify that the filing of this Amended and Restated Certificate is my act and deed and the facts stated herein are true, and accordingly, I have executed this Amended and Restated Certificate as of this 20th day of May, 1997. ---- [SIGNATURE] --------------------------- David Rickey, President ATTESTED: [SIGNATURE] --------------------------- Joel O. Holliday, Secretary 16 EX-3.2 4 FORM OF AMENDED & RESTATED CERTIFICATE OF INCORPORATION Exhibit 3.2 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF APPLIED MICRO CIRCUITS CORPORATION The following Amended and Restated Certificate of Incorporation of Applied Micro Circuits Corporation amends and restates the provisions of and supersedes the Certificate of Incorporation filed with the Secretary of State of the State of Delaware on February 6, 1984, as amended, in its entirety. FIRST: The name of this corporation is Applied Micro Circuits Corporation ----- (the "Corporation"). SECOND: The address of the Corporation's registered office in the State of ------ Delaware is 15 East North Street, City of Dover, County of Kent. The name of its registered agent at such address is Incorporating Services Limited. THIRD: The purpose of the Corporation is to engage in any lawful act or ----- activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: (A) This Corporation is authorized to issue 62,000,000 shares of ------ its capital stock, which shall be divided into two classes known as Common Stock and Preferred Stock, respectively. (B) The total number of shares of Common Stock which this Corporation is authorized to issue is 60,000,000 with a par value of $0.01 per share. The total number of shares of Preferred Stock which this Corporation is authorized to issue is 2,000,000 with a par value of $0.01 per share. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors of this Corporation is hereby authorized, within the limitations and restrictions prescribed by law or stated in this Certificate of Incorporation, and by filing a certificate pursuant to applicable law of the State of Delaware, to provide for the issuance of Preferred Stock in series and (i) to establish from time to time the number of shares to be included in each such series; (ii) to fix the voting powers, designations, powers, preferences and relative, participating, optional or other rights of the shares of each such series and the qualifications, limitations or restrictions thereof, including but not limited to, the fixing or alteration of the dividend rights, dividend rate, conversion rights, conversion rates, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices, and the liquidation preferences of any wholly unissued series of shares of Preferred Stock; and (iii) to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. FIFTH: In furtherance and not in limitation of powers conferred by ----- statute, the Board of Directors of the Corporation is expressly authorized to make, alter or repeal any or all of the Bylaws of the Corporation. SIXTH: Elections of directors need not be by written ballot except and to ----- the extent provided in the Bylaws of the Corporation. SEVENTH: (A) To the fullest extent permitted by the Delaware General ------- Corporation Law as the same exists or as may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. (B) The Corporation may indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he or she, his or her testator or intestate is or was a director, officer or employee of the Corporation or any predecessor of the Corporation or serves or served at any other enterprise as a director, officer or employee at the request of the Corporation or any predecessor to the Corporation. (C) Neither any amendment nor repeal of this Article SEVENTH, nor the adoption of any provision of the Corporation's Certificate of Incorporation inconsistent with this Article SEVENTH, shall eliminate or reduce the effect of this Article SEVENTH in respect of any matter occurring, or any action or proceeding accruing or arising or that, but for this Article SEVENTH, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. EIGHTH: The Corporation is to have perpetual existence. ------ NINTH: The number of directors which will constitute the whole Board of ----- Directors of the Corporation shall be designated in the Bylaws of the Corporation. TENTH: Meetings of stockholders may be held within or outside the State of ----- Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any statutory provision) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors in the Bylaws of the Corporation. The foregoing Amended and Restated Certificate of Incorporation has been duly adopted by the stockholders of the corporation in accordance with the provisions of Section 242 and 245 of the General Corporate Law of the State of Delaware, as amended. IN WITNESS WHEREOF, the undersigned have executed this certificate on ___________________, 1997. David M. Rickey, President ________________, Secretary The undersigned certify under penalty of perjury that they have read the foregoing Amended and Restated Certificate of Incorporation and know the contents thereof, and that the statements therein are true. Executed at San Diego, California on _____________, 1997. David M. Rickey, President ________________, Secretary EX-3.3 5 AMENDED & RESTATED BYLAWS OF THE COMPANY EXHIBIT 3.3 BYLAWS OF APPLIED MICRO CIRCUITS CORPORATION, a Delaware Corporation ARTICLE I OFFICES Section 1. REGISTERED OFFICE. The registered office shall be established and - ---------- maintained at 229 South State Street, Dover, Delaware 19901. Section 2. OTHER OFFICES. The Corporation may have other offices, either - ---------- within or without the State of Delaware, at such place or places as the Board of Directors may from time to time appoint or the business of the Corporation may require. The initial executive offices of the Corporation in the State of California shall be at 5502 Oberlin Drive, San Diego, California 92121. ARTICLE II MEETING OF STOCKHOLDERS Section 1. ANNUAL MEETINGS. Annual meetings of stockholders for the election - ---------- of directors and for such other business as may be stated in the notice of the meeting, shall be held at such place, either within or without the State of Delaware, and at such time and date as the Board of Directors, by resolution, shall determine and as set forth in the notice of the meeting. If the date of the annual meeting shall fall upon a legal holiday, the meeting shall be held on the next succeeding business day. At each annual meeting, the stockholders entitled to vote shall elect a Board of Directors and may transact such other corporate business as shall be 1 stated in the notice of the meeting. Section 2. OTHER MEETINGS. Meetings of stockholders for any purpose other - ---------- than the election of directors may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting. Section 3. VOTING. Each stockholder entitled to vote in accordance with the - ---------- terms and provisions of the Certificate of Incorporation and these Bylaws shall be entitled to one vote, in person or by proxy, for each share of stock entitled to vote held by such stockholder, but no proxy shall be voted after three years from its date unless such proxy provides for a longer period. All elections for directors shall be decided by plurality vote; all other questions shall be decided by majority vote except as otherwise provided by the Certificate of Incorporation or the laws of the State of Delaware. Section 4. STOCKHOLDER LIST. The officer who has charge of the stock ledger - ---------- of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Said list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall be available for inspection at the meeting. Section 5. QUORUM. Except as otherwise required by law, by the Certificate - ---------- of Incorporation or by these Bylaws, the presence, in person or by proxy, of stockholders holding a 2 majority of the stock of the Corporation entitled to vote shall constitute a quorum at all meetings of the stockholders. In case a quorum shall not be present at any meeting, a majority in interest of the stockholders entitled to vote, present in person or by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. At any such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 6. SPECIAL MEETINGS. A special meeting of the stockholders, for any - ---------- purpose, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called at any time by the Board of Directors, or by the Chairman of the Board, or by the President, or by one or more stockholders holding shares in the aggregate entitled to cast not less than 10% of the votes at that meeting or one or more persons holding in the aggregate not less than 20% of the number of shares of Common Stock issued or issuable upon conversion of the aggregate of the Preferred Stock Series 1 and Preferred Stock Series 2. Such request shall state the purpose of the proposed meeting. Section 7. NOTICE OF MEETINGS. Written notice, stating the place, date and - ---------- time of the meeting, and the general nature of the business to be considered, shall be given to each stockholder entitled to vote at his/her address as it appears on the records of the Corporation, not less than ten (10) nor more than sixty (60) days before the date of the meeting. 3 Section 8. BUSINESS TRANSACTED. No business other than that stated in the - ---------- notice shall be transacted at any meeting without the unanimous consent of all the stockholders entitled to vote at such meeting. Section 9. ACTION WITHOUT MEETING. Unless otherwise provided in the - ---------- Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III DIRECTORS Section 1. NUMBER AND TERM. The number of directors which shall constitute - ---------- the whole board shall be established from time to time by the Board of Directors, but in no event shall be less than five or more than eleven. The directors shall be elected at the annual meeting of the stockholders, and except as provided in Section 2 of this Article III, each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders. 4 Section 2. RESIGNATIONS. Any director may resign at any time. Such - ---------- resignation shall be made in writing, and shall take effect at the time specified therein, and if no time be specified, at the time of its receipt by the President or Secretary. The acceptance of a resignation shall not be necessary to make it effective. Section 3. VACANCIES. Vacancies and newly created directorships resulting - ---------- from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director; whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the Certificate of Incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. The directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 4. REMOVAL. Any director or directors may be removed either for or - ---------- without 5 cause at any time by the affirmative vote of the holders of a majority of all the shares of stock outstanding and entitled to vote at a special meeting of the stockholders called for the purpose and the vacancies thus created may be filled, at the meeting held for the purpose of removal, by the affirmative vote of a majority in interest of the stockholders entitled to vote. Section 5. INCREASE OF NUMBER. The number of directors may be increased by - --------- amendment of these Bylaws by the affirmative vote of a majority of the directors, or, by the affirmative vote of a majority in interest of the stockholders, at the annual meeting or at a special meeting called for that purpose, and by like vote the additional directors may be chosen at such meeting in accordance with Section 1 of this Article, to hold office until the next annual election and until their successors are elected and qualify. The foregoing right of the stockholders to elect directors to fill vacancies on the Board of Directors created by an increase in the number of authorized directors shall not be in derogation of the right of the directors to fill such vacancies pursuant to Section 3 of this Article. Section 6. COMPENSATION. Unless otherwise restricted by the Certificate of - ---------- Incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of the directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. Nothing herein contained shall be construed to preclude any director for serving the Corporation in any other capacity as an officer, agent or otherwise, and receiving compensation therefor. Section 7. ACTION WITHOUT MEETING. Any action required or permitted to be - ---------- taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a 6 meeting if all members of the Board or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board, or committee. Section 8. MANAGEMENT OF BUSINESS OF CORPORATION. The business of the - --------- Corporation shall be managed by or under the direction of its Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. ARTICLE IV MEETINGS OF THE BOARD OF DIRECTORS Section 1. PLACE OF MEETINGS. The Board of Directors of the Corporation may - ---------- hold meetings either within or without the State of Delaware. Section 2. QUORUM AT MEETING. At all meetings of the board a majority of the - ---------- directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 3. COMMUNICATION AT MEETINGS. Unless otherwise restricted by the - --------- Certificate of Incorporation or these Bylaws, members of the Board of Directors, or any 7 committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors for - --------- any purpose or purposes may be called at any time by the Chairman of the Board or the President or any Vice President or the Secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at the director's address as it is shown on the records of the Corporation. In the case the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. In case the notice is delivered personally, or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the Corporation. ARTICLE V COMMITTEES OF DIRECTORS Section 1. DESIGNATION OF COMMITTEES. The Board of Directors may, by - --------- resolution passed by a majority of the whole board, designate one or more committees, each committee to 8 consist of one or more of the Directors of the Corporation. The board many designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Section 2. POWERS OF COMMITTEES. Any such committee, to the extent provided - ---------- in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation (except to the extent provided in resolutions of the Board of Directors and permitted by the General Corporation Law of Delaware), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets, recommending to the stockholders a dissolution of the Corporation or a revocation of a dissolution, or amending the Bylaws of the Corporation; and, unless the resolution or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock or to adopt a certificate of ownership and merger pursuant to the General Corporation Law of Delaware. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 3. MINUTES OF COMMITTEES. Each. committee shall keep regular minutes - ---------- of its meetings and report the same to the Board of Directors when required. 9 ARTICLE VI OFFICERS Section 1. OFFICERS. The officers of the Corporation shall consist of a - ---------- Chairman of the Board, a President, a Treasurer, and a Secretary, and shall be elected by the Board of Directors and shall hold office until their successors are elected and qualified. In addition, the Board of Directors may elect one or more Vice-Presidents and such Assistant Secretaries and Assistant Treasurers as it may deem proper. None of the officers of the Corporation need be directors. The officers shall be elected at the first meeting of the Board of Directors after each annual meeting. More than two offices may be held by the same person, unless the Certificate of Incorporation or these Bylaws otherwise provide. Section 2. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint such - ---------- officers and agents as it may deem advisable, who shall hold their offices for such terms and shall exercise such power and perform such duties as from time to time may be assigned by the Board of Directors. Section 3. SALARIES AND TERMS OF OFFICERS. The salaries of all officers and - ---------- agents of the Corporation shall be fixed by the Board of Directors. The officers of the Corporation shall hold office until their successors are chosen and qualified. Any officer elected or appointed by the Board of Directors may be removed at any time by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. 10 Section 4. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of - ---------- Directors shall be the Chief Executive Officer of the Corporation, and shall, subject to the control of the Board, have general supervision, direction and control of the business and affairs of the Corporation. The Chairman shall preside at all meetings of the Board. He shall be ex officio a member of all the committees of the Corporation, and shall have the general powers and duties of management usually vested in the office of Chief Executive Officer of a corporation, and shall have such other powers and duties as may be prescribed by the Board. Section 5. PRESIDENT. Subject to such supervisory powers as may be given by - ---------- the Board or the Bylaws to the Chairman of the Board of Directors, the President shall be the Chief Operating Officer of the Corporation. In the absence of the Chairman of the Board of Directors, the President shall preside at all meetings of the Board. He shall have the general powers and duties of management usually vested in the office of Chief Operating Officer of a corporation, and shall have such other powers and duties as may be prescribed by the Board or the Bylaws. Section 6. VICE-PRESIDENT. Each Vice-President shall have such powers and - ---------- shall perform such duties as shall be assigned by the directors. Section 7. TREASURER. The Treasurer shall have the custody of the corporate - ---------- funds and securities and shall keep full and accurate account of receipts and disbursements in books belonging to the Corporation. He/she shall deposit all monies and other valuables in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by 11 the Board of Directors, or the President, taking proper vouchers for such disbursements. He/she shall render to the President and Board of Directors at the regular meetings of the Board of Directors, or whenever they may request it, an account of all his/her transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond for the faithful discharge of duties in such amount and with such surety as the Board shall prescribe. The Treasurer also shall, in general, perform all the duties incident to the office of Treasurer, including the development of financial statements based on existing facts, together with recommendations to the President regarding all fiscal matters; provided, however, that he/she shall not have the authority to make any material financial decisions without approval of the Chairman, the President or the Board of Directors. Section 8. SECRETARY. The Secretary shall give, or cause to be given, notice - ---------- of all meetings of stockholders and directors, and all other notices required by law or by these Bylaws, and in case of absence or refusal or neglect so to do, any such notice may be given by any person thereunto directed by the President, or by the Directors, or stockholders, upon whose requisition the meeting is called as provided in these Bylaws. He shall record all the proceedings of the meetings of the Corporation and of directors in a book to be kept for that purpose. He/she shall keep in safe custody the seal of the Corporation, and when authorized by the Board of Directors, affix the same to any instrument requiring it, and when so affixed, it shall be attested by his signature or by the signature of any Assistant Secretary. The Secretary shall perform such other duties as may be prescribed by the Board of Directors or President under whose supervision he shall be. 12 Section 9. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. Assistant - ---------- Treasurers and Assistant Secretaries, if any, shall be elected and shall have such powers and shall perform such duties as shall be assigned to them, respectively, by the directors. ARTICLE VII CERTIFICATES OF STOCK Section 1. CERTIFICATES OF STOCK. The shares of the Corporation shall be - ---------- represented by certificates, provided that the Board of Directors of the Corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the Chairman of the Board of Directors, or the President or a Vice-President and the Treasurer or an Assistant Treasurer, or the Secretary of the Corporation, certifying the number of shares owned by him in the Corporation. If the Corporation shall be authorized to issue more than one class of stock or more than one series of any class, the designations, preferences and relative, participating, optional or other special rights or each class of stock or series thereof and the qualifications, limitations, or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the Corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements, there may be set forth on the face or 13 back of the certificate which the Corporation shall issue to represent such class or series of stock a statement that the Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Where a certificate is countersigned (1) by a transfer agent other than the Corporation or its employee, or (2) by a registrar other than the Corporation or its employee, the signatures of such officers may be facsimiles. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if he/she were such officer, transfer agent or registrar at the date of issue. Section 2. LOST CERTIFICATES. New certificates of stock may be issued in the - ---------- place of any certificate theretofor issued by the Corporation, alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. The directors may, in their discretion, require the owner of the lost, stolen or destroyed certificate or his legal representatives, to give the Corporation a bond, in such sum as they may direct, not exceeding double the value of the stock, to indemnify the Corporation against it on account of the alleged loss, theft or destruction of any such new certificate. Section 3. TRANSFER OF STOCK. The shares of stock of the Corporation shall be - ---------- transferable only upon its books by the holders thereof in person or by their duly authorized attorneys or legal representatives, and upon such transfer the old certificates shall be surrendered 14 to the Corporation by the delivery thereof to the person in charge of the stock and transfer books and ledgers, or to such other persons as the directors may designate, by who they shall be canceled, and new certificates shall thereupon be issued. A record shall be made of each transfer and whenever a transfer shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer books and ledgers. The Board of Directors shall have the power and authority to make such rules and regulations as they deem expedient concerning the issuance, transfer and registration of certificates for the shares of the Corporation. Section 4. STOCKHOLDERS' RECORD DATE. In order that the Corporation may - ---------- determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 5. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to - ---------- recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable 15 or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VIII GENERAL PROVISIONS Section 1. DIVIDENDS. Subject to the provisions of the Certificate of - ---------- Incorporation, the Board of Directors may, out of funds legally available therefor at any regular or special meeting, declare dividends upon the capital stock of the Corporation as and when they deem expedient. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Before declaring any dividends there may be set apart out of any funds of the Corporation available for dividends, such sum or sums as the directors from time to time in their discretion deem proper working capital or as a reserve fund to meet contingencies or for equalizing dividends or for such other purposes as the directors shall deem conducive to the interests of the Corporation. Section 2. SEAL. The corporate seal shall be circular in form and shall - ---------- contain the name of the Corporation, the year of its creation and the words "CORPORATE SEAL DELAWARE". Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or otherwise reproduced. Section 3. FISCAL YEAR. The fiscal year of the Corporation shall be determined - ---------- by resolution of the Board of Directors. Section 4. CHECKS. All checks, drafts, or other orders for the payment of - ---------- money, notes or 16 other evidences of indebtedness issued in the name of the Corporation shall be signed by the officer or officers, agent or agents of the Corporation, and in such manner as shall be determined from time to time by resolution of the Board of Directors. Section 5. NOTICE AND WAIVER OF NOTICE. Whenever any notice is required by - ---------- these Bylaws to be given, personal notice is not meant unless expressly stated, and any notice so required shall be deemed to be sufficient if given by depositing the same in the United States mail, postage prepaid, addressed to the person entitled thereto at his/her address as it appears on the records of the Corporation, and such notice shall be deemed to have been given on the day of such mailing. Stockholders not entitled to vote shall not be entitled to receive notice of any meetings except as otherwise provided by statute. Whenever any notice whatever is required to be given under the provisions of any law, or under the provisions of the Certificate of Incorporation of the Corporation or these Bylaws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed proper notice. Whenever notice is required to be given under the provisions of any law or the Certificate of Incorporation or these Bylaws to any stockholder whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a twelve month period, have been mailed addressed to such person at his/her address as shown on the records of the Corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. If any such person shall deliver to the 17 Corporation a written notice setting forth his/her then current address, notice to such person shall be reinstated. ARTICLE IX INDEMNIFICATION Each person who is or was a director, officer, employee or agent of the Corporation (including the heirs, executors, administrators or estate of such person) shall be indemnified by the Corporation as of right to the full extent permitted or authorized by the General Corporation Law of Delaware against any liability, cost or expense asserted against such director, officer, employee or agent and incurred by such director, officer, employee or agent in any such person's capacity as a director, officer, employee or agent or arising out of any such person's status as a director, officer, employee or agent. The Corporation may, but shall not be obligated to, maintain insurance, at its expense, to protect itself and any such person against any such liability, cost or expense. ARTICLE X AMENDMENTS These Bylaws may be altered and repealed or new bylaws may be adopted at any annual meeting of the stockholders or any special meeting thereof if notice thereof is contained in the notice of such special meeting by the affirmative vote of a majority of the stock issued and outstanding or entitled to vote at such meeting, or by the regular meeting of the Board of Directors, at any regular meeting of the Board of Directors, or at any special meeting of the Board of Directors, if notice thereof is contained in the notice of such special meeting. 18 EX-3.4 6 FORM OF AMENDED & RESTATED BYLAWS Exhibit 3.4 AMENDED AND RESTATED BYLAWS OF APPLIED MICRO CIRCUITS CORPORATION TABLE OF CONTENTS Page ---- ARTICLE I - CORPORATE OFFICES 1 1.1 Registered Office 1 1.2 Other Offices 1 ARTICLE II - MEETINGS OF STOCKHOLDERS 1 2.1 Place Of Meetings 1 2.2 Annual Meeting 1 2.3 Special Meeting 1 2.4 Manner Of Giving Notice; Affidavit Of Notice 2 2.5 Advance Notice of Stockholder Nominees 2 2.6 Quorum 3 2.7 Adjourned Meeting; Notice 3 2.8 Conduct Of Business 3 2.9 Voting 3 2.10 Waiver Of Notice 4 2.11 Record Date For Stockholder Notice; Voting; Giving Consents 4 2.12 Proxies 4 ARTICLE III - DIRECTOR 5 3.1 Powers 5 3.2 Number Of Directors 5 3.3 Election, Qualification And Term Of Office Of Directors 5 3.4 Resignation And Vacancies 5 3.5 Place Of Meetings; Meetings By Telephone 6 3.6 Regular Meetings 6 3.7 Special Meetings; Notice 7 3.8 Quorum 7 3.9 Waiver Of Notice 7 3.10 Board Action By Written Consent Without A Meeting 8 3.11 Fees And Compensation Of Directors 8 3.12 Approval Of Loans To Officers 8 3.13 Removal Of Directors 8 3.14 Chairman Of The Board Of Directors 9 ARTICLE IV - COMMITTEES 9 4.1 Committees Of Directors 9 4.2 Committee Minutes 9 4.3 Meetings And Action Of Committees 10 ARTICLE V - OFFICERS 10 5.1 Officers 10 5.2 Appointment Of Officers 10 5.3 Subordinate Officers 10 5.4 Removal And Resignation Of Officers 11 5.5 Vacancies In Offices 11 5.6 Chief Executive Officer 11 5.7 President 11 5.8 Vice Presidents 11 5.9 Secretary 12 5.10 Chief Financial Officer 12 5.11 Representation Of Shares Of Other Corporations 12 5.12 Authority And Duties Of Officers 13 ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS 13 6.1 Indemnification Of Directors And Officers 13 6.2 Indemnification Of Others 13 6.3 Payment Of Expenses In Advance 14 6.4 Indemnity Not Exclusive 14 6.5 Insurance 14 6.6 Conflicts 14 ARTICLE VII - RECORDS AND REPORTS 15 7.1 Maintenance And Inspection Of Records 15 7.2 Inspection By Directors 15 7.3 Annual Statement To Stockholders 15 ARTICLE VIII - GENERAL MATTERS 16 8.1 Checks 16 8.2 Execution Of Corporate Contracts And Instruments 16 8.3 Stock Certificates; Partly Paid Shares 16 8.4 Special Designation On Certificates 17 8.5 Lost Certificates 17 8.6 Construction; Definitions 17 8.7 Dividends 17 8.8 Fiscal Year 18 8.9 Seal 18 8.10 Transfer Of Stock 18 8.11 Stock Transfer Agreements 18 8.12 Registered Stockholders 18 ARTICLE IX - AMENDMENTS 18 AMENDED AND RESTATED BYLAWS OF APPLIED MICRO CIRCUITS CORPORATION ARTICLE I CORPORATE OFFICES ----------------- 1.1 REGISTERED OFFICE. ----------------- The registered office of the corporation shall be in the City of Dover, County of Kent, State of Delaware. The name of the registered agent of the corporation at such location is Incorporating Services Limited. 1.2 OTHER OFFICES. ------------- The Board of Directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS ------------------------ 2.1 PLACE OF MEETINGS. ----------------- Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 ANNUAL MEETING. -------------- The annual meeting of stockholders shall be held on such date, time and place, either within or without the State of Delaware, as may be designated by resolution of the Board of Directors each year. At the meeting, directors shall be elected and any other proper business may be transacted. 2.3 SPECIAL MEETING. --------------- (a) A special meeting of the stockholders may be called at any time by the Board of Directors, the chairman of the board or the president. -1- 2.4 NOTICE OF STOCKHOLDER'S MEETINGS; AFFIDAVIT OF NOTICE. ----------------------------------------------------- All notices of meetings of stockholders shall be in writing and shall be sent or otherwise given in accordance with this Section 2.4 of these Bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting (or such longer or shorter time as is required by Section 2.5 of these Bylaws, if applicable). The notice shall specify the place, date, and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES. -------------------------------------- Only persons who are nominated in accordance with the procedures set forth in this Section 2.5 shall be eligible for election as directors. Nominations of persons for election to the board of directors of the corporation may be made at a meeting of stockholders by or at the direction of the board of directors or by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.5. Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than sixty (60) days nor more than ninety (90) days prior to the meeting; provided, however, that in the event that less than sixty (60) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re- election as a Director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such person's written -2- consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the corporation's books, of such stockholder and (ii) the class and number of shares of the corporation which are beneficially owned by such stockholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the secretary of the corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 2.5. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the Bylaws, and if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. 2.6 QUORUM. ------ The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (a) the chairman of the meeting or (b) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.7 ADJOURNED MEETING; NOTICE. ------------------------- When a meeting is adjourned to another time or place, unless these Bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.8 CONDUCT OF BUSINESS. ------------------- The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including the manner of voting and the conduct of business. 2.9 VOTING. ------ -3- (a) The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these Bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). (b) Except as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.10 WAIVER OF NOTICE. ---------------- Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING. ------------------------------------------ In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the Board of Directors does not so fix a record date: (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. -4- (b) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 2.12 PROXIES. ------- Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware. ARTICLE III DIRECTORS --------- 3.1 POWERS. ------ Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these Bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the Board of Directors. 3.2 NUMBER OF DIRECTORS. ------------------- Upon the adoption of these Bylaws, the number of directors constituting the entire Board of Directors shall be six. Thereafter, this number may be changed by a resolution of the Board of Directors or of the stockholders, subject to Section 3.4 of these Bylaws. No reduction of the authorized number of directors shall have the effect of removing any director before such director's term of office expires. 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS. ------------------------------------------------------- Except as provided in Section 3.4 of these Bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be -5- stockholders unless so required by the certificate of incorporation or these Bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his or her successor is elected and qualified or until his or her earlier resignation or removal. Elections of directors need not be by written ballot. 3.4 RESIGNATION AND VACANCIES. ------------------------- Any director may resign at any time upon written notice to the attention of the Secretary of the corporation. When one or more directors so resigns and the resignation is effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this section in the filling of other vacancies. Unless otherwise provided in the certificate of incorporation or these Bylaws: (a) Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. (b) Whenever the holders of any class or classes of stock or series thereof are entitled to elect one or more directors by the provisions of the certificate of incorporation, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series thereof then in office, or by a sole remaining director so elected. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these Bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. -6- If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. ---------------------------------------- The Board of Directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these Bylaws, members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors, or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.6 REGULAR MEETINGS. ---------------- Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.7 SPECIAL MEETINGS; NOTICE. ------------------------ Special meetings of the Board of Directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need -7- not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 QUORUM. ------ At all meetings of the Board of Directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the Board of Directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE. ---------------- Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these Bylaws. 3.10 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING. ------------------------------------------------- Unless otherwise restricted by the certificate of incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the board or committee. Written consents representing actions taken by the board -8- or committee may be executed by telex, telecopy or other facsimile transmission, and such facsimile shall be valid and binding to the same extent as if it were an original. 3.11 FEES AND COMPENSATION OF DIRECTORS. ---------------------------------- Unless otherwise restricted by the certificate of incorporation or these Bylaws, the Board of Directors shall have the authority to fix the compensation of directors. No such compensation shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 3.12 APPROVAL OF LOANS TO OFFICERS. ----------------------------- The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the Board of Directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.13 REMOVAL OF DIRECTORS. -------------------- Unless otherwise restricted by statute, by the certificate of incorporation or by these Bylaws, any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided, however, that if the stockholders of the corporation are entitled to cumulative voting, if less than the entire Board of Directors is to be removed, no director may be removed without cause if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire Board of Directors. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. 3.14 CHAIRMAN OF THE BOARD OF DIRECTORS. ---------------------------------- The corporation may also have, at the discretion of the Board of Directors, a chairman of the Board of Directors who shall not be considered an officer of the corporation. ARTICLE IV -9- COMMITTEES ---------- 4.1 COMMITTEES OF DIRECTORS. ----------------------- The Board of Directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors or in the Bylaws of the corporation, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (a) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series), (b) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (c) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (d) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (e) amend the Bylaws of the corporation; and, unless the board resolution establishing the committee, the Bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 COMMITTEE MINUTES. ----------------- Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. -10- 4.3 MEETINGS AND ACTION OF COMMITTEES. --------------------------------- Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Section 3.5 (place of meetings and meetings by telephone), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), and Section 3.10 (action without a meeting) of these Bylaws, with such changes in the context of such provisions as are necessary to substitute the committee and its members for the Board of Directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the Board of Directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the Board of Directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board of Directors may adopt rules for the government of any committee not inconsistent with the provisions of these Bylaws. ARTICLE V OFFICERS -------- 5.1 OFFICERS. -------- The officers of the corporation shall be a chief executive officer, a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the Board of Directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these Bylaws. Any number of offices may be held by the same person. 5.2 APPOINTMENT OF OFFICERS. ----------------------- The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these Bylaws, shall be appointed by the Board of Directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 SUBORDINATE OFFICERS. -------------------- The Board of Directors may appoint, or empower the chief executive officer or the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these Bylaws or as the Board of Directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS. ----------------------------------- -11- Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board of Directors at any regular or special meeting of the board or, except in the case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the attention of the Secretary of the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES. -------------------- Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. 5.6 CHIEF EXECUTIVE OFFICER. ----------------------- Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board, if any, the chief executive officer of the corporation shall, subject to the control of the Board of Directors, have general supervision, direction, and control of the business and the officers of the corporation. He or she shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the Board of Directors and shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation and shall have such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. 5.7 PRESIDENT. --------- Subject to such supervisory powers, if any, as may be given by the Board of Directors to the chairman of the board (if any) or the chief executive officer, the president shall have general supervision, direction, and control of the business and other officers of the corporation. He or she shall have the general powers and duties of management usually vested in the office of president of a corporation and such other powers and duties as may be prescribed by the Board of Directors or these Bylaws. -12- 5.8 VICE PRESIDENTS. --------------- In the absence or disability of the chief executive officer and president, the vice presidents, if any, in order of their rank as fixed by the Board of Directors or, if not ranked, a vice president designated by the Board of Directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, these Bylaws, the president or the chairman of the board. 5.9 SECRETARY. --------- The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the Board of Directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board of Directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the Board of Directors required to be given by law or by these Bylaws. He or she shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by these Bylaws. 5.10 CHIEF FINANCIAL OFFICER. ----------------------- The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. -13- The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. He or she shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the president, the chief executive officer, or the directors, upon request, an account of all his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. 5.11 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. ---------------------------------------------- The chairman of the board, the chief executive officer, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the Board of Directors or the chief executive officer or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by the person having such authority. 5.12 AUTHORITY AND DUTIES OF OFFICERS. -------------------------------- In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the Board of Directors or the stockholders. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS -------------------------------------------------------------------- 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. ----------------------------------------- The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (a) who is or was a director or officer of the corporation, (b) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was a director or officer of a -14- corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 INDEMNIFICATION OF OTHERS. ------------------------- The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (a) who is or was an employee or agent of the corporation, (b) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (c) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 PAYMENT OF EXPENSES IN ADVANCE. ------------------------------ Expenses incurred in defending any action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. 6.4 INDEMNITY NOT EXCLUSIVE. ----------------------- The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any Bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the certificate of incorporation 6.5 INSURANCE. --------- The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation -15- would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. 6.6 CONFLICTS. --------- No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (a) That it would be inconsistent with a provision of the certificate of incorporation, these Bylaws, a resolution of the stockholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. ARTICLE VII RECORDS AND REPORTS ------------------- 7.1 MAINTENANCE AND INSPECTION OF RECORDS. ------------------------------------- The corporation shall, either at its principal executive offices or at such place or places as designated by the Board of Directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder, a copy of these Bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 INSPECTION BY DIRECTORS. ----------------------- -16- Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his or her position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 ANNUAL STATEMENT TO STOCKHOLDERS. -------------------------------- The Board of Directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by vote of the stockholders, a full and clear statement of the business and condition of the corporation. ARTICLE VIII GENERAL MATTERS --------------- 8.1 CHECKS. ------ From time to time, the Board of Directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS. ------------------------------------------------ The Board of Directors, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board of Directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 STOCK CERTIFICATES; PARTLY PAID SHARES. -------------------------------------- The shares of a corporation shall be represented by certificates, provided that the Board of Directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. -17- Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the Board of Directors, or the chief executive officer or the president or vice-president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he or she were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 SPECIAL DESIGNATION ON CERTIFICATES. ----------------------------------- If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 LOST CERTIFICATES. ----------------- -18- Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate previously issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or the owner's legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 CONSTRUCTION; DEFINITIONS. ------------------------- Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these Bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 DIVIDENDS. --------- The directors of the corporation, subject to any restrictions contained in (a) the General Corporation Law of Delaware or (b) the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 FISCAL YEAR. ----------- The fiscal year of the corporation shall be fixed by resolution of the Board of Directors and may be changed by the Board of Directors. 8.9 SEAL. ---- The corporation may adopt a corporate seal, which may be altered at pleasure, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. 8.10 TRANSFER OF STOCK. ----------------- -19- Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 STOCK TRANSFER AGREEMENTS. ------------------------- The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 REGISTERED STOCKHOLDERS. ----------------------- The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX AMENDMENTS ---------- The Bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal Bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal Bylaws. -20- EX-10.1 7 FORM OF INDEMNIFICATION AGREEMENT Exhibit 10.1 INDEMNIFICATION AGREEMENT ------------------------- This Indemnification Agreement (the "Agreement") is made as of --------- ____________, 1997, by and between Applied Micro Circuits Corporation, a Delaware corporation (the "Company"), and ______________ (the "Indemnitee"). ------- ---------- RECITALS -------- The Company and Indemnitee recognize the increasing difficulty in obtaining liability insurance for directors, officers and key employees, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance. The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers and key employees to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited. Indemnitee does not regard the current protection available as adequate under the present circumstances, and Indemnitee and agents of the Company may not be willing to continue to serve as agents of the Company without additional protection. The Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, and to indemnify its directors, officers and key employees so as to provide them with the maximum protection permitted by law. AGREEMENT --------- In consideration of the mutual promises made in this Agreement, and for other good and valuable consideration, receipt of which is hereby acknowledged, the Company and Indemnitee hereby agree as follows: 1. INDEMNIFICATION. --------------- (a) THIRD PARTY PROCEEDINGS. The Company shall indemnify Indemnitee ----------------------- if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, or, with respect to any criminal action or proceeding, that Indemnitee had reasonable cause to believe that Indemnitee's conduct was unlawful. (b) PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company shall --------------------------------------------- indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or proceeding by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director, officer, employee or agent of the Company, or any subsidiary of the Company, by reason of any action or inaction on the part of Indemnitee while an officer or director or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and, to the fullest extent permitted by law, amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld), in each case to the extent actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company and its stockholders, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been finally adjudicated by court order or judgment to be liable to the Company in the performance of Indemnitee's duty to the Company and its stockholders unless and only to the extent that the court in which such action or proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses which such court shall deem proper. (c) MANDATORY PAYMENT OF EXPENSES. To the extent that Indemnitee has ----------------------------- been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 1(a) or Section 1(b) or the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by Indemnitee in connection therewith. 2. NO EMPLOYMENT RIGHTS. Nothing contained in this Agreement is intended -------------------- to create in Indemnitee any right to continued employment. 3. EXPENSES; INDEMNIFICATION PROCEDURE. ----------------------------------- (a) ADVANCEMENT OF EXPENSES. The Company shall advance all expenses ----------------------- incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding referred to in Section l(a) or Section 1(b) hereof 2 (including amounts actually paid in settlement of any such action, suit or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. (b) NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a -------------------------------- condition precedent to his or her right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company and shall be given in accordance with the provisions of Section 12(d) below. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. (c) PROCEDURE. Any indemnification and advances provided for in --------- Section 1 and this Section 3 shall be made no later than twenty (20) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company's Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within twenty (20) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 11 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed, but the burden of proving such defense shall be on the Company and Indemnitee shall be entitled to receive interim payments of expenses pursuant to Section 3(a) unless and until such defense may be finally adjudicated by court order or judgment from which no further right of appeal exists. It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. (d) NOTICE TO INSURERS. If, at the time of the receipt of a notice of ------------------ a claim pursuant to Section 3(b) hereof, the Company has director and officer liability insurance in 3 effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. (e) SELECTION OF COUNSEL. In the event the Company shall be obligated -------------------- under Section 3(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. 4. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY. ------------------------------------------------- (a) SCOPE. Notwithstanding any other provision of this Agreement, the ----- Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes shall be deemed to be within the purview of Indemnitee's rights and the Company's obligations under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder. (b) NONEXCLUSIVITY. The indemnification provided by this Agreement -------------- shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested members of the Company's Board of Directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Indemnitee's official capacity and as to action in 4 another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he or she may have ceased to serve in any such capacity at the time of any action, suit or other covered proceeding. 5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision ----------------------- of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. 6. MUTUAL ACKNOWLEDGMENT. Both the Company and Indemnitee acknowledge --------------------- that in certain instances, Federal law or public policy may override applicable state law and prohibit the Company from indemnifying its directors and officers under this Agreement or otherwise. For example, the Company and Indemnitee acknowledge that the Securities and Exchange Commission (the "SEC") has taken --- the position that indemnification is not permissible for liabilities arising under certain federal securities laws, and federal legislation prohibits indemnification for certain ERISA violations. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the SEC to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 7. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from time ---------------------------------------- to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the officers and directors of the Company with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director and officer liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, if Indemnitee is not an officer or director but is a key employee. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or if Indemnitee is covered by similar insurance maintained by a parent or subsidiary of the Company. 5 8. SEVERABILITY. Nothing in this Agreement is intended to require or ------------ shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 9. EXCEPTIONS. Any other provision herein to the contrary ---------- notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses ------------------------------ to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors finds it to be appropriate; (b) LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses ------------------ incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; (c) INSURED CLAIMS. To indemnify Indemnitee for expenses or -------------- liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) to the extent such expenses or liabilities have been paid directly to Indemnitee by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the Company; or (d) CLAIMS UNDER SECTION 16(B). To indemnify Indemnitee for expenses -------------------------- or the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 10. CONSTRUCTION OF CERTAIN PHRASES. ------------------------------- (a) For purposes of this Agreement, references to the "Company" shall ------- include, in addition to the resulting corporation, any constituent corporation (including any 6 constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that if Indemnitee is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" ----------------- shall include employee benefit plans; references to "fines" shall include any ----- excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any ------------------------------------- service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not --- opposed to the best interests of the Company" as referred to in this Agreement. - -------------------------------------------- 11. ATTORNEYS' FEES. In the event that any action is instituted by --------------- Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. 12. MISCELLANEOUS. ------------- (a) GOVERNING LAW. This Agreement and all acts and transactions ------------- pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflict of law. 7 (b) ENTIRE AGREEMENT; ENFORCEMENT OF RIGHTS. This Agreement sets --------------------------------------- forth the entire agreement and understanding of the parties relating to the subject matter herein and merges all prior discussions between them. No modification of or amendment to this Agreement, nor any waiver of any rights under this Agreement, shall be effective unless in writing signed by the parties to this Agreement. The failure by either party to enforce any rights under this Agreement shall not be construed as a waiver of any rights of such party. (c) CONSTRUCTION. This Agreement is the result of negotiations ------------ between and has been reviewed by each of the parties hereto and their respective counsel, if any; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto. (d) NOTICES. Any notice, demand or request required or permitted to ------- be given under this Agreement shall be in writing and shall be deemed sufficient when delivered personally or sent by telegram or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address as set forth below or as subsequently modified by written notice. (e) COUNTERPARTS. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. (f) SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the ---------------------- Company and its successors and assigns, and inure to the benefit of Indemnitee and Indemnitee's heirs, legal representatives and assigns. (g) SUBROGATION. In the event of payment under this Agreement, the ----------- Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company to effectively bring suit to enforce such rights. [Signature Page Follows] 8 The parties hereto have executed this Agreement as of the day and year set forth on the first page of this Agreement. APPLIED MICRO CIRCUITS CORPORATION By: Title: AGREED TO AND ACCEPTED: [Indemnitee Name] (Signature) Address: [Indemnitee Address] [Indemnitee Adcdress] 9 EX-10.2 8 1982 EMPLOYEE INCENTIVE STOCK OPTION PLAN EXHIBIT 10.2 AS AMENDED EFFECTIVE December 13,1990 1982 EMPLOYEE INCENTIVE STOCK OPTION PLAN OF APPLIED MICRO CIRCUITS CORPORATION ---------------------------------- 1. PURPOSE OF THE PLAN ------------------- The purpose of the 1982 Employee Incentive Stock Option Plan (the "Plan") of APPLIED MICRO CIRCUITS CORPORATION (the "Company") are to: a. furnish incentive to individuals chosen to receive options because they are considered capable of responding by improving operations and increasing profits; b. encourage selected employees to accept or continue employment with the Company or its subsidiaries; and c. increase the interest of individuals chosen to receive options in the Company's welfare by encouraging ownership of its Common stock. To accomplish the foregoing objectives, the Plan provides a means whereby employees may receive stock options which qualify as "incentive stock options" under Section 422A ("Section 422A") of the Internal Revenue Code ("Code") as it may be amended from time to time. 2. ELIGIBLE PERSONS ---------------- Every person who at the date of grant is an employee of the Company or of any affiliate of the Company is eligible to receive an option or options under the Plan; provided, however, that options may not be granted under the Plan to any person who owns, directly or indirectly, stock of the Company constituting more than 10% of the total combined voting power of the Company's outstanding stock, or the stock of any affiliate of the Company, unless the exercise price of the options granted to any such person under the Plan, at the time such option is granted, is equal to at least 110% of the fair market value of the stock subject to the option, and any such option is not exercisable for a period exceeding five years after the date of grant. The term "affiliate," as used in the Plan, means a parent or subsidiary corporation, as defined in the applicable provisions (currently set forth in Section 425) of the Code. The term "employee" includes an officer or a director who is an employee. 3. STOCK SUBJECT TO THE PLAN ------------------------- An aggregate of 8,008,000 authorized but unissued shares of the Common Stock of the Company or such number and class of securities as adjusted to give effect to the antidilution provisions contained in Section 6(b) hereof, may be sold upon the exercise of options granted under the Plan. In the event that any option outstanding under the Plan expires, or is terminated for any reason, unexercised in whole or in part, prior to the end of the period during which options may be granted under the Plan, the shares of stock allocable to the unexercised portion of such option may again be subjected to option under the Plan. In addition, shares of stock issued as the result of an exercise of options granted under the Plan which are repurchased by the Company prior to the end of the period during which options may be granted under the Plan may again be subjected to option under the Plan; provided, however that only those shares which are repurchased pursuant to a written agreement between the optionee and the Company in connection with the execution or amendment of a written stock option agreement shall be so subjected to option under the Plan. 4. ADMINISTRATION -------------- The Plan shall be administered by the Board of Directors or, if established by the Board of Directors, by a committee (the "Committee") consisting of not less than three persons, all of whom are and shall be directors of the Company, to be appointed by the Company's Board of Directors. Committee members shall serve for such terms as the Board of Directors may in each case determine, and shall be subject to removal at any time by the Board of Directors. Vacancies on the Committee, however caused, may be filled by the Board of Directors. The committee may select one of its members as chairman, and may hold meetings at such times and places as it may determine. A majority of the Committee shall constitute a quorum, and acts of the Committee approved at a meeting at which a quorum is present, or acts approved in writing by all of the members of the Committee, shall be valid acts of the Committee. Subject to the general purposes, terms and conditions of the Plan, and to the direction of the Board of Directors, the Committee, if there be one, shall have full power to implement and carryout the Plan in all ways permissible under the applicable provisions of the Code including, but not limited to, the following: to construe and interpret the Plan; to prescribe, amend and rescind rules and regulations relating to the Plan; and to make all other determinations necessary or advisable for the administration of the Plan. The Committee, if there be one, shall submit to the Board of Directors the names of employees to whom the Committee recommends that an option or options be granted under the Plan, the number of shares of stock to be covered by each option and the terms and conditions of each option. Options shall be granted upon approval by the Board of Directors or, if the Committee is given general or specific authority to do so by the Board of Directors, to the extent so authorized, upon approval by the Committee without submission to, and review by, the Board of Directors, except that the Committee shall not have authority to approve the grant of options to members of the Board of Directors without approval by the Board of Directors. 5. GRANTING OF OPTIONS ------------------- No options shall be granted under the plan after November 1, 1992. Each option shall be evidenced by a written stock option agreement executed by the Company and employee to whom such option is granted. -2- The aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the first time by a grantee hereunder during any calendar year (under all incentive stock option plans of the Company and its parent and subsidiary corporations) shall not exceed one hundred thousand dollars ($100,000.00). The limitations imposed by this paragraph shall apply only to options granted on or after January 1,1987. 6. TERMS AND CONDITIONS OF OPTIONS ------------------------------- Each option shall be subject to the following terms and conditions: a. Option Price. The option price, which shall be approved by the ------------ Board of Directors, shall be determined in accordance with the applicable provisions of the Code and shall in no event be less than the fair market value of the Company's capital stock at the time the option is granted. In the absence of an established market for such stock, the fair market value thereof, for the purposes of the plan, shall be determined in good faith by the Committee of the Board of Directors. If the stock of the Company is regularly quoted by a recognized securities dealer, the fair market value thereof, for the purposes of the Plan, shall be the mean between the highest and lowest selling prices for such stock as quoted on such exchange for the date the option is granted (or if there are no sales for such date of grant, then for the last preceding business day on which there were sales). b. Adjustments. In the event that the stock of the Company is ----------- changed by reason of any stock split, reverse stock split, recapitalization, or other change in the capital structure of the Company, or converted into or exchanged for other securities as a result of any merger, consolidation or reorganization, or in the event that the outstanding number of shares of stock of the Company is increased through payment of a stock dividend, appropriate proportionate adjustments shall be made in the number and class of shares of stock subject to the Plan, the number and class of shares of stock subject to any option outstanding under the Plan, and the exercise price of any such outstanding option; provided, however, that the Company shall not be required to issue fractional shares as a result of any such adjustment. Any such adjustment shall be made upon approval by the Board of Directors, whose determination shall be conclusive. If there is any other change in the number or kind of the outstanding shares of stock of the Company, or of any other security into which such stock shall have been changed or for which it shall have been exchanged, and if the Board of Directors, in its sole discretion, determines that such change equitably requires any adjustment in the options then outstanding under the Plan, such adjustment shall be made in accordance with the determination of the Board of Directors. No adjustments shall be required by reason of the issuance or sale by the Company for cash or other consideration of additional shares of its stock or securities convertible into or exchangeable for shares of its stock. All adjustments shall be made in such a manner that each option which is adjusted will continue to qualify under Section 422A as an "incentive stock option." c. Corporate Transactions. New option rights may be substituted ---------------------- for the option rights granted under the Plan, or the Company's duties as to options outstanding under the -3- Plan may be assumed, by an employer corporation other than the Company, or by a parent or subsidiary of such employer corporation, in connection with any merger, consolidation, acquisition, separation, reorganization, liquidation or like occurrence in which the Company is involved, in such a manner that will allow the then outstanding options to continue to qualify as "incentive stock options" under Section 422A to the full extent permitted thereby. Notwithstanding the foregoing or the provisions of paragraph 6(b) hereof, in the event such employer corporation, or parent or subsidiary of such employer corporation, does not substitute new option rights for, and substantially equivalent to, the option rights granted hereunder, or assume the option rights granted hereunder, or if the Company's Board of Directors determines, in its sole discretion, that option rights outstanding under the Plan should not then continue to be outstanding, the option rights granted hereunder shall terminate and thereupon become null and void (i) upon dissolution or liquidation of the Company, or similar occurrence, or (ii) upon any merger, consolidation, acquisition, separation, or similar occurrence, where the Company will not be a surviving corporation; provided, however, that each optionee shall have the right immediately prior to or concurrently with such dissolution, liquidation, merger, consolidation, acquisition, separation, or similar occurrence, to exercise any unexpired option rights granted here under subject to the time limitations for exercise of "incentive stock options" provided in Section 422A. d. Option Exercise Period. Each option granted under the Plan shall ---------------------- become exercisable and shall expire on a date or in installments, and shall contain such other terms as may be determined by the Committee or by the Board of Directors and as set forth in the stock option agreement, but in no event shall any option hereunder expire later than ten (10) years from the date such option is granted. e. Exercise of Option by Employee Who Holds Other Options. ------------------------------------------------------ Notwithstanding any terms of any stock option agreement, no option granted under the Plan ("new option") shall be exercisable while there is outstanding in favor of the optionee to whom such new option is granted an "incentive stock option," granted to such optionee prior to the granting of the new option, which permits the employee to purchase stock in such optionee's employer corporation, or in a predecessor corporation of any of such corporations. For such purposes, any incentive stock option shall be treated as outstanding until such option is exercised in full or expires by reason of lapse of time. This paragraph 6(e), however, shall not restrict the exercisability of any option granted under the Plan except as may be necessary to allow such option to qualify under Section 422A as an "incentive stock option" and shall not apply to any option granted under the plan after December 31, 1986. f. Change of Option Period. Notwithstanding any other provision of ----------------------- the Plan, the Board of Directors or the Committee may accelerate the earliest date or dates on which outstanding options (or any installments thereof) are exercisable. g. Option Grant Date. The date of grant of an option granted under ----------------- the Plan shall be the date as of which the Board of Directors or the Committee (if the option is granted by the Committee without review by the Board of Directors) approves the grant. If for any reason, including a unilateral decision by the Company not to execute an agreement evidencing such -4- option, a written stock option agreement evidencing the option is not executed within sixty (60) days after the date of grant, such option shall be deemed null and void. No option shall be exercisable until such a stock option agreement is executed by the Company and the optionee. h. Nonassignability of Option Rights. No option granted under the --------------------------------- Plan shall be assignable or otherwise transferable by the optionee except by win or by the laws of descent and distribution. During the life of an optionee, his option shall be exercisable only by the optionee. i. Payment. Except as provided below, payment in full, in cash, ------- shall be made for all stock purchased at the time written notice of exercise of an option is given to the company, and proceeds of any payment shall constitute general funds of the Company. Notwithstanding the preceding sentence, the Board of Directors may authorize any one or more of the following in connection with the exercise of an option by an optionee: i. acceptance of the optionee's personal promissory note for all or part of the option price, bearing such interest rate, if any, as determined by the Board of Directors, which promissory note may be either secured or unsecured in such manner as the Board of Directors shall approve (including, without limitation, by a security interest in the shares of the Company); ii. delivery by optionee of Common Stock of the Company already owned by such optionee for all or part of the option price, provided the value of such Common Stock is equal on the date of exercise to the option price, or such portion thereof as the optionee is authorized to pay by delivery of such stock; iii. a loan by the Company to optionee of all or a portion of the option price at such interest rate, if any, as determined by the Board of Directors, and on an unsecured or secured basis as the Board of Directors shall approve (including, without limitation, by a security interest in the shares of the Company), and/or iv. a guaranty by the Company of a loan to the optionee by a third party of all or part of the option price (but not more than the option price), and such guaranty may be on an unsecured or secured basis as the Board of Directors shall approve (including, without limitation, by a security interest in the shares of the Company). Any such authorization shall be made at the time of option grant. j. Termination of Employment. Option rights granted under the Plan, ------------------------- to the extent such rights have not then expired pursuant to paragraph 6(k) or otherwise, or been exercised, shall terminate and become null and void thirty (30) days after the date that an optionee ceases, for any reason, to be an employee of the Company or any affiliate of the Company, and shall be exercisable during said thirty (30) day period only to the extent such rights were exercisable on or before the date the optionee ceased to be an employee of the Company or any affiliate of the Company. Subject to paragraph 6(k), but notwithstanding any other provision hereof: -5- i. In the event of such a termination of employment due to the death of the optionee, the personal representatives of the optionee or any person or persons who acquire any such option rights from the optionee by will or the applicable laws of descent and distribution may, at any time within a period of twelve (12) months after the death of the optionee, exercise any or all of such option rights to the extent such option rights were exercisable on the date of the death of the optionee; ii. In the event of such a termination of employment by reason of the disability of the optionee, the optionee or, if the optionee thereafter dies, the personal representative of the optionee or any person or persons who acquired any such option rights from the optionee by will or the applicable laws of descent and distribution may, at any time within a period of twelve (12) months after said termination, exercise any or all of such option rights to the extent such option rights were exercisable on the date of the termination of employment; iii. For Plan purposes a transfer of an optionee from the Company to an affiliate or vice versa, or from one affiliate to another, or leave of absence duly authorized by the Company shall not be deemed a termination of employment or a break in continuous employment. k. Expiration of Certain Option Rights. Any option rights held by ----------------------------------- an optionee on the date such optionee ceases, for any reason, to be an employee of the Company or any affiliate of the Company which would, when exercised, result in the purchase of shares of the Company which would be subject to repurchase rights held by the Company pursuant to an agreement signed by the optionee and the Company, shall expire on the date the optionee ceases to be an employee of the Company or any affiliate of the Company. 1. Other Provisions. Each option granted under the Plan may contain ---------------- such other terms, provisions, and conditions not inconsistent with the Plan as may be determined by the Board of Directors or the Committee, and shall include such provisions and conditions as are necessary to qualify the option under Section 422A as an "incentive stock option." 7. MANNER OF EXERCISE ------------------ An optionee wishing to exercise an option shall give written notice to the Company at its principal executive office, to the attention of the Secretary of the Company, accompanied by payment of the exercise price. The date the Company receives written notice of an exercise hereunder accompanied by payment of the exercise price will be considered as the date such option was exercised. As soon as possible after receipt of such written notice, the Company shall, without stock issue or transfer taxes to the optionee or other person entitled to exercise, deliver to the optionee or other person a certificate or certificates for the requisite number of shares of stock. An optionee or transferee of an option shall not have any privileges as shareholder with respect to any stock covered by the option until the date of issuance of stock certificate. -6- 8. EMPLOYMENT RELATIONSHIP ----------------------- Nothing in the Plan or any option granted thereunder shall interfere with or limit in any way the right of the Company or of any of its subsidiaries to terminate any optionee's employment at any time, nor confer upon any optionee any right to continue in the employ of the Company or any of its subsidiaries. 9. AMENDMENT. SUSPENSION OR TERMINATION OF THE PLAN ------------------------------------------------- The Board of Directors may at any time amend, alter, suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall be made which would impair the right of any optionee under any option theretofore granted, without his consent, or which, without the approval of the stockholders, would: a. except as is provided in Section 6 of the Plan, increase the total number of shares of stock reserved for the purposes of the Plan; b. extend the duration of the Plan; c. extend the period during and over which options may be exercised under the Plan; or d. change the class of persons eligible to receive options granted hereunder. Without limiting the foregoing, but subject to the provisions of paragraph 6(e) hereof, the Board of Directors may at any time or from time to time authorize the Company, with the consent of the respective optionees, to issue new options in exchange for the surrender and cancellation of any or all outstanding options. 10. EFFECTIVE DATE OF THE PLAN -------------------------- The Plan shall become effective upon approval by the Board of Directors, provided, however, that any option granted prior to approval by stockholders of the Company holding a majority (or such greater number as may be required by law or applicable governmental regulations or order) of the shares entitled to vote shall be subject to, and conditioned upon, such shareholder approval. Options may be granted and exercised under the Plan only after there has been compliance with all applicable federal and state securities laws. -7- STOCK OPTION AGREEMENT OPTIONS GRANTED UNDER 1982 EMPLOYEE INCENTIVE STOCK OPTION PLAN OF APPLIED MICRO CIRCUITS CORPORATION ---------------------------------- THIS AGREEMENT, is entered into by and between APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation (the "Company"), and the undersigned employee of the Company or one of its affiliates (the "Employee"). RECITALS -------- WHEREAS, the Company has adopted a stock option plan, designated as the 1982 Employee Incentive Stock Option Plan (the "Plan"), pursuant to which options that qualify as "incentive stock options" under Section 422A of the Internal Revenue Code, as added by the Economic Recovery Tax Act of 1981, and as it may be amended from time to time ("Section 422A"), may be granted to selected employees of the Company or any of its affiliates; and WHEREAS, on the date hereof the employee is a bona fide employee of the Company or one of its affiliates, as defined in the Plan; and WHEREAS, the Board of Directors (or the Committee appointed to administer the Plan) has determined that it would be to the advantage and interest of the Company and its stockholders to grant to the Employee the option rights provided for herein as an inducement to continue to render services to the Company or one of its affiliates and as an incentive for increased efforts in the rendering of such services; and has advised the Company thereof and instructed the undersigned officer to issue the within option rights as provided in the Plan; and WHEREAS, the Board of Directors (or the Committee) has approved of the granting to the Employee of the option rights evidenced by this Agreement; NOW, THEREFORE, it is mutually agreed as follows: 1. Grant of Option Rights. Subject to the terms and conditions ---------------------- contained herein, the Company hereby grants to the Employee the option rights specified herein: (a) the number and class of shares of the Company's currently authorized but unissued stock subject to the option rights granted hereunder are in an aggregate of not to exceed [number] shares of the company's common stock; (b) the option exercise price, which has been determined as specified in the Plan, is $.35 per share; (c) the option rights granted hereunder are exercisable beginning on [dated] and ending on [tenyears]. (In no event may any option rights granted hereunder be exercised later than ten (10) years from the date hereof); (d) notwithstanding the provisions of subparagraph 1(c) above, the minimum number of shares which may be purchased upon any partial exercise of the option rights granted hereunder is 100 shares; (e) upon execution of this Agreement, Employee shall also execute an Applied Micro Circuits Corporation Incentive Stock Option Repurchase Agreement. To exercise any of the option rights granted hereunder, the Employee must have remained in the employ of the Company or one of its affiliates continuously from the date of this Agreement through the date of each exercise, except as otherwise provided in paragraph 3 hereof. The granting of option rights hereunder shall impose no obligation on the Company or any of its affiliates to continue the employment of the Employee, and shall not lessen or affect the right of the Company or any affiliate which employs the Employee to terminate such employment or to change the duties, compensation, or other terms of employment of the Employee. The term "affiliate", wherever herein used, shall have the same meaning as in the Plan, and shall mean any parent or subsidiary corporation as defined in the applicable provisions of the Internal Revenue Code (currently set forth in Section 425 of said Code). 2. Fractional Shares; Compliance with Laws. In no even shall the --------------------------------------- Company be required to issue factional shares upon the exercise of any option rights granted hereunder. No option rights granted hereunder may be exercised, and the Company shall not be required to issue or deliver any certificate or certificates for shares purchased upon the exercise of option rights granted hereunder, until there has been compliance with all then applicable requirements of law, including such registration or other proceedings under federal and state securities' laws including such registration or other proceedings under federal and state securities laws as may in the Company's opinion be necessary or appropriate. 3. Necessity of Employment When Option is Exercised. The option rights ------------------------------------------------ granted hereunder, to the extent such rights have not expired pursuant to Section 4 or otherwise, or been exercised, shall terminate and become null and void thirty (30) days after the date that the Employee ceases, for any reason, to be an employee of the Company or one of its affiliates, and shall not be exercisable on or after said date. Option rights granted hereunder shall only be exercisable during said thirty (30) day period to the extent such rights were exercisable on or before the date Employee ceases to be an employee of the Company or one of its affiliates. Subject to Section 4 hereof, but not withstanding the foregoing: (a) in the event of such a termination of employment due to the death of the Employee, the personal representatives of the Employee or any person or persons who acquired any such option rights from the Employee by will or the applicable laws of descent and distribution may, at any time within a period of twelve (12) months after the death of the Employee, exercise any or all of such option rights to the extent such option rights were exercisable on the date of death of the Employee; (b) in the event of such a termination of employment by reason of the disability of the Employee, the Employee or, if the Employee dies within a period of twelve (12) months after said termination, the personal representatives of the Employee or any person or persons who acquired any such option rights from the Employee by will or the applicable laws of descent and distribution may, at any time within a period of twelve (12) months after said termination, exercise any or all of such option rights to the extent such option rights were exercisable on the date of termination of employment; (c) provided, however, that, for the purposes of this Agreement, a transfer of the Employee from the Company to an affiliate or vice versa, or from one affiliate to another, or a leave of absence duly authorized by the Company shall not be deemed a termination of employment or a break in continuous employment. In no event may any option rights granted under this Agreement be exercised by any person or entity after the expiration of ten (10) years from the date hereof. References throughout this Agreement to the Employee shall be deemed, where appropriate, to include any person entitled to exercise the option after the death of the Employee under the terms of this paragraph 3. 4. Expiration of Certain Option Rights. Any option rights held by Employee ----------------------------------- on the date Employee ceases, for any reason, to be an employee of the Company or any affiliate of the Company which would, when exercised, result in the purchase of shares of the Company which would be subject to repurchase rights held by the Company pursuant to an agreement signed by Employee and the Company, shall expire on the date Employee ceases to be an employee of the Company or any affiliate of the Company. 5. Nonassignability of Option Rights. The option rights granted hereunder --------------------------------- (i) shall, except as provided in paragraph 3 hereof, be exercisable only by the Employee, (ii) shall not be transferred, assigned, pledged or hypothecated in any manner whatsoever, whether voluntarily, involuntarily or by operation of law, and (iii) shall not be subject to EXECUTION, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate, or otherwise dispose of the said option rights contrary to the provisions hereof, the said option rights shall immediately become null and void. 6. Adjustments: Appropriate proportionate adjustments shall be made by the ----------- Company in the number and class of shares of stock subject to the option rights granted hereunder and the exercise price of the option rights granted hereunder in the event that (i) the common stock of the Company is changed by reason of any stock split, reverse stock split, recapitalization, or other change in the capital structure of the Company, or converted into or exchanged for other securities as a result of any merger, consolidation or reorganization, or (ii) the outstanding number of shares of common stock of the Company is increased through payment of a stock dividend; provided, however, that the Company shall not be required to issue fractional shares as a result of any such adjustment. Any such adjustment shall be made upon approval by the Board of Directors, whose determination shall be conclusive. If there is any other change in the number or kind of the outstanding shares of capital stock of the Company, or of any other security into which such stock shall have been changed or for which it shall have been exchanged, and if the Board of Directors, in its sole discretion, determines that such change equitably requires any adjustment in the option rights granted hereunder, such adjustment shall be made in accordance with the determination of the Board of Directors. No adjustments shall be required by reason of the issuance or sale by the Company for cash or other consideration of additional shares of its capital stock or securities convertible into or exchangeable for share of its capital stock. All adjustments shall be made in such a manner that will allow the option rights granted hereunder to continue to qualify under Section 422A as "Incentive stock option" rights. New option rights may be substituted for the option rights granted hereunder, or the Company's duties under this Agreement may be assumed by an employer corporation other than the Company, or by an affiliate of such employer corporation, in connection with any merger, consolidation, acquisition, separation, reorganization, liquidation, or like occurrence, in which the Company is involved, in such a manner that will allow the option rights granted hereunder to continue to qualify as "incentive stock option" rights under Section 422A and to the full extent permitted thereby. Not withstanding the foregoing provisions of this paragraph 5, in the event such employer corporation, or affiliate of such employer corporation, refuses to substitute new option rights for an substantially equivalent to, the option rights granted hereunder, or to assume the option rights granted hereunder, or if the Company's Board of Directors determines, in its sole discretion, that option rights outstanding under the Plan should not then continue to be outstanding, the option rights granted hereunder shall terminate and thereupon become null and void (i) upon the dissolution or liquidation of the Company, or similar occurrence, or (ii) upon any merger, consolidation, acquisition, or separation, or similar occurrence, if the Company is not the surviving corporation, provided, however, that the Employee shall have the right, immediately prior to or concurrently with such dissolution, liquidation, merger, consolidation, acquisition, separation, or similar occurrences, to exercise any unexpired option rights granted hereunder subject to (i) the condition of paragraph 1(c) that no option rights granted hereunder may be exercised after the expiration of ten (10) years from the date hereof, and (ii) the provisions of paragraph 1(e) hereof. 7. Method of Exercise; Rights of Optionee in Stock. The option rights ----------------------------------------------- granted hereunder shall be exercisable upon written notice to the Company accompanied by payment to the Company of the option exercise price as to the shares being purchased. Payment of the option exercise price shall be in cash or, at the optionee's election, by delivery of Common Stock of the Company for all or part of the option price, provided the value of such Common Stock as determined by the Board of Directors or the Committee in accordance with any reasonable valuation method, is equal to the option price or such portion thereof as the Optionee is authorized to pay by delivery of such stock. Neither the Employee nor his personal representatives, heirs, or legatees shall have any rights or privileges of a shareholder of the Company in respect to the shares issuable upon the exercise of the option rights granted hereunder, unless and until certificates representing such shares shall have been issued and delivered in accordance with the terms hereof. 8. Notices. Any notice to be given under the terms of this Agreement ------- shall be mailed, telegraphed, or delivered, and confirmed, to the Company, in care of its Secretary, at the principal office of the Company, and any notice to be given to the Employee shall be mailed, telegraphed, or delivered, and confirmed, to him at the address given beneath his signature hereto, or at such other address as either party may hereafter designate in writing to the other. Any such notice shall be deemed to have been duly given 48 hours after the deposit thereof in the United States mail, addressed as aforesaid, registered or certified and postage and registry or certification fee prepaid. 9. Date of Grant. The option rights granted hereunder shall be deemed to ------------- have been granted on the date set forth below, which is the date upon which the Board of Directors or the Committee approved the granting of such option rights. The said date is within ten years from the date on which the Plan was adopted by the Board of Directors, or the date on which the Plan was approved by the Company's stockholders, whichever date is earlier. 10. Option Rights Governed by Plan and Internal Revenue Code. The -------------------------------------------------------- provisions of the Plan, a copy of which is attached hereto, shall be deemed to be incorporated in, and to have been made a part of, this Agreement, and shall be deemed to be controlling in the event that any of the provisions of this Agreement are inconsistent therewith. This Agreement shall be deemed to include such other provisions not set forth in the Plan or herein, or not inconsistent with any provisions set forth in the Plan or herein, as may be necessary to qualify the option granted hereunder as an "incentive stock option" under Section 422A. 11. Securities Law Compliance. Upon each issuance of shares of ------------------------- stock in accordance herewith, the Employee, or his personal representatives, heirs, or legatees receiving such shares, shall, if requested by the Company in order to comply with federal or state securities laws, represent in writing to the Company that such shares are being acquired with not view to any distribution thereof or shall make such other representations in writing to the Company, with respect to the further transfer of such shares, as may be deemed by the Company to be necessary or appropriate under the applicable federal and state securities laws. The Company, at its sole discretion, may take all reasonable steps (including the affixing of an appropriate legend on certificates embodying such shares of stock) to assure itself against any resale or distribution not in compliance with federal or state securities laws. 12. Persons Bound. Subject to the provisions against assignment set forth ------------- in paragraph 4 hereof, and to the provisions of paragraph 5 hereof, this Agreement shall be binding upon and inure to the benefit of any successor or successors of the Company, and the personal representatives, heirs, and legatees of the Employee. IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in its behalf by one of its officers and sealed by its corporate seal, as of the date set forth below, and the Employee has hereunto set his hand on or as of said date, which date is the date such option rights were approved for grant, with Employee by his aid execution hereof hereby representing that the residence indicated below his (or her) name is his (or her) bona fide residence and domicile. Dated as of: APPLIED MICRO CIRCUITS CORPORATION By: -------------------------------------------- Joel O. Holliday, Vice President EMPLOYEE EX-10.3 9 1992 STOCK OPTION PLAN EXHIBIT 10.3 APPLIED MICRO CIRCUITS CORPORATION 1992 STOCK OPTION PLAN 1. Purposes of the Plan. The purposes of this 1992 Stock Option Plan are -------------------- to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan may be incentive stock options (as defined under Section 422 of the Code) or non statutory stock options, as determined by the Administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code, as amended, and the regulations promulgated thereunder. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Administrator" means the Board or any of its Committees appointed ------------- pursuant to Section 4 of the Plan. (b) "Board" means the Board of Directors of the Company. ----- (c) "Code" means the Internal Revenue Code of 1986, as amended. ---- (d) "Committee" means the Committee appointed by the Board of --------- Directors in accordance with paragraph (a) of Section 4 of the Plan. (e) "Common Stock" means the Common Stock of the Company. ------------ (f) "Company" means Applied Micro Circuits Corporation, a Delaware ------- corporation. (g) "Consultant" means any person, including an advisor, who is ---------- engaged by the Company or any Parent or Subsidiary to render services and is compensated for such services, and any director of the Company whether compensated for such services or not. (h) "Continuous Status as an Employee or Consultant" means the absence ---------------------------------------------- of any interruption or termination of service as an Employee or Consultant. Continuous Status as an Employee or Consultant shall not be considered in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Board, provided that such leave is for a period of not more than ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company, its Subsidiaries or its successor. (i) "Employee" means any person, including officers and directors, -------- employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient to constitute "employment" by the Company. (j) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (k) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system including without limitation the National Market of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported, as quoted on such system or exchange, or the exchange with the greatest volume of trading in Common Stock, for the last market trading day prior to the time of determination) as reported in The Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, its Fair Market Value shall be the mean between the high bid and low asked prices for the Common Stock or; (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (1) "Incentive Stock Option" means an Option intended to qualify as an ---------------------- incentive stock option within the meaning of Section 422 of the Code. (m) "Named Executive" means any individual who, on the last day of the --------------- Company's fiscal year, is the chief executive officer of the Company (or is acting in such capacity) or among the four highest compensated officers of the Company (other than the chief executive officer). Such officer status shall be determined pursuant to the executive compensation disclosure rules under the Exchange Act. (n) "Nonstatutory Stock Option" means an Option not intended to ------------------------- qualify as an Incentive Stock Option. (o) "Option" means a stock option granted pursuant to the Plan. ------ (p) "Optioned Stock" means the Common Stock subject to an Option. -------------- (q) "Optionee" means an Employee or Consultant who receives an Option. -------- (r) "Parent" means a "parent corporation", whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (s) "Plan" means this 1992 Stock Option Plan. ---- (t) "Share" means a share of the Common Stock, as adjusted in ----- accordance with Section 13 of the Plan. (u) "Subsidiary" means a "subsidiary corporation", whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. Subject to the provisions of Section 14 of ------------------------- the Plan, the maximum aggregate number of shares which may be optioned and sold under the Plan is Six Million Twenty-Seven Thousand Three Hundred Four (6,027,304) shares of Common Stock (on a post-split basis). The shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. 4. Administration of the Plan. -------------------------- (a) Procedure. --------- (i) Administration With Respect to Directors and Officers. With ----------------------------------------------------- respect to grants of Options to Employees or Consultants who are also officers or directors of the Company, grants under the Plan shall be made by (A) the Board if the Board may make grants under the Plan in compliance with Rule 16b-3 promulgated under the Exchange Act or any successor thereto ("Rule 16b-3") and Section 162(m) of the Code as it applies so as to qualify grants or Options to Named Executives as performance-based compensation, or (B) a Committee designated by the Board to make grants under the Plan, which Committee shall be constituted in such a manner as to permit grants under the Plan to comply with Rule 16b-3, to qualify grants of options to Named Executives as performance- based compensation under Section 162(m) of the Code and otherwise so as to satisfy legal requirements relating to the administration of incentive stock option plans, if any, of California corporate and securities laws and of the Code (the "Applicable Laws"). Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by Rule 16b-3 and to the extent required under Section 162(m) of the Code to qualify grants of Options to Named Executives as performance-based compensation. (ii) Multiple Administrative Bodies. If permitted by Rule ------------------------------ 16b-3, the Plan may be administered by different bodies with respect to directors, non-director officers and Employees who are neither directors nor officers. (iii) Administration With Respect to Consultants and Other ---------------------------------------------------- Employees. With respect to grants of Options to Employees or Consultants who are neither directors nor officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which committee shall be constituted in such a manner as to satisfy the Applicable Laws. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws. (b) Powers of the Administrator. Subject to the provisions of the --------------------------- Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(k) of the Plan; (ii) to select the Consultants and Employees to whom Options may from time to time be granted hereunder; (iii) to determine whether and to what extent Options are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each such award granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder; (vii) to reduce the exercise price of any Option to the then current Fair Market Value if the Fair Market Value of the Common Stock covered by such Option shall have declined since the date the Option was granted. (c) Effect of Administrator's Decision. All decisions, determinations ---------------------------------- and interpretations of the Administrator shall be final and binding on all Optionees and any other holders of any Options 5. Eligibility. ----------- (a) Nonstatutory Stock Options may be granted to Employees and Consultants. Incentive Stock Options may be granted only to Employees. An Employee or Consultant who has been granted an Option may, if such Optionee is otherwise eligible, be granted an additional Option or Options. (b) Each Option shall be designated in the written option agreement as either an Incentive Stock Option or a Nonstatutory Stock Option. However, notwithstanding such designations, to the extent that the aggregate Fair Market Value of the Shares with respect to which Options designated as Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options shall be treated as Nonstatutory Stock Options. (c) For purposes of Section 5(b), Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the time the Option with respect to such Shares is granted. (d) The Plan shall not confer upon any Optionee any right with respect to continuation of employment or consulting relationship with 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 or consulting relationship at any time, with or without cause. 6. Term of Plan. The Plan shall become effective upon the earlier to ------------ occur of its adoption by the Board of Directors or its approval by the stockholders of the Company as described in Section 19 of the Plan. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 15 of the Plan. 7. Term of Option. The term of each Option shall be the term stated in -------------- the Option Agreement; provided, however, that the term shall be no more than ten (10) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement. However, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Option Agreement 8. Limitation on Grants to Employees. Subject to adjustment as provided --------------------------------- in this Plan, the maximum number of Shares which may be subject to options granted to any one Employee under this Plan for any fiscal year of the Company shall be 1,000,000 (on a post-split basis). This Section 8 shall not apply prior to the date upon which the Company becomes subject to the Exchange Act and following such date, shall not apply until the (i) earliest of: (A) the first material modification of the Plan (including any increase to the number of shares reserved for issuance under the Plan in accordance with Section 3); (B) the issuance of all of the shares of common stock reserved for issuance under the Plan; (C) the expiration of the Plan; or (D) the first meeting of shareholders at which directors are to be elected that occurs after the close of the third calendar year following the calendar year in which occurred the first registration of any equity security under Section 12 of the Exchange Act; or (ii) such other date required by Section 162(m) of the Code and the rules and regulations promulgated thereunder. 9. Option Exercise Price and Consideration. --------------------------------------- (a) The per share exercise price for the Shares to be issued pursuant to exercise of an Option shall be such price as is determined by the Board, but shall be subject to the following: (i) In the case of an Incentive Stock Option (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be no less than 110% of the Fair Market Value per Share on the date of grant. (B) granted to any other Employee, the per Share exercise price shall be no less than 100% of the Fair Market Value per Share on the date of grant. (ii) In the case of a Nonstatutory Stock Option (A) granted to a person who, at the time of grant of such Option, is a Named Executive of the Company, the per Share exercise price shall be no less than 100% of the Fair Market Value on the date of grant. (B) granted to any person other than a Named Executive, the per Share exercise price shall be no less than 85% of the Fair Market Value per Share on the date of grant. (b) The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option have been owned by the Optionee for more than six months on the date of surrender, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (5) delivery of a properly 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) by delivering an irrevocable subscription agreement for the Shares which irrevocably obligates the option holder to take and pay for the Shares not more than twelve months after the date of delivery of the subscription agreement, (7) any combination of the foregoing methods of payment, (8) or such other consideration and method of payment for the issuance of Shares to the extent permitted under Applicable Laws. In making its determination as to the type of consideration to accept, the Board shall consider if acceptance of such consideration may be reasonably expected to benefit the Company. 10. Exercise of Option. ------------------ (a) Procedure for Exercise; Rights as a Stockholder. Any Option ----------------------------------------------- granted hereunder shall be exercisable at such times and under such conditions as determined by the Board, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Board, consist of any consideration and method of payment allowable under Section 8(b) of the Plan. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Option. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) Termination of Employment. In the event of termination of an ------------------------- Optionee's Continuous Status as an Employee or Consultant with the Company (as the case may be), such Optionee may, but only within thirty (30) days (or such other period of time as is determined by the Board, which, in the case of an Incentive Stock Option shall not exceed three (3) months after the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise such Optionee's Option to the extent that Optionee was entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of such termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (c) Disability of Optionee. Notwithstanding the provisions of Section ---------------------- 9(b) above, in the event of termination of an Optionee's or Continuous Status as an Employee or Consultant as a result of such Optionee's total and permanent disability (as defined in Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months from the date of such termination (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), exercise the Option to the extent otherwise entitled to exercise it at the date of such termination. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (d) Death of Optionee. In the event of the death of an Optionee, the ----------------- Option may be exercised at any time within twelve (12) months following the date of death (but in no event later than the expiration date of the term of such Option as set forth in the Option Agreement), by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent the Optionee was entitled to exercise the Option at the date of death. To the extent that Optionee was not entitled to exercise the Option at the date of termination, or if Optionee does not exercise such Option to the extent so entitled within the time specified herein, the Option shall terminate. (e) Rule 16b-3. Options granted to persons subject to Section 16(b) ---------- of the Exchange Act must comply with Rule 16b-3 and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. 11. Non-Transferability of Options. The Option may not be sold, pledged, ------------------------------ assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. 12. Stock Withholding to Satisfy Withholding Tax Obligations. At the -------------------------------------------------------- discretion of the Administrator, Optionees may satisfy withholding obligations as provided in this paragraph. When an Optionee incurs tax liability in connection with an Option, which tax liability is subject to tax withholding under applicable tax laws, and the Optionee is obligated to pay the Company an amount required to be withheld under applicable tax laws, the Optionee may satisfy the withholding tax obligation by one or some combination of the following methods: (i) by cash payment, or (ii) out of Optionee's current compensation, or (iii) if permitted by the Administrator, in its discretion, by surrendering to the Company Shares which (a) in the case of Shares previously acquired from the Company, have been owned by the Optionee for more than six months on the date of surrender, and (b) have a fair market value on the date of surrender equal to or less than the applicant's withholding taxes, (iv) by electing to have the Company withhold from the Shares to be issued upon exercise of the Option that number of Shares having a fair market value equal to the amount required to be withheld. For this purpose, the fair market value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). If the Optionee is subject to Section 16 of the Exchange Act (an "Insider"), any surrender of previously owned Shares to satisfy tax withholding obligations arising upon exercise of this Option must comply with the applicable provisions of Rule 16b-3 promulgated under the Exchange Act ("Rule 16b-3"). All elections by an Optionee to have Shares withheld to satisfy tax withholding obligations shall be made in writing in a form acceptable to the Administrator and shall be subject to the following restrictions: (a) the election must be made on or prior to the applicable Tax Date; (b) once made, the election shall be irrevocable as to the particular Shares of the Option as to which the election is made; and (c) all elections shall be subject to the consent or disapproval of the Administrator. In the event the election to have Shares withheld is made by an Optionee and the Tax Date is deferred under Section 83 of the Code because no election is filed under Section 83(b) of the Code, the Optionee shall receive the full number of Shares with respect to which the Option is exercised but such Optionee shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 13. Adjustments Upon Changes in Capitalization; Corporate Transactions. ------------------------------------------------------------------ (a) Changes in Capitalization. Subject to any required action by the ------------------------- stockholders of the Company, the number of shares of Common Stock covered by each outstanding Option, the number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) Corporate Transactions. In the event of the proposed dissolution ---------------------- or liquidation of the Company, the Option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Administrator. The Administrator may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Administrator and give each Optionee the right to exercise his or her Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. In the event of a sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, in which the Company is not the surviving corporation the Option shall vest and become immediately exercisable for the number of Shares that would otherwise be vested and exercisable under the terms of the Option one (1) year after the date of the Corporate Transaction. Thereafter, the Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Administrator determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Option shall vest and the Optionee shall have the right to exercise the Option as to some or all of the Optioned Stock, including Shares as to which the Option would not otherwise be vested and exercisable. If the Administrator makes an Option vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee that the Option shall be vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option will terminate upon the expiration of such period. 14. Time of Granting Options. The date of grant of an Option shall, for ------------------------ all purposes, be the date on which the Administrator makes the determination granting such Option, or such other date as is determined by the Board. Notice of the determination shall be given to each Employee or Consultant to whom an Option is so granted within a reasonable time after the date of such grant. 15. Amendment and Termination of the Plan. ------------------------------------- (a) Amendment and Termination. The Board may at any time amend, ------------------------- alter, suspend or discontinue the Plan, but no amendment, alteration, suspension or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without such Optionee's consent. In addition, to the extent necessary and desirable to comply with Rule 16b-3 under the Exchange Act or with Sections 162(m) and 422 of the Code (or any other applicable law or regulation, including the requirements of the NASD or an established stock exchange), the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required. (b) Effect of Amendment or Termination. Any such amendment or ---------------------------------- termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 16. Conditions Upon Issuance of Shares. Shares shall not be issued ---------------------------------- pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 17. Reservation of Shares. The Company, during the term of this Plan, --------------------- will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 18. Agreements. Options shall be evidenced by written agreements in such ---------- form as the Board shall approve from time to time. 19. Stockholder Approval. Continuance of the Plan shall be subject to -------------------- approval by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under applicable state and federal law. 20. Information to Optionees. The Company shall provide to each Optionee, ------------------------ during the period such Optionee has one or more Options outstanding, and to each individual who acquired shares pursuant to the exercise of an option, with copies of all annual reports and other information which are provided to all stockholders of the Company. The Company shall not be required to provide such information if the issuance of Options under the Plan is limited to key employees whose duties in connection with the Company assure their access to equivalent information. APPLIED MICRO CIRCUITS CORPORATION INCENTIVE STOCK OPTION AGREEMENT Optionee: Total Options Granted: Exercise Price per Share: $5.50 Date of Grant: SEPTEMBER 23, 1997 Expiration Date: SEPTEMBER 23, 2007 Vesting Commencement Date: SEPTEMBER 30, 1997 Applied Micro Circuits Corporation, a Delaware corporation (the "Company"), has granted to the optionee named above (the "Optionee"), an option (the "Option") to purchase the total number of shares of Common Stock of the Company set forth above (the "Shares"), at the price as set forth above, subject in all respects to the terms, definitions and provisions of the 1992 Stock Option Plan (the "Plan") adopted by the Company, which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings herein. 1. Nature of the Option. This Option is intended to qualify as an --------------------- Incentive Stock Option as defined in Section 422 of the Code. 2. Exercise Price. The exercise price for each share of Common Stock is -------------- set forth above and is not less than the fair market value per share of the Common Stock on the date of grant. 3. Exercise of Option. This Option shall be exercisable during its term ------------------ in accordance with the provisions of Section 9 of the Plan as follows: (i) Right to Exercise. ----------------- (a) Subject to subsections 3(i)(b), (c) and (d) below, this Option shall be exercisable cumulatively as follows: 1/48th of the aggregate number of shares subject to this Option shall be deemed exercisable one month from the vesting commencement date of this Option and 1/48th of the aggregate number of shares subject to this Opton shall be exercisable for each following full month period Optionee has been continuously employed by the Company, such that this Option shall be fully exercisable four years from the vesting commencement date of this Option; provided, however, that the foregoing vesting schedule shall temporarily cease during any period of time that Optionee's employment is subject to an approved leave of absence as set forth in Section 2(g) of the Plan and shall recommence upon Optionee's return to the employ of the Company. This Option may be exercised in whole or in part at any time as to Shares which have not yet vested under the above vesting schedule; provided, however, that the Optionee shall execute as a condition to such exercise of this Option, the Exercise Notice and Restricted Stock Purchase Agreement attached hereto as Exhibit A. (b) This Option may not be exercised for a fraction of a share or for an amount less than 100 shares. (c) In the event of Optionee's death, disability or other termination of employment, the exercisability of the Option is governed by Sections 7, 8 and 9 below, subject to the limitations contained in subsection 3(i)(d). (d) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in Section 11 below. (ii) Method of Exercise. This Option shall be exercisable by ------------------ executing the Exercise Notice and Restricted Stock Purchase Agreement in the form attached hereto as Exhibit A (the "Exercise Agreement") which shall state Optionee's election to exercise the Option, the number of Shares in respect of which the Option is being exercised, the Company's right to repurchase all or a portion of the Shares under certain specified conditions, the Company's right of first refusal as to the Shares and such other representations and agreements as to the 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 Agreement 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 Agreement 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, concurrently with the exercise of all or any portion of this Option, deliver to the Company such Optionee's Investment Representation Statement in the form attached hereto as Exhibit B. 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; or (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. 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. 8. Disability of Optionee. Notwithstanding the provisions of Section 7 ---------------------- above, in the event of termination of Optionee's Continuous Status as an Employee as a result of such Optionee's total and permanent disability (as defined in Section 22(e)(3) of the Code), the Optionee may, but only within twelve (12) months from the date of termination of employment (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. To the extent that the Option was not exercisable at the date of termination, or if the Optionee does not exercise such Option within the time specified herein, the Option shall terminate. 9. Death of Optionee. In the event of the death of Optionee during the ----------------- term of this Option and while an Employee of the Company and having been in Continuous Status as an Employee since the date of grant of the Option, the Option may be exercised, at any time within twelve (12) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent exercisable at the date of death. 10. Non-Transferability of Option. This Option may not be transferred in ----------------------------- any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by him. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 11. Term of Option. This Option may be exercised on or before the -------------- Expiration Date and may be exercised during such term only in accordance with the Plan and the terms of this Option. 12. Early Disposition of Stock. Optionee understands that if Optionee -------------------------- disposes of any Shares received under this Option within two (2) years after the date of this Agreement or within one (1) year after such Shares were transferred to such Optionee, Optionee will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount generally measured by the difference between the price paid for the Shares and the lower of the fair market value of the Shares at the date of the exercise or the fair market value of the Shares at the date of disposition. The amount of such ordinary income may be measured differently if Optionee is an officer, director or 10% stockholder of the Company, or if the Shares were subject to a substantial risk of forfeiture at the time they were transferred to Optionee. Optionee hereby agrees to notify the Company in writing within 30 days after the - -------------------------------------------------------------------------------- date of any such disposition. Optionee understands that if Optionee disposes of - ---------------------------- such Shares at any time after the expiration of such two-year and one-year holding periods, any gain on such sale will be taxed as long-term capital gain. 13. Section 83(b) Election For Alternative Minimum Tax for Incentive Stock ---------------------------------------------------------------------- Options. Optionee hereby acknowledges that Optionee has been informed that if - ------- Optionee exercises an incentive stock option as to "unvested shares," unless an 83(b) election is filed by the Optionee with the Internal Revenue Service within ------ 30 days of the purchase of the Shares, the Optionee will be required to include - ------- (for alternative minimum tax purposes only) an amount equal to the excess, if any, of the fair market value of the Shares at the time the shares vest over the purchase price for such Shares. For this purpose, "unvested" shares includes shares purchased by certain persons who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, and shares as to which the Company retains a right to repurchase unvested shares at the Optionee's cost upon the Optionee's termination of employment with the Company. Optionee is encouraged and advised to consult tax advisors in connection with the purchase of the Shares as to the advisability of filing an election for alternative minimum tax purposes under Section 83(b). OPTIONEE HEREBY ASSUMES ALL RESPONSIBILITY FOR FILING SUCH ELECTION AND PAYING ANY TAXES RESULTING FROM SUCH ELECTION OR THE VESTING LAPSE OF SUCH SHARES. APPLIED MICRO CIRCUITS CORPORATION a Delaware corporation By: ----------------------------------- Joel O. Holliday Title: Vice President THIS SPACE INTENTIONALLY LEFT BLANK - SIGNATURE OF OPTIONEE ON FOLLOWING PAGE OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO 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: ---------------- -------------------------------------------------- (Optionee) Residence Address: APPLIED MICRO CIRCUITS CORPORATION INCENTIVE STOCK OPTION AGREEMENT Optionee: Total Options Granted: Exercise Price per Share: Date of Grant: Expiration Date: Vesting Commencement Date: Applied Micro Circuits Corporation, a Delaware corporation (the "Company"), has granted to the optionee named above (the "Optionee"), an option (the "Option") to purchase the total number of shares of Common Stock of the Company set forth above (the "Shares"), at the price as set forth above, subject in all respects to the terms, definitions and provisions of the 1992 Stock Option Plan (the "Plan") adopted by the Company, which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings herein. 1. Nature of the Option. This Option is intended to qualify as an --------------------- Incentive Stock Option as defined in Section 422 of the Code. 2. Exercise Price. The exercise price for each share of Common Stock is -------------- set forth above and is not less than the fair market value per share of the Common Stock on the date of grant. 3. Exercise of Option. This Option shall be exercisable during its term ------------------ in accordance with the provisions of Section 9 of the Plan as follows: (i) Right to Exercise. ----------------- (a) Subject to subsections 3(i)(b), (c) and (d) below, this Option shall be exercisable cumulatively as follows: 25% of the aggregate number of shares subject to this Option shall be deemed exercisable one year from the vesting commencement date of this Option and 1/48th of the aggregate number of shares subject to this Option shall be exercisable for each following full month period Optionee has been continuously employed by the Company, such that this Option shall be fully exercisable four years from the vesting commencement date of this Option; provided, however, that the foregoing vesting schedule shall temporarily cease during any period of time that Optionee's employment is subject to an approved leave of absence as set forth in Section 2(g) of the Plan and shall recommence upon Optionee's return to the employ of the Company. This Option may be exercised in whole or in part at any time as to Shares which have not yet vested under the above vesting schedule; provided, however, that the Optionee shall execute as a condition to such exercise of this Option, the Exercise Notice and Restricted Stock Purchase Agreement attached hereto as Exhibit A. (b) This Option may not be exercised for a fraction of a share or for an amount less than 100 shares. (c) In the event of Optionee's death, disability or other termination of employment, the exercisability of the Option is governed by Sections 7, 8 and 9 below, subject to the limitations contained in subsection 3(i)(d). (d) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in Section 11 below. (ii) Method of Exercise. This Option shall be exercisable by ------------------ executing the Exercise Notice and Restricted Stock Purchase Agreement in the form attached hereto as Exhibit A (the "Exercise Agreement") which shall state Optionee's election to exercise the Option, the number of Shares in respect of which the Option is being exercised, the Company's right to repurchase all or a portion of the Shares under certain specified conditions, the Company's right of first refusal as to the Shares and such other representations and agreements as to the 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 Agreement 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 Agreement 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, concurrently with the exercise of all or any portion of this Option, deliver to the Company such Optionee's Investment Representation Statement in the form attached hereto as Exhibit B. 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; or (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. 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. 8. Disability of Optionee. Notwithstanding the provisions of Section 7 ---------------------- above, in the event of termination of Optionee's Continuous Status as an Employee as a result of such Optionee's total and permanent disability (as defined in Section 22(e)(3) of the Code), the Optionee may, but only within twelve (12) months from the date of termination of employment (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. To the extent that the Option was not exercisable at the date of termination, or if the Optionee does not exercise such Option within the time specified herein, the Option shall terminate. 9. Death of Optionee. In the event of the death of Optionee during the ----------------- term of this Option and while an Employee of the Company and having been in Continuous Status as an Employee since the date of grant of the Option, the Option may be exercised, at any time within twelve (12) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 11 below), by Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent exercisable at the date of death. 10. Non-Transferability of Option. This Option may not be transferred in ----------------------------- any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by him. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee. 11. Term of Option. This Option may be exercised on or before the -------------- Expiration Date and may be exercised during such term only in accordance with the Plan and the terms of this Option. 12. Early Disposition of Stock. Optionee understands that if Optionee -------------------------- disposes of any Shares received under this Option within two (2) years after the date of this Agreement or within one (1) year after such Shares were transferred to such Optionee, Optionee will be treated for federal income tax purposes as having received ordinary income at the time of such disposition in an amount generally measured by the difference between the price paid for the Shares and the lower of the fair market value of the Shares at the date of the exercise or the fair market value of the Shares at the date of disposition. The amount of such ordinary income may be measured differently if Optionee is an officer, director or 10% stockholder of the Company, or if the Shares were subject to a substantial risk of forfeiture at the time they were transferred to Optionee. Optionee hereby agrees to notify the Company in writing within 30 days after the - -------------------------------------------------------------------------------- date of any such disposition. Optionee understands that if Optionee disposes of - ---------------------------- such Shares at any time after the expiration of such two-year and one-year holding periods, any gain on such sale will be taxed as long-term capital gain. 13. Section 83(b) Election For Alternative Minimum Tax for Incentive Stock ---------------------------------------------------------------------- Options. Optionee hereby acknowledges that Optionee has been informed that if - ------- Optionee exercises an incentive stock option as to "unvested shares," unless an 83(b) election is filed by the Optionee with the Internal Revenue Service within ------ 30 days of the purchase of the Shares, the Optionee will be required to include - ------- (for alternative minimum tax purposes only) an amount equal to the excess, if any, of the fair market value of the Shares at the time the shares vest over the purchase price for such Shares. For this purpose, "unvested" shares includes shares purchased by certain persons who are subject to Section 16 of the Securities Exchange Act of 1934, as amended, and shares as to which the Company retains a right to repurchase unvested shares at the Optionee's cost upon the Optionee's termination of employment with the Company. Optionee is encouraged and advised to consult tax advisors in connection with the purchase of the Shares as to the advisability of filing an election for alternative minimum tax purposes under Section 83(b). OPTIONEE HEREBY ASSUMES ALL RESPONSIBILITY FOR FILING SUCH ELECTION AND PAYING ANY TAXES RESULTING FROM SUCH ELECTION OR THE VESTING LAPSE OF SUCH SHARES. APPLIED MICRO CIRCUITS CORPORATION a Delaware corporation By: ---------------------------------- Joel O. Holliday Title: Vice President THIS SPACE INTENTIONALLY LEFT BLANK - SIGNATURE OF OPTIONEE ON FOLLOWING PAGE OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO 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: --------------- ------------------------------------------------ (Optionee) Residence Address: APPLIED MICRO CIRCUITS CORPORATION EXERCISE NOTICE AND RESTRICTED STOCK PURCHASE AGREEMENT Applied Micro Circuits Corporation 6195 Lusk Blvd. San Diego, CA 92121-2793 Attention: Corporate Secretary THIS AGREEMENT is made between (the "Purchaser") and -------------- Applied Micro Circuits Corporation, a Delaware corporation (the "Company") as of . - --------------- RECITALS -------- (1) Pursuant to the exercise of a stock option granted to the Purchaser under the Company's 1992 Stock Option Plan (the "Plan"), and pursuant to the Incentive Stock Option Agreement (the "Option Agreement") dated by and --------- between the Company and the Purchaser, the Purchaser has elected to purchase of those shares which have become vested under the vesting schedule - ---------- set forth in Section 3(i) of the Option Agreement ("Vested Shares") and shares which have not yet vested under such schedule ("Unvested - ---------- Shares"). (The Vested Shares and the Unvested Shares are sometimes collectively referred to herein as the "Shares"). (2) As set forth in the Option Agreement and the Plan, this Agreement gives the Company the right to repurchase at cost of the Unvested Shares in the event of a termination of the Purchaser's employment with the Company prior to the date upon which they would have vested under the Option Agreement and also grants the Company a right of first refusal to purchase the Shares upon certain conditions. Company's Option to Repurchase. If the Purchaser's employment with ------------------------------ the Company is terminated for any reason (a "Termination"), the Company (or its assignee under this Agreement) shall have the right and option to purchase from the Purchaser, or the Purchaser's legal representative, as the case may be (the "Company Option"), at the price paid by Purchaser for such shares (the "Option Price"), up to that number of shares which would, if the option had not been so exercised, have been unvested as of the date of termination. The Option Agreement and the Plan are hereby incorporated by reference and made a part of this Agreement. 1 Procedure for Exercise of Company Option. ---------------------------------------- Upon the occurrence of a Termination, the Company may exercise the Company Option by delivering personally or by first class mail, to Purchaser (or such Purchaser's transferee or legal representative, as the case may be), within 60 days of the Termination, a notice in writing indicating the Company's intention to exercise the Company Option and setting forth a date for closing (the "Closing") not later than thirty (30) days from the mailing of such notice. The Closing shall take place at the Company's principal executive offices. At the Closing, the holder of the certificates for the Unvested Shares being transferred shall deliver the stock certificate or certificates evidencing the Unvested Shares, and the Company shall deliver the purchase price therefor. Whenever the Company shall have the right to purchase the Unvested Shares pursuant to this Agreement, the Company may, upon written notice to the Purchaser, assign to one or more persons the right to exercise all or part of the Company's purchase rights. Each such assignee shall have the right to exercise such right in its own name and for its own account. If the Company Option is assigned by the Company and the fair market value of the shares, as determined by the Board of Directors of the Company, exceeds the repurchase price, and such assignee exercises the Company Option, then the assignee shall pay to the Company the difference between the fair market value of the shares repurchased and the aggregate repurchase price. If the Company does not elect to exercise the Company Option conferred above by giving the requisite notice within sixty (60) days following the Termination, the Company Option shall terminate. Termination of Company Option. The Company Option provided for in ----------------------------- Section 1 of this Agreement shall terminate upon the first date on which there are no longer any Unvested Shares which are the subject of the Company Option. Company's Right of First Refusal. Before any Shares held by Purchaser -------------------------------- or any transferee (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (the "Right of First Refusal"). The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (i) the Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares at the Offered Price to the Company or its assignee(s). At any time within 30 days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (c) below. 2 The purchase price ("Purchase Price") for the Shares purchased by the Company or its assignee(s) under this Section shall be (i) the Offered Price in the case of Shares that are Vested Shares, or (ii) in the case of Shares that are not Vested Shares, the lower of the Offered Price or the Option Price as defined in Section 1 hereof. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice. If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 120 days after the date of the Notice and provided further that any such sale or other transfer is effected in accordance with any applicable securities laws and the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. Anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Purchaser's lifetime or on the Purchaser's death by will or intestacy to the Purchaser's immediate family or a trust for the benefit of the Purchaser's immediate family shall be exempt from the provisions of this Section. "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section. The Right of First Refusal shall terminate as to any Shares 90 days after the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the 1933 Act. Transferability of the Shares; Escrow. ------------------------------------- Purchaser hereby authorizes and directs the Secretary of the Company, or such other person designated by the Company, to transfer the Unvested Shares as to which the Company Option to purchase has been exercised from Purchaser to the 3 Company. Purchaser further authorizes the Company to refuse, or to cause its transfer agent to refuse, to transfer any stock attempted to be transferred in violation of this Agreement. Except as required to effectuate the exercise of the Company Option, none of the Unvested Shares which are subject to the Company Option under Section 1 may be sold, transferred, pledged, hypothecated or otherwise disposed of by Purchaser. The certificate or certificates evidencing any of the shares purchased hereunder shall be endorsed with a legend substantially as follows (together with any other legend(s) restricting the transfer of the Unvested Shares necessary or appropriate under applicable Federal or State securities laws): "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN OPTION AGREEMENT AND A RESTRICTED STOCK PURCHASE AGREEMENT PURSUANT TO WHICH SUCH SHARES WERE PURCHASED, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE CORPORATION." To ensure the availability for delivery of the Purchaser's Unvested Shares upon repurchase by the Company pursuant to the Company Option under Section 1, the Purchaser shall, upon execution of this Agreement, deliver and deposit with the Secretary of the Company, or such other person designated by the Company, the share certificates representing the Unvested Shares. Purchaser shall further deliver to the Company a stock power, duly endorsed in blank, attached hereto as Exhibit A-1, that will be used only in accordance with the transfer of Shares pursuant to the Company Option and the Right of First Refusal. The Unvested Shares shall be held by the Secretary in escrow, until such time as the Company's rights of repurchase pursuant to the Company Option no longer are in effect. As a further condition to the Company's obligations under this Agreement, the spouse of Purchaser, if any, shall execute and deliver to the Company the Consent of Spouse attached hereto as Exhibit A-2. The Company, or its designee, shall not be liable for any act it may do or omit to do with respect to holding the Unvested Shares in escrow and while acting in good faith and in the exercise of its judgment. Transfer or sale of said Unvested Shares is subject to restrictions on transfer imposed by any applicable State and Federal securities laws. Any transferee shall hold such Unvested Shares subject to all the provisions hereof and shall acknowledge the same by signing a copy of this Agreement. Ownership, Voting Rights, Duties. This Agreement shall not affect in -------------------------------- any way the ownership, voting rights or other rights or duties of Purchaser, except as specifically provided herein. Adjustments of Unvested Shares. The Unvested Shares subject to this ------------------------------ Agreement shall be proportionately adjusted for any increase or decrease in the number of issued shares of the Company, resulting from a subdivision or consolidation of shares or the payment of a stock dividend or any other increase or decrease in the number of said shares effected without receipt of consideration by the Company. 4 Market Standoff Agreement. Purchaser hereby agrees that if so ------------------------- requested by the Company or any representative of the underwriters in connection with any registration of the offering of any securities of the Company under the 1933 Act, Purchaser shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period following the effective date of a registration statement of the Company filed under the 1933 Act; provided, however, that such restriction shall only apply to the first two registration statements of the Company to become effective under the 1933 Act which include securities to be sold on behalf of the Company to the public in an underwritten public offering under the 1933 Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such 180-day period. Delivery of Payment. Purchaser herewith delivers to the Company full ------------------- payment for the exercise of the Shares. Notices. Notices required hereunder shall be given in person or by ------- first class mail to the address of Purchaser shown on the records of the Company, and to the Company at its principal executive office. Survival of Terms. This Agreement shall apply to and bind Purchaser ----------------- and the Company and their respective permitted assignees and transferees, heirs, legatees, executors, administrators and legal successors. Tax Consequences. The Purchaser understands that upon the sale of ---------------- shares acquired upon exercise of an incentive stock option at least two years after the grant of the option and at least one year after exercise of the option, any gain will be taxed to the Purchaser as long-term capital gain, which under current law is taxed at the same rates as ordinary income. If these holding periods are not satisfied, the Purchaser will recognize ordinary income on the date of disposition. However, there may also be tax consequences to the Purchaser under the alternative minimum tax in the year of exercise or in the year that certain restrictions imposed on the shares lapse (i.e., the year the stock is fully vested). Such restrictions include the Company's right to repurchase unvested shares at cost in the event of termination of employment, and, include the potential liability of any "insider" (as defined below) of the Company to forfeit to the Company any profits from any purchase and sale of Common Stock of the Company within a six-month period, pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended. If unvested shares (i.e., shares subject to a repurchase option of the Company) are purchased upon exercise of an incentive stock option, or if shares are purchased by a Purchaser who could be subject to suit under Section 16(b) of the Securities Exchange Act of 1934 in the event Purchaser disposed of such shares, and the Purchaser subsequently disposes of such shares prior to the expiration of the two-year and one-year holding periods, under proposed regulations issued by the Internal Revenue Service the shares will be treated as if they had been acquired by the Purchaser pursuant to a nonstatutory option. See "Nonstatutory Options" below. It may be possible for a Purchaser to file a "protective" election with the Internal Revenue Service under Section 83(b) within 30 days after the date of exercise of an incentive stock option. However, the Internal Revenue Service has never considered the question of whether a Section 83(b) election can be filed with respect to the exercise of an incentive stock option, and there can be no assurance that any such "protective" election, even if properly and timely filed, would be recognized as effective by the Internal Revenue Service. Therefore, a Purchaser should consult such Purchaser's own tax 5 advisor prior to exercising an incentive stock option with respect to unvested shares, or prior to any exercise of an incentive stock option in the event that Purchaser could be subject to Section 16(b) of the Securities Exchange Act of 1934 upon disposing of such shares, concerning the advisability of filing a "protective" election under Section 83(b) of the Code. A Section 83(b) election also commences the Purchaser's holding period in the acquired property (for capital gain purposes) and affects the characterization of gain or loss incurred upon disposition of such property. Capital losses are allowed against up to $3,000 of ordinary income, and the excess of net long-term capital loss over net short-term capital gain is allowed in full for this purpose. In addition, the existence of capital gains or losses will affect the limitation or the deductibility of a Purchaser's investment interest. The Purchaser understands that the tax consequences of exercising an option and disposing of shares acquired thereunder depend on the Purchaser's individual circumstances. Purchaser represents that Purchaser has had the opportunity to consult a tax advisor and is not relying upon the Company for tax advice in this regard. Representations. The Purchaser has had the opportunity to review with --------------- ---------------------------------------------------- such Purchaser's own tax advisors the federal, state, local and foreign tax - --------------------------------------------------------------------------- consequences of this investment and the transactions contemplated by this - ------------------------------------------------------------------------- Agreement. The Purchaser is relying solely on such advisors and not on any - --------------------------------------------------------------------------- statements or representations of the Company or any of its agents. The - ----------------------------------------------------------------------- Purchaser understands that Purchaser (and not the Company) shall be responsible - ------------------------------------------------------------------------------- for such Purchaser's own tax liability that may arise as a result of this - ------------------------------------------------------------------------- investment or the transactions contemplated by this Agreement. - ------------------------------------------------------------- Governing Law. This Agreement shall be governed by and construed and ------------- enforced in accordance with the laws of the State of California. Purchaser represents that Purchaser has read this Agreement and is familiar with its terms and provisions. Purchaser hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Agreement. IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set forth above. APPLIED MICRO CIRCUITS CORPORATION A DELAWARE CORPORATION By: __________________________ Joel Holliday Title: Vice President, Finance & Administration PURCHASER 6 7 EXHIBIT A-1 ----------- ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, I hereby sell, assign and transfer unto ---------------- ( ) shares of the Common Stock of Applied Micro Circuits Corporation -------- standing in my name of the books of said corporation represented by Certificate No. herewith and do hereby irrevocably constitute and appoint ----- -------------- to transfer said stock on the books of the within-named corporation with full power of substitution in the premises. Dated: , 19 . ----------- -- Signature: ----------------------------------------- This Assignment Separate from Certificate was executed in conjunction with the terms of a Restricted Stock Purchase Agreement between the above assignor and Applied Micro Circuits Corporation dated and is to be used only in --------- accordance with the exercise of the Company Option and the Company's Right of First Refusal. EXHIBIT A-2 ----------- CONSENT OF SPOUSE I, , spouse of have read and approved the foregoing -------- ----------- Agreement. In consideration of granting of the right to my spouse to purchase shares of Applied Micro Circuits Corporation as set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights under such Agreement or in any shares issued pursuant thereto under the community property laws of the State of California or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: ----------- --------------------------------------------- EXHIBIT A-3 ----------- INCENTIVE STOCK OPTION ELECTION UNDER SECTION 83(b) ---------------------------------------------------- OF THE INTERNAL REVENUE CODE OF 1986 ------------------------------------ The undersigned taxpayer ("Taxpayer") has acquired property pursuant to the exercise of an incentive stock option within the meaning of Section 422 of the Code. Taxpayer hereby elects, pursuant to Section 83(b) of the Code and subject to the limitations set forth herein (1) to include in the computation of such Taxpayer's alternative minimum taxable income for the current taxable year an amount equal to the excess of the fair market value of the property described below (as of the time of transfer) over the amount paid for such property. 1. The name, address, Social Security number and taxable year of Taxpayer and such Taxpayer's spouse are as follows: Name : Taxpayer: Spouse : Address : Social Security No. : Taxpayer: Spouse : Taxable Year: : 2. The property with respect to which the election is made is shares of the Common Stock of Applied Micro Circuits ------------- Corporation, a Delaware corporation (the "Company"). 3. The date on which the property was transferred is : ----------- 4. The property is subject to the restrictions checked below: ---- the right of the Company to repurchase the property at the initial purchase price in the event that Taxpayer ceases to perform substantial services for the Company within a certain period of time; ---- restrictions imposed by Section 16(b) of the Securities Exchange Act of 1934, as amended. 5. The fair market value of the property at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, was $ ----------- 6. The amount (if any) paid for the property was $ ----------- 1 Taxpayer has submitted a copy of this statement to the Company and to the IRS Service Center where Taxpayer files such Taxpayer's federal income tax returns. A copy will also be filed with Taxpayer's federal income tax return for the taxable year to which this election relates. The transferee of the property is the person performing the services in connection with the transfer of the property. This election is made to the same effect, and with the same limitations, for purposes of any applicable state statute corresponding to Section 83(b) of the Code. Taxpayer understands that the foregoing election may not be revoked except with - ------------------------------------------------------------------------------- the consent of the Commissioner. - ------------------------------- Dated: --------------------------------------- The undersigned spouse of Taxpayer joins in this election. Dated: --------------------------------------- 2 EXHIBIT B --------- INVESTMENT REPRESENTATION STATEMENT PURCHASER : SELLER : APPLIED MICRO CIRCUITS CORPORATION COMPANY : APPLIED MICRO CIRCUITS CORPORATION SECURITY : COMMON STOCK AMOUNT : DATE : In connection with the purchase of the above-listed Securities, I, the Purchaser, represent to the Seller and to the Company the following: (a) I am aware of the Company's business affairs and financial condition, and have acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. I am purchasing these Securities for my own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "Securities Act"). (b) I understand that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of my investment intent as expressed herein. In this connection, I understand that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if my representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (c) I further understand that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. Moreover, I understand that the Company is under no obligation to register the Securities. In addition, I understand that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel for the Company. (d) I am familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of issuance of the Securities, such issuance will be exempt from registration under the Securities Act. In the event the Company later becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) 1 days thereafter the securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including among other things: (1) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company, and the amount of securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), if applicable. Notwithstanding this paragraph (d), I acknowledge and agree to the restrictions set forth in paragraph (e) hereof. In the event that the Company does not qualify under Rule 701 at the time of issuance of the Securities, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires among other things: (1) the availability of certain public information about the Company, (2) the resale occurring not less than two years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and, in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, (3) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. (e) I agree, in connection with the Company's initial underwritten public offering of the Company's securities, (1) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock of the Company held by me (other than those shares included in the registration) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for one hundred eighty (180) days from the effective date of such registration, and (2) I further agree to execute any agreement reflecting (1) above as may be requested by the underwriters at the time of the public offering; provided however that the officers and directors of the Company -------- ------- who own the stock of the Company also agree to such restrictions. (f) I further understand that in the event all of the applicable requirements of Rule 144 or Rule 701 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 and Rule 701 are not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 or Rule 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. (g) I understand that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities without the consent of the Commissioner of Corporations of California. I have read the applicable Commissioner's Rules with respect to such restriction, a copy of which is attached. Signature of Purchaser: 2 STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE ---------------------------------------------------- Title 10. Investment - Chapter 3. Commissioner of Corporations 260.141.11: Restriction on Transfer. (a) The issuer of any security upon ---------- ----------------------- which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferror's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferror or the transferror's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors, descendants or spouse; (5) to holders of securities of the same class of the same issuer; (6) by way of gift or donation inter vivos or on death; (7) by or through a broker-dealer licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities law of the foreign state, territory or country concerned; (8) to a broker-dealer licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; (10) by way of a sale qualified under Sections 25111, 25112, 25113 or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification; (11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the Code, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; or (17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital letters of not less than 10-point size, reading as follows: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." EXHIBIT B --------- INVESTMENT REPRESENTATION STATEMENT PURCHASER : SELLER : APPLIED MICRO CIRCUITS CORPORATION COMPANY : APPLIED MICRO CIRCUITS CORPORATION SECURITY : COMMON STOCK AMOUNT : DATE : In connection with the purchase of the above-listed Securities, I, the Purchaser, represent to the Seller and to the Company the following: (a) I am aware of the Company's business affairs and financial condition, and have acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. I am purchasing these Securities for my own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "Securities Act"). (b) I understand that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of my investment intent as expressed herein. In this connection, I understand that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if my representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (c) I further understand that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. Moreover, I understand that the Company is under no obligation to register the Securities. In addition, I understand that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel for the Company. (d) I am familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of issuance of the Securities, such issuance will be exempt from registration under the Securities Act. In the event the Company later becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter the securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including among other things: (1) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company, and the amount of securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), if applicable. Notwithstanding this paragraph (d), I acknowledge and agree to the restrictions set forth in paragraph (e) hereof. In the event that the Company does not qualify under Rule 701 at the time of issuance of the Securities, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires among other things: (1) the availability of certain public information about the Company, (2) the resale occurring not less than two years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and, in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, (3) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. (e) I agree, in connection with the Company's initial underwritten public offering of the Company's securities, (1) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock of the Company held by me (other than those shares included in the registration) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for one hundred eighty (180) days from the effective date of such registration, and (2) I further agree to execute any agreement reflecting (1) above as may be requested by the underwriters at the time of the public offering, provided however that the officers and directors of the Company ----------------- who own the stock of the Company also agree to such restrictions. (f) I further understand that in the event all of the applicable requirements of Rule 144 or Rule 701 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required, and that, notwithstanding the fact that Rule 144 and Rule 701 are not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 or Rule 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. (g) I understand that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities without the consent of the Commissioner of Corporations of California. I have read the applicable Commissioner's Rules with respect to such restriction, a copy of which is attached. Signature of Purchaser: ------------------------------------ Date: , 19 ---------- --- EX-10.4 10 1997 EMPLOYEE STOCK PURCHASE PLAN Exhibit 10.4 APPLIED MICRO CIRCUITS CORPORATION 1997 EMPLOYEE STOCK PURCHASE PLAN The following constitute the provisions of the 1997 Employee Stock Purchase Plan of Applied Micro Circuits Corporation. 1. Purpose. The purpose of the Plan is to provide employees of the ------- Company and its Designated Subsidiaries with an opportunity to purchase Common Stock of the Company. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. ----------- (a) "Board" shall mean the Board of Directors of the Company. ----- (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (c) "Common Stock" shall mean the Common Stock of the Company. ------------ (d) "Company" shall mean Applied Micro Circuits Corporation, a ------- Delaware corporation. (e) "Compensation" shall mean all earnings reportable as W-2 wages for ------------ federal income tax withholding purposes. (f) "Continuous Status as an Employee" shall mean the absence of any -------------------------------- interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of a leave of absence agreed to in writing by the Company, provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute. (g) "Contributions" shall mean all amounts credited to the account of ------------- a participant pursuant to the Plan. -1- (h) "Designated Subsidiaries" shall mean the Subsidiaries which have ----------------------- been designated by the Board from time to time in its sole discretion as eligible to participate in the Plan. (i) "Employee" shall mean any person, including an Officer, who is -------- customarily employed for at least twenty (20) hours per week and more than five (5) months in a calendar year by the Company or one of its Designated Subsidiaries. (j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended. (k) "Purchase Date" shall mean the last day of each Purchase Period of ------------- the Plan. (l) "Offering Date" shall mean the first business day of each Offering ------------- Period of the Plan. (m) "Offering Period" shall mean a period of twenty-four (24) months --------------- commencing on February 1 and August 1 of each year, except for the first Offering Period as set forth in Section 4(a). (n) "Officer" shall mean a person who is an officer of the Company ------- within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (o) "Plan" shall mean this Employee Stock Purchase Plan. ---- (p) "Purchase Period" shall mean a period of six (6) months within an --------------- Offering Period, except for the first Purchase Period as set forth in Section 4(b). (q) "Subsidiary" shall mean a corporation, domestic or foreign, of ---------- which not less than 50% of the voting shares are held by the Company or a Subsidiary, whether or not such corporation now exists or is hereafter organized or acquired by the Company or a Subsidiary. 3. Eligibility. ----------- (a) Any person who is an Employee as of the Offering Date of a given Offering Period shall be eligible to participate in such Offering Period under the Plan, subject to the requirements of Section 5(a) and the limitations imposed by Section 423(b) of the Code. -2- (b) Any provisions of the Plan to the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (or any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own stock and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any subsidiary of the Company, or (ii) if such option would permit his or her rights to purchase stock under all employee stock purchase plans (described in Section 423 of the Code) of the Company and its Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of fair market value of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. 4. Offering Periods and Purchase Periods. -------------------------------------- (a) Offering Periods. The Plan shall be implemented by a series of ---------------- Offering Periods of twenty-four (24) months duration, with new Offering Periods commencing on or about February 1 and August 1 of each year (or at such other time or times as may be determined by the Board of Directors). The first Offering Period shall commence on the beginning of the effective date of the Registration Statement on Form S-1 for the initial public offering of the Company's Common Stock (the "IPO Date") and continue until January 31, 2000. The Plan shall continue until terminated in accordance with Section 19 hereof. The Board of Directors of the Company shall have the power to change the duration and/or the frequency of Offering Periods with respect to future offerings without shareholder approval if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first Offering Period to be affected. Eligible employees may not participate in more than one Offering Period at a time. (b) Purchase Periods. Each Offering Period shall consist of four (4) ---------------- consecutive purchase periods of six (6) months duration. The last day of each Purchase Period shall be the "Purchase Date" for such Purchase Period. A Purchase Period commencing on February 1 shall end on the next July 31. A Purchase Period commencing on August 1 shall end on the next January 31. The first Purchase Period shall commence on the IPO Date and shall end on July 31, 1998. The Board of Directors of the Company shall have the power to change the duration and/or frequency of Purchase Periods with respect to future purchases without shareholder approval if such change is announced at least fifteen (15) days prior to the scheduled beginning of the first Purchase Period to be affected. 5. Participation. ------------- -3- (a) An eligible Employee may become a participant in the Plan by completing a subscription agreement on the form provided by the Company and filing it with the Company's payroll office prior to the applicable Offering Date, unless a later time for filing the subscription agreement is set by the Board for all eligible Employees with respect to a given offering. The subscription agreement shall set forth the percentage of the participant's Compensation (which shall be not less than 1% and not more than 20%) to be paid as Contributions pursuant to the Plan. (b) Payroll deductions shall commence on the first payroll following the Offering Date and shall end on the last payroll paid on or prior to the last Purchase Period of the Offering Period to which the subscription agreement is applicable, unless sooner terminated by the participant as provided in Section 10. 6. Method of Payment of Contributions. ---------------------------------- (a) The participant shall elect to have payroll deductions made on each payday during the Offering Period in an amount not less than one percent (1%) and not more than twenty percent (20%) of such participant's Compensation on each such payday. All payroll deductions made by a participant shall be credited to his or her account under the Plan. A participant may not make any additional payments into such account. (b) A participant may discontinue his or her participation in the Plan as provided in Section 10, or, during the Offering Period may increase or decrease the rate of his or her Contributions during such Offering Period by completing and filing with the Company a new subscription agreement; provided, however, that no participant may effect more than one increase or decrease during an Offering Period. The change in rate shall be effective as of the beginning of the next calendar month following the date of filing of the new subscription agreement, if the agreement is filed at least ten (10) business days prior to such date and, if not, as of the beginning of the next succeeding calendar month. (c) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) herein, a participant's payroll deductions may be decreased to 0% at such time during any Offering Period which is scheduled to end during the current calendar year that the aggregate of all payroll deductions accumulated with respect to such Offering Period and any other Offering Period ending within the same calendar year equal $21,250. Payroll deductions shall re-commence at the rate provided in such participant's subscription Agreement at the beginning of the first Offering Period which is scheduled to end in the following calendar year, unless terminated by the participant as provided in Section 10. -4- 7. Grant of Option. --------------- (a) On the Offering Date of each Offering Period, each eligible Employee participating in such Offering Period shall be granted an option to purchase on each Purchase Date a number of shares of the Company's Common Stock determined by dividing such Employee's Contributions accumulated prior to such Purchase Date and retained in the participant's account as of the Purchase Date by the lower of (i) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Offering Date, or (ii) eighty-five percent (85%) of the fair market value of a share of the Company's Common Stock on the Purchase Date; provided however, that the maximum number of shares an Employee may purchase during each Offering Period shall be determined at the Offering Date by dividing $25,000 by the fair market value of a share of the Company's Common Stock on the Offering Date, and provided further that such purchase shall be subject to the limitations set forth in Sections 3(b) and 13. The fair market value of a share of the Company's Common Stock shall be determined as provided in Section 7(b). (b) The option price per share of the shares offered in a given Offering Period shall be the lower of: (i) 85% of the fair market value of a share of the Common Stock of the Company on the Offering Date; or (ii) 85% of the fair market value of a share of the Common Stock of the Company on the Purchase Date. The fair market value of the Company's Common Stock on a given date shall be determined by the Board in its discretion based on the closing price of the Common Stock for such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported by the National Association of Securities Dealers Automated Quotation (Nasdaq) National Market or, if such price is not reported, the mean of the bid and asked prices per share of the Common Stock as reported by Nasdaq or, in the event the Common Stock is listed on a stock exchange, the fair market value per share shall be the closing price on such exchange on such date (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in The Wall Street Journal. For purposes of the Offering Date under the first Offering Period under the Plan, the fair market value of a share of the Common Stock of the Company shall be the Price to Public as set forth in the final prospectus filed with the Securities and Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, as amended. 8. Exercise of Option. Unless a participant withdraws from the Plan as ------------------ provided in paragraph 10, his or her option for the purchase of shares will be exercised automatically on each Purchase Date of an Offering Period, and the maximum number of full shares subject to the option will be purchased at the applicable option price with the accumulated Contributions in his or her account. The shares purchased upon exercise of an option hereunder shall be deemed to be transferred to the participant on the Purchase Date. No fractional shares shall be purchased. Any -5- payroll deductions accumulated in a participant's account which are not sufficient to purchase a full share shall be retained in the participant's account for the subsequent Purchase Period or Offering Period, subject to earlier withdrawal by the participant as provided in Section 10. Any other monies left over in a participant's account after a Purchase Date shall be returned to the Participant. During his or her lifetime, a participant's option to purchase shares hereunder is exercisable only by him or her. 9. Delivery. As promptly as practicable after each Purchase Date of each -------- Offering Period, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his or her option or the deposit of such number of shares with the broker selected by the Company for administration of Plan stock purchases, as determined by the Company. 10. Voluntary Withdrawal; Termination of Employment. ----------------------------------------------- (a) A participant may withdraw all but not less than all the Contributions credited to his or her account under the Plan at any time at least five (5) business days prior to each Purchase Date by giving written notice to the Company. All of the participant's Contributions credited to his or her account will be paid to him or her promptly after receipt of his or her notice of withdrawal and his or her option for the current period will be automatically terminated, and no further Contributions for the purchase of shares will be made during the Offering Period. (b) Upon termination of the participant's Continuous Status as an Employee prior to the Purchase Date of an Offering Period for any reason, including retirement or death, the Contributions credited to his or her account will be returned to him or her or, in the case of his or her death, to the person or persons entitled thereto under Section 14, and his or her option will be automatically terminated. (c) In the event an Employee fails to remain in Continuous Status as an Employee of the Company for at least twenty (20) hours per week during the Offering Period in which the employee is a participant, he or she will be deemed to have elected to withdraw from the Plan and the Contributions credited to his or her account will be returned to him or her and his or her option terminated. (d) A participant's withdrawal from an offering will not have any effect upon his or her eligibility to participate in a succeeding offering or in any similar plan which may hereafter be adopted by the Company. -6- 11. Automatic Withdrawal. If the fair market value of the shares on the -------------------- first Purchase Date of an Offering Period is less than the fair market value of the shares on the Offering Date for such Offering Period, then every participant shall automatically (i) be withdrawn from such Offering Period at the close of such Purchase Date and after the acquisition of shares for such Purchase Period, and (ii) be enrolled in the Offering Period commencing on the first business day subsequent to such Purchase Period. 12. Interest. No interest shall accrue on the Contributions of a -------- participant in the Plan. 13. Stock. ----- (a) The maximum number of shares of the Company's Common Stock which shall be made available for sale under the Plan shall be 400,000 shares subject to adjustment upon changes in capitalization of the Company as provided in Section 19. If the total number of shares which would otherwise be subject to options granted pursuant to Section 7(a) on the Offering Date of an Offering Period exceeds the number of shares then available under the Plan (after deduction of all shares for which options have been exercised or are then outstanding), the Company shall make a pro rata allocation of the shares remaining available for option grant in as uniform a manner as shall be practicable and as it shall determine to be equitable. In such event, the Company shall give written notice of such reduction of the number of shares subject to the option to each Employee affected thereby and shall similarly reduce the rate of Contributions, if necessary. (b) The participant will have no interest or voting right in shares covered by his or her option until such option has been exercised. (c) Shares to be delivered to a participant under the Plan will be registered in the name of the participant or in the name of the participant and his or her spouse. 14. Administration. The Board, or a committee named by the Board, shall -------------- supervise and administer the Plan and shall have full power to adopt, amend and rescind any rules deemed desirable and appropriate for the administration of the Plan and not inconsistent with the Plan, to construe and interpret the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. The composition of the committee shall be in accordance with the requirements to obtain or retain any available exemption from the operation of Section 16(b) of the Exchange Act pursuant to Rule 16b-3 promulgated thereunder. 15. Designation of Beneficiary. -------------------------- -7- (a) A participant may file a written designation of a beneficiary who is to receive any shares and cash, if any, from the participant's account under the Plan in the event of such participant's death subsequent to the end of a Purchase Period but prior to delivery to him or her of such shares and cash. In addition, a participant may file a written designation of a beneficiary who is to receive any cash from the participant's account under the Plan in the event of such participant's death prior to the Purchase Date of an Offering Period. If a participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the participant (and his or her spouse, if any) at any time by written notice. In the event of the death of a participant and in the absence of a beneficiary validly designated under the Plan who is living at the time of such participant's death, the Company shall deliver such shares and/or cash to the executor or administrator of the estate of the participant, or if no such executor or administrator has been appointed (to the knowledge of the Company), the Company, in its discretion, may deliver such shares and/or cash to the spouse or to any one or more dependents or relatives of the participant, or if no spouse, dependent or relative is known to the Company, then to such other person as the Company may designate. 16. Transferability. Neither Contributions credited to a participant's --------------- account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution, or as provided in Section 14) by the participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Company may treat such act as an election to withdraw funds in accordance with Section 10. 17. Use of Funds. All Contributions received or held by the Company under ------------ the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such Contributions. 18. Reports. Individual accounts will be maintained for each participant ------- in the Plan. Statements of account will be given to participating Employees promptly following the Purchase Date, which statements will set forth the amounts of Contributions, the per share purchase price, the number of shares purchased and the remaining cash balance, if any. 19. Adjustments Upon Changes in Capitalization; Corporate Transactions. ------------------------------------------------------------------ (a) Adjustment. Subject to any required action by the shareholders of ---------- the Company, the number of shares of Common Stock covered by each option under the Plan which has -8- not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but have not yet been placed under option (collectively, the "Reserves"), as well as the price per share of Common Stock covered by each option under the Plan which has not yet been exercised, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration". Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an option. (b) Corporate Transactions. In the event of the proposed dissolution ---------------------- or liquidation of the Company, the Offering Period will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each option under the Plan shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, to shorten the Offering Period then in progress by setting a new Purchase Date (the "New Purchase Date"). If the Board shortens the Offering Period then in progress in lieu of assumption or substitution in the event of a merger or sale of assets, the Board shall notify each participant in writing, at least ten (10) days prior to the New Purchase Date, that the Purchase Date for his or her option has been changed to the New Purchase Date and that his or her option will be exercised automatically on the New Purchase Date, unless prior to such date he or she has withdrawn from the Offering Period as provided in Section 10. For purposes of this paragraph, an option granted under the Plan shall be deemed to be assumed if, following the sale of assets or merger, the option confers the right to purchase, for each share of option stock subject to the option immediately prior to the sale of assets or merger, the consideration (whether stock, cash or other securities or property) received in the sale of assets or merger by holders of Common Stock for each share of Common Stock held on the effective date of the transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Common Stock); provided, however, that if such consideration received in the sale of assets or merger was not solely common stock of the successor corporation or its parent (as defined in Section 424(e) of the Code), the Board may, with the consent of the successor corporation and the participant, provide for the consideration to be received upon exercise of the option to be -9- solely common stock of the successor corporation or its parent equal in fair market value to the per share consideration received by holders of Common Stock and the sale of assets or merger. The Board may, if it so determines in the exercise of its sole discretion, also make provision for adjusting the Reserves, as well as the price per share of Common Stock covered by each outstanding option, in the event that the Company effects one or more reorganizations, recapitalizations, rights offerings or other increases or reductions of shares of its outstanding Common Stock, and in the event of the Company being consolidated with or merged into any other corporation. 20. Amendment or Termination. ------------------------ (a) The Board of Directors of the Company may at any time terminate or amend the Plan. Except as provided in Section 19, no such termination may affect options previously granted, nor may an amendment make any change in any option theretofore granted which adversely affects the rights of any participant. In addition, to the extent necessary to comply with Rule 16b-3 under the Exchange Act, or under Section 423 of the Code (or any successor rule or provision or any applicable law or regulation), the Company shall obtain shareholder approval in such a manner and to such a degree as so required. (b) Without shareholder consent and without regard to whether any participant rights may be considered to have been adversely affected, the Board (or its committee) shall be entitled to change the Offering Periods and Purchase Periods, limit the frequency and/or number of changes in the amount withheld during an Offering Period, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, permit payroll withholding in excess of the amount designated by a participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each participant properly correspond with amounts withheld from the participant's Compensation, and establish such other limitations or procedures as the Board (or its committee) determines in its sole discretion advisable which are consistent with the Plan. 21. Notices. All notices or other communications by a participant to the ------- Company under or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Company at the location, or by the person, designated by the Company for the receipt thereof. -10- 22. Conditions Upon Issuance of Shares. Shares shall not be issued with ---------------------------------- respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all applicable provisions of law, domestic or foreign, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the person exercising such option to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned applicable provisions of law. 23. Term of Plan; Effective Date. The Plan shall become effective upon ---------------------------- the earlier to occur of its adoption by the Board of Directors or its approval by the shareholders of the Company. It shall continue in effect for a term of twenty (20) years unless sooner terminated under Section 20. 24. Additional Restrictions of Rule 16b-3. The terms and conditions of ------------------------------------- options granted hereunder to, and the purchase of shares by, persons subject to Section 16 of the Exchange Act shall comply with the applicable provisions of Rule 16b-3. This Plan shall be deemed to contain, and such options shall contain, and the shares issued upon exercise thereof shall be subject to, such additional conditions and restrictions as may be required by Rule 16b-3 to qualify for the maximum exemption from Section 16 of the Exchange Act with respect to Plan transactions. -11- APPLIED MICRO CIRCUITS CORPORATION 1997 EMPLOYEE STOCK PURCHASE PLAN SUBSCRIPTION AGREEMENT New Election ______ Change of Election ______ 1. I, ________________________, hereby elect to participate in the APPLIED MICRO CIRCUITS CORPORATION 1997 Employee Stock Purchase Plan (the "Plan") for the Offering Period ______________, _____ to _______________, _____, and subscribe to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the Plan. 2. I elect to have Contributions in the amount of _____% of my Compensation, as those terms are defined in the Plan, applied to this purchase. I understand that this amount must not be less than 1% and not more than 20% of my Compensation during the Offering Period. (Please note that no fractional percentages are permitted). 3. I hereby authorize payroll deductions from each paycheck during the Offering Period at the rate stated in Item 2 of this Subscription Agreement. I understand that all payroll deductions made by me shall be credited to my account under the Plan and that I may not make any additional payments into such account. I understand that all payments made by me shall be accumulated for the purchase of shares of Common Stock at the applicable purchase price determined in accordance with the Plan. I further understand that, except as otherwise set forth in the Plan, shares will be purchased for me automatically on the Purchase Date of each Offering Period unless I otherwise withdraw from the Plan by giving written notice to the Company for such purpose. 4. I understand that I may discontinue at any time prior to the Purchase Date my participation in the Plan as provided in Section 10 of the Plan. I also understand that I can increase or decrease the rate of my Contributions to not less than 1% and to not more than 20% of my Compensation on one occasion only for each rate change during any Offering Period by completing and filing a new Subscription Agreement with such increase or decrease taking effect as of the beginning of the calendar month following the date of filing of the new Subscription Agreement, if filed at least five (5) business days prior to the beginning of such month. Further, I may change the rate of deductions for future Offering Periods by filing a new Subscription Agreement, and any such change will be effective as of the beginning of the next Offering Period. In addition, I acknowledge that, unless I discontinue my participation in the Plan as provided in Section 10 of the Plan, my election will continue to be effective for each successive Offering Period. 5. I have received a copy of the Company's most recent description of the Plan and a copy of the complete "APPLIED MICRO CIRCUITS CORPORATION 1997 Employee Stock Purchase Plan." I understand that my participation in the Plan is in all respects subject to the terms of the Plan. -1- 6. Shares purchased for me under the Plan should be issued in the name(s) of (name of employee or employee and spouse only): ____________________________________ -2- ------------------------------------ 7. In the event of my death, I hereby designate the following as my beneficiary(ies) to receive all payments and shares due to me under the Plan: NAME: (Please print) ------------------------------------- (First) (Middle) (Last) - ------------------------- ------------------------------------- (Relationship) (Address) ------------------------------------- 8. I understand that if I dispose of any shares received by me pursuant to the Plan within 2 years after the Offering Date (the first day of the Offering Period during which I purchased such shares) or within 1 year after the Purchase Date, I will be treated for federal income tax purposes as having received ordinary compensation income at the time of such disposition in an amount equal to the excess of the fair market value of the shares on the Purchase Date over the price which I paid for the shares, regardless of whether I disposed of the shares at a price less than their fair market value at the Purchase Date. The remainder of the gain or loss, if any, recognized on such disposition will be treated as capital gain or loss. I hereby agree to notify the Company in writing within 30 days after -------------------------------------------------------------------- the date of any such disposition, and I will make adequate provision for - ------------------------------------------------------------------------ federal, state or other tax withholding obligations, if any, which arise upon - ----------------------------------------------------------------------------- the disposition of the Common Stock. The Company may, but will not be obligated - ----------------------------------- to, withhold from my compensation the amount necessary to meet any applicable withholding obligation including any withholding necessary to make available to the Company any tax deductions or benefits attributable to the sale or early disposition of Common Stock by me. 9. If I dispose of such shares at any time after expiration of the 2-year and 1-year holding periods, I understand that I will be treated for federal income tax purposes as having -3- received compensation income only to the extent of an amount equal to the lesser of (1) the excess of the fair market value of the shares at the time of such disposition over the purchase price which I paid for the shares under the option, or (2) 15% of the fair market value of the shares on the Offering Date. The remainder of the gain or loss, if any, recognized on such disposition will be treated as capital gain or loss. I understand that this tax summary is only a summary and is subject to ---------------------------------------------------------------------- change. I further understand that I should consult a tax advisor concerning the - ------ tax implications of the purchase and sale of stock under the Plan. 10. I hereby agree to be bound by the terms of the Plan. The effectiveness of this Subscription Agreement is dependent upon my eligibility to participate in the Plan. SIGNATURE: SOCIAL SECURITY #: DATE: SPOUSE'S SIGNATURE (necessary if beneficiary is not spouse): (Signature) (Print name) -4- APPLIED MICRO CIRCUITS CORPORATION 1997 EMPLOYEE STOCK PURCHASE PLAN NOTICE OF WITHDRAWAL I, __________________________, hereby elect to withdraw my participation in the APPLIED MICRO CIRCUITS CORPORATION 1997 Employee Stock Purchase Plan (the "Plan") for the Offering Period _________. This withdrawal covers all Contributions credited to my account and is effective on the date designated below. I understand that all Contributions credited to my account will be paid to me within ten (10) business days of receipt by the Company of this Notice of Withdrawal and that my option for the current period will automatically terminate, and that no further Contributions for the purchase of shares can be made by me during the Offering Period. The undersigned further understands and agrees that he or she shall be eligible to participate in succeeding offering periods only by delivering to the Company a new Subscription Agreement. Dated:___________________ Signature of Employee Social Security Number EX-10.5 11 1997 DIRECTORS' STOCK OPTION PLAN EXHIBIT 10.5 APPLIED MICRO CIRCUITS CORPORATION 1997 DIRECTORS' STOCK OPTION PLAN --------------------------------- 1. PURPOSES OF THE PLAN. The purposes of this Directors' Stock Option -------------------- Plan are to attract and retain the best available personnel for service as Directors of the Company, to provide additional incentive to the Outside Directors of the Company to serve as Directors, and to encourage their continued service on the Board. All options granted hereunder shall be nonstatutory stock options. 2. DEFINITIONS. As used herein, the following definitions shall apply: ----------- (a) "Board" shall mean the Board of Directors of the Company. ----- (b) "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- (c) "Common Stock" shall mean the Common Stock of the Company. ------------ (d) "Company" shall mean Applied Micro Circuits Corporation, a ------- Delaware corporation. (e) "Continuous Status as a Director" shall mean the absence of any ------------------------------- interruption or termination of service as a Director. (f) "Director" shall mean a member of the Board. -------- (g) "Employee" shall mean any person, including any officer or -------- director, employed by the Company or any Parent or Subsidiary of the Company. The payment of a director's fee by the Company shall not be sufficient in and of itself to constitute "employment" by the Company. (h) "Exchange Act" shall mean the Securities Exchange Act of 1934, as ------------ amended. (i) "Option" shall mean a stock option granted pursuant to the Plan. ------ All options shall be nonstatutory stock options (i.e., options that are not intended to qualify as incentive stock options under Section 422 of the Code). 1 (j) "Optioned Stock" shall mean the Common Stock subject to an Option. -------------- (k) "Optionee" shall mean an Outside Director who receives an Option. -------- (l) "Outside Director" shall mean a Director who is not an Employee. ---------------- (m) "Parent" shall mean a "parent corporation," whether now or ------ hereafter existing, as defined in Section 424(e) of the Code. (n) "Plan" shall mean this 1997 Directors' Stock Option Plan. ---- (o) "Share" shall mean a share of the Common Stock, as adjusted in ----- accordance with Section 11 of the Plan. (p) "Subsidiary" shall mean a "subsidiary corporation," whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 11 of ------------------------- the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 200,000 Shares (the "Pool") of Common Stock. The Shares may ---- be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan. If Shares which were acquired upon exercise of an Option are subsequently repurchased by the Company, such Shares shall not in any event be returned to the Plan and shall not become available for future grant under the Plan. 2 4. ADMINISTRATION OF AND GRANTS OF OPTIONS UNDER THE PLAN. ------------------------------------------------------ (a) ADMINISTRATOR. Except as otherwise required herein, the Plan ------------- shall be administered by the Board. (b) PROCEDURE FOR GRANTS. All grants of Options hereunder shall be -------------------- automatic and nondiscretionary and shall be made strictly in accordance with the following provisions: (i) No person shall have any discretion to select which Outside Directors shall be granted Options or to determine the number of Shares to be covered by Options granted to Outside Directors. (ii) An Outside Director shall be automatically granted an Option to purchase 12,500 Shares (the "First Option") on the date on which such ------------ person first becomes an Outside Director after the effective date of the Plan, whether through election by the stockholders of the Company or appointment by the Board of Directors to fill a vacancy. (iii) Each Outside Director shall be automatically granted an Option to purchase 12,500 Shares (a "Subsequent Option") on April 1 of each ----------------- calendar year, provided that, on such date, he or she shall have served on the Board for at least six (6) months prior to the date of such Annual Meeting and, provided further, that a Subsequent Option shall not be granted to an Outside Director who is an Outside Director on the effective date of the Plan until April 1, 2000. (iv) Notwithstanding the provisions of subsections (ii) and (iii) hereof, in the event that a grant would cause the number of Shares subject to outstanding Options plus the number of Shares previously purchased upon exercise of Options to exceed the Pool, then each such automatic grant shall be for that number of Shares determined by dividing the total number of Shares remaining available for grant by the number of Outside Directors receiving an Option on such date on the automatic grant date. Any further grants shall then be deferred until such time, if any, as additional Shares become available for grant under the Plan through action of the stockholders to increase the number of Shares which may be issued under the Plan or through cancellation or expiration of Options previously granted hereunder. (v) Notwithstanding the provisions of subsections (ii) and (iii) hereof, any grant of an Option made before the Company has obtained stockholder approval of the Plan in 3 accordance with Section 17 hereof shall be conditioned upon obtaining such stockholder approval of the Plan in accordance with Section 17 hereof. (vi) The terms of each First Option granted hereunder shall be as follows: (1) the First Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 9 hereof; (2) the exercise price per Share shall be 100% of the fair market value per Share on the date of grant of the First Option, determined in accordance with Section 8 hereof; and (3) the First Option shall become exercisable in installments cumulatively as to 1/12th of the Shares subject to the First Option on each monthly anniversary of the date of grant of the Option. (vii) The terms of each Subsequent Option granted hereunder shall be as follows: (1) the Subsequent Option shall be exercisable only while the Outside Director remains a Director of the Company, except as set forth in Section 9 hereof; (2) the exercise price per Share shall be 100% of the fair market value per Share on the date of grant of the Subsequent Option, determined in accordance with Section 8 hereof; and (3) the Subsequent Option shall become exercisable in installments cumulatively as to 1/12th of the Shares subject to the Subsequent Option on each monthly anniversary of the date of grant of the Subsequent Option. (c) POWERS OF THE BOARD. Subject to the provisions and restrictions ------------------- of the Plan, the Board shall have the authority, in its discretion: (i) to determine, upon review of relevant information and in accordance with Section 8(b) of the Plan, the fair market value of the Common Stock; (ii) to determine the exercise price per share of Options to be granted, which exercise price shall be determined in accordance with Section 8(a) of the Plan; (iii) to interpret the Plan; (iv) to prescribe, amend and rescind rules and regulations relating to the Plan; (v) to authorize any person to execute on behalf of the Company any instrument required to effectuate 4 the grant of an Option previously granted hereunder; and (vi) to make all other determinations deemed necessary or advisable for the administration of the Plan. (d) EFFECT OF BOARD'S DECISION. All decisions, determinations and -------------------------- interpretations of the Board shall be final and binding on all Optionees and any other holders of any Options granted under the Plan. (e) SUSPENSION OR TERMINATION OF OPTION. If the President or his or ----------------------------------- her designee reasonably believes that an Optionee has committed an act of misconduct, the President may suspend the Optionee's right to exercise any option pending a determination by the Board of Directors (excluding the Outside Director accused of such misconduct). If the Board of Directors (excluding the Outside Director accused of such misconduct) determines an Optionee has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary duty or deliberate disregard of the Company rules resulting in loss, damage or injury to the Company, or if an Optionee makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company or induces any principal for whom the Company acts as agent to terminate such agency relationship, neither the Optionee nor his or her estate shall be entitled to exercise any option whatsoever. In making such determination, the Board of Directors (excluding the Outside Director accused of such misconduct) shall act fairly and shall give the Optionee an opportunity to appear and present evidence on Optionee's behalf at a hearing before the Board or a committee of the Board. 5. ELIGIBILITY. Options may be granted only to Outside Directors. All ----------- Options shall be automatically granted in accordance with the terms set forth in Section 4(b) hereof. An Outside Director who has been granted an Option may, if he or she is otherwise eligible, be granted an additional Option or Options in accordance with such provisions. The Plan shall not confer upon any Optionee any right with respect to continuation of service as a Director or nomination to serve as a Director, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate his or her directorship at any time. 6. TERM OF PLAN; EFFECTIVE DATE. The Plan shall become effective on the ---------------------------- effectiveness of the registration statement under the Securities Act of 1933, as amended, relating to the Company's initial public offering of securities. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 13 of the Plan. 5 7. TERM OF OPTIONS. The term of each Option shall be ten (10) years from --------------- the date of grant thereof. 8. EXERCISE PRICE AND CONSIDERATION. -------------------------------- (a) EXERCISE PRICE. The per Share exercise price for the Shares to be -------------- issued pursuant to exercise of an Option shall be 100% of the fair market value per Share on the date of grant of the Option. (b) FAIR MARKET VALUE. The fair market value shall be determined by ----------------- the Board; provided, however, that where there is a public market for the Common -------- ------- Stock, the fair market value per Share shall be the mean of the bid and asked prices of the Common Stock in the over-the-counter market on the date of grant, as reported in The Wall Street Journal (or, if not so reported, as otherwise ------------------------ reported by the National Association of Securities Dealers Automated Quotation ("Nasdaq") System) or, in the event the Common Stock is traded on the Nasdaq National Market or listed on a stock exchange, the fair market value per Share shall be the closing price on such system or exchange on the date of grant of the Option (or, in the event that the Common Stock is not traded on such date, on the immediately preceding trading date), as reported in The Wall Street --------------- Journal. With respect to any Options granted hereunder concurrently with the - ------- initial effectiveness of the Plan, the fair market value shall be the Price to Public as set forth in the final prospectus relating to such initial public offering. (c) FORM OF CONSIDERATION. The consideration to be paid for the --------------------- Shares to be issued upon exercise of an Option shall consist entirely of cash, check, other Shares of Common Stock having a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised (which, if acquired from the Company, shall have been held for at least six months), by delivery of a properly 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, or any combination of such methods of payment and/or any other consideration or method of payment as shall be permitted under applicable corporate law. 9. EXERCISE OF OPTION. ------------------ 6 (a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option ----------------------------------------------- granted hereunder shall be exercisable at such times as are set forth in Section 4(b) hereof; provided, however, that no Options shall be exercisable prior to stockholder approval of the Plan in accordance with Section 17 hereof has been obtained. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may consist of any consideration and method of payment allowable under Section 8(c) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. A share certificate for the number of Shares so acquired shall be issued to the Optionee as soon as practicable after exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (b) TERMINATION OF STATUS AS A DIRECTOR. If an Outside Director ----------------------------------- ceases to serve as a Director, he or she may, but only within ninety (90) days after the date he or she ceases to be a Director of the Company, exercise his or her Option to the extent that he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. To the extent that such Outside Director was not entitled to exercise an Option at the date of such termination, or does not exercise such Option (which he or she was entitled to exercise) within the time specified herein, the Option shall terminate. (c) DISABILITY OF OPTIONEE. Notwithstanding Section 9(b) above, in ---------------------- the event a Director is unable to continue his or her service as a Director with the Company as a result of his or her total and permanent disability (as defined in Section 22(e)(3) of the Code), he or she may, but only within six (6) months (or such other period of time not exceeding twelve (12) 7 months as is determined by the Board) from the date of such termination, exercise his or her Option to the extent he or she was entitled to exercise it at the date of such termination. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. To the extent that he or she was not entitled to exercise the Option at the date of termination, or if he or she does not exercise such Option (which he or she was entitled to exercise) within the time specified herein, the Option shall terminate. (d) DEATH OF OPTIONEE. In the event of the death of an Optionee: ----------------- (i) During the term of the Option who is, at the time of his or her death, a Director of the Company and who shall have been in Continuous Status as a Director since the date of grant of the Option, the Option may be exercised, at any time within six (6) months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living and remained in Continuous Status as Director for six (6) months (or such lesser period of time as is determined by the Board) after the date of death. Notwithstanding the foregoing, in no event may the Option be exercised after its term set forth in Section 7 has expired. (ii) Three (3) months after the termination of Continuous Status as a Director, the Option may be exercised, at any time within six (6) months following the date of death, by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. Notwithstanding the foregoing, in no event may the option be exercised after its term set forth in Section 7 has expired. 10. NONTRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged, ----------------------------- assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution or pursuant to a qualified domestic relations order (as defined by the Code or the rules thereunder). The designation of a beneficiary by an Optionee does not constitute a transfer. An Option may be exercised during the lifetime of an Optionee only by the Optionee or a transferee permitted by this Section. 11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; CORPORATE TRANSACTIONS. ------------------------------------------------------------------ (a) ADJUSTMENT. Subject to any required action by the stockholders of ---------- the Company, the number of shares of Common Stock covered by each outstanding Option, and the 8 number of shares of Common Stock which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per share of Common Stock covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, -------- ------- that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to an Option. (b) CORPORATE TRANSACTIONS. In the event of (i) a dissolution or ---------------------- liquidation of the Company, (ii) a sale of all or substantially all of the Company's assets, (iii) a merger or consolidation in which the Company is not the surviving corporation, or (iv) any other capital reorganization in which more than fifty percent (50%) of the shares of the Company entitled to vote are exchanged, the Company shall give to the Eligible Director, at the time of adoption of the plan for liquidation, dissolution, sale, merger, consolidation or reorganization, either a reasonable time thereafter within which to exercise the Option, including Shares as to which the Option would not be otherwise exercisable, prior to the effectiveness of such liquidation, dissolution, sale, merger, consolidation or reorganization, at the end of which time the Option shall terminate, or the right to exercise the Option, including Shares as to which the Option would not be otherwise exercisable (or receive a substitute option with comparable terms), as to an equivalent number of shares of stock of the corporation succeeding the Company or acquiring its business by reason of such liquidation, dissolution, sale, merger, consolidation or reorganization. 12. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for ------------------------ all purposes, be the date determined in accordance with Section 4(b) hereof. Notice of the determination shall be given to each Outside Director to whom an Option is so granted within a reasonable time after the date of such grant. 13. AMENDMENT AND TERMINATION OF THE PLAN. ------------------------------------- 9 (a) AMENDMENT AND TERMINATION. The Board may amend or terminate the ------------------------- Plan from time to time in such respects as the Board may deem advisable; provided that, to the extent necessary and desirable to comply with Rule 16b-3 - -------- ---- under the Exchange Act (or any other applicable law or regulation), the Company shall obtain approval of the stockholders of the Company to Plan amendments to the extent and in the manner required by such law or regulation. Notwithstanding the foregoing, the provisions set forth in Section 4 of this Plan (and any other Sections of this Plan that affect the formula award terms required to be specified in this Plan by Rule 16b-3) shall not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. (b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or ---------------------------------- termination of the Plan that would impair the rights of any Optionee shall not affect Options already granted to such Optionee and such Options shall remain in full force and effect as if this Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company. 14. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued ---------------------------------- pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares, if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 15. RESERVATION OF SHARES. The Company, during the term of this Plan, --------------------- will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in 10 respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 16. OPTION AGREEMENT. Options shall be evidenced by written option ---------------- agreements in such form as the Board shall approve. 17. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to -------------------- approval by the stockholders of the Company at or prior to the first annual meeting of stockholders held subsequent to the granting of an Option hereunder. If such stockholder approval is obtained at a duly held stockholders' meeting, it may be obtained by the affirmative vote of the holders of a majority of the outstanding shares of the Company present or represented and entitled to vote thereon. If such stockholder approval is obtained by written consent, it may be obtained by the written consent of the holders of a majority of the outstanding shares of the Company. Options may be granted, but not exercised, before such stockholder approval. 11 EX-10.6 12 401(K) PLAN EXHIBIT 10.6 CERTIFICATE OF THE SECRETARY REGARDING THE ADOPTION OF A RESOLUTION BY THE BOARD OF DIRECTORS OF APPLIED MICRO CIRCUITS CORPORATION APPROVING AND ADOPTING THE 401(k) PROFIT SHARING PLAN AND TRUST AGREEMENT, AS AMENDED * * * * * * * * * * * * WHEREAS, Applied Micro Circuits Corporation, (the "Employer"), has had in effect the Applied Micro Circuits Corporation 401(k) Employee Savings & Retirement Plan ("Plan") and its corresponding trust ("Trust") effective as of April 1, 1985, and said Plan and Trust have been amended from time to time subsequent to adoption; and WHEREAS, due to the enactment of the Tax Reform Act of 1986, and subsequent legislation and regulations affecting retirement plans, the Board of Directors is of the opinion that the said Plan and Trust should be amended and restated in their entireties, for the purposes of clarity and continuity; and WHEREAS, there have been presented to this meeting a form of Code Section 401(k) profit sharing plan and trust agreement representing amendments and restatements in their entireties of the Plan and Trust previously adopted and in effect, and said Plan and Trust, as amended, contains all the changes required by law, and the Board of Directors is of the opinion that the Plan and the Trust should be adopted. NOW, THEREFORE, BE IT RESOLVED that the 401(k) Profit Sharing Plan and the Trust agreement, as amended, in substantially the forms presented to this meeting and heretofore considered and discussed, copies of which the Secretary of the Employer is hereby authorized and directed to annex to the minutes of this meeting and which are hereby made a part of the record thereof, be and the same are hereby adopted by the Employer; and BE IT FURTHER RESOLVED that a duly authorized Officer and representative of the Employer be, and are hereby, authorized and directed to execute said Plan and Trust for and on behalf of the Employer, and to do and perform such other acts as may be necessary or convenient to establish said Plan and Trust and to place them in operation in accordance with all of their terms; and BE IT FURTHER RESOLVED that the Secretary of the Employer be and is hereby authorized, whenever necessary or convenient, to prepare true and correct copies of said Plan or Trust, and of this Resolution, to certify the correctness of the same; and BE IT FURTHER RESOLVED that the President or Vice President and Secretary of the Employer be and are hereby authorized and directed to take such action and follow such procedure as may be necessary or proper for the Employer to secure the approval of said Plan and Trust by the Commissioner of Internal Revenue; and BE IT FURTHER RESOLVED that in order to carry out the provisions of this Plan, Applied Micro Circuits Corporation shall be named to act as Plan Administrator as provided for by said Plan and Trust; and BE IT FURTHER RESOLVED that the Board of Directors of the Employer hereby gives to the Plan Administrator(s) the full authority and duty to direct the investment and management of all trust assets; and BE IT FURTHER RESOLVED that the Board of Directors of this Employer be, and is hereby, authorized to accept the resignation of any Plan Administrator and to appoint a replacement therefore; and BE IT FURTHER RESOLVED that the Trustee(s) pursuant to the Retirement Trust Agreement shall be: T. Rowe Price Trust Company said Trustee(s) shall signify acceptance of this appointment by execution of the Retirement Trust Agreement. * * * * * * * * * * * * I, Joel Holliday, Secretary (or duly representative) of Applied Micro Circuits Corporation, do hereby certify that the foregoing Resolution was duly adopted and that the same is now in full force and effect, and has not been altered, amended, or revoked. DATED THIS 31 day of December, 1995. By: /s/ JOEL HOLLIDAY ----------------------------- Joel Holliday TITLE: V.P. Finance & Administration ----------------------------- -2- APPLIED MICRO CIRCUITS CORPORATION 401(k) EMPLOYEE SAVINGS AND RETIREMENT PLAN PREAMBLE THIS AGREEMENT is made and entered into by Applied Micro Circuits Corporation (hereinafter referred to as "Employer"). The Employer desires to provide its Eligible Employees with a method of saving money for their security upon retirement, disability, or death. The Applied Micro Circuits Corporation 401(k) Employee Savings and Retirement Plan is hereby created for the sole and exclusive benefit of Eligible Employees and their Beneficiaries. The Plan, and the Trust described in the Plan, are designed and intended to qualify under the appropriate provisions of the Internal Revenue Code and the appropriate State or Territory Taxation Code. 401k SAVINGS PLAN INDEX ----- ARTICLE PAGE - ------- ---- ARTICLE ONE ELECTIVE PROVISIONS 1.1 PLAN INFORMATION AND DEFINITIONS (a) PLAN shall mean the APPLIED MICRO CIRCUITS CORPORATION 401(k) EMPLOYEE ---- SAVINGS AND RETIREMENT PLAN. (b) EFFECTIVE DATE shall mean January 1, 1995 for the restated Plan, the -------------- initial Effective Date of which was April 1, 1985. Notwithstanding the foregoing, in the case of restatements for the Tax Reform Act of 1986, the provisions of the Plan, generally, shall be applicable to Plan Years commencing after 1988, except to the extent that an earlier effective date is required pursuant to statute, Treasury Regulation, or as stated in the Plan document. (c) PLAN ADMINISTRATOR shall mean the Employer. ------------------ (d) PLAN YEAR shall mean the twelve (12)-consecutive month period --------- commencing on January 1st, and ending on December 31st. (e) LIMITATION YEAR shall be the same as the Plan Year. --------------- (f) HOUR OF SERVICE, for all Employees covered under the Plan, shall be --------------- determined on the basis of actual hours for which an Employee is paid, or entitled to payment. (g) LOOK BACK YEAR shall mean prior Plan Year. -------------- (h) TOTAL DISABILITY shall be defined as a physical or mental condition ---------------- which totally and presumably prevents the Participant from engaging in any substantial gainful employment, determined on the basis of a medical examination by a doctor, or clinic which is satisfactory to the Administrator. 1.2 PARTICIPATION (a) ELIGIBILITY REQUIREMENTS. An Eligible Employee shall mean any ------------------------ Employee of the Employer who meets the eligibility requirements set forth below. An Employee shall satisfy the eligibility requirements upon attaining age eighteen (18) and completing three (3) Months during which an Employee shall not be required to complete any specified number of Hours of Service to receive credit for such fractional year. (b) ELIGIBILITY REQUIREMENT FOR EMPLOYEE DEFERRALS. An Employee may elect ---------------------------------------------- to make deferrals upon the completion of 3 Months of Service during which such Employee shall not be required to complete any specified number of Hours of Service. 1-1 Employees of Affiliated Employers shall not participate in the Plan. (c) ELIGIBILITY COMPUTATION PERIODS shall mean the Initial Eligibility ------------------------------- Computation Period, which is the twelve (12) consecutive month period beginning with the date upon which an Employee first performs an Hour of Service for the Employer, and the Subsequent Eligibility Computation Period which shall mean the Plan Year which includes the first anniversary of the commencement of the twelve (12) consecutive month period beginning with the date upon which an Employee first performs an Hour of Service for the Employer, and, where additional periods are necessary, succeeding Plan Years. (d) ENTRY DATE shall be the date an Eligible Employee commences ---------- participation in the Plan, and shall mean first day of the month coinciding with, or next following the Participant's satisfaction of the Eligibility Requirements of the Plan, or the date required under the provisions of Section 3.7. 1.3 EMPLOYER CONTRIBUTIONS, ALLOCATIONS AND ALLOCATION LIMITS (a) COMPENSATION shall mean the total compensation paid to each ------------ Participant. Compensation shall be based on the Plan Year. Compensation for the first year of participation shall be recognized as of the first day of the Plan Year which includes the Participant's Entry Date. Compensation and "414(s) Compensation" shall not include compensation which is not currently includable in the Participant's income by reason of the application of Code Sections 125, 402(a)(8), 402(h)(1)(B), or 403(b). (b) EMPLOYEE DEFERRALS ------------------ A Participant may elect to defer from one percent (1%) to twenty percent (20%) of his Compensation into the Trust each Plan Year. Bonuses, paid within two and one-half months after the end of the Plan Year, shall not be subject to elective deferral for the prior Plan Year, but shall be included in the definition of Compensation for purposes of determining the percentage of salary deferrals for the year in which such bonus was received. (1) COMMENCEMENT OF EMPLOYEE DEFERRALS ---------------------------------- A Participant may begin to defer Compensation upon electing to make payroll deductions, beginning with the next payroll period coincident with, or following each Entry Date. 1-2 (2) CHANGE OF EMPLOYEE DEFERRAL AMOUNTS ----------------------------------- (i) A Participant may increase the rate of his deferral on February 1st, May 1st, August 1st and November 1st of each Plan Year. (ii) A Participant may decrease the rate of his deferral on the same date(s) as he may increase deferrals. (iii) A Participant may stop his deferral anytime during the Plan Year. (iv) In order to make a requested change in the deferral rate in a timely manner, the Administrator must be given at least ten (10) working days notice of any changes in deferral percentage. (c) MATCHING CONTRIBUTIONS ---------------------- (1) EMPLOYER MATCHING CONTRIBUTIONS ------------------------------- The Employer may make a Matching Contribution equal to a percent of the Participant's Employee deferrals, subject to the limitations set forth in Section 1.3(c)(2). This percentage will be determined at the beginning of each Plan Year. (2) LIMITATIONS ON MATCHING CONTRIBUTIONS ------------------------------------- Matching Contributions, on behalf of any Participant each year, shall be limited to a certain dollar amount, subject to the limitations set forth in Article Four, Section 4.12. This dollar amount will be set at the beginning of each Plan Year. (3) EMPLOYEES ELIGIBLE TO RECEIVE A MATCHING CONTRIBUTION ----------------------------------------------------- All Participants who elect to make deferrals shall be entitled to receive an allocation of Matching Contributions, subject to the provisions of Section 1.3(c)(4) and Section 4.12 of the Plan. (4) ELIGIBILITY FOR MATCHING CONTRIBUTIONS -------------------------------------- In order to receive a Matching Contribution, a Participant must elect to make Employee Deferrals, and shall share in the allocation regardless of the number of Hours of Service completed in the Plan Year. If, by the Participants not sharing in Employer Matching Contributions, or forfeitures (if any) of such contributions for the Plan Year, the Plan would fail to meet the coverage requirements of Code Section 410(b)(1) for the Plan Year, then, subject to Section 4.18(b), and within the provisions of Code Section 401(b), the members of the group of Participants, previously specified in this Section as not sharing in Employer Contributions, shall share in Employer Contributions for the Plan Year as follows: the minimum number required to meet the coverage tests under Code Section 410(b)(1) shall be eligible to receive an allocation 1-3 based on their number of Hours of Service credited during the Plan Year, ranked in descending order. If more than one individual receives credit for the lowest number of Hours of Service for which any individual must be covered in order to meet the coverage tests, then all individuals receiving credit for exactly that number of Hours of Service shall share in the allocation of Employer Contributions. (5) FORFEITURES OF MATCHING CONTRIBUTIONS ------------------------------------- All forfeitures of Matching Contributions shall be used to reduce Employer contributions. (6) TIMING OF FORFEITURES OF MATCHING CONTRIBUTIONS ----------------------------------------------- Forfeitures of Matching Contributions shall occur immediately upon the distribution of benefits from the Plan to the Participant, subject to the requirements of Article Eleven. (d) EMPLOYER NON-ELECTIVE CONTRIBUTIONS (discretionary) --------------------------------------------------- Non-elective (discretionary) Contributions shall not be made to the Plan. QUALIFIED NON-ELECTIVE CONTRIBUTIONS ------------------------------------ Qualified Non-elective Contributions may be made in accordance with Section 4.14 of the Plan. ELIGIBILITY TO RECEIVE AN ALLOCATION OF QUALIFIED NON-ELECTIVE -------------------------------------------------------------- CONTRIBUTIONS ------------- In order to receive an allocation of Qualified Non-elective Contributions, a Participant must complete 1,000 Hours of Service during a Plan Year. (e) EMPLOYEE VOLUNTARY (AFTER-TAX) CONTRIBUTIONS: -------------------------------------------- Employee Voluntary (after-tax) Contributions shall be permitted, up to the maximum allowable, as set forth in the Plan. Such contributions shall be collected through either payroll deductions, or by direct contributions from Participants. (f) ROLLOVERS FROM QUALIFIED PLANS: ------------------------------ Rollovers from other qualified plans, shall be allowed from any Employee, even if not a Participant. (g) TRANSFERS FROM QUALIFIED PLANS: ------------------------------ Transfers from other qualified plans, shall be allowed from any Employee, even if not a Participant, but must be distributed in a form permitted by the Plan. 1-4 (h) VALUATION RELATED INFORMATION ----------------------------- (1) DEPOSIT OF EMPLOYER CONTRIBUTIONS --------------------------------- The Employer shall deposit Employer Contributions into the Trust each pay period, or on a more frequent basis at the discretion of the Employer. (2) ALLOCATION DATE(S) ------------------ Employer contributions shall be allocated on the same date as such contributions are deposited, as described in Section 1.3(h)(1). (3) GUARANTEED RATE OF RETURN ------------------------- There shall be no guaranteed rate of return in the Plan. Investment returns shall be based on actual earnings of the Trust. (4) VALUATIONS PER YEAR ------------------- On an annual basis (or more frequently at the discretion of the Plan Administrator), a valuation shall be performed subject to the provisions of Section 4.18(d) . (i) FAILSAFE ELECTION FOR CODE SECTION 415 LIMITS --------------------------------------------- If any Participant in the Plan is also covered by one or more qualified retirement plans, a welfare benefit fund, as defined in Code Section 419(e), an individual medical account, as defined in Code Section 415(l)(2), which are maintained, or considered to be maintained by the Employer, then the following method shall be used in regard to the treatment of Annual Additions with respect to any Participant in the Plan. No participant has ever been covered by one, or more qualified plans maintained by this Sponsoring Employer. (j) MINIMUM TOP-HEAVY ALLOCATIONS: Contributions and forfeitures, to ----------------------------- equal 3% of each non-Key Employee's Compensation, shall be allocated to the Employee's account when the Plan is Top-Heavy, subject to the contribution allocations to Key Employees. (k) MINIMUM BENEFITS FOR COMBINATION PLANS -------------------------------------- For Employers who maintain both defined benefit and defined contribution plans: The Minimum Top-Heavy Allocation, referenced in Section 1.3(j), shall be provided by this Plan. For Employers who maintain two or more defined contribution plans, the Minimum Top-Heavy Allocation, referenced in Section 1.3(j), shall be provided under this Plan. 1-5 The term "Present Value" shall refer to the Account Balance(s) of each Participant in the Plan, as the Employer does not maintain a Defined Benefit Pension Plan. 1.4 VESTING OF EMPLOYER CONTRIBUTIONS (a) VESTING COMPUTATION PERIOD shall mean the twelve (12) consecutive -------------------------- month period with the Plan Year. (b) VESTING SCHEDULE ---------------- (1) Each Participant shall have a fully vested, nonforfeitable interest in his Employee Deferral Account. (2) Matching Contributions shall become vested in accordance with the following vesting schedule: Years of Counted Service Vested Percentage ------------------------ ----------------- Less than 1 year 0% 1 20% 2 40% 3 60% 4 80% 5 or more years 100% (3) TOP-HEAVYVESTING SCHEDULE, for years in which the Plan is Top-Heavy, ------------------------- and all years thereafter, shall be determined on the basis of: The same vesting schedule as the non Top-Heavy vesting schedule. (4) COUNTED YEARS OF SERVICE FOR VESTING: ------------------------------------ All of an Employee's Years of Service with the Employer are counted to determine the vested percent of the Employee's Account Balance derived from Employer Contributions. 1.5 DISTRIBUTION OF BENEFITS (a) NORMAL RETIREMENT AGE shall mean age sixty-five (65). --------------------- (b) NORMAL RETIREMENT or NORMAL RETIREMENT DATE shall mean the first day ----------------- ---------------------- of the Participant's Normal Retirement Age. (c) EARLY RETIREMENT AGE shall not be applicable to the Plan. -------------------- (d) EARLY RETIREMENT DATE shall not be applicable to the Plan. --------------------- 1-6 (e) FORM OF DISTRIBUTIONS: --------------------- Distributions shall be made in a form such as lump sum distributions, installments, a form of annuity, or another payment form of the Participant's choosing. Further, distributions shall be made in cash and/or property. (f) DISTRIBUTIONS UPON DEATH, as set forth in Article Thirteen, shall be ------------------------ made pursuant to the election of the Participant, or Beneficiary. (g) AMOUNT OF DISTRIBUTION UPON TERMINATION OR RETIREMENT: ----------------------------------------------------- The Participant shall be eligible to receive a distribution of the vested portion of his Account, and the balance of any other accounts of such Participant. (h) CONDITIONS FOR DISTRIBUTIONS UPON TERMINATION: --------------------------------------------- At the Participant's election, immediate distributions shall be made as soon as administratively feasible. (i) IN-SERVICE DISTRIBUTIONS - WITHDRAWAL OF EMPLOYER CONTRIBUTIONS shall --------------------------------------------------------------- be allowed. (j) PRE-RETIREMENT DISTRIBUTIONS shall be permitted if the Participant is --------------------------- 100% vested, and has reached the age of 59-1/2. The Participant may request a distribution of his Account Balance without terminating employment. The Participant may take distributions from the following Participant's Account(s): All Accounts. (k) HARDSHIP DISTRIBUTIONS: ---------------------- Participants may request a distribution based on financial hardship, subject to the provisions of Section 11.9 of the Plan. This distribution shall only be permitted from a Participant's Employee Deferral Account. (1) The LIFE EXPECTANCIES of the Participant, and the Participant's spouse ----------------- should the Participant (or spouse) so elect under Article Eleven of the Plan, shall be recalculated pursuant to Code Section 401(a)(9)(D). 1.6 MISCELLANEOUS (a) PARTICIPANT DIRECTED ACCOUNTS: ----------------------------- Participants shall be permitted to direct the investment of their accounts regardless of the Participant's vested interest in the Plan. 1-7 The Administrator shall establish rules and shall provide information about the fund(s) currently being offered, and their past performance. (b) LOANS TO PARTICIPANTS: --------------------- Participants shall be permitted to borrow from the Trust, pursuant to the provisions of the loan policy. Monies repaid shall be directly credited to the Participants' accounts. (c) LIFE INSURANCE: -------------- The purchase of life insurance shall not be allowed. 1-8 ARTICLE TWO DEFINITIONS 2.1 ACCOUNT BALANCE shall mean the balance of the Participant's Account which --------------- shall be the accrued benefit. 2.2 ADMINISTRATIVE COMMITTEE, COMMITTEE OR PLAN ADMINISTRATOR shall mean the --------------------------------------------------------- individual, individuals or Employer specified in Article One, Section 1.1(c) appointed to act in accordance with the provisions of Article Six hereof. 2.3 AGGREGATION GROUP shall mean (i) each plan of the Employer in which a Key ----------------- Employee is a Participant, and (ii) each other plan of the Employer which enables any plan described in subsection (i) above to meet the requirements of Sections 401(a)(4) or 410 of the Code. The Employer may treat any plan not required to be included in an Aggregation Group under subsections (i) and (ii) above, as being a part of such group if such group would continue to meet the requirements of Sections 401(a)(4) and 410 of the Code with such plan being taken into account. Collectively-bargained plans that include a Key Employee of the Employer must be included in the required Aggregation Group for that Employer. 2.4 ANNIVERSARY DATE shall mean the last day of the Plan Year. ---------------- 2.5 ANNUAL ADDITIONS: For Plan Years beginning on or after January 1, 1987, ---------------- the sum of the following amounts credited to a Participant's Account for the Limitation Year: (i) Employer Contributions (including Employee Deferrals), (ii) Employee (after-tax) Contributions, (iii) Forfeitures, and (iv) amounts allocated, after March 31, 1984, to an individual medical account, as defined in Section 415(l)(2) of the Code, which is part of a pension or annuity plan maintained by the Employer are treated as Annual Additions to a defined contribution plan. Also amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits, allocated to the separate account of a Key Employee, as defined in Section 419A(d)(3) of the Code, under a welfare benefit fund, as defined in Section 419(e) of the Code, maintained by the Employer are treated as Annual Additions to a defined contribution plan. For this purpose, any excess amount applied under Sections 4.19(d) or 4.19(k) in the Limitation Year to reduce Contributions will be considered Annual Additions for such Limitation Year. 2.6 BENEFICIARY shall mean the recipient selected by a Participant to ----------- receive death benefits from the Participant's Account. If a Participant fails to designate a Beneficiary, the Committee shall be empowered to designate a Beneficiary or Beneficiaries from among the 2-1 following persons and in the following order: (1) spouse at time of death; (2) natural and adopted children; (3) parents; (4) brothers, sisters, nieces and nephews; (5) estate of the Participant. Neither the Employer nor the Trustee shall be named as Beneficiary. 2.7 BREAK IN SERVICE shall mean a Vesting Computation Period, Eligibility ---------------- Computation Period, or other relevant twelve (12) consecutive month period (computation period) during which the Participant does not complete more than five hundred (500) Hours of Service with Employer. 2.8 CODE shall mean the Internal Revenue Code of 1986 as amended. ---- 2.9 COMPENSATION shall mean a Participant's compensation as specified by ------------ the Employer in Section 1.3(a). For any self-employed individual covered under the Plan, Compensation will mean Earned Income. For purposes of Section 1.3(a), "415 COMPENSATION" shall mean the 415 Safe Harbor Compensation as defined in Section 4.19(m), "W-2 EARNINGS" shall mean wages as defined in Section 3401(a) of the Code for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment for the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2), "TOTAL COMPENSATION" shall mean wages as defined in Section 3121(a) of the Code for purposes of calculating social security taxes but determined without regard to the wage base limitation in Section 3121(a)(1), the limitations on the exclusions from wages in Section 3121(a)(5)(C) and (D) for employee elective deferrals and payments by reason of salary reduction agreements, the special rules in Code Section 3121(v), any rules that limit covered employment based on the type or location of an employee's employer, and any rules that limit the remuneration included in wages based on familial relationship or based on the nature or location of the employment or the services performed (such as the definition of employment in Code Section 3121(b)(1) through (20). As an alternative to the definition of Compensation provided in Section 1.3(a), an Employer may, by written resolution or certificate, elect to use the definition contained in Internal Revenue Temporary Regulation 1.414(s)- 1T(c)(3) which is a safe-harbor alternative definition." Compensation, using this safe-harbor definition, shall mean compensation as defined in Code Section 415(c)(3) or the "415 Safe Harbor Compensation" defined in Section 4.8(m) of the Plan reduced by all of the following: reimbursements or other expense allowances, fringe benefits (cash or noncash), moving expenses, deferred compensation, and welfare benefits. The foregoing safe-harbor definition shall not be used to determine the Compensation of a self-employed individual. As an alternative to the definition of "W-2 EARNINGS" as stated above, an Employer may, by written resolution or certificate, elect to use the definition contained in Internal Revenue Regulation 1.415-2(d)(11)(i) which means that Compensation shall be defined as wages within the meaning of Section 3401(a) of the Code and all other payments of Compensation to an Employee by his Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee with a written statement 2-2 under Code Sections 6041(d), 6051(a)(3), and 6052. The Employer may choose to modify the definition further by excluding amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the time of the payment it is reasonable to believe that that these amounts are deductible by the Employee under Code Section 217. Compensation shall be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or the location of the employment or the services performed. This is the amount which is shown on the "W-2" as earnings. For Plan Years beginning after December 31, 1986, for purposes of the Code Sections 401(k) and 401(m) testing in Sections 4.7 and 4.12 of the Plan, an Employer may limit the amount of Compensation taken into consideration to that portion of the Plan Year or calendar year in which the Employee was an eligible Employee, provided that this limit is applied uniformly to all eligible Employees under the Plan for the Plan Year. Notwithstanding the above, if elected by the Employer in Section 1.3(a), Compensation shall include any amount which is contributed by the Employer pursuant to a salary reduction agreement and which is not includible in the gross income of the Employee under Sections 125, 402(e)(3), 402(h) or 403(b) of the Code. For years beginning after December 31, 1988, the annual Compensation of each Participant taken into account under the Plan for any year shall not exceed two hundred thousand dollars ($200,000), as adjusted by the Secretary at the same time and in the same manner as under Section 415(d) of the Code, except that the dollar increase in effect on January 1st of any calendar year is effective for years beginning such calendar year and the first adjustment to the $200,000 limitation is effected on January 1, 1990. If a plan determines Compensation on a period of time that contains fewer than twelve calendar months, then the annual Compensation limit is an amount equal to the annual Compensation limit for the calendar year in which the Compensation period begins multiplied by the ratio obtained by dividing the number of full months in the period by 12. In determining the Compensation of a Participant for purposes of this limitation, the rules of Section 414(q)(6) of the Code shall apply, except in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age nineteen (19) before the close of the year. If, as a result of the application of such rules the adjusted two hundred thousand dollars ($200,000) limitation is exceeded, then (except for purposes of determining the portion of Compensation up to the integration level if this Plan provides for permitted disparity) the following methods of adjustment shall be permitted: (1) the limitation may be prorated among the affected individuals in proportion to each such individual's Compensation as determined under this Section prior to the application of this limitation; or (2) if, as a result of the application of the family aggregation rules the adjusted two hundred thousand dollars ($200,000) limitation is exceeded, then the limitation shall be met by first reducing the highest paid family member(s) to the annual dollar Code Section 401(a)(17) limitation (if applicable). Second, the Compensation of all family members shall be prorated in the same proportion such that the total Compensation of all such family members shall, when added together, equal the maximum Code Section 401(a)(17) dollar limitation. 2-3 If Compensation for any prior Plan Year is taken into account in determining an Employee's contributions or benefits for the current year, the Compensation for such prior year shall be subject to the applicable annual Compensation limit in effect for that prior year. For this purpose, for years beginning after January 1, 1990, the applicable annual Compensation limit shall be $200,000. In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual Compensation of each Employee taken into account under the Plan shall not exceed the OBRA `93 annual compensation limit. The OBRA `93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA `93 annual compensation limit shall be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under Code Section 401(a)(17) shall mean the OBRA `93 annual compensation limit set forth in this provision. If Compensation for any prior determination period is taken into account in determining an Employee's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to the OBRA `93 annual compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA `93 annual compensation limit is $150,000. The term Compensation does not include (i) contributions made by the Employer to a plan of deferred compensation to the extent that, before the application of Code Section 415 limitations to that plan, the contributions are not includable in the gross income of the Employee for the taxable year in which contributed; (ii) Employer Contributions made on behalf of an Employee to a simplified Employee pension described under Code Section 408(k) are not considered as Compensation for the taxable year in which contributed to the extent that such contributions are deductible by the Employee under Code Section 219(b)(7); (iii) distributions from a plan of deferred compensation are not considered as Compensation herein, regardless of whether such amounts are includable in the gross income of the Employee when distributed. However, any amounts received by the Employee pursuant to an unfunded nonqualified plan of deferred compensation may be considered as Compensation herein in the year such amounts are includable in the gross income of the Employee; (iv) amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by an Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (v) amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; or (vi) other amounts which receive special tax benefits such as premiums for group term 2-4 life insurance (but only to the extent that the premiums are not includable in the gross income of the Employee) or contributions made by an Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described under Section 403(b) of the Code, whether or not the contributions are excludable from the gross income of the Employee. 2.10 DEFINED BENEFIT PLAN FRACTION shall mean a fraction, the numerator of ----------------------------- which is the sum of the Participant's projected annual benefits under all the defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the Limitation Year under Sections 415(b) and (d) of the Code or 140 percent of the highest average Compensation, including any adjustments under Section 415(b) of the Code. Notwithstanding the above, if the Participant was a Participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the Participant had accrued as of the close of the last Limitation Year beginning before January 1, 1981, disregarding any changes in the terms and conditions of the Plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Section 415 for all Limitation Years beginning before January 1, 1987. 2.11 DEFINED CONTRIBUTION PLAN FRACTION shall mean a fraction ,the numerator of ---------------------------------- which is the sum of the Annual Additions to the Participant's account under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior Limitation Years (including the Annual Additions attributable to the Participant's nondeductible Employee contributions to all defined benefit plans, whether or not terminated, maintained by the Employer, and the Annual Additions attributable to all welfare benefit funds, as defined in Section 419(e) of the Code, and individual medical accounts, as defined in Section 415(l)(2) of the Code, maintained by the Employer), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior Limitation Years of Service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The maximum aggregate amount in any Limitation Year is the lesser of one hundred twenty-five (125) percent of the dollar limitation determined under Sections 415(b) and (d) of the Code in effect under Section 415(c)(1)(A) of the Code or thirty-five (35) percent of the Participant's Compensation for such year. If the Employee was a Participant as of the end of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined contribution plans maintained by the Employer which were in existence on May 6, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the defined benefit fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning 2-5 before January 1,1987, and disregarding any changes in the terms and conditions of the Plan made after May 5, 1986, but using the Section 415 limitation applicable to the first Limitation . Year beginning on or after January 1, 1987. For prior years calculations may be made as if the Tax Reform Act of 1986 was applicable to such years. The annual addition for any Limitation Year beginning before January 1, 1987, shall not be recomputed to treat all Employee contributions as Annual Additions. 2.12 DETERMINATION DATE shall mean, with respect to any Plan Year, the last day ------------------ of the preceding Plan Year, or in case of the initial Plan Year, the last day of such Plan Year. 2.13 EARNED INCOME shall mean the net earnings from self-employment in the ------------- trade or business with respect to which the Plan is established, for which personal services of the individual are a material income-producing factor. Net earnings shall be determined with regard to the deduction allowed to the Employer by Section 164(f) of the Code for taxable years beginning after December 31, 1989. Net earnings shall be determined without regard to items not included in gross income and the deductions allocable to such items. Net earnings shall be reduced by contributions by the Employer to a qualified plan to the extent deductible under Section 404 of the Code. 2.14 ELAPSED TIME: In the event that the "Elapsed Time" method is used to a ------------ ear of Service for Eligibility or Vesting as described in Article One, an Employee will receive credit for the aggregate of all time period(s) commencing with the Employee's first day of employment or reemployment and ending on the date a Break in Service begins. The first day of employment or reemployment is the first day the Employee performs an Hour of Service. An Employee will also receive credit for any period of severance of less than 12-consecutive months. Fractional periods of a year will be expressed in terms of days. Break in Service, for purposes of this Section, is a Period of Severance of at least 12-consecutive months. Period of Severance is a continuous period of time during which the Employee is not employed by the Employer. Such period begins on the date the Employee retires, quits or is discharged, or if earlier, the 12-month anniversary of the date on which the employee was otherwise first absent from service. An Employee who incurs a Break in Service under this Section 2.15, Elapsed Time shall re-enter the Plan in accordance with the provisions of Section 3.5; however, the term "Break In Service" as used in Section 3.5 shall have the meaning set forth herein. In the case of an Employee who is absent from work for maternity or paternity reasons, the 12-consecutive month period beginning on the first anniversary of the first date of such absence shall not constitute a Break In Service. For purposes of this Paragraph, an absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the Employee, (2) by reason of a birth of a child of the Employee, (3) by reason of the placement of a child with the Employee in connection with the adoption of such child by such Employee, or 2-6 (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. The time credited under this Paragraph shall be credited in the computation period in which the absence begins if the crediting is necessary to prevent a Break in Service in that period, or in all other cases, in the following computation period. No credit will be given under this Section, however, unless the Employee returns to covered employment and furnishes to the Administrative Committee such timely information as the Committee may reasonably require to establish that the absence from work is for reasons qualifying for the maternity/paternity provision (as set forth above) and the number of days for which there was an absence. 2.15 ELIGIBLE EMPLOYEE shall mean any Employee who meets the Eligibility ----------------- Requirements of Section 1.2(a). 2.1 EMPLOYEE shall mean any common-law Employee who is employed in any -------- capacity by the Employer maintaining the Plan or of any other Employer required to be aggregated with such Employer under Sections 414(b), (c), (m) or (o) of the Code. Unless specifically excluded under Section 1.2(a), the term Employee shall also include any leased Employee deemed to be an Employee of any Employer described in Section 2.32 as provided in Sections 414(n) or (o) of the Code. 2.17 EMPLOYEE CONTRIBUTIONS (AFTER-TAX) shall mean the amount, if any, which ---------------------------------- the Participant contributes to the Plan, on an after-tax basis. 2.18 EMPLOYEE CONTRIBUTION ACCOUNT shall mean the account maintained to record ----------------------------- the Participant's Employee Contributions and adjustments relating thereto. 2.19 EMPLOYEE DEFERRAL CONTRIBUTION shall mean the amount of Compensation ------------------------------ electively deferred by the Participant on a pre-tax basis to the Plan in accordance with the provisions of Article Four. 2.20 EMPLOYEE DEFERRAL OR DEFERRED INCOME ACCOUNT shall mean the account of a -------------------------------------------- Participant to which are credited the Employee Deferral Contributions made this Plan. 2.21 EMPLOYER shall mean the Employer adopting this Plan as signatory hereto -------- and any successor assuming the obligations created hereunder. The Employer shall include all trades or businesses which are members of a controlled group of corporations under common control or members of an affiliated service group, as defined in Sections 414(b), (c) and (m) of the Code (subject, however to the provisions of Code Section 415(h) when applying the benefit limitations of Code Section 415). If subsequent to the Employer's adoption of this Plan another employer adopts this Plan and/or is required to be included within the meaning of "Employer," then for purposes of Article Six "Employer" shall mean the initial adopting Employer, unless otherwise stated herein. An Affiliated ---------- Employer shall mean an entity described in the second sentence of this - -------- definition. 2.22 EMPLOYER CONTRIBUTIONS shall mean the amount contributed to the Trust Fund ---------------------- by the Employer pursuant to the terms of this Plan. This term shall not include Employee Deferral 2-7 Contributions unless specifically noted but shall include Employer Matching Contributions and Employer Non-elective Contribution unless otherwise stated herein. 2.23 EMPLOYER CONTRIBUTION OR GENERAL ACCOUNT shall mean an account that is ---------------------------------------- credited with Employer Contributions and each Participant's share of any net income or loss of the Trust, but shall not include amounts allocated to the Employee Deferral Account and the earnings and losses therefrom. 2.24 EMPLOYER MATCHING CONTRIBUTION OR MATCHING CONTRIBUTION shall mean the ------------------------------------------------------- amount contributed to the Trust Fund by the Employer according to the provisions of Article One and Section 4.10. 2.25 EMPLOYER MATCHING ACCOUNT shall mean an account that is credited with each ------------------------- eligible Participant's share of any Employer Matching Contribution, and any net income or loss of the Trust in relation to such contributions. 2.26 ERISA shall mean the Employee Retirement Income Security Act of 1974, as ----- amended. 2.27 FIDUCIARY shall mean a person who exercises any discretionary authority or --------- discretionary control affecting the management of the Plan; who exercises any authority or control respecting the management or disposition of Plan assets; who renders investment advice for a fee or other compensation, direct or indirect, with respect to any money or other property of the Plan or has any authority or responsibility to do so; who has any discretionary authority or discretionary responsibility in the administration of the Plan; or who, when designated by a Named Fiduciary pursuant to authority granted by the Plan, acts to carry out a fiduciary responsibility, subject to any exceptions granted directly or indirectly by ERISA or any regulations promulgated thereunder. 2.28 FISCAL YEAR shall mean the fiscal year of the Employer's business. ----------- 2.29 HIGHLY COMPENSATED EMPLOYEE shall mean any highly compensated active --------------------------- Employees and highly compensated former Employees. (a) Highly compensated active Employee includes any Employee who performs service for the Employer during the determination year and who, during the look- back year: (i) received compensation from the Employer in excess of $15,000 (as adjusted pursuant to Section 415(d) of the Code); (ii) received compensation from the Employer in excess of $50,000 (as adjusted pursuant to Section 415(d) of the Code) and was a member of the top-paid group for such year; or (iii) was an officer of the Employer and received compensation during such year that was greater than fifty percent of the dollar limitation in effect under Section 415(b)(1)(A) of the Code. The term Highly Compensated Employee also includes: (i) Employees who are both described in the preceding sentence If the term "determination year" is substituted for the term "look-back year" and the Employee is one of the 100 Employees who received the most compensation from the Employer during the determination year; and (ii) Employees who are five (5) percent owners at any time during the look-back year or determination year. 2-8 (1) If no officer has satisfied the compensation requirement of (iii) above during either a determination year or look-back year, the highest-paid officer for such year shall be treated as a Highly Compensated Employee. (i) For this purpose, the determination year shall be the Plan Year. The look-back year shall be as provided for in Section 1.1(g). (b) A highly compensated former Employee includes any Employee who separated from service (or was deemed to have separated) prior to the determination year, performs no service for the Employer during the Determination Year, and was a highly compensated active Employee for either the separation year or any Determination Year ending on or after the Employee's fifty-fifth (55th) birthday. (c) If an Employee is, during a determination year or look-back year, a family member of either a five (5) percent owner who is an active or former Employee or a Highly Compensated Employee who is one of the ten (10) most highly compensated Employees ranked on the basis of compensation paid by the Employer during such year, then the family member and the five (5) percent owner or top- ten highly compensated Employee shall be aggregated. In such case, the family member and five (5) percent owner or top-ten (10) highly compensated Employee shall be treated as a single Employee receiving compensation and plan contributions or benefits equal to the sum of such compensation and contributions or benefits of the family member and five (5) percent owner or top-ten (10) Highly Compensated Employee. For purposes of this Section, family member includes the spouse, lineal ascendants and descendants of the Employee or former Employee and the spouses of such lineal ascendants and descendants. (d) The determination of who is a Highly Compensated Employee, including the determinations of the number and identity of Employees in the top-paid group, the top one-hundred (100) Employees, the number of Employees treated as officers and the compensation that is considered, will be made in accordance with Section 414(q) of the Code and the Regulations thereunder. 2.30 HOUR OF SERVICE shall have the meaning set forth in Section 1.1(f) for the --------------- performance of duties during the applicable computation period. An Hour of Service shall also mean each hour for which back pay, irrespective of mitigation of damages, has been either awarded or agreed to be awarded by the Employer to the extent not otherwise credited to the Employee pursuant to this Section. An Hour of Service shall also mean each hour for which an Employee is paid, or entitled to payment, on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), lay-off, jury duty, military leave or leave of absence; provided, however, that no hours shall be credited for a payment which reimburses an Employee for medical expenses, and further provided that no more than five hundred one (501) Hours of Service shall be credited under this sentence to an Employee on account of any single continuous period during which the Employee performs no duties. Hours for nonperformance of duties shall be credited in accordance with Department of Labor Regulations Section 2530.200b-2(b). Hours 2-9 shall be credited to the applicable computation period in accordance with Department of Labor Regulations Section 2530.200b-2(c). For purposes of determining whether a Break in Service, as defined herein, for participation and vesting purposes has occurred in a computation period, an Employee who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such Employee but for such absence, or in any case in which such hours cannot be determined eight (8) Hours of Service per day of such absence (but not to exceed five hundred one (501) Hours of Service in any computation period). For purposes of this Paragraph, an absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the Employee, (2) by reason of a birth of a child of the Employee, (3) by reason of the placement of a child with the Employee in connection with the adoption of such child by such Employee, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this Paragraph shall be credited in the computation period in which the absence begins if the crediting is necessary to prevent a Break in Service in that period, or in all other cases, in the following computation period. No credit will be given under this Section, however, unless the Employee returns to covered employment and furnishes to the Administrative Committee such timely information as the Committee may reasonably require to establish that the absence from work is for reasons qualifying for the maternity/paternity provision (as set forth above) and the number of days for which there was an absence. 2.31 KEY EMPLOYEE shall mean any Employee or former Employee (and the ------------ beneficiaries of such Employee) who at any time during the determination period was an officer of the Employer if such individual's annual compensation exceeds fifty (50) percent of the dollar limitation under Section 415(b)(1)(A) of the Code, an owner (or considered an owner under Section 318 of the Code) of one of the ten (10) largest interests in the Employer if such individual's compensation exceeds one hundred (100) percent of the dollar limitation under Section 415(c)(1)(A) of the Code, a five (5) percent owner of the Employer, or a one (1) percent owner of the Employer who has an annual compensation of more than one hundred fifty thousand ($150,000). Annual compensation means compensation as defined in Section 415(c)(3) of the Code, but including amounts contributed by the Employer pursuant to a salary reduction agreement which are excludible from the Employee's gross income under Section 125, Section 402(e)(3), Section 402(h) or Section 403(b) of the Code. The determination period is the Plan Year containing the Determination Date and the four (4) preceding Plan Years. The determination of who is a Key Employee will be made in accordance with Section 416(i)(1) of the Code and Regulations thereunder. 2.32 LEASED EMPLOYEE shall mean any person (other than an Employee of the --------------- recipient pursuant to an agreement between the recipient and any other person ("leasing organization") has performed services for the recipient (or for the recipient and related persons determined in accordance with Section 414(n)(6) of the Code) on a substantially full time basis for a period of at least one (1) year, and such services are of a type historically performed by Employees in the business field of the recipient Employer. Contributions or benefits provided a leased Employee 2-10 by the leasing organization which are attributable to services performed for the recipient Employer shall be treated as provided by the recipient Employer. If and to the extent, that there are contributions or benefits provided by a leasing organization on behalf of a Leased Employee, any reduction or offset which may be made under this Plan shall be in accordance with Regulation Section 1.401(a)(26)-2(d)(9), and shall not constitute a separate current or prior benefit structure. A leased Employee shall not be considered an Employee of the recipient if: (i) such Employee is covered by a money purchase pension plan providing: (1) a nonintegrated Employer contribution rate of at least ten (10) percent of compensation, as defined in Section 415(c)(3) of the Code, but including amounts contributed pursuant to a salary reduction agreement which are excludable from the Employee's gross income under Section 125, Section 402(e)(3), Section 402(h) or Section 403(b) of the Code, (2) Immediate participation, and (3) full and immediate vesting; and (ii) leased Employees do not constitute more than twenty (20) percent of the recipient's nonhighly compensated workforce. 2.33 NAMED FIDUCIARY shall mean the parties in Section 2.2. --------------- 2.34 NET PROFITS shall mean current and accumulated earnings of the Employer ----------- before federal and state taxes based upon net income as determined by the Employer's annual tax return and contributions to this and any other qualified plan. 2.35 NON-KEY EMPLOYEE shall mean any Employee or Beneficiary of any Employee or ---------------- former Employee who is not a Key Employee. 2.36 OWNER-EMPLOYEE shall mean a self-employed individual who is either a sole -------------- proprietor or a partner who owns more than ten percent (10%) of the capital interest or profits interest in a partnership. 2.37 PARTICIPANT shall mean an Eligible Employee as defined in Section 1.2. ----------- 2.38 PARTICIPANT'S ACCOUNT OR ACCOUNTS shall mean the account(s) maintained to --------------------------------- record the Participant's Employee Deferral Account, Employee Contribution Account, Employer Contribution Account, Employer Matching Account and any other account maintained for the Participant, collectively or singly as the context requires. 2.39 PARTY-IN-INTEREST shall mean any person or other entity defined as a ----------------- Party-in-Interest under Section 3(14) of ERISA. 2.40 PRIOR PLAN shall mean any plan of the Employer which is superseded by this ---------- Plan. 2.41 QUALIFIED JOINT AND SURVIVOR ANNUITY shall mean an immediate annuity for ------------------------------------ the life of the Participant with a survivor annuity for the life of the spouse which is not less than fifty (50) percent and not more than one hundred (100) percent of the amount of the annuity which is payable during the joint lives of the Participant and the spouse, which is the amount of benefit which can be purchased with the Participant's vested Account Balance or, if greater, of any 2-11 optional form of life annuity offered under the Plan. The percentage of the Survivor Annuity under the Plan shall be fifty percent (50%). No Qualified Joint and Survivor Annuity shall provide that payments to the spouse of a deceased Participant are terminated because of the spouse's remarriage. 2.42 QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY shall mean an annuity for the ----------------------------------------- life of the spouse of a Participant, the actuarial equivalent of which is not less than fifty percent (50%) of the Account Balance of the Participant as of the date of death and which commences upon the death of the Participant. 2.43 SELF-EMPLOYED INDIVIDUAL shall mean an individual who has Earned Income ------------------------ for the taxable year from the trade or business for which the Plan is established; also, an individual who would have had Earned Income but for the fact that the trade or business had no Net Profits for the taxable year. 2.44 SHAREHOLDER-EMPLOYEE shall mean an Employee or officer of an electing -------------------- small business corporation who owns, or is considered as owning within the meaning of Code Section 318(a)(1), on any day during the taxable year of such corporation, more than five percent (5%) of the outstanding stock of such corporation. 2.45 TAXABLE YEAR OR FISCAL YEAR shall mean the twelve (12) month period used --------------------------- by the Employer for reporting income. 2.46 TOP-HEAVY GROUP shall mean any Aggregation Group if the sum (as of the --------------- Determination Date) of (i) the present value of the cumulative Accrued Benefits for Key Employees under all defined benefit plans included in such group, and (ii) the aggregate of the accounts of Key Employees under all defined contribution plans included in such group) exceed sixty percent (60%) of a similar sum determined for all Employees, excluding former Key Employees. For purposes of determining the present value of the cumulative benefit for any Participant, or the amount of the account of any Participant, such present value or amount shall be determined in accordance with Regulations issued by the Department of Treasury and such present value or amount shall be increased by the aggregate distributions made with respect to such Participant under the Plan during the five (5) year period ending on the Determination Date. Account Balances shall be determined as of the most recent valuation date occurring within a twelve (12) month period ending on the Determination Date and shall be adjusted for contributions due or made as of the Determination Date. If an Aggregation Group includes two (2) or more defined benefit plans, the same actuarial assumptions must be used with respect to all such plans and must be specified in such plans. 2.47 TOP-HEAVY PLAN shall mean for any Plan Year beginning after December 31, -------------- 1983, this Plan is top-heavy if any of the following conditions exists: 2-12 (1) if the top-heavy ratio for this Plan exceeds sixty percent (60%) and this Plan is not part of any required Aggregation Group or permissive Aggregation Group of plans, or (2) if this Plan is part of a required Aggregation Group of plans but not part of a permissive Aggregation Group and the top-heavy ratio for the group or plans exceeds sixty percent (60%), or (3) if this Plan is part of a required Aggregation Group and part of a permissive Aggregation Group of plans and the top-heavy ratio for the permissive Aggregation Group exceeds sixty percent (60%). 2.48 TOTAL DISABILITY shall have the meaning set forth in Section 1.1. ---------------- 2.49 TRUST OR TRUST FUND shall mean the Trust which is established by the ------------------- Employer in connection with the adoption of this Plan and which holds the assets of the Plan for the benefit of the Participants and their Beneficiaries. However, if all of the assets of the Plan are insurance contracts, within the meaning of ERISA Section 403, then all references to Trust or Trust Fund shall refer to these assets. 2.50 TRUST AGREEMENT shall mean the agreement between the Employer and the --------------- Trustee which provides for the administration of the Trust Fund. However, if all of the assets of the Plan are insurance contracts, within the meaning of ERISA Section 403, then all references to Trust Agreement shall refer to these assets. 2.51 TRUSTEE shall mean the Trustee of the Trust Fund. However, if all of the ------- assets of the Plan are insurance contracts, within the meaning of ERISA Section 403, then all references to Trustee shall refer to either the Committee or the insurance company as appropriate. 2.52 YEAR OF SERVICE shall mean a relevant twelve (12) consecutive month period --------------- (computation period) during which the Employee completes at least 1,000 Hours of Service with the Employer. In the event that the Employer adopts and maintains the Plan of a predecessor employer, service with such predecessor employer shall be treated as Years of Service with the successor Employer. The foregoing terms whenever used in this Plan shall have the meaning set forth herein unless a different meaning is specifically provided for in this Plan. 2-13 ARTICLE THREE PARTICIPATION 3.1 ELIGIBILITY TO PARTICIPATE -------------------------- The Plan Administrator shall establish an application procedure for the purpose of enrolling new Participants. Each Employee who is an Eligible Employee (as defined in Section 1.2) shall become a Participant as of the applicable Entry Date. Any Employee who does not elect to participate hereunder at the time he initially becomes an Eligible Employee may become a Participant on the next applicable Entry Date upon giving written notice to the Administrator. The Committee may establish forms and requirements through which an Eligible Employee may elect not to become a Participant. 3.2 TERMINATION ----------- A Participant shall continue to participate hereunder until employment with the Employer is terminated by Normal Retirement, Late Retirement, Death, Total Disability or a Break in Service. An Employee whose participation has ceased may resume Plan participation upon re-hire as determined under Section 3.5 herein . 3.3 LEAVE OF ABSENCE AND MILITARY SERVICE ------------------------------------- (a) A Participant's employment with the Employer shall not be deemed terminated, and the Participant shall not incur a Break in Service, if the Participant: (1) Has been on a leave of absence, granted in writing by the Employer in a nondiscriminatory manner before or after the absence, for any purpose including, but not limited to, sickness, accident or other casualty, or for the convenience of the Employer, provided that the Participant returns to work before or at the expiration of such leave of absence or any extension thereof; or (2) Has been in the service of the Armed Forces of the United States or any of its allies during a period of declared national emergency or in time of war, or in the compulsory military service of the United States whether during time of war or otherwise, provided that the Participant returns to work within the period during which the Participant's employment rights are guaranteed by applicable federal law following a discharge or severance from such service; and (3) Was in the employ of the Employer on the day immediately preceding the period of absence. (b) If the Participant fails to return to work within the time required following such period of absence, such individual shall be deemed to have terminated employment with the Employer as of the first day of such leave unless the failure to return was due to the Participant's death, Total Disability, Late Retirement, or Normal Retirement during such leave, in which event 3-1 the Participant shall be deemed a Participant up to the time of the Participant's death, Total Disability, Late Retirement, or Normal Retirement. 3.4 INACTIVE PARTICIPANTS --------------------- Subject to the eligibility requirements in Section 1.2 and eligibility requirements to receive an allocation of Employer contributions described in Article One, Section 1.3(c) and Section 1.3(d), a Participant with more than five hundred (500) Hours of Service but less than one thousand (1,000) Hours of Service in any Plan Year shall be an inactive Participant for such Plan Year. Amounts previously credited to the Participant's Account shall continue to be held in trust for such Participant and the Participant shall be entitled to benefits in accordance with the other provisions of the Plan throughout the period during which the Participant is an inactive Participant. 3.5 BREAK IN SERVICE RULES - ELIGIBILITY ------------------------------------ (a) Except as otherwise provided in this Section, all of an Employee's Years of Service with the Employer shall be taken into account when determining whether such Employee is an Eligible Employee. (b) In the case of a Participant who does not have any nonforfeitable right under the Plan to the Participant's Account Balance derived from Employer Contributions, Years of Service prior to a period of consecutive one (1) year Breaks in Service shall be disregarded when determining the Employee's Years of Service for purposes of eligibility if the number of the Participant's consecutive one (1) year Breaks in Service equals or exceeds the greater of five (5) or the aggregate number of Years of Service prior to such period of consecutive Breaks in Service. When computing the aggregate number of Years of Service prior to such Break in Service, Years of Service which could have been disregarded under this Paragraph by reason of any prior Break in Service shall be disregarded. (1) If a Participant's Years of Service are disregarded pursuant to Section 3.5(c), such Participant will be treated as a new Employee for eligibility purposes. If a Participant's Years of Service may not be disregarded pursuant to Section 3.5(c), such Participant shall continue to participate in the Plan, or, if terminated, shall participate immediately upon reemployment. 3.6 ELIGIBILITY COMPUTATION PERIODS (Section 1.2(b)] ------------------------------- (a) Except as provided in Section 3.6(d), Hours of Service completed in the Initial Eligibility Computation Period of the Employee shall be used when determining whether the Employee has completed the eligibility requirements of Section 1.2 for purposes of this Article. If the Employee fails to complete the required number of Hours of Service in the Initial Eligibility Computation Period, then the Hours of Service completed within the Subsequent Eligibility Computation Period shall be used. 3-2 (b) For purposes of determining Years of Service and Breaks in Service for purposes of eligibility, the Initial Eligibility Computation Period and Subsequent Eligibility Computation Period are those periods defined in Section 1.2(b). (c) For purposes of Section 3.5, Years of Service shall be computed by reference to the Hours of Service performed within the Initial Eligibility Computation Period and Subsequent Eligibility Computation Period, if any, prior to the time that the Employee becomes an Eligible Employee, plus the Vesting Computation Period beginning with the Vesting Computation Period which includes the date upon which the Employee becomes an Eligible Employee. (d) Except as provided in Section 3.6(f) of this Section, the Hours of Service completed within each Vesting Computation Period shall be used when determining whether an Employee has incurred a Break in Service. (e) Years of Service and Breaks in Service will be measured on the same eligibility computation period. (f) When determining whether an Employee who is not a Participant is an Eligible Employee, and for purposes of Section 3.6, a Break in Service shall be measured by Hours of Service completed within an Eligibility Computation Period. 3.7 COMMENCEMENT OF PARTICIPATION ----------------------------- If the Plan provides for an eligibility requirement of a period equal to or greater than six (6) months which elapses from a Participant's first Hour of Service and/or the attainment of an age greater than twenty and one-half (20- 1/2) years, and does not provide a dual Entry Date in the definition of Entry Date in Section 1.2(c) hereof, then the provisions of this Article shall be construed and enforced so that it will be impossible for an Eligible Employee to become a Participant later than the earlier of the first day of the Plan Year which follows the date on which the Employee satisfies the statutory requirements or the date six (6) months after the date on which the Employee first satisfies such statutory requirements, unless the Employee separates from service with the Employer and does not return before the earlier of such dates. For purposes of this Section, if an Employee's prior service is disregarded by the Break in Service rules of the Plan, such service shall also be disregarded for purposes of determining the date upon which such Employee first became an Eligible Employee. An Employee who has met the eligibility requirements but terminates employment before becoming a Participant, will participate on the later of the Employee's date of reemployment or the first Entry Date following the date the Employee met the eligibility requirements, if such individual is rehired prior to Incurring a Break in Service. 3.8 PARTICIPATION UPON RETURN TO ELIGIBLE CLASS ------------------------------------------- (a) In the event a Participant is no longer a member of an eligible class of Employees and becomes ineligible to participate but has not incurred a Break in Service, such Employee will participate immediately upon returning to an eligible class of Employees. If such Participant 3-3 incurs a Break In Service, eligibility will be determined under the Break in Service rules of the Plan. (b) In the event an Employee who is not a member of an eligible class of Employees becomes a member of an eligible class, such Employee will participate immediately if such Employee has satisfied the minimum age and service requirements and would have otherwise previously become a Participant. 3-4 ARTICLE FOUR CONTRIBUTIONS AND ALLOCATIONS 4.1 COST OF PLAN ------------ The entire cost of establishing the Plan shall be borne by the Employer. No Participant shall be required to contribute hereunder. 4.2 EMPLOYER CONTRIBUTIONS ---------------------- (a) Each Plan Year the Employer shall contribute an amount equal to the Employee Deferral contributions. These contributions shall be allocated in accordance with Section 4.18 among the Employee Deferral Accounts. Unless other procedures are selected by the Committee, Participant deferrals shall generally be made by payroll deduction in accordance with procedures established by the Committee and shall be paid to the Trustee as soon as reasonably practicable after the close of the calendar month in which the deferral was made, and in no event later than the close of the next following calendar month. (b) In the event that contributions shall be required in accordance with Article One, Section 1.3 (e.g. required matching contributions or mandatory non-elective contribution), or shall be deemed mandatory or non-discretionary as provided in the various Articles of this Plan, the Employer shall contribute an amount equal to such required contributions into the Trust each Plan Year. (c) In addition, each Fiscal Year the Employer shall contribute such amounts as the Employer may determine in its sole discretion, provided that (i) no contribution shall be made for any Fiscal Year in excess of the maximum allowable tax deduction, including carry-over amounts that are available, for a contribution to this Plan for such Fiscal Year under the then current tax laws; and (ii) the Fiscal Year for which each contribution is made shall be designated at the time of the contribution. (d) All contributions shall be made by the Employer no later than the time prescribed by law for filing the federal income tax return of the Employer, including extensions thereof, for the Fiscal Year for which a deduction for such contribution is claimed. The Employer's Contribution may be made either in cash or in kind, or partly in both cash and kind, but it shall be the Employer's responsibility to determine the fair market value of a contribution which is not made entirely in cash. (e) Notwithstanding anything herein to the contrary, for Plan Years in which the Plan is deemed to be a Top-Heavy Plan, Employer Contributions and allocations shall be subject to the requirements of Article Fourteen herein. 4-1 4.3 EMPLOYEE (AFTER-TAX) CONTRIBUTIONS ---------------------------------- (a) Participants are not required to make any contribution under this Plan. However, if permitted by the provisions of Section 1.3(e), a Participant may, each Fiscal Year, voluntarily contribute to this Plan and to all other qualified plans of deferred compensation in which such individual is a Participant, an amount which does not exceed the amount provided for in Section 1.3(h). Further, all Employee Contributions will be limited so as to meet the nondiscrimination test of Section 401(m) of the Code. Employee Contributions may be made by payroll deduction or by other methods and at other intervals in accordance with rules established by the Committee. A Participant's contribution shall be transmitted to the Trustee by the Employer within sixty (60) days after the date on which the contribution was made. The Employer shall promptly notify the Committee of any amounts so paid by it to the Trustee. (b) If nondeductible Employee Contributions were permitted prior to the year in which this Plan was adopted, then, either a separate account will be maintained by the Trustee for the nondeductible Employee contributions of each Participant, or the Account Balance derived from nondeductible Employee contributions is the Employee's total Account Balance multiplied by a fraction, the numerator of which is the total amount of nondeductible Employee contributions less withdrawals and the denominator of which is the sum of the numerator and the total contributions made by the Employer on behalf of the Employee less withdrawals. For this purpose, contributions include contributed amounts used to provide ancillary benefits and withdrawals include only amounts distributed to the Employee and do not reflect the cost of any death benefits. (c) A Participant may withdraw the Employee Contributions made by him at any time upon thirty (30) days' written notice to the Committee, which notice must be signed by the Participant's spouse in the presence of a Notary Public or a Plan representative. (d) No forfeitures will occur solely as a result of an Employee's withdrawal of Employee contributions. (e) If deductible Employee Contributions were permitted prior to the Plan Year in which this Plan was adopted, then, the Committee will not accept deductible Employee contributions which are made for a taxable year beginning after December 31, 1986. Contributions made prior to that date will be maintained in a separate account which will be nonforfeitable at all times. The account will share in the gains and losses of the Trust in the same manner as described in Section 4.11 of the Plan. No part of the deductible Employee Contribution account will be used to purchase life insurance. Subject to Section 12.2, Joint and Survivor Annuity requirements (if applicable), the Participant may withdraw any part of the deductible Employee Contribution account by making a written application to the Committee. 4.4 EMPLOYEE DEFERRAL ELECTION -------------------------- (a) Each Plan Year a Participant shall be entitled to defer a portion of his Compensation (in an amount permitted under Section 4.4(d), below) and to have such deferred amount allocated to his Employee Deferral Account in the Plan by submitting a written election 4-2 to the Committee (on forms provided by the Committee or the Employer) which designates the amount of Compensation to be deferred and which is signed by the Participant. No amount shall be deferred for any pay period in excess of the Participant's Compensation for services rendered while an active Participant. All deferrals under this Section shall constitute Employer Contributions to the Plan. Notwithstanding the above, in no event shall any Participant defer his Compensation in an amount which exceeds the amount permitted under Section 4.5 for any Plan Year. (b) Except as otherwise permitted by the Administrative Committee, elections under Section 4.4(a) may only be made according to the options chosen in Section 1.3(d). If job positions are first covered by the Plan during the course of the Plan Year, the Administrative Committee may elect to apply the preceding sentence to affected Employees as if the first day on which their job positions are covered by the Plan was the first day of the Plan Year. An Employee who transfers into a position covered by the Plan shall be permitted to make a deferral election for the balance of the Plan Year in which the transfer occurs if and to the extent permitted under written personnel practices of the Employer covering the facility to which the individual transferred. Such practices shall be uniformly and consistently applied. (c) An election made under Section 4.4(a) may be modified in accordance with the provisions of Article One, Section 1.3(b)(2). If an election is revoked while in effect during the Plan Year, no further deferrals shall be made for the balance of the Plan Year [unless otherwise noted in Section 1.3(b)(2)(iii)], effective as soon as administratively practicable after the Employer receives written notice of the revocation. A revocation shall not cause amounts which were deferred before the revocation became effective to become distributable. Any new deferral election made after a revocation shall become effective as of the first day of the immediately following Plan Year. (d) Subject to Article One, each Plan Year a Participant shall be entitled to defer his Compensation in a stated dollar amount which complies with the percentage limitations above. (e) All Participant elections under this Section shall be considered permanent and shall be effective in subsequent Plan Years unless otherwise stated in the Participant's written election to defer annual compensation. 4.5 ELECTIVE DEFERRALS-CONTRIBUTION LIMITATION ------------------------------------------- No Participant shall be permitted to have Elective Deferrals made under this Plan, or any other qualified plan maintained by the Employer, during any taxable year, in excess of the dollar limitation contained in Section 402(g) of the Code in effect at the beginning of such taxable year. 4.6 DISTRIBUTION OF EXCESS ELECTIVE DEFERRALS ----------------------------------------- (a) A Participant may assign to this Plan any Excess Elective Deferrals made during a taxable year of the Participant by notifying the Plan Administrator on or before April 1st of the following year of the amount of the Excess Elective Deferrals to be assigned to the Plan. A Participant is deemed to notify the Plan Administrator of any Excess Elective Deferrals that arise 4-3 by taking into account only those Elective Deferrals made to this Plan and any other Plans of this Employer. Notwithstanding any other provisions of the Plan, Excess Elective Deferrals, plus any income and minus any loss allocable thereto, shall be distributed no later than April 15th to any Participant to whose account Excess Elective Deferrals were assigned for the preceding year and who claims Excess Elective Deferrals for such taxable year. (b) Definitions: (1) "Elective Deferrals" shall mean any Employer contributions made to the Plan at the election of the Participant, in lieu of cash compensation, and shall include contributions made pursuant to a salary reduction agreement or other deferral mechanism. With respect to any taxable year, a Participant's Elective Deferral is the sum of all Employer contributions made on behalf of such Participant pursuant to an election to defer under any qualified plan as described in Section 401(k) of the Code, any simplified employee pension cash or deferred arrangement as described in Section 402(h)(1)(B), any eligible deferred compensation plan under Section 457, any plan as described under Section 501(c)(18), and any Employer contributions made on the behalf of a Participant for the purchase of an annuity contract under Section 403(b) pursuant to a salary reduction agreement. Elective Deferrals shall not include any deferrals properly distributed as excess Annual Additions. (2) "Excess Elective Deferrals" shall mean those Elective Deferrals that are includible in a Participant's gross income under Section 402(g) of the Code to the extent such Participant's Elective Deferrals for a taxable year exceed the dollar limitation under such Code section. Excess Elective Deferrals shall be treated as Annual Additions under the Plan, unless such amounts are distributed no later than the first April 15 following the close of the Participant's taxable year. Determination of income or loss: Excess Elective Deferrals shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Elective Deferrals shall be determined using (i) or (ii) as a reasonable method. Income or loss allocable to the period between the end of the taxable year and the date of distributions may be disregarded or may be determined using the method described in (iii). The method chosen shall be: (1) nondiscriminatory; (2) used for all the Plan's corrective distributions for the Plan Year; and (3) for purposes of (2)(ii) of this Section, used for allocating income to Participant's Accounts. The reasonable methods are: (i) The income or loss allocable to Excess Elective Deferrals is the sum of: (1) income or loss allocable to the Participant's Elective Deferral account for the taxable year multiplied by a fraction, the numerator of which is such Participant's Excess Elective Deferrals for the year and the denominator is the Participant's Account Balance attributable to Elective Deferrals without regard to any income or loss occurring during such taxable year. (ii) The income or loss allocable to Excess Elective Deferrals shall be determined by first calculating the total allocable income for the Plan Year attributable to 4-4 Elective Deferrals, then multiplying the total allocable income by a fraction. The numerator of the fraction is the total excess amount distributable to the highly compensated employee and the denominator shall be the sum of the Participant's Account Balance attributable to Elective Deferrals, determined as of the beginning of the Plan Year. (iii) Safe Harbor Method of Determining Gap Period Income: The Employer may choose to determine the income during the period between the end of the Plan Year and the date of distribution under the methods in this sub-section or sub-sections (i) or (ii) above, or such income may be disregarded in determining income or loss. Gap Income allocable can be determined by using ten percent (10%) of the income allocable to Excess Elective Deferrals for the Plan Year multiplied by the number of whole calendar months between the end of the Plan Year and the date of distribution, counting the month of distribution if distribution occurs after the 15th of such month. 4.7 ACTUAL DEFERRAL PERCENTAGE TEST ------------------------------- (a) The Actual Deferral Percentage (hereinafter "ADP") for Participants who are Highly Compensated Employees for each Plan Year and the Actual Deferral Percentage for Participants who are Non-highly Compensated Employees for the same Plan Year must satisfy one of the following tests: (1) The Actual Deferral Percentage for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Actual Deferral Percentage for Participants who are Non-highly Compensated Employees for the same Plan Year multiplied by 1.25; or (2) The Actual Deferral Percentage for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Actual Deferral Percentage for Participants who are Non-highly Compensated Employees for the same Plan Year multiplied by 2.0, provided that the Actual Deferral Percentage for Participants who are Highly Compensated Employees does not exceed the Actual Deferral Percentage for Participants who are Non-highly Compensated Employees by more than two (2) percentage points. (b) Qualified Matching Contributions and Qualified Non-elective Contributions (if any) may be taken into account as Elective Deferrals for purposes of calculating the Actual Deferral Percentages under this Plan or any other plan of the Employer, as provided by regulations under the Code. (c) The amount of Qualified Matching Contributions made and/or Qualified Non-elective Contributions made under Sections 4.11 or 4.14 of this Plan and taken into account as Elective Deferrals for purposes of calculating the Actual Deferral Percentage, subject to such other requirements as maybe prescribed by the Secretary of the Treasury, shall be that amount necessary to meet the Actual Deferral Percentage test stated in Section 4.1 of the Plan. 4-5 (d) Special Rules: (1) The Actual Deferral Percentage for any Participant who is a Highly Compensated Employee for the Plan Year and who is eligible to have Elective Deferrals (and Qualified Non-elective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the Actual Deferral Percentage test) allocated to the Participant's accounts under two or more arrangements described in Section 401(k) of the Code, that are maintained by the Employer, shall be determined as if such Elective Deferrals (and, if applicable, such Qualified Non-elective Contributions or Qualified Matching Contributions, or both) were made under a single arrangement. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different Plan Years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under Code Section 401(k). (2) In the event that this Plan satisfies the requirements of Sections 401(k), 401(a)(4), or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Sections of the Code only if aggregated with this Plan, then this Section shall be applied by determining the Actual Deferral Percentage of Employees as if all such plans were a single plan. For Plan Years beginning after December 31, 1989, plans may be aggregated in order to satisfy Section 401(k) of the Code only if they have the same Plan Year. (i) For purposes of determining the Actual Deferral Percentage of a Participant who is a 5-percent owner or one of the ten most highly-paid Highly Compensated Employees, the Elective Deferrals (and Qualified Non-elective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the Actual Deferral Percentage test) and Compensation of such Participant shall include the Elective Deferrals (and, if applicable, Qualified Non-elective Contributions and Qualified Matching Contributions, or both) and Compensation for the Plan Year of Family Members (as defined in Section 414(q)(6) of the Code). Family Members, with respect to such Highly Compensated Employees, shall be disregarded as separate Employees in determining the Actual Deferral Percentage both for Participants who are Non- highly Compensated Employees and for Participants who are Highly Compensated Employees. (ii) For purposes of determining the Actual Deferral Percentage test, Elective Deferrals, Qualified Non-elective Contributions and Qualified Matching Contributions must be made before the last day of the twelve-month period immediately following the Plan Year to which contributions relate. (iii) The Employer shall maintain records sufficient to demonstrate satisfaction of the Actual Deferral Percentage test and the amount of Qualified Non-elective Contributions or Qualified Matching Contributions, or both, used in such test. 4-6 (iv) The determination and treatment of the Actual Deferral Percentage amounts of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (v) Section 4.12(b) Multiple Use of Alternative Limitation and Correction of Multiple Use shall apply at the discretion of the Plan Administrator. (e) Definitions: (1) "Actual Deferral Percentage" shall mean, for a specified group of Participants for a Plan Year, the average of the ratios (calculated separately for each Participant in such group) of (1) the amount of Employer contributions actually paid over to the Trust on behalf of such Participant for the Plan Year to (2) the Participant's Compensation for such Plan Year (whether or not the Employee was a Participant for the entire Plan Year). Employer contributions on behalf of any Participant shall include: (1) any Elective Deferrals made pursuant to the Participant's deferral election (including Excess Elective Deferrals of Highly Compensated Employees), but excluding (a) Excess Elective Deferrals of Non-highly Compensated Employees that arise solely from Elective Deferrals made under the Plan or Plans of this Employer and (b) Elective Deferrals that are taken into account in the Contribution Percentage test (provided the Actual Deferral Percentage test is satisfied both with and without exclusion of these Elective Deferrals); and (2) at the election of the Employer, Qualified Non-elective Contributions and Qualified Matching Contributions. For purposes of computing Actual Deferral Percentages, an Employee who would be a Participant but for the failure to make Elective Deferrals shall be treated as a Participant on whose behalf no Elective Deferrals are made. 4.8 DISTRIBUTION OF EXCESS CONTRIBUTIONS ------------------------------------ (a) Notwithstanding any other provision of this Plan, Excess Contributions, plus any income and minus any loss allocable thereto, shall be distributed following the close of the Plan Year in which the Excess Contributions arose, but no later than the last day of the succeeding Plan Year to Participants to whose accounts such Excess Contributions were allocated for the preceding Plan Year. If such excess amounts are distributed more than 2-1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten (10) percent excise tax will be imposed on the Employer maintaining the Plan with respect to such excess contribution. Such distributions shall be made to Highly Compensated Employees on the basis of the respective portions of the Excess Contributions attributable to each of such Employees. Excess Contributions of Participants who are subject to the family member aggregation rules shall be allocated among the family members in proportion to the Elective Deferrals (and amounts treated as Elective Deferrals) of each family member that is combined to determine the combined ADP. (b) Excess Contributions (including the amounts recharacterized) shall be treated as Annual Additions under the Plan. (c) Determination of Income or Loss: Excess Contributions shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess 4-7 Contributions shall be determined using (i) or (ii) as a reasonable method. The gap income may be disregarded or determined in the manner set forth in (iii) below. The method chosen shall be: (1) nondiscriminatory; (2) used for all the Plan's corrective distributions for the Plan Year; and (3) for purposes of (c)(ii) of this Section, used for allocating income or Participant's Accounts. The reasonable methods are: (i) The income or loss allocable to Excess Contributions is the sum of: (1) income or loss allocable to the Participant's Elective Deferral account (and, if applicable, the Qualified Non-elective Contribution Account or the Qualified Matching Contributions Account or both) for the Plan Year multiplied by a fraction, the numerator of which is such Participant's Excess Contributions for the year and the denominator is the Participant's account balance attributable to Elective Deferrals (and Qualified Non-Elective Contributions or Qualified Matching Contributions, or both, if any of such contributions are included in the Actual Deferral Percentage test) without regard to any income or loss occurring during such Plan Year. (ii) The income or loss allocable to Excess Contributions shall be determined by first calculating the total allocable income for the Plan Year attributable to Elective Deferrals, then multiplying the total allocable income by a fraction. The numerator of the fraction is the total excess amount distributable to the highly compensated employee and the denominator shall be the sum of the Participant's Account Balance attributable to Elective Deferrals, determined as of the beginning of the Plan Year. (iii) Safe Harbor Method of Determining Gap Period Income: The Employer may choose to determine the income during the period between the end of the Plan Year and the date of distribution under the methods in this sub-section or sub-sections (i) or (ii) above, or such income may be disregarded in determining income or loss. Gap Income allocable can be determined by using ten percent (10%) of the income allocable to Excess Contributions for the Plan Year multiplied by the number of whole calendar months between the end of the Plan Year and the date of distribution, counting the month of distribution if distribution occurs after the 15th of such month. (d) Accounting for Excess Contributions: Excess Contributions shall be distributed by first returning any amount of unmatched elective deferrals which exceed the limitation percentage specified in Section 1.3(c)(2), if applicable. Secondly, Excess Contributions shall be distributed from the Participant's Elective Deferral Account and Qualified Matching Contribution Account (if applicable) in proportion to the Participant's remaining Elective Deferrals and Qualified Matching Contributions (to the extent used in the Actual Deferral Percentage test) for the Plan Year. Excess Contributions shall be distributed from the Participant's Qualified Non-elective Contribution Account only to the extent that such Excess Contributions exceed the balance in the Participant's Elective Deferral Account and Qualified Matching Contribution Account. 4-8 (e) Definition: "Excess Contributions" shall mean, with respect to any Plan Year, the excess of: (i) The aggregate amount of Employer contributions actually taken into account in computing the Actual Deferral Percentage of Highly Compensated Employees for such Plan Year, over (ii) The maximum amount of such contributions permitted by the Actual Deferral Percentage test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of the Actual Deferral Percentages, beginning with the highest of such percentages). 4.9 RECHARACTERIZATION ------------------ (a) In the event the Plan permits participants to maker Employee Voluntary (after-tax) Contributions in Section 1.3(e) of Article One, a Participant may treat his or her Excess Contributions as an after-tax contribution to the Plan. Recharacterized amounts will remain nonforfeitable and subject to the same distribution requirements as Elective Deferrals. Amounts may not be recharacterized by a Highly Compensated Employee to the extent that such amount in combination with other Employee Contributions made by that Employee would exceed any stated limit under the Plan on Employee Contributions. (b) Recharacterization must occur no later than two and one-half months after the last day of the Plan Year in which such Excess Contributions arose and is deemed to occur no earlier than the date the last Highly Compensated Employee is informed in writing of the amount recharacterized and the consequences thereof. Recharacterized amounts will be taxable to the Participant for the Participant's tax year in which the Participant would have received them in cash. 4.10 EMPLOYER MATCHING CONTRIBUTIONS ------------------------------- If elected by the Employer in the Plan, the Employer may make Matching Contributions to the Plan. Matching Contributions shall be vested in accordance with Section 1.4(b) of the Plan. In any event, Matching Contributions shall be fully vested at Normal Retirement Age, death, Total Disability, upon the complete or partial termination of the Plan, or upon the complete discontinuance of Employer contributions. Forfeitures of Matching Contributions, other than Excess Aggregate Contributions, shall be made in accordance with Sections 1.3(c)(4) and (5). 4.11 QUALIFIED MATCHING CONTRIBUTIONS -------------------------------- (a) The Matching Contribution, if any, made by the Employer according to Section l.3(c)(l) and Section 4.10 above, may (at the direction of the Plan Administrator) become a Qualified Matching Contribution in part or in whole in the event that the Plan fails to meet the 4-9 Code Section 401(k) nondiscrimination tests as described in Section 4.12 of the Plan or the Employer may elect to make an additional contribution as a Qualified Matching Contribution based on a discretionary percentage, subject to the limitations of Section 4.12 and Code Section 401(m) and corresponding regulations. (b) Definition: "Qualified Matching Contributions" shall mean Matching Contributions which are subject to the distribution and nonforfeitability requirements under Section 401(k)(2)(B)(ii) of the Code when made. 4.12 LIMITATIONS ON EMPLOYER CONTRIBUTIONS AND MATCHING CONTRIBUTIONS ---------------------------------------------------------------- (effective for Plan Years beginning on or after January 1, 1987) (a) The Average Contribution Percentage for Participants who are Highly Compensated Employees for reach Plan Year and the Average Contribution Percentage for Participants who are Non-highly Compensated Employees for the same Plan Year must satisfy one of the following tests: (1) The Average Contribution Percentage for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for Participants who are Non-highly Compensated Employees for the same Plan Year multiplied by 1.25; or (2) The Average Contribution Percentage for Participants who are Highly Compensated Employees for the Plan Year shall not exceed the Average Contribution Percentage for Participants who are Non-highly Compensated Employees for the same Plan Year multiplied by two (2), provided that the Average Contribution Percentage for Participants who are Highly Compensated Employees does not exceed the Average Contribution Percentage for Participants who are Non-highly Compensated Employees by more than two (2) percentage points. (b) Special Rules: (1) Multiple Use of Alternative Limitation and Correction of Multiple Use: (i) There is a Multiple Use of the Alternative Limitation, if one or more Highly Compensated Employees participate in both a cash or deferred arrangement and a plan subject to the Average Contribution Percentage test maintained by the Employer and the sum of Actual Deferral Percentage and Average Contribution Percentage of those Highly Compensated Employees subject to either or both tests exceeds the Aggregate Limit. The amount by which each Highly Compensated Employee's Contribution Percentage Amounts is reduced shall be treated as an Excess Aggregate Contribution. The Actual Deferral Percentage and Average Contribution Percentage of the Highly Compensated Employees are determined after any corrections required to meet the Actual Deferral Percentage and Average Contribution Percentage tests. Multiple use does not occur if either the Actual Deferral Percentage or the Average Contribution Percentage of the Highly Compensated Employees does not exceed 1.25 4-10 multiplied by the Actual Deferral Percentage or the Average Contribution Percentage of the Non-highly Compensated Employees, respectively. (ii) A Multiple Use shall be corrected by reducing the Actual Deferral Percentage of the entire group of Highly Compensated Employees eligible for the cash or deferred arrangement in the manner described in Regulation Section 1.401(k)-1(f)(1)(ii) [Regulation Section 1.401(k)-1(f)(2)] and/or by reducing the actual contribution percentage of the entire group of Highly Compensated Employees eligible to make Employee Contributions in the manner described in Regulation Section 1.401(m)-1(e)(2), as described in Section 4.5, so that there is no Multiple Use of the Alternative Limitation. The Employer may elect to reduce the Actual Deferral Ratios and/or the Actual Contribution Ratios, either for all Highly Compensated Employees under this Plan and/or the cash or deferred arrangement subject to the reduction or for only those Highly Compensated Employees who are eligible in both this Plan and the Code Section 401(k) cash or deferred arrangement. (iii) The required reduction for correction for Multiple Use shall be treated as an excess contribution or excess aggregate contribution under this Plan. (2) For purposes of this Section, the Contribution Percentage for any Participant who is a Highly Compensated Employee and who is eligible to have Contribution Percentage Amounts allocated to his or her account under two or more plans described in Section 401(a) of the Code, or arrangements described in Section 401(k) of the Code that are maintained by the Employer, shall be determined as if the total of such Contribution Percentage Amounts was made under each plan. If a Highly Compensated Employee participates in two or more cash or deferred arrangements that have different plan years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under regulations under Section 401(m) of the Code. (3) In the event that this Plan satisfies the requirements of Sections 401(m), 401(a)(4) or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Sections of the Code only if aggregated with this Plan, then this Section shall be applied by determining the Contribution Percentage of Employees as if all such plans were a single plan. For plan years beginning after December 31, 1989, plans may be aggregated in order to satisfy Section 401(m) of the Code only if they have the same plan year. (4) For purposes of determining the Contribution Percentage of a Participant who is a five-percent owner or one of the ten most highly-paid Highly Compensated Employees, and is thereby subject to the family aggregation rules of Code Section 414(q)(6), the Contribution Percentage Amounts for the family group (which is treated as one Highly Compensated Employee) is the greater of (1) the Contribution Percentage determined by combining the contributions and Compensation of all eligible family members who are highly compensated without regard to family aggregation, and (2) the Contribution Percentage Amounts determined by combining the contributions and compensation of all eligible family members. 4-11 Except to the extent taken into account in the preceding sentence, the contributions and compensation of all family members are disregarded in determining the Contribution Percentage for the groups of Highly Compensated Employees and Non-highly Compensated Employees. (5) For purposes of determining the Contribution Percentage test, Employee Contributions are considered to have been made in the Plan Year in which contributed to the Trust. Matching Contributions and Qualified Non- elective Contributions will be considered made for a Plan Year if made no later than the end of the twelve-month period beginning on the day after the close of the Plan Year. (6) The Employer shall maintain records sufficient to demonstrate satisfaction of the Average Contribution Percentage test and the amount of Qualified Non-elective Contributions or Qualified Matching Contributions, or both, used in such test. (7) The determination and treatment of the Contribution Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. (8) In the event that the contribution of a full Matching Contribution would cause the Plan to fail the Contribution Percentage test, or the multiple use test the Matching Contribution may be reduced in a manner which would permit the Plan to satisfy the nondiscrimination requirements of this Section 4.12. (c) Definitions: (1) "Aggregate Limit" shall mean the greater of: (A) the sum of: (i) 1.25 times the greater of the Relevant Actual Deferral Percentage of the non-highly compensated or the Relevant Average Contribution Percentage of the non-highly compensated, and (ii) two percentage points plus the lesser of the Relevant Actual Deferral Percentage or the Relevant Actual Contribution Percentage. In no event, however, shall this amount exceed twice the lesser of the Relevant Actual Deferral Percentage or the Relevant Actual Contribution Percentage; or (B) the sum of: (i) 1.25 times the lesser of the Relevant Actual Deferral Percentage or the Relevant Actual Contribution Percentage, and (ii) two percentage points plus the greater of the Relevant Actual Deferral Percentage or the Relevant Actual Contribution Percentage. In no event, however, shall this amount exceed twice the greater of the Relevant Actual Deferral Percentage or the Relevant Actual Contribution Percentage. (2) "Alternative Limitation" shall mean the alternative methods of compliance with Code Sections 401(k) and (m) contained in Code Sections 401(k)(3)(A)(ii)(I) and 401(m)(2)(ii) respectively. (3) "Average Contribution Percentage" shall mean the average of the Contribution Percentages of the Eligible Participants in a group. 4-12 (4) "Compensation" for purposes of Code Section 401(m) and the determination of Excess Aggregate Contributions shall be defined as provided in Section 2.9. Notwithstanding the foregoing, the Employer may elect to define "Compensation" in an alternative manner by using the definition of compensation provided in Code Section 414(s) provided this election is made on a uniform and consistent basis with respect to all Employees and all plans of the Employer. (5) "Contribution Percentage" shall mean the ratio (expressed as a percentage) of the Participant's Contribution Percentage Amounts to the Participant's Compensation for the Plan Year (whether or not the Employee was a Participant for the entire Plan Year). (6) "Contribution Percentage Amounts" shall mean the Employee Contributions, Matching Contributions, Qualified Matching Contributions (to the extent not taken into account for purposes of the ADP test), Qualified Non- elective Contributions and Elective Deferrals (as long as the ADP test is met before the Elective Deferral are used in the ACP test and continues to be met following the exclusion of those Elective Deferrals that are used to meet the ACP test) made under the Plan on behalf of the Participant for the Plan Year. Such Contribution Percentage Amounts shall not include Matching Contributions that are forfeited either to correct Excess Aggregate Contributions or because the contributions to which they relate are Excess Deferrals, Excess Contributions, or Excess Aggregate Contributions. Such Contribution Percentage Amounts shall include forfeitures of Matching Contributions allocated to the Participant's account which shall be taken into account in the year in which such forfeiture is allocated, but only if such Forfeitures are allocated in proportion to deferrals or Matching Contributions. (7) "Eligible Participant" shall mean any Employee who is eligible to make an Employee Contribution, or an Elective Deferral (if the Employer takes such contributions into account in the calculation of the Contribution Percentage), or to receive a Matching Contribution (including forfeitures) or a Qualified Matching Contribution. If an Employee Contribution is required as a condition of participation in the Plan, any Employee who would be a Participant in the Plan if such Employee made such a contribution shall be treated as an eligible Participant on behalf of whom no Employee Contributions are made. (8) "Employee Contribution" shall mean any contribution made to the Plan by or on behalf of a Participant that is included in the Participant's gross income in the year in which made and that is maintained under a separate account to which earnings and losses are allocated. (9) "Matching Contribution" shall mean an Employer Contribution made to this or any other defined contribution plan on behalf of a Participant on account of an Employee Contribution made by such Participant, or on account of a Participant's elective deferral under a cash or deferred plan maintained by the Employer. (10) "Relevant Actual Deferral Percentage And Relevant Actual Contribution Percentage" shall mean the Actual Deferral Percentage of the group of Non-Highly Compensated 4-13 Employees eligible under the cash or deferred arrangement subject to Code Section 401(k) for the Plan Year, and/or the Actual Contribution Percentage of the group of Non-Highly compensated Employees eligible under the plan subject to Code Section 401(m) for the Plan Year beginning with or within the Plan Year of the cash or deferred arrangement subject to Code Section 401(k). 4.13 DETERMINATION OF EXCESS AGGREGATE CONTRIBUTIONS ----------------------------------------------- (a) In computing the Average Contribution Percentage, the Employer shall take into account, and include as Contribution Percentage Amounts, Qualified Non-elective Contributions under this Plan or any other plan of the Employer, as provided by regulations. (b) The amount of Qualified Non-elective Contributions that are made under Section 4.14 of this Plan and taken into account as Contribution Percentage Amounts for purposes of calculating the Average Contribution Percentage, subject to such other requirements as may be prescribed by the Secretary of the Treasury, shall be such Qualified Non-elective Contributions that are needed to meet the Average Contribution Percentage test stated in Section 4.12(a) of the Plan. (c) The amount of Elective Deferrals made under Section 4.4(a) of the Plan and taken into account as Contribution Percentage Amounts for purposes of calculating the Average Contribution Percentage, subject to such other requirements as may be prescribed by the Secretary of the Treasury, shall be all Elective Deferrals available after satisfying the Actual Deferral Percentage test or such Elective Deferrals that are needed to meet the Average Contribution Percentage test stated in Section 4.12(a) of the Plan and/or the 1.25 rule or a combination of the foregoing. (d) By written election of the Employer, Forfeitures of Excess Aggregate Contributions shall either be applied to reduce Employer contributions or allocated, after all other forfeitures under the Plan to each Participant's Matching Contribution Account in the ratio which each Participant's Compensation for the Plan Year bears to the total Compensation of all Participants for such Plan Year. (e) The amount of excess aggregate contributions for a Highly Compensated Employee under the Plan shall be subject to the requirements of Code Section 401(m) and shall be determined in the following manner: (i) First, the actual contribution ratio of the of the Highly Compensated Employee with the highest actual contribution ratio is reduced to the extent necessary to satisfy the actual contribution percentage test or cause such ratio to equal the actual contribution ratio of the Highly Compensated Employee with the next highest ratio. (ii) Second, this process shall be repeated until the actual contribution percentage test is satisfied. The amount of excess aggregate contributions for a Highly Compensated Employee is then equal to the total of the Employee Contributions, and other 4-14 contributions taken into account for the actual contribution percentage test minus the product of the Employee's contribution ratio as determined above the Employee's Compensation. (f) In the case of a Highly Compensated Employee whose actual contribution ratio is determined under the family aggregation rules, the determination of the amount of excess aggregate contribution shall be made as follows: (i) If the Highly Compensated Employee's actual contribution ratio is determined by combining the contributions and Compensation of all family members, then the actual contribution ratio is reduced in accordance with the "leveling" method described in Section 4.13(e) and the excess aggregate contributions for the family unit are allocated among the family member in proportion to the contribution of each family member that have been combined. (ii) If the Highly Compensated Employee's actual contribution ratio is determined by combining the contribution and compensation of only those family members who are highly compensated without regard to family aggregation, then the actual contribution ratio is reduced in accordance with the "leveling" method but not below the actual contribution ratio of eligible non-highly compensated family members. Excess aggregate contributions are determined by taking into account the contributions of the eligible family members who are highly compensated without regard to family aggregation and are allocated among such members in proportion to their contributions. If further reduction of the actual contribution ratio is required, excess aggregate contributions resulting from this reduction are determined by taking into account the contributions of all eligible family members and are allocated among such family members in proportion to their contributions. (g) DISTRIBUTION OF EXCESS AGGREGATE CONTRIBUTIONS ---------------------------------------------- Notwithstanding any other provision of this Plan, Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be forfeited, if forfeitable. Or if not forfeitable, shall be distributed no later than the last day of each Plan Year to Participants to whose accounts such Excess Aggregate Contributions were allocated for the preceding Plan Year. Excess Aggregate Contributions of Participants who are subject to the family member aggregation rules shall be allocated among the family members in proportion to the Employee and Matching Contributions (or amounts treated as Matching Contributions) of each family member that is combined to determine the combined ACP. If such Excess Aggregate Contributions are distributed more than 2-1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten (10) percent excise tax will be imposed on the Employer maintaining the Plan with respect to those amounts. Excess Aggregate Contributions shall be treated as Annual Additions under the Plan. Furthermore, the distribution (or forfeiture, if applicable) of excess aggregate contributions shall be made on the basis of the respective portions of such amounts attributable to each Highly Compensated Employee. (h) Determination of Income or Loss: Excess Aggregate Contributions shall be adjusted for any income or loss up to the date of distribution. The income or loss allocable to Excess Aggregate Contributions shall be determined using (i) or (ii) as a reasonable method. 4-15 Income or loss allocable to the period between the end of the taxable year and the date of distributions may be disregarded or may be determined using the method described in (iii). The method chosen shall be: (1) nondiscriminatory; (2) used for all the Plan's corrective distributions for the Plan Year; and (3) for purposes of (2)(ii) of this Section, used for allocating income to Participant's Accounts. The reasonable methods are: (i) The income or loss allocable to Excess Aggregate Contributions is the sum of: (1) income or loss allocable to the Participant's Employee Voluntary (After-Tax) Contribution Account, Matching Contribution Account, Qualified Matching Contribution Account (if any, and if all amounts therein are not used in the ADP test) and, if applicable, Qualified non-elective Contribution Account and Elective Deferral Account for the Plan Year multiplied by a fraction, the numerator of which is such Participant's Excess Aggregate Contributions for the year and the denominator is the Participant's Account Balance attributable to Contribution Percentage Amounts without regard to any income or loss occurring during such Plan Year. (ii) The income or loss allocable to Excess Aggregate Contributions shall be determined by first calculating the total allocable income for the Plan Year attributable to Participant's Employee Voluntary (After-Tax) Contribution Account, Matching Contribution Account, Qualified Matching Contribution Account (if any, and if all amounts therein are not used in the ADP test) and, if applicable, Qualified non-elective Contribution Account and Elective Deferrals, then multiplying the total allocable income by a fraction. The numerator of the fraction is the total excess amount distributable to the highly compensated employee and the denominator shall be the sum of the Participant's Account Balance attributable to Elective Deferrals, determined as of the beginning of the Plan Year. (iii) Safe Harbor Method of Determining Gap Period Income: The Employer may choose to determine the income during the period between the end of the Plan Year and the date of distribution under the methods in this sub-section or sub-sections (i) or (ii) above, or such income may be disregarded in determining income or loss. Gap Income allocable can be determined by using ten percent (10%) of the income allocable to Excess Aggregate Contributions for the Plan Year multiplied by the number of whole calendar months between the end of the Plan Year and the date of distribution, counting the month of distribution if distribution occurs after the 15th of such month. (i) Forfeitures of Excess Aggregate Contributions: Forfeitures of Excess Aggregate Contributions may either be reallocated to the accounts of Employees or applied to reduce Employer contributions. (j) Accounting for Excess Aggregate Contributions: Excess Aggregate Contributions shall be forfeited, if forfeitable or distributed on a pro rata basis from the Participant's Employee Contribution Account, Matching Contribution Account, and Qualified Matching Contribution Account (and, if applicable, the Participant's Qualified Non-elected Contribution Account or Elective Deferral Account, or both). 4-16 (k) Definitions: "Excess Aggregate Contributions" shall mean, with respect to any Plan Year, the excess of: (i) The aggregate Contribution Percentage Amounts taken into account in computing the numerator of the Contribution Percentage actually made on behalf of Highly Compensated Employees for such Plan Year, over (ii) The maximum Contribution Percentage Amounts permitted by the Average Contribution Percentage test (determined by reducing contributions made on behalf of Highly Compensated Employees in order of their Contribution Percentages beginning with the highest of such percentages). 4.14 QUALIFIED NON-ELECTIVE CONTRIBUTIONS ------------------------------------ (a) The Non-elective Contribution, if any, made by the Employer according to Section 1.3(d) above, may (at the direction of the Plan Administrator) become a Qualified Non-elective Contribution in part or in whole. (b) In addition, in lieu of distributing Excess Contributions as provided in Section 4.8(a) of the Plan, or Excess Aggregate Contributions as provided in Section 4.13(a) of the Plan, and to the extent elected by the Employer in the Plan, the Employer may make Qualified Non-elective Contributions on behalf of Non-highly Compensated Employees that are sufficient to satisfy either the Actual Deferral Percentage test or the Average Contribution Percentage Test, or both, pursuant to regulations under the Code. (c) Eligibility to Receive an Allocation of Qualified Non-elective -------------------------------------------------------------- Contributions - ------------- An Employer may, through resolution of the Board or Employer certification, choose the following method of allocating Qualified Non-elective Contributions as an alternative to the method chosen in Section 1.3(d): The Qualified Non-elective Contribution shall be allocated to Non- highly Compensated Employees (based on their Compensation credited during the Plan Year, ranked in descending order) in the following manner: First the lesser of the amount needed to satisfy the Actual Deferral Percentage Test or the amount which does not exceed Code Section 415 limits shall be allocated to the Participant with the least amount of Compensation in the Plan Year. Second, this procedure shall be repeated for only as many Non-highly Compensated Employees as shall be needed to satisfy the Actual Deferral Percentage Test." (d) Definition: "Qualified Non-elective Contributions" shall mean contributions (other than Matching Contributions or Qualified Matching Contributions) made by the Employer and allocated to Participants' accounts that the Participants may not elect to receive in cash until distributed from the Plan; that are nonforfeitable when made; and that are distributable only in 4-17 accordance with the distribution provisions that are applicable to Elective Deferrals and Qualified Matching Contributions. 4.15 NONFORFEITABILITY AND VESTING ----------------------------- The Participant's account balance derived from Elective Deferrals, Qualified Non-elective Contributions, Employee Contributions, and Qualified Matching Contributions is nonforfeitable. Separate accounts for Elective Deferrals, Qualified Non-elective Contributions, Employee Contributions, Matching Contributions, and Qualified Matching Contributions will be maintained for each Participant. Each account will be credited with the applicable contributions and earnings thereon. Matching Contributions (including Qualified Matching Contributions) may be forfeited if the contribution to which they relate are Excess Deferrals Excess Contributions, or Excess Aggregate Contributions. 4.16 DISTRIBUTION REQUIREMENTS ------------------------- (a) Elective Deferrals, Qualified Non-elective Contributions, and Qualified Matching Contributions, and income allocable to each are not distributable to a Participant or his or her Beneficiary or Beneficiaries, in accordance with such Participant's or Beneficiary or Beneficiaries election, earlier than upon separation from service, death, retirement or Total Disability. (b) Such amounts may also be distributed upon: (1) Termination of the Plan without the establishment of another defined contribution plan, other than an employee stock ownership plan (as defined in Section 4975(e)(7) or Section 409 of the Code) or a simplified employee pension plan as defined in Section 408(k). (2) The disposition by a corporation to an unrelated corporation of substantially all of the assets (within the meaning of Section 409(d)(2) of the Code) used in a trade or business of such corporation if such corporation continues to maintain this Plan after the disposition, but only with respect to Employees who continue employment with the corporation acquiring such assets. (3) The disposition by a corporation to an unrelated entity of such corporation's interest in a subsidiary (within the meaning of Section 409(d)(3) of the Code) if such corporation continues to maintain this Plan, but only with respect to Employees who continue employment with such subsidiary. (4) The attainment of age 59-1/2. (5) The hardship of the Participant as described in Section 11.9. (c) All distributions that may be made pursuant to one or more of the forgoing distributable events are subject to the Spousal and Participant consent requirements (if applicable) contained in Sections 411(a)(11) and 417 of the Code. In addition, distributions after 4-18 March 31, 1988, that are triggered by any of the first three events enumerated above must be made in a lump sum. 4.17 PARTICIPANTS' ACCOUNTS ---------------------- (a) The Committee shall open and maintain an Employer Contribution Account and, if applicable, an Employer Matching Account for each Participant to which it shall credit the proper allocated share of the annual contributions made to the Trust by the Employer (not including contributions pursuant to Section 4.2(a), herein,) and the earnings, losses, increases or decreases of the total Trust Fund as herein provided. (b) The Committee shall open and maintain a separate and distinct Employee Contribution Account for each Participant to which it shall credit the amount of the contributions made to the Trust by the Participant and the earnings, losses, increases or decreases thereon. The value of the Participant's Employee Contribution Account shall be entirely nonforfeitable. (c) The Committee shall open and maintain a separate and distinct Employee Deferral Account for each Participant to which it shall credit amounts equal to the Compensation deferred by the Participant pursuant to Section 4.2(a), and the earnings, losses, increases or decreases therein. The value of the Participant's Employee Deferral Account shall be entirely nonforfeitable. (d) The maintenance of individual accounts is only for accounting purposes and, unless otherwise specifically provided herein or in the Trust Agreement, a segregation of the assets of the Trust Fund to each account shall not be required. The allocations, credits and notifications shall not vest in any Participant any right, title or interest in the Trust, except at the time or times and upon the terms and conditions herein provided. (e) If the Plan permits Participant directed accounts in Section 1.6(a), each Participant will direct the Trustee(s) as to the type of investment to be purchased with the Participant's account. The Trustee(s) may decline to implement participant instructions which would generate income that would be taxable to the Plan. The Trustee(s) may charge a Participant's Account for the reasonable expenses of carrying out the Participant's instructions. Otherwise, each Employee will have a ratable interest in all assets of the Trust. To the extent that the Participant directs the investment of his Account(s), the Plan Administrator shall not have any fiduciary responsibility with respect to such investments. In the event that the Plan permits Participants to direct the investment of their Accounts in some limited fashion (i.e. Plan Administrator offers a selection of four investment funds in which Participants may determine what percentage of their Account(s) shall be invested in each of the four investments), such limited investment direction shall not release the Plan Administrator or other Plan Fiduciary from liability or responsibility for such investments. 4-19 4.18 ALLOCATIONS TO PARTICIPANTS' ACCOUNTS ------------------------------------- (a) Employer Contributions under Section 4.2(a) shall be allocated to the respective Deferred Income Accounts in an amount equal to Participant deferrals under Section 4.4(a), credited with Trust Fund gains, losses, increases or decreases therein. Allocations shall not be dependent upon participation in the Plan as of any date subsequent to the date of allocation. (b) Employer Contributions and other amounts described in Section 4.2(b) for each Plan Year shall be allocated to the Employer Contribution Account and, if applicable, the Employer Matching Account of each Participant who is eligible to receive a contribution under Section 1.3. The Employer Contribution shall be allocated as provided for in Section 1.3 or Section 4.18(c). Notwithstanding the foregoing or any provisions in Article One or this Plan to the contrary, if the Plan would fail to meet the coverage requirements under Code Section 410(b) for the Plan Year and the correction procedures described in Section 1.3 of Article One shall be implemented in regard to Matching or Non-elective contributions, then the following rules shall apply in operation of this section: (1) The specific Non-Highly Compensated Participants who shall become eligible under the terms of the last paragraph of Section 1.3(c)(4) and/or Section 1.3(d)(3)(ii) shall be those who are actively employed on the last day of the Plan Year. (2) If after application of paragraph (1) above, Code Section 410(b) is still not satisfied, then the group of Participants eligible to share in the Employer's contribution and Forfeitures for the Plan Year shall be further expanded to include the minimum number of Non-Highly Compensated Participants who are not actively employed on the last day of the Plan Year. (c) If the Employer has chosen to allow permitted disparity in the Plan (i.e. integrate the Plan) as specified in Section 1.3(d), Employer Contributions for the Plan Year will be allocated to Participants' accounts as follows: STEP ONE: Contributions and forfeitures will be allocated to each Participant's account in the ratio that the sum of each Participant's total Compensation bears to all Participants' total Compensation, but not in excess of 3% of each Participant's Compensation. STEP TWO: Any contributions and forfeitures remaining after the allocation in Step One will be allocated to each Participant's Account in the ratio that each Participant's Compensation for the Plan Year in excess of the integration level bears to the excess Compensation of all Participants, but not in excess of 3%. STEP THREE: Any contributions and forfeitures remaining after the allocation in Step Two will be allocated to each Participant's Account in the ratio that the sum of each Participant's total Compensation and Compensation in excess of the Integration Level bears to 4-20 the sum of all Participants total Compensation and Compensation in excess of the Integration Level, but not in excess of the maximum profit sharing disparity rate. STEP FOUR: Any remaining Employer Contributions or forfeitures will be allocated to each Participant's account in the ratio that each Participant's total Compensation for that year bears to all Participants' total Compensation for that year. The integration level shall be equal to the taxable wage base or such lesser amount elected by the Employer in Section 1.3(d). The taxable wage base ("TWB") is the maximum amount of earnings which may be considered wages for a year under Section 3121 (a)(1) of the Code in effect as of the beginning of the Plan Year. Compensation shall mean Compensation as defined in Section 2.9 of the Plan. The maximum profit sharing disparity rate is equal to the lesser of: (1) 2.7%; or (2) the applicable percentage determined in accordance with the table below - If the Integration Level: is more but not more the applicable percentage than than is: $0 X* 2.7% X*ofTWB 80%ofTWB 1.3% 80% of TWB Y** 2.4% *X = the greater of $10,000 or 20 percent of the TWB. **Y = any amount more than 80% of the TWB but less than 100% of the TWB. If the Integration Level used is equal to the taxable wage base, the applicable percentage is 2.7%. If the Plan is Top-heavy for any Plan Year, Employer Contributions for the Plan Year plus any forfeitures must be allocated to Participants' accounts so that each Participant receives the percentage of Compensation as indicated in Section 1.3(d) or the highest percentage allocated to a Key Employee, if less. For Plan Years in which the Plan is not Top-Heavy, Step One and Step Two above shall not apply and the applicable percentage shown above as the maximum profit- 4-21 sharing disparity rate shall be increased by 3% (e.g. the applicable percentage for an Integration level equal to the taxable wage base shall be 5.7%, instead of 2.7%). In the event that the Employer sponsors more than one plan which involves permitted disparity (integration), then the maximum disparity allowance shall not exceed one hundred percent (100%). In the alternative an Employer may elect to only allow permitted disparity in one of the plans sponsored by such Employer. (d) As of each allocation date, the Committee shall determine the fair market value of the net Trust Fund assets, excluding the Employer's contribution due to the Trustee as of that date and any amounts which are distributable to Participants whose participation has terminated on or before such allocation date. Any increase or decrease in the fair market value of such asset as of the preceding allocation date shall be allocated to the Participant's Account(s) of each Employee who is a party-in-interest on such allocation date. The Employer and the Committee do not to any extent warrant or represent that the value of a Participant's Account at any time will equal the amount previously allocated thereto. (e) The Participant's Account(s) of a Participant whose participation is terminated on other than an allocation date shall be valued as provided for in Section 1.5(g). The percentage thus determined shall be applied to the Accounts of all Participants who terminate following the selected valuation date and before the next valuation date. (f) Subject to Sections 1.3(c)(7) and 1.3(d)(5), all amounts held by the Trustee representing the forfeited interest of a former Participant shall be retained in the Trust Fund and allocated in accordance with Sections 1.3(c)(6) and 1.3(d)(4) hereof. Such allocation of the forfeited interest shall be made on the allocation date following the date that such nonvested interest is forfeited. A nonvested Interest shall be forfeited (become a Forfeiture) for purposes of this Section 4.18(f) on one of the following dates: (1) the date upon which the Participant terminates employment; (2) the date upon which a terminated Participant incurs a one-year Break in Service; (3) the date upon which a terminated Participant incurs five consecutive one-year Breaks in Service; or (4) the Anniversary Date following or coincident with the date upon which the Participant terminates employment. In the event that the former Participant is rehired by the Employer and makes repayment in accordance with Section 11.11, the forfeited amount shall be restored to such Participant's Account from current Forfeitures or from contributions by the Employer. (g) If through mistake a Participant either receives an allocation or does not receive an allocation, the mistake shall be rectified upon the next allocation following the discovery of the mistake. If an allocation was not made, the Participant's account shall receive an allocation which shall include the amount which should have been allocated plus an amount which will make the Participant's account whole. If an allocation was made in an amount which exceeds the amount which should have been made, the Participant's account will be reduced by the appropriate amount. 4-22 4.19 LIMITATIONS OF BENEFITS AND CONTRIBUTIONS ----------------------------------------- (a) If the Participant does not participate in, and has never participated in another qualified plan maintained by the Employer or a welfare benefit fund, as defined in Section 419(e) of the Code maintained by the Employer, or an individual medical account, as defined in Section 415(l)(2) of the Code, maintained by the Employer, which provides an annual addition as defined in Section 2.5, the amount of Annual Additions which may be credited to the Participant's account for any Limitation Year will not exceed the lesser of the maximum permissible amount or any other limitation contained in this Plan. If the Employer contribution that would otherwise be contributed or allocated to the Participant's account would cause the Annual Additions for the Limitation Year to exceed the maximum permissible amount, the amount contributed or allocated will be reduced so that the Annual Additions for the Limitation Year will equal the maximum permissible amount. (b) Prior to determining the Participant's actual 415 Compensation for the Limitation Year, the Employer may determine the maximum permissible amount for a Participant on the basis of a reasonable estimation of the Participant's 415 Compensation for the Limitation Year, uniformly determined for all Participants similarly situated. (c) As soon as is administratively feasible after the end of the Limitation Year, the maximum permissible amount for the Limitation Year will be determined on the basis of the Participant's actual 415 Compensation for the Limitation Year. (d) If pursuant to Section 4.19(c), or as a result of the allocation of forfeitures, there is an excess Annual Addition amount, the excess will be disposed of using one of the following methods: (1) Any Excess deferrals, to the extent they would reduce the excess amount, will be returned to the Participant and such returned Excess deferrals shall not be used in the Actual Deferral Percentage Test in Section 4.6; or (2) Any nondeductible voluntary Employee contributions, to the extent they would reduce the excess amount, will be returned to the Participant; or (3) If the Participant is covered by the Plan at the end of the Limitation Year: (i) Employee Deferrals relating to the present Plan Year shall be returned within a one year period following the relevant Plan Year end; and/or (ii) the excess Annual Addition amount in the Participant's account will be used to reduce Employer Contributions (including any allocation of forfeitures) for such Participant in the next Limitation Year, and each succeeding Limitation Year if necessary. (4) If the Participant is not covered by the Plan at the end of a Limitation Year, the excess amount will be held unallocated in a suspense account. The suspense account will be applied to reduce current or succeeding Employer Contributions (including allocation of any forfeitures) for all remaining Participants in the next Limitation Year, and each succeeding Limitation Year if necessary; 4-23 (5) If a suspense account is in existence at any time during a Limitation Year pursuant to this Section, the suspense account will not participate in the allocation of the Trust's investment gains and losses. If a suspense account is in existence at any time during a particular Limitation Year, all amounts in the suspense account must be allocated and reallocated to Participants' accounts before any Employer Contributions or any Employee contributions may be made to the Plan for that Limitation Year. Excess amounts may not be distributed to Participants or former Participants. (e) This Section applies, if in addition to this Plan, the Participant is covered under another qualified defined contribution plan maintained by the Employer, a welfare benefit fund, as defined in Section 419(e) of the Code maintained by the Employer or an individual medical account, as defined in Section 415(l)(2) of the Code, maintained by the Employer, which provides an annual addition as defined in Section 2.5, during any Limitation Year. The Annual Additions which may be credited to a Participant's account under this Plan for any such Limitation Year will not exceed the maximum permissible amount reduced by the Annual Additions credited to a Participant's account under the other plans and welfare benefit funds for the same Limitation Year. If the Annual Addition exceeds the maximum permissible amount, the annual addition will be limited in accordance with Sections 4.19(i) through 4.19(k). (f) The Annual Addition to a Participant's Account shall be automatically frozen to preclude the possibility that the limitations imposed by Section 415(c) of the Code are exceeded. (g) Prior to determining the Participant's actual 415 Compensation for the Limitation Year, the Employer may determine the maximum permissible amount for a Participant in the manner described in Section 4.19(b). (h) As soon as is administratively feasible after the end of the Limitation Year, the maximum permissible amount for the Limitation Year will be determined on the basis of the Participant's actual 415 Compensation for the Limitation Year . (i) If, pursuant to Section 4.19(h) or as a result of the allocation of forfeitures, a Participant's Annual Additions under this Plan and such other plans would result in an excess amount for a Limitation Year, the excess amount will be deemed to consist of the Annual Additions last allocated, except that Annual Additions attributable to a welfare benefit fund or individual medical account will be deemed to have been allocated first regardless of the actual allocation date. (j) If an excess amount was allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the excess amount attributed to this Plan will be the product of, (1) the total excess amount allocated as of such date, times (2) the ratio of (i) the Annual Additions allocated to the Participant for the Limitation Year as of such date under this Plan to (ii) the total Annual Additions allocated to the 4-24 Participant for the Limitation Year as of such date under this and all the other qualified defined contribution plans. (k) Any excess amount attributed to this Plan will be disposed of in the manner described in Section 4.19(d). (l) If the Employer maintains, or at any time maintained, a qualified defined benefit plan covering any Participant in this Plan, the sum of the Participant's Defined Benefit Plan Fraction and Defined Contribution Plan Fraction will not exceed 1.0 in any Limitation Year. The Annual Additions which may be credited to the Participant's account under this Plan for any Limitation Year will be limited in accordance with Section 1.3(i). (1) If the sum of such fractions exceeds 1.0 and neither plan has either been terminated at any time Including the last day of the Limitation Year in which the fractions exceed 1.0 or determined to be a multi-Employer plan (within the meaning of Section 414(f) of the Code), the Employer may elect, in a manner determined by the Commissioner of Internal Revenue Service, the plan that is to be disqualified. Where a controlled group of businesses exist (within the meaning of Section 414(b), (c) and (m) of the Code), the Employers within the controlled or affiliated group may elect, in a manner determined by the Commissioner of Internal Revenue Service, the plan that is disqualified. However, such election is not effective unless made by all of the Employers within the controlled or affiliated group. For purposes of this Section, the elected plan is deemed disqualified in the year in which the fractions exceed 1.0. (m) Definitions. The following definitions shall apply for purposes of limitations of Benefits and Contributions: (1) 415 Compensation or 415 Safe Harbor Compensation: A Participant's earned income, wages, salaries, and fees for professional services and other amounts received for personal services actually rendered in the course of employment with the Employer maintaining the Plan (including, but not limited to, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, reimbursements and expense allowances) and excluding the following: (i) Employer Contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer Contributions under a simplified Employee pension plan to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation; (ii) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (iii) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and 4-25 (iv) Other amounts which received special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity described in Section 403(b) of the Code (whether or not the amounts are actually excludible from the gross income of the Employee). For Limitation Years beginning after December 31, 1991, for the purposes of applying the limitations of this Article, Compensation for a Limitation Year is the Compensation actually paid or includible in gross income during such Limitation Year. Notwithstanding the preceding sentence, Compensation for a Participant in a defined contribution plan who is permanently and totally disabled (as defined in Section 22(e)(3) of the Code) is the Compensation such Participant would have received for the Limitation Year if the Participant had been paid at the rate of Compensation paid immediately before becoming permanently and totally disabled; such imputed Compensation for the disabled Participant may be taken into account only if the Participant is not a Highly Compensated Employee (as defined in Section 414(q) of the Code) and contributions made on behalf of such Participant are nonforfeitable when made. (2) Defined contribution dollar limitation: $30,000 or if greater, one-fourth of the defined benefit dollar limitation set forth in Section 415(b)(1) of the Code as in effect for the Limitation Year. (3) Employer: For purposes of this Article, Employer shall have the same meaning as in Section 2.21. (4) Excess amount: The excess of the Participant's Annual Additions for the Limitation Year over the maximum permissible amount. (5) Highest Average Compensation: The average Compensation for the three consecutive Years of Service with the Employer that produces the highest average. A Year of Service with the Employer is the twelve (12) consecutive month period defined in Section 2.52. (6) Limitation Year: A calendar year, or the twelve (12) consecutive month period elected by the Employer in Section 1.1(e). All qualified plans maintained by the Employer must use the same Limitation Year. If the Limitation Year is amended to a different twelve (12) consecutive month period, the new Limitation Year must begin on a date within the Limitation Year in which the amendment is made. (7) Master or Prototype Plan: A plan the form of which is the subject of a favorable opinion letter from the Internal Revenue Service. (8) Maximum permissible amount: The maximum annual addition that may be contributed or allocated to a Participant's account under the Plan for any Limitation Year shall not exceed the lesser of: (i) the defined contribution dollar limitation, or 4-26 (ii) 25 percent of the Participant's Compensation for the Limitation Year. The Compensation limitation referred or in Section 4.19(m)(8)(ii) shall not apply to any contribution for medical benefits (within the meaning of Section 401(h) or Section 419A(f)(2) of the Code) which is otherwise treated as an annual addition under Section 415(l)(1) or 419A(d)(2) of the Code. If a short Limitation Year is created because of an amendment changing the Limitation Year to a different twelve (12) consecutive month period, the maximum permissible amount for such year will not exceed the defined contribution dollar limitation multiplied by the following fraction: Number of months in the short Limitation Year --------------------------------------------- twelve (12) (9) Projected Annual Benefit: The annual retirement benefit (adjusted to an actuarially equivalent straight life annuity if such benefit is expressed in a form other than a straight life annuity or Qualified Joint and Survivor Annuity) to which the Participant would be entitled under the terms of the Plan assuming: (i) the Participant will continue employment until Normal Retirement Age under the Plan (or current age, if later), and (ii) the Participant's Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the Plan will remain constant for all future Limitation Years. 4.20 ROLLOVER CONTRIBUTIONS ---------------------- If permitted in Article One, Section 1.3(f), the Plan may accept any amounts received by a Participant from another qualified plan, either directly within sixty (60) days after such receipt or through the medium of an individual retirement account, provided that such individual retirement account contains no assets other than those allowed by law for a tax-free rollover contribution. Such amounts shall be held by the Trustee and a separate accounting shall be made for them. All such amounts shall be fully vested and their value shall be paid to the Participant in the manner the Participant elects at the time the Participant is entitled to a distribution of benefits hereunder. Amounts so received by the Plan shall not be counted when determining whether the limitations on contributions and benefits set forth in Section 4.19 has been exceeded. Rollover or transferred assets and the income or other property derived therefrom may be held and administered by the Trustee in a segregated Trust account. All such amounts may be withdrawn by the Participant at any time. 4.21 DIRECT TRANSFERS ---------------- If permitted in Article One, Section 1.3(g), the Plan may accept any amounts transferred directly to it by another qualified retirement plan qualified pursuant to Code Section 401, or 4-27 through the medium of an individual retirement account provided that such individual retirement account contains no assets other than those allowed by law for a tax free rollover or transfer of assets. All such amounts may be withdrawn by the Participant at any time. Notwithstanding the foregoing sentence, elective deferrals [as defined in Code Section 402(g)] transferred into this Plan directly from another qualified Code Section 401(k) cash or deferred arrangement may not be withdrawn until a distributable event occurs pursuant to the requirements of Section 4.16 of the Plan. 4-28 ARTICLE FIVE VESTING OF EMPLOYER CONTRIBUTIONS 5.1 FULL VESTING The full amount credited to a Participant's Account shall be nonforfeitable when the Participant attains Normal Retirement Age or when the Participant's participation terminates by death, a judicial declaration of the Participant's incompetence, Total Disability, or upon termination or partial termination of the Plan. Any amount credited to a Participant's Account attributable to the Employer's Contribution for the Plan Year in which occurs termination for one of the reasons enumerated in the foregoing sentence shall also be completely nonforfeitable at the time of such contribution. Employee contributions and earnings thereon will be nonforfeitable at all times. Any amount credited to a Participant's Deferred Income Account, if any, will be nonforfeitable. In the event of a complete discontinuance of contributions under the Plan, the Account Balance of each affected Participant will be nonforfeitable. A Participant shall not fail to attain Normal Retirement Age on the earlier of: (a) the time a Plan Participant attains Normal Retirement Age as specified in Section 1.5(a) of the Plan, or (b) the later of: (i) the time a Plan Participant attains age 65, or (ii) the fifth anniversary of the time a Plan Participant commenced participation in the Plan. 5.2 INCREMENTAL VESTING Except as otherwise provided herein, a Participant's Account shall vest in accordance with the vesting schedule set forth in Section 1.4(b). For Plan Years in which the Plan is deemed to be a Top-Heavy Plan, a Participant's Account shall vest in accordance with the Top-Heavy Vesting Schedule provided for under Section 1.4(b)(4). 5.3 YEAR OF SERVICE RULES - VESTING Subject to the provisions of Section 1.2(d), when computing the period of service under the Plan for purposes of determining a Participant's vested interest in the Participant's account, all of the Participant's Years of Service with the Employer shall be taken into account except as follows: (a) A Year of Service which is not required to be taken into account by reason of a Break in Service shall be disregarded. (b) In the case of a Participant who has incurred a one (1) year Break in Service, Years of Service before such break will not be taken into account until the Participant has completed a Year of Service after such Break in Service. (c) In the case of a Participant who has five (5) or more consecutive one (1) year Breaks in Service all service after such Breaks in Service will be disregarded for the purpose of 5-1 vesting the Employer-derived Account Balance that accrued before such Breaks in Service. Such Participant's pre-break service will count in vesting the post- break Employer-derived Account Balance only if either: (1) such Participant has any nonforfeitable interest in the Account Balance attributable to Employer Contributions at the time of separation from service; or (2) upon returning to service the number of consecutive one (1) year Breaks in Service is less than the number of Years in Service. Separate accounts will be maintained for the Participant's pre-break and post-break Employer-derived Account Balance. Both accounts will share in the earnings and losses of the fund. (d) If the Plan makes a distribution to a Participant at a time when the Participant is less than one hundred percent (100%) vested in the Participant's Employer-derived benefits and there is no five (5) consecutive one (1) year Breaks in Service prior to a "relevant time" subsequent to such distribution, (1) A separate account will be established for the Participant's interest in the Plan as of the time of distribution, and (2) At any relevant time the Participant's vested portion of the separate account will not be less than an amount ("X") determined by the following formula: X = P(AB + (R X D)) - (R X D), where P = vested percentage at the relevant time AB = Account Balance at the relevant time D = amount of distribution R = ratio of the Account Balance at the relevant time to the Account Balance after distribution. (e) In the case of a Participant who has no vested right in Employer- derived benefits at the time the Participant incurs a Break in Service, Years of Service completed by such Participant before such break shall not be taken into account for purposes of determining the nonforfeitable percentage of the Participant's right to Employer-derived benefits if at such time the number of consecutive one-year Breaks in Service included in the Participant's most recent Break in Service equals or exceeds the greater of five (5) or the aggregate number of the Participant's Years of Service, whether or not consecutive, completed before such break. In computing the aggregate number of Years of Service prior to the Break in Service, Years of Service which are disregarded under this Section by reason of any prior Break in Service shall be disregarded. 5-2 5.4 EFFECT OF CERTAIN CASH-OUT (a) For purposes of determining the Participant's Account Balance under the Plan, the Plan shall disregard Years of Service performed by the Participant with respect to which the Participant has received a distribution of the present value of the Participant's entire nonforfeitable benefit if such distribution was no more than Three Thousand Five Hundred Dollars ($3,500.00) (or an amount permitted under regulations prescribed by the Secretary of Treasury) or a distribution of the present value of the Participant's nonforfeitable benefit attributable to such service which the Participant elected to receive. A Participant who has no nonforfeitable benefit shall be considered to be "cashed- out" for all purposes upon termination of employment. Any distribution under this Section 5.4(a) which exceeds $3,500.00 shall be subject to the consent of the Participant and, if any, the Participant's Spouse. If the Account Balance at the time of any distribution exceeds $3,500.00, then the Account Balance at any subsequent time shall be deemed to exceed $3,500.00 and such subsequent distribution shall be subject to the written consent of the Participant and the Participant's Spouse, if applicable. (b) In order for a distribution to be considered a "cash out" under this Plan, a Participant receiving such distribution must have terminated employment with the Employer. All Participants who have been "cashed-out" under the provision of Section 5.4(a) above, shall have the opportunity to repay the full amount of the distribution upon resumption of employment with the Employer in accordance with the provisions of Section 11.11 herein. (c) If a distribution is made at a time when a Participant has a nonforfeitable right to less than 100 percent of the Account Balance derived from Employer Contributions and the Participant may increase the nonforfeitable percentage in the account: (1) A separate account will be established for the Participant's interest in the Plan as of the time of the distribution, and (2) At any relevant time the Participant's nonforfeitable portion of the separate account will be equal to an amount ("X") determined by the formula: X = P(AB + (R x D)) - (R x D) For purposes of applying the formula: P is the nonforfeitable percentage at the relevant time, AB is the Account Balance at the relevant time, D is the amount of the distribution, and R is the ratio of the Account Balance at the relevant time to the Account Balance after distribution. 5.5 VESTING COMPUTATION PERIOD The vesting computation period shall mean the twelve consecutive-month period (or its equivalent) as defined in Article One. Hours of Service completed within each Vesting Computation Period shall be used when determining whether a Participant has completed a Year of Service or has incurred a Break in Service for purposes of this Article. 5-3 Notwithstanding the foregoing, in the event that a Year of Service for Eligibility or Vesting is based on Elapsed Time using a 365-day period of service, then the Vesting Computation Period shall mean Year of Service as defined in Article One, Section 1.1. In the event of a short Plan Year, there shall be overlapping Vesting Computation Periods. The first Vesting Computation Period shall begin on the first day of the short Plan Year and end twelve months thereafter and the overlapping Vesting Computation Period shall begin on the first day of the new Plan Year and end on the last day of the new Plan Year. 5.6 AMENDMENT TO VESTING SCHEDULE (a) If the vesting schedule of this Plan is amended, the new vesting schedule shall satisfy the requirements set forth in Code Section 411(a)(2)(A), (B) or (C) for all Years of Service. (b) If the vesting schedule of this Plan is amended, then in the case of an Employee who is a Participant on the date the amendment is adopted or the date the amendment is effective, if later, the vested percentage of the Participant's right to the Participant's Employer-derived benefit, determined as of such date, shall not be less than the Participant's percentage computed under the Plan without regard to such amendment. (c) If the Plan's vesting schedule is amended, or the Plan is amended in any way that directly or indirectly affects the computation of the Participant's nonforfeitable percentage or if the Plan is deemed amended by an automatic change to or from a top-heavy vesting schedule, each Participant with at least three (3) Years of Service with the Employer may elect, within a reasonable period after the adoption of the amendment or change, to have the nonforfeitable percentage computed under the Plan without regard to such amendment or change. For Participants who do not have at least one (1) Hour of Service in any Plan Year beginning after December 31, 1988, the preceding sentence shall be applied by substituting "five (5) Years of Service" for "three (3) Years of Service" where such language appears. The period during which the election may be made shall commence with the date the amendment is adopted or deemed to be made and shall end on the latest of: (1) 60 days after the amendment is adopted; (2) 60 days after the amendment becomes effective; or (3) 60 days after the Participant is issued written notice of the amendment by the Employer or Committee. (d) No amendment to the Plan shall be effective to the extent that it has the effect of decreasing a Participant's Account Balance. Notwithstanding the preceding sentence, a Participant's Account Balance may be reduced to the extent permitted under Section 412(c)(8) of the Code. For purposes of this Section 5.6(c), a Plan amendment which has the effect of decreasing a Participant's Account Balance or eliminating an optional form of benefit, with 5-4 respect to benefits attributable to service before the amendment shall be treated as reducing an Account Balance. Furthermore, if the vesting schedule of this Plan is amended, in the case of an Employee who is a Participant as of the later of the date such amendment is adopted or the date it becomes effective, the nonforfeitable percentage (determined as of such date) of such Employee's Employer-derived Account Balance will not be less than the percentage computed under this Plan without regard to such amendment. 5-5 ARTICLE SIX THE ADMINISTRATIVE COMMITTEE 6.1 COMMITTEE MEMBERSHIP The Plan shall be administered by an Administrative Committee appointed by and serving at the pleasure of the Employer. Any Employee may serve as a member of the Committee, although members need not be Employees. Any member of the Committee may be removed by the Employer, and members shall hold office until resignation, death, removal or disqualification. Vacancies in the Committee arising for whatever reason shall be filled by the Employer as soon as is reasonably possible after the vacancy occurs, and until a new appointment is made the remaining member or members shall have full authority to act. The Employer shall file with the Trustee written notice of the names of the members of the Committee together with specimen signatures, and as changes take place in membership, that fact and the names and specimen signatures of the new members shall be filed by the Employer with the Trustee. 6.2 COMMITTEE ACTION The Committee shall choose a Secretary who shall keep minutes of the Committee's proceedings and all data, records and documents pertaining to the Committee's administration of the Plan. The Committee shall act by a majority of its members at the time in office and such action may be taken by a vote either at a meeting or in writing without a meeting. The Committee may by such majority action authorize its Secretary or any one or more of its members to execute any document or documents on behalf of the Committee, in which event the Committee shall notify the Trustee in writing of such action and the name or names of those so designated. The Trustee thereafter shall accept and rely conclusively upon any direction or document executed by such Secretary, member or members as representing action by the Committee until the Committee files with the Trustee a written revocation of such designation. 6.3 ADMINISTRATIVE RULES The Committee shall exercise all discretionary powers in the administration of any matters which come under its functions and may, from time to time, formulate such rules for the administration of the Plan as it may deem necessary so long as such rules are not inconsistent with the terms of the Plan itself. 6.4 POWERS OF THE COMMITTEE The Committee, on behalf of the Participants and their Beneficiaries, is hereby designated as the Named Fiduciary referred to in Section 402(a) of ERISA. The Committee shall enforce the Plan in accordance with its terms, shall be charged with the general administration of the Plan, and shall have all powers necessary to accomplish those objectives, including, but not by way of limitation, the following: 6-1 (a) To determine all questions relating to the eligibility of Employees to participate; (b) To compute and certify to the Trustee the amount and kind of benefit payable to Participants and their Beneficiaries; (c) To authorize all disbursements by the Trustee from the Trust Fund; (d) To maintain all the records necessary for the administration of the Plan other than those maintained by the Trustee; (e) To make and publish such rules for the regulation of the Plan as are not inconsistent with the terms hereof; (f) To authorize the Trustee to purchase contracts of life insurance on the lives of Key Employees whose death might adversely affect the earnings of the Employer. Any such contract shall be owned by the Trustee, and any and all benefits, including any amounts payable upon the death of the insured Employee, shall be payable to the Trustee and considered as an investment for the benefit of the Trust as a whole; (g) To authorize the Trustee to purchase, for the benefit of the individual Participants, contracts of life insurance or annuities on an annual or single premium basis at retirement or prior thereto, and on such terms and conditions as the Committee may prescribe. (h) To direct the Trustee to sell any assets held in the Trust and to direct the Trustee in all respects concerning investments to be made with funds available to the Trust for that purpose. (i) To accept service of legal process on behalf of the Plan. (j) To file with the appropriate government agency (or agencies) the annual report, plan description, summary plan description, and other pertinent documents which may be duly requested. (k) To furnish each Employee and each beneficiary receiving benefits hereunder a summary plan description explaining the Plan. (l) To file such terminal and supplementary reports as may be necessary in the event of termination of the Plan; and to allocate the assets of the Plan available to provide benefits to Employees in the event the Plan should terminate. 6.5 EMPLOYMENT OF ADVISERS The Committee may, in its discretion, employ agents, brokers, attorneys (including attorneys for the Employer), accountants, investment counsel, or such other assistants as it may deem proper to discharge its responsibilities, and the Employer agrees to pay all fees and expenses incurred in connection therewith. However, such fee may be paid by the Trustee upon written direction of the Committee. 6-2 6.6 INFORMATION TO BE COMMUNICATED In order to enable the Committee to perform its functions, the Employer shall supply full and timely information to the Committee, including all pertinent facts as the Committee may require. The Committee shall advise the Trustee of such of the foregoing facts as may be pertinent to the Trustee's administration of the Plan. 6.7 COMPENSATION AND INDEMNITY (a) The members of the Committee shall serve without compensation for their services thereunder. All expenses of the Committee shall be paid by the Employer or by the Plan, and the Employer shall furnish the Committee with such clerical and other assistance as is necessary in the performance of its duties. (b) The Employer shall indemnify and hold harmless the members of the Committee from and against any and all liabilities, claims, demands, costs and expenses (including attorneys' fees), arising out of an alleged breach in the performance of their fiduciary duties under the Plan and under ERISA, other than such liabilities, claims, demands, costs and expenses as may result from the gross negligence or willful misconduct of such persons. The Employer shall have the right, but not the obligation, to conduct the defense of such persons in any proceeding to which this Paragraph applies. In lieu of the foregoing, the Employer may satisfy its obligations under this Paragraph through the purchase of a policy or policies of insurance providing equivalent protection. 6.8 DUTY OF CARE In discharging each of the duties and responsibilities assigned to it under this Plan, the Committee shall act solely in the interests of the Participants and Beneficiaries of the Plan and with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. In the exercise of any discretion, the Committee shall not discriminate in favor of Participants who are officers, stockholders or Highly Compensated Employees. No member of the Committee may participate in any decision which involves solely the member's interest as a Participant separate and distinct from the member's status as a member of the group of Participants. 6.9 ESTABLISHMENT OF FUNDING POLICY The Committee from time to time shall establish a funding policy and method for the Plan which is consistent with the objectives of the Plan and the requirements of ERISA. The funding policy and method, as established and amended from time, shall be communicated to the Trustee in order that the Trustee may coordinate the investment policies of the Trust Fund consistent with such funding policy and method. 6-3 ARTICLE SEVEN THE TRUST AGREEMENT 7.1 TRUST AGREEMENT The Employer shall enter into a Trust Agreement to effectuate the purposes of the Plan as it may be in force from time to time. The duties, responsibilities and powers of the Trustee shall be limited as specifically provided in the Plan and the Trust Agreement. 7.2 RELATIONSHIP OF COMMITTEE AND TRUSTEE (a) The Committee shall direct the administration of the Plan and the Trustee shall follow the written directions of the Committee, or any member of the Committee who shall be designated from time to time, which are communicated to the Trustee. The Committee shall notify the Trustee of any changes in the membership of the Committee. The Trustee shall follow directions of the member whose authority to act on behalf of the Committee was last certified to the Trustee, regardless of changes in membership of the Committee. Any direction or notification by the Committee or member thereof to the Trustee shall be effective upon delivery in writing to the Trustee. (b) If it is necessary to perform some act hereunder and there is neither direction in this Plan nor direction of the Committee on file with the Trustee, and no such direction can be obtained after reasonable inquiry, the Trustee shall have full power and direction to act. (c) The Employer will indemnify and hold harmless the Trustee of and from any liability, loss, cost or expense arising from or in any way connected with its acting upon a direction of the Committee, or failing to act because of the lack of any direction from the Committee where the Trustee has no duty to act in the absence of direction from the Committee. (d) The Trustee shall have no duty to enforce collection or payment to it of any contribution nor to determine or verify the accuracy thereof. 7.3 RULE AGAINST PERPETUITIES Unless sooner terminated in accordance with other provisions of this Plan, the Plan and Trust Agreement shall in any event terminate upon the death of the last survivor of such of the Participants who are living on the day of execution of this Plan. 7-1 ARTICLE EIGHT THE INSURANCE COMPANY 8.1 INSURER NOT A PARTY HERETO No Insurer issuing a life insurance policy in connection with this Plan shall be deemed to be a party hereto. 8.2 NOTIFICATION OF CHANGES IN PLAN The Insurer may assume, in dealing with the Trustee, that no modification or alteration has been made in the terms of the Plan until notice of such modification or alteration has been given to the Insurer. 8.3 OWNERSHIP OF POLICIES The Insurer shall deal with the Trustee as owner of all policies and shall accept the signature of the Trustee in connection with any application, changes or any action under the policies. The Insurer is authorized at all times to deal with the Trustee of the Plan. 8.4 ACTION OF INSURER No such Insurer shall be required to concern itself with the terms of this Plan or question any action of the Trustee and/or of the Committee, or be responsible to see that any action of the Trustee and/or the Committee is authorized by the terms of this Plan. 8.5 EXECUTION OF DOCUMENTS Any and all certificates or other documents requiring signature of the Trustee shall be executed in its name as Trustee. Any documents which may require the signature of the Committee shall be executed in its name by a majority of its members thereof or by any member thereof who has been authorized to sign on its behalf under the terms of this Plan. When so executed, any such documents may be received by the Insurer as conclusive evidence of any of the matters mentioned in this Plan, and the Insurer shall be fully protected in taking or permitting any action to be taken on the strength thereof and shall incur no liability or responsibility for so doing. 8-1 ARTICLE NINE TYPE OF INSURANCE CONTRACT 9.1 PURCHASE OF CONTRACT (a) If permitted by the provisions of Section 1.6(c), and in the event that the Committee elects life insurance as a Plan investment, the Trustee, as directed by the Committee, shall purchase at standard rates individual level- premium whole life insurance or term insurance contracts. (b) The Trustee shall apply for and will be the owner of any insurance contract purchased under the terms of this Plan. The insurance contract(s) must provide that proceeds will be payable to the Trustee, however the Trustee shall be required to pay over all proceeds of the contract(s) to the Participant's designated Beneficiary in accordance with the distribution provisions of this Plan. A Participant's spouse will be the designated Beneficiary of the proceeds in all circumstances unless a qualified election has been made in accordance with Section 12.2(a), Joint and Survivor Annuity Requirements, if applicable. In the event of any conflict between the terms of this Plan and the terms of any insurance contract purchased hereunder, the Plan provisions shall control. 9.2 UNINSURABLE PARTICIPANTS For each Participant who is found by the Insurer to be uninsurable or not insurable at standard rates, the Trustee, as directed by the Committee, shall purchase either a similar life insurance contract for the same amount of premium but containing a lesser death benefit as specified in a schedule attached to the contract, or a retirement annuity contract on the life of such Participant with a death benefit on death before Normal Retirement Date in an amount equal to the total of premiums paid or the cash surrender value of such contract, whichever is greater. 9.2.1 VOLUNTARY WAIVER OF INSURANCE CONTRACT -------------------------------------- Once eligible, a Participant may voluntarily elect to waive his right to purchase or to have insurance purchased on his life in the Plan. A Participant shall be deemed to waived his right to insurance in the event that he (or his spouse, if applicable) refuses to execute a waiver form and fails to comply with the requirements of the insurer for issuance of an insurance contract. Upon the death of a Participant who has waived (or deemed to have waived) his right under this section, the designated Beneficiary shall only be entitled to receive an amount equal to the Participant's Accounts. 9-1 9.3 APPLICATION FOR CONTRACTS The original applications for contract or contracts to be issued hereunder shall be made to the insurer as designated by the employer. the employer, in its sole discretion, may thereafter designate any insurance company to which subsequent applications may be made. the type of such contracts or any features thereof or supplements or additions thereto shall be determined by the committee. the failure of the employer to obtain any contract applied for shall not give rise to any right, claim or benefit to any employee. the contract or contracts shall be applied for by the employer at or on the effective date and by the trustee at any anniversary date as directed by the committee. 9.4 PAYMENT OF PREMIUMS The Trustee shall be under no duty to pay premiums on contracts of life insurance or annuities held by the Trustee as an investment hereunder unless adequate funds are available therefor, and only upon direction by the Committee. When the Committee directs the Trustee to make such premium payments, the Committee shall direct the Trustee with respect to the source of funds for such payment. 9.5 APPLICATION OF DIVIDENDS (a) If the Plan is a fully insured Plan, any dividends or credits earned on insurance contracts will be applied, within the taxable year of the Employer in which received or within the next succeeding taxable year, toward the next premium due before any further Employer Contributions are so applied. (b) If the Plan is a Trusteed Plan, any dividends or credits earned on insurance contracts will be allocated to the Participant's account derived from Employer Contributions for whose benefit the contract is held. 9.6 PARTICIPANT'S ELECTION Subject to Section 1.6(c) and Section 9.1, each Participant may direct the Committee with respect to the amount, if any, of each contribution made by the Employer on behalf of said Participant which shall be applied to the purchase, as an investment and for the benefit of said Participant, of a life insurance contract or contracts. Upon such direction, the Committee shall direct the Trustee to pay premiums and apply for and secure said life insurance contract or contracts, subject to the restrictions provided herein and provided that the total premiums paid or due for life insurance on the life of any Participant shall not exceed the amounts stated in Section 9.8 of this Plan. A new Participant may give direction in writing upon entry into the Plan, and an existing Participant shall give direction in writing within the thirty (30) day period preceding the Anniversary Date of the Plan. These directions may be changed, amended or revoked only by a further direction in writing in the same manner as the initial direction aforesaid and the initial direction shall remain in effect until changed, amended or revoked. Upon the failure of said Participant to give direction, the Committee shall make its own determination as to the amount, 9-2 if any, of the Employer's Contribution made on behalf of said Participant which shall be so applied. 9.7 DISTRIBUTION OF INSURANCE CONTRACTS Subject to Article Twelve, Joint and Survivor Annuity Requirements, the contracts on a Participant's life will be converted to cash or an annuity or distributed to the Participant upon commencement of benefits. 9.8 LIMITATIONS (a) The Administrator shall limit the premiums invested in ordinary life insurance on the life of each Participant to less than fifty percent (50%) of the aggregate of all contributions and Forfeitures allocated to each such Participant's Accounts. (b) The Administrator shall limit the premiums invested in term life insurance on the life of each Participant to less than twenty-five percent (25%) of the aggregate of all contributions and Forfeitures allocated to each such Participant's Accounts. 9-3 ARTICLE TEN APPLICATIONS FOR BENEFITS 10.1 APPLICATION PROCEDURE Participants should submit applications for benefits under the Plan to the Committee at the principal office of the Employer. Applications for benefits should be in writing on the forms prescribed by the Committee and must be signed by the Participant and the Participant's spouse (if applicable), or in the case of a death benefit, by the Beneficiary or legal representative of the deceased Participant. The Committee reserves the right to require that the Participant furnish proof of his age and that of his joint annuitant, if any, prior to processing any application. Each application shall be acted upon and approved or disapproved within sixty (60) days following its receipt by the Committee. In the event any application for benefits is denied in whole or in part, the Committee shall notify the applicant in writing of such denial and of the applicant's right to a review of such denial, and shall set forth in a manner calculated to be understood by the applicant specific reasons for such denial, specific references to pertinent Plan provisions on which the denial is based, a description of any additional material or information necessary for the applicant to perfect the application, an explanation of why such material or information is necessary, and an explanation of the Plan's review procedure. 10.2 REVIEW PROCEDURE Any person or duly authorized representative whose application for benefits is denied in whole or in part may appeal from such denial to the Committee for a review of the decision by submitting to the Committee, within sixty (60) days after receiving written notice of the denial of the application for benefits, a written statement requesting a review of the application for benefits by the Committee, setting forth all of the grounds upon which the request for a review is based and any facts in support thereof, and setting forth any issues or comments which the applicant deems pertinent to the application. 10.3 COMMITTEE ACTION (a) The Committee shall meet from time to time to review applications for benefits submitted pursuant to this Article. The Committee shall act upon each application within sixty (60) days following receipt of the applicant's request for review by the Committee, unless special circumstances require an extension. Such extension cannot extend beyond one hundred twenty (120) days after receipt of the appeal by the Committee. If the Committee fails to act within sixty (60) days or, if special circumstances extend it to one hundred twenty (120) days, the application will be treated as denied and the applicant may appeal for a review. (b) The Committee shall make a full and fair review of each such application and any written materials submitted by the applicant or the Employer in connection therewith, and may require the Employer or the applicant to submit such additional facts, documents, or other evidence as the Committee, in its sole discretion, deems necessary or advisable in making such a review. On the basis of this review, the Committee shall make an independent determination of 10-1 the applicant's eligibility for benefits under the Plan. The decision of the Committee on any application for benefits shall be final and conclusive upon all persons if supported by the substantial evidence in the record. (c) In the event the Committee denies an application in whole or in part, the applicant shall be given written notice of the decision setting forth in a manner calculated to be understood by the applicant the specific reasons for such denial and specific references to the pertinent Plan provisions upon which the Committee based its decision. 10-2 ARTICLE ELEVEN DISTRIBUTION OF BENEFITS 11.1 RETIREMENT BENEFITS When a Participant reaches his Early Retirement Date or Normal Retirement Date, the Participant shall be entitled to retirement income and benefits which shall be based upon the value of the Participant's Account(s). Participants who meet the service requirement for Early Retirement but who separate from service prior to satisfying the age requirement, shall be entitled to receive the benefit when the age requirement is satisfied. 11.2 MODES OF DISTRIBUTION The Trustee, when so directed by the Committee, shall make distribution in a form provided for in Section 1.5(e), provided that each such mode shall have the same present value. The alternative modes of settlement are: (a) A cash lump sum. However, a Participant's benefit may not be cashed out without the Participant's written consent if the present value of any Participant's nonforfeitable Account Balance exceeds Three Thousand Five Hundred Dollars ($3,500.00), and if such benefits are paid in the form of a cash lump sum, the provisions of Section 11.12 hereof shall apply. The Three Thousand Five Hundred Dollars ($3,500.00) shall be determined by using both employer and employee contributions, but not accumulated deductible contributions. Any distribution under Section 5.4(a) which exceeds $3,500.00 shall be subject to the consent of the Participant and, if any, the Participant's Spouse. If the Account Balance at the time of any distribution exceeds $3,500.00, then the Account Balance at any subsequent time shall be deemed to exceed $3,500.00 and such subsequent distribution shall be subject to the written consent of the Participant and the Participant's Spouse, If applicable. (b) Substantially equal installments with or without a period certain, payable not less frequently than annually. However, the benefits to which the Participant is entitled must be paid over a period not exceeding the life expectancy of the Participant determined at the date of the Participant's retirement or the joint life expectancy of the Participant and a designated Beneficiary. If the distribution is to be made in the form of installments, the Committee may direct the Trustee to segregate in a separate account an amount equal to the lump sum value and to invest it in United States obligations or to deposit it in an interest-bearing savings account of any bank, including the Trustee's own banking department, or to deposit it in an interest-bearing savings account of a federal savings and loan association. If a separate segregated account is established, any interest received thereon shall be distributed with the final installment of benefits. In the event a Participant dies prior to complete distribution of the Participant's installments, the Participant's Beneficiary shall be entitled to the balance. (c) An annuity payable over the life of the Participant or the joint lives of the Participant and a designated Beneficiary with or without a period certain. 11-1 (d) A nontransferable deferred annuity contract purchased from a legal reserve life insurance company selected by the Committee, which provides for annuity payments to commence at the Participant's Normal Retirement Date. Any annuity contract distributed herefrom must be nontransferable and the terms of any annuity contract purchased and distributed by this Plan to a Participant or spouse shall comply with the requirements of this Plan. (e) Upon written request of the Participant or the Participant's Beneficiary, shares issued by a regulated investment company registered under the Investment Company Act of 1940, or shares of stock listed on a national stock exchange. (f) Upon written request of the Participant or the Participant's Beneficiary, approved by the Committee, in kind or any assets held by the Trustee as an investment, or partly in cash and partly in kind. 11.3 LATE RETIREMENT A Participant may remain in the employ of the Employer and, if he remains in the employ of the Employer, shall continue to be entitled to benefits/contributions according to the terms of this Plan beyond the Normal Retirement Date. If a Participant elects, he may commence distribution from the Plan at Normal Retirement Age. 11.4 TERMINATION PRIOR TO RETIREMENT (a) If a Participant ceases to be employed by the Employer for any reason other than retirement, military service, or death, the Committee shall certify that fact to the Trustee, giving the date of such termination. In this event, the Participant shall have a vested right in the account held for the Participant's benefit as determined under Article Five hereof. The benefits to which the Participant is entitled shall be provided by the value of the Participant's Account. The benefits shall only be distributed to the Participant under the provisions of Section 1.5(h). The cash surrender value of any insurance contracts insuring the Participant's life must be included in the value of the Participant's account. (b) The Trustee shall, as directed by the Committee, assign, transfer and set over to such Participant all contracts on the Participant's life in such form or with such endorsements, if any, as the Committee may, in Its discretion, direct, restricting the Participant to surrender, assign or otherwise realize cash on the contract or contracts prior to the Participant's Normal Retirement Date. (c) If the Participant and the Participant's spouse elect not to receive benefits in a form having the effect of a Qualified Joint and Survivor Annuity or a Qualified Pre-Retirement Annuity, the Committee shall direct the Trustee to distribute the amount required from the Participant's Account, subject to the provisions of Sections 1.5(e) and 11.2 of this Plan. 11-2 11.5 LEAVE OF ABSENCE AND MILITARY SERVICE (a) A Participant on temporary absence from the service of the Employer may, for purposes of this Article, be deemed to have continued in the employ of the Employer during such absence, provided such absence does not continue for a period longer than one (1) year, and further provided that such Participant shall pay all premiums necessary to keep policies in the Participant's account effective during such absence, if any are required. In granting temporary leaves of absence, the Employer shall not discriminate between the various Participants. (b) A Participant on temporary absence from the service of the Employer because of service in the Armed Forces of the United States shall be deemed to be continued in the employ of the Employer during such absence, provided that such Participant shall pay all premiums necessary to keep policies in the Participant's account effective during such absence, if any are required. (c) If any Employee or Participant on military leave voluntarily fails to return to employment within ninety (90) days after the Employee's or the Participant's discharge from the service, such facts shall be treated as though the Employee or the Participant had voluntarily left the employment of the Employer as of the date of discharge. In the event of death during such military service leave, it shall be treated as though the Employee or the Participant had died during employment with the Employer, and in the event of any Total Disability arising from military service, such disability shall be treated as though it were a Total Disability arising during employment, and all of the Participant's rights under the Plan shall become fully vested as of the date of inability to return to employment. 11.6 VALUE OF BENEFITS Any payment to any Participant, the Participant's Beneficiary or legal representative, in accordance with the provisions of the Plan, shall to the extent thereof be in full satisfaction of all claims hereunder against the Trustee, the Committee and the Employer, any of whom may require such Participant, Beneficiary or legal representative, as a condition precedent to such payment, to execute a receipt therefor in such form as shall be determined by the Trustee, the Committee or the Employer, as the case may be. The Employer does not guarantee the Trustee, the Participants, former Participants or their Beneficiaries against loss of or depreciation in the value of any right or benefit that any of them may acquire under the terms of this Plan. All the benefits payable hereunder shall be paid or provided for solely from the Trust and the Employer does not assume any liability or responsibility therefor . 11.7 COMMENCEMENT OF BENEFITS Unless the Participant elects otherwise, distribution of benefits will begin as soon as administratively feasible but no later than the 60th day after the latest of the close of the Plan Year in which: (1) the Participant attains age 65 (or Normal Retirement Age, if earlier); 11-3 (2) occurs the 10th anniversary of the year in which the Participant commenced participation in the Plan; or, (3) the Participant terminates service with the Employer. Notwithstanding the foregoing, the failure of a Participant and spouse to consent to a distribution while a benefit is immediately distributable, within the meaning of Section 12.8 of the Plan, shall be deemed to be an election to defer commencement of payment of any benefit sufficient to satisfy this Section. A Participant who elects to defer receipt of benefits may not do so to the extent that such deferral creates a death benefit that is more than incidental. 11.8 DISTRIBUTION OF BENEFIT RULES (a) GENERAL RULES. ------------- (1) Subject to Article Twelve, Joint and Survivor Annuity Requirements, the requirements of this Article shall apply to any distribution of a Participant's interest and will take precedence over any inconsistent provisions of this Plan. Unless otherwise specified, the provisions of this Article apply to calendar years beginning after December 31, 1984. (2) All distributions required under this Article shall be determined and made in accordance with the proposed regulations under Section 401(a)(9), including the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the proposed regulations. (b) REQUIRED BEGINNING DATE. The entire interest of a Participant must be ----------------------- distributed or begin to be distributed no later than April 1st of the calendar year following the calendar year in which the Participant attains age 70-1/2. (c) LIMITS ON DISTRIBUTION PERIODS. As of the first distribution calendar ------------------------------ year, distributions, if not made in a single-sum, may only be made over one of the following periods (or a combination thereof): (1) the life of the Participant, (2) the life of the Participant and a designated Beneficiary, (3) a period certain not extending beyond the life expectancy of the Participant, or (4) a period certain not extending beyond the joint and last survivor expectancy of the Participant and a designated Beneficiary. 11-4 (d) DEATH DISTRIBUTION PROVISIONS. ----------------------------- (1) Distribution beginning before death. If the Participant dies ----------------------------------- after distribution of the Participant's interest has begun, the remaining portion of such interest will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Participant's death. (2) Distribution beginning after death. If the Participant dies ---------------------------------- before distribution of the Participant's interest begins, distribution of the Participant's entire interest shall be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death except to the extent that an election is made to receive distributions in accordance with 11.8(d)(2)(i) or 11.8(d)(2)(ii) below: (i) if any portion of the Participant's interest is payable to a designated Beneficiary, distributions may be made over the life or over a period certain not greater than the life expectancy of the designated Beneficiary commencing on or before December 31st of the calendar year immediately following the calendar year in which the Participant died; (ii) if the designated Beneficiary is the Participant's surviving spouse, the date distributions are required to begin in accordance with Section 11.8(d)(2)(i) above shall not be earlier than the later of (1) December 31st of the calendar year immediately following the calendar year in which the Participant died and (2) December 31st of the calendar year in which the Participant would have attained age 70-1/2. (iii) If the Participant has not made an election pursuant to this Section 11.8(d)(2) by the time of the Participant's death, the Participant's designated Beneficiary must elect the method of distribution no later than the earlier of (1) December 31st of the calendar year in which distributions would be required to begin under this Section, or (2) December 31st of the calendar year which contains the fifth anniversary of the date of death of the Participant. If the Participant has no designated Beneficiary, or if the designated Beneficiary does not elect a method of distribution, distribution of the Participant's entire interest must be completed by December 31st of the calendar year containing the fifth anniversary of the Participant's death. (3) For purposes of Section 11.8(d)(2) above, if the surviving spouse dies after the Participant, but before payments to such spouse begin, the provisions of Section 11.8(d)(2), with the exception of Section 11.8(d)(2)(ii) therein, shall be applied as if the surviving spouse were the Participant. (4) For purposes of this Section 11.8(d), any amount paid to a child of the Participant will be treated as if it had been paid to the surviving spouse if the amount becomes payable to the surviving spouse when the child reaches the age of majority. 11.9 HARDSHIP WITHDRAWALS Subject to the options chosen in Article One, Section 1.5(k) in the event a Participant incurs a "hardship" prior to the occurrence of an event allowing distribution from this Plan, he 11-5 may request a withdrawal from his Employee Deferral Account (including, if applicable, any earnings credited to a Participant's Account as of the end of the last Plan Year ending before July 1, 1989), for the following reasons: a) Medical expenses (not covered by insurance, described in Code Section 213(d)) incurred by the Participant, the Participant's spouse, or any dependents (as defined in Code Section 152) of the Participant or necessary medical expenses for aforementioned persons to obtain medical care (described in Section 213(d) of the Code). b) Purchase (excluding mortgage payments) of a principal residence for the Participant. c) Payment of tuition and related educational expenses for the next twelve months of post-secondary education for the Participant, the Participant's spouse, or any dependents of the Participant (as defined in Code Section 152). d) Payment of a sum of money in order to prevent the eviction of the Participant from his principal residence or foreclosure on the mortgage of the Participant's principal residence. e) Funeral expenses. The amount of the hardship withdrawal may include any amounts necessary to pay any federal, state or local income taxes or penalties reasonably anticipated to result from such hardship distribution. A Participant must file a written request for a withdrawal and establish, to the satisfaction of the Administrator, that he has a financial need. A financial need shall be deemed established if the following conditions exist: a) The distribution is not in excess of the amount of the immediate and heavy financial need of the Participant; and, b) The Participant has obtained all distributions, other than hardship distributions, and all nontaxable funds (nontaxable at the time of the loan) available through the provisions relating to Participants loans, if permitted in Article One of the Plan; and c) The Participant agrees and elects in a written agreement that all Employee Deferral Contributions shall be suspended for a 12-month period after the receipt of the hardship distribution; and d) The Participant agrees that Employee Deferral Contributions during the tax year immediately following the taxable year of the withdrawal may not exceed the $7,000 limit (as adjusted by the Secretary of the Treasury) less the amount of the Participant's Employee Savings Contributions made during the taxable year of the hardship distribution. 11-6 11.10 IN-SERVICE DISTRIBUTIONS - WITHDRAWAL OF EMPLOYER CONTRIBUTIONS (1) If permitted by Section 1.5(i), the Committee may at any time permit any Participant to request in writing a withdrawal from the Participant's Account. (a) A request for a withdrawal shall be made, in writing, to the Administrator. The Administrator shall have absolute discretion in approving or denying the request and shall act in a uniform, and non-discriminatory manner. Any such request received by the Administrator shall be acted upon within sixty (60) days of actual receipt. (b) The withdrawal shall not exceed the vested amount of the Participant's Account. Any amount withdrawn must have been in the Participant's Account and in the Trust for at least two (2) full years. If a Participant has sixty (60) months of Plan participation, he may withdraw monies in the Trust that have been in the Trust for less than a two (2) year period. (c) In the event the Administrator grants a request for such withdrawal, the Participant shall continue his participation in the Plan uninterrupted. (d) If an in-service distribution shall only be permitted in the event of a hardship, the requirements set forth in Section 11.9 shall apply. (2) If permitted by Section 1.5(j), a Participant may request a distribution subject to the provisions of Section 1.5(j) notwithstanding the provisions of Section 11.10(1). 11.11 LOANS TO PARTICIPANTS (a) If loans to Participants are permitted by the provisions of Section 1.6(b), loans shall be made available to all Participants and beneficiaries on a reasonably equivalent basis. Loans to Participants shall be governed by the written policies and procedures adopted by the Employer. (b) Loans shall not be made available to Highly Compensated Employees (as defined in Section 414(q) of the Code) in any amount greater than the amount made available to other Employees. (c) Loans must be adequately secured and bear a reasonable interest rate. (d) A Participant must obtain the written consent of the Participant's spouse, if any, to use of the Account Balance as security for the loan. Spousal consent shall be obtained no earlier than the beginning of the 90-day period that ends on the date on which the loan is to be so secured. The consent must be in writing, must acknowledge the effect of the loan, and must be witnessed by a Plan representative or notary public. Such consent shall thereafter be binding with respect to the consenting spouse or any subsequent spouse with respect to that loan. A new consent shall be required if the Account Balance is used for renegotiation, extension, renewal, or other revision of the loan. 11-7 (e) If a valid spousal consent has been obtained in accordance with Section 11.10(d), then, notwithstanding any other provision of this Plan, the portion of the Participant's vested Account Balance used as a security interest held by the Plan by reason of a loan outstanding to the Participant shall be taken into account for purposes of determining the amount of the Account Balance payable at the time of death or distribution, but only if the reduction is used as repayment of the loan. (f) No loan to any Participant or Beneficiary can be made to the extent that such loan when added to the outstanding balance of all other loans to the Participant or Beneficiary would exceed the lesser of (a) $50,000 reduced by the excess (if any) of the highest outstanding balance of loans during the one-year period ending on the day before the loan is made, over the outstanding balance of loans from the Plan on the date the loan is made, or (b) one-half the present value of the nonforfeitable Account Balance of the Participant or, if greater, the total Account Balance up to $10,000. (1) For the purpose of the above limitation, all loans from all plans of the Employer and other members of a group of Employers described in Sections 414(b), 414(c), and 414(m) of the Code are aggregated. (2) Furthermore, any loan shall by its terms require that repayment (principal and interest) be amortized in level payments, not less frequently than quarterly. All loans must be repaid over a period not extending beyond five years from the date of the loan, unless such loan is used to acquire dwelling unit which within reasonable time (determined at the time the loan is made) will be used as the principal residence of the Participant. (3) An assignment or pledge of any portion of the Participant's interest in the Plan and a loan, pledge, or assignment with respect to any insurance contract purchased under the Plan, will be treated as a loan under this Paragraph. (4) Notwithstanding the foregoing, the Plan may make a loan for more than $50,000, however, such a loan shall limited by the Participant's vested interest in such Plan and shall be deemed a taxable event. (g) The Committee shall be responsible for administering the loan program and shall establish written procedures for the application process for loans, the basis on which loans will be approved or denied, the procedure for determining a reasonable rate of interest, the limitations on amount or type of loans offered, the types of collateral which may secure a loan, and the events constituting default and the steps that will be taken to preserve the Plan assets in the event of default. 11.12 REPAYMENT OF DISTRIBUTED BENEFITS (a) Any Participant who has received a distribution of the vested interest in his account due to the termination of employment with the Employer may repay the full amount of such distribution to the Plan if: 11-8 (1) the distribution was received in a Plan Year which commenced after December 31, 1975; (2) the distribution was less than the present value of the Participant's Account Balance when distributed; (3) the Participant resumes employment with the Employer covered under the Plan; and (4) the Participant repays the full amount of distribution before the earlier of five (5) years after the first date on which the Participant is subsequently re-employed by the Employer, or the close of the first period of five (5) consecutive one-year Breaks in Service commencing after the distribution. Upon repayment of the distributed benefits, the Participant's Account Balances shall be recomputed by taking into account service performed by the Participant to which the repaid benefits are attributable, to the extent such service had been disregarded in determining the Account Balances because of the distribution. (c) No repayments under this Section shall be subject to the limitation on contributions stated in Section 4.19 of this Plan. (d) In the event of any other withdrawal, the repayment period shall be five (5) years after the date of the withdrawal. 11.13 TOTAL DISABILITY If a Participant suffers a Total Disability, said Participant shall be fully vested in his Participant Account and the Committee may either make a distribution in any mode described in Section 1.5(e) or may defer payment until the Participant's Normal Retirement Date. 11.14 CASH-OUTS In the event the value of a Participant's vested Account Balance derived from Employer and Employee contributions exceeds (or at any time exceeded) $3,500, any distribution of such Account Balance would be subject to Section 5.4 and 12.8 of the Plan. However, in the event that the value of a Participant's vested Account Balance derived from Employer and Employee contributions does not exceed (or at any time exceeded) $3,500, and the account balance is immediately distributable, the Account Balance may be distributed to the Participant upon termination of employment. 11.15 DIRECT ROLLOVER OF DISTRIBUTION (a) This Section applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee may elect, at the time and in the manner 11-9 prescribed by the Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. (b) Definitions. The following definitions shall apply for purposes of ----------- this Section: (1) Eligible rollover distribution: An eligible rollover distribution ------------------------------ is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (2) Eligible retirement plan: An eligible retirement plan is an ------------------------ individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a) or a qualified trust described in Code Section 401(a), that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. (3) Distributee: A distributee includes an Employee or former ----------- Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are distributees with regard to the interest of the spouse or former spouse. (4) Direct rollover: A direct rollover is a payment by the Plan to --------------- the eligible retirement plan specified by the distributee. 11.16 DISTRIBUTIONS PURSUANT TO A QUALIFIED DOMESTIC RELATIONS ORDER Notwithstanding any provisions in the Plan and this Article Eleven to the contrary, all distributions under this Plan and Trust shall be subject to the rights given to an "alternate payee" under a Qualified Domestic Relations Order (defined in Section 16.3 of the Plan). A distribution to an "alternate payee" shall be permitted upon the determination of qualification of a domestic relations order by the Plan Administrator in accordance with the established policy, regardless of whether or not there is a distributable event for the Participant. Such distribution may take place upon the "earliest retirement age," or if the policy permits, in the event that the Participant has not reached the earliest retirement age, pursuant to Code Section 414(p)(10). No amendment to the Plan shall be necessary to implement the rights of an alternate payee, in accordance with the foregoing; provided that the qualified order does not specifically require the Plan to be amended for special circumstances (for example, permitting the alternate payee to have individual investment direction of a segregated account). 11-10 ARTICLE TWELVE ANNUITY ELECTION 12.1 APPLICATION OF ARTICLE The provisions of this Article shall apply to any Participant who is credited with at least one Hour of Service with the Employer on or after August 23, 1984, and such other Participants as provided in Section 12.1. 12.2 QUALIFIED JOINT AND SURVIVOR ANNUITY If annuities are permitted as a form of benefit pursuant to Section 1.5(e) and unless an optional form of benefit is selected within the election period described in the second paragraph of Section 12.4(a)1, a married Participant's vested Account Balance will be paid in the form of a Qualified Joint and Survivor Annuity and an unmarried Participant's vested Account Balance will be paid in the form of a life annuity. The Participant may elect to have such annuity distributed upon attainment of the earliest retirement age under the Plan. Notwithstanding the foregoing, if this Plan accepts a transfer from another qualified plan which must be paid in the form of an annuity, such transferred amount will be paid as an annuity. 12.3 QUALIFIED PRE-RETIREMENT SURVIVOR ANNUITY Unless an optional form of benefit has been selected within the election period pursuant to a qualified election, if a Participant dies before the annuity starting date then the Participant's vested Account Balance shall be applied toward the purchase of an annuity for the life of the surviving spouse. The surviving spouse may elect to have such annuity distributed within a reasonable period after the Participant's death. 12.4 DEFINITIONS FOR PURPOSES OF SURVIVOR ANNUITIES (a) Election period: For purposes of the Pre-retirement Survivor Annuity, --------------- the period which begins on the first day of the Plan Year in which the Participant attains age 35 and ends on the date of the Participant's death. If a Participant separates from service prior to the first day of the Plan Year in which age 35 is attained, with respect to the Account Balance as of the date of separation, the election period shall begin on the date of separation. For purposes of the Qualified Joint and Survivor Annuity, the election period shall mean the ninety (90) day period prior to the Annuity Starting Date. Pre-age 35 waiver: A Participant who will not yet attain age 35 as of ----------------- the end of any current plan year may make a special qualified election to waive the Qualified Pre-retirement Survivor Annuity for the period beginning on the date of such election and ending on the first day of the Plan Year in which the Participant will attain age 35. Such election shall not be valid unless the Participant receives a written explanation of the Qualified Pre-retirement Survivor Annuity in such terms as are comparable to the explanation required under Section 12.5(a). 12-1 Qualified Pre-retirement Survivor Annuity coverage will be automatically reinstated as of the first day of the Plan Year in which the Participant attains age 35. Any new waiver on or after such date shall be subject to the full requirements of this Article. (b) Earliest retirement age: The earliest date on which, under the Plan, ----------------------- the Participant could elect to receive retirement benefits. (c) Qualified election: A waiver of a Qualified Joint and Survivor ------------------ Annuity or a Qualified Pre-retirement Survivor Annuity. Any waiver of a Qualified Joint and Survivor Annuity or a Qualified Pre-retirement Survivor Annuity shall not be effective unless: (1) the Participant's spouse consents in writing to the election; (2) the Participant has designated a specific Beneficiary, including any class of beneficiaries or any contingent beneficiaries, which may not be changed without spousal consent (or the spouse expressly permits designations by the Participant without any further spousal consent); (3) the spouse's consent acknowledges the effect of the election; and (4) the spouse's consent is witnessed by a Plan representative or notary public. Additionally, a Participant's waiver of the Qualified Joint and Survivor Annuity shall not be effective unless the election designates a form of benefit payment which may not be changed without spousal consent (or the spouse expressly permits designations by the Participant without any further spousal consent). If it is established to the satisfaction of a Plan representative that there is no spouse or that the spouse cannot be located, a waiver will be deemed a qualified election. Any consent by a spouse obtained under this provision (or establishment that the consent of a spouse may not be obtained) shall be effective only with respect to such spouse. A consent that permits designations by the Participant without any requirement of further consent by such spouse must acknowledge that the spouse has the right to limit consent to a specific Beneficiary, and a specific form of benefit where applicable, and that the spouse voluntarily elects to relinquish either or both of such rights. A revocation of a prior waiver may be made by a Participant without the consent of the spouse at any time before the commencement of benefits. The number of revocations shall not be limited. No consent obtained under this provision shall be valid unless the Participant has received notice as provided in Section 12.5 below. (d) Spouse (surviving spouse): The spouse or surviving spouse of the ------ Participant, provided that a former spouse will be treated as the spouse or surviving spouse and a current spouse will not be treated as the spouse or surviving spouse to the extent provided under a qualified domestic relations order as described in Section 414(p) of the Code. (1) Notwithstanding the above, a Qualified Joint and Survivor Annuity, or a Qualified Pre-retirement Survivor Annuity, will not be provided unless the Participant and spouse had been married throughout the one (1) year period ending on the earlier of (i) the Participant's "annuity starting date," or (ii) the date of the Participant's death; provided, however, that if a Participant marries within one (1) year before the "annuity starting date," and the Participant and the Participant's spouse in such marriage have been married for at least a one (1) year period ending on or before the date of the Participant's death, such Participant and such 12-2 spouse shall be treated as having been married throughout the one (1) year period ending on the Participant's "annuity starting date." (e) Annuity starting date: The first day of the first period for which an --------------------- amount is paid as an annuity or any other form. (f) Vested Account Balance: The aggregate value of the Participant's ---------------------- vested Account Balances derived from Employer and Employee contributions (including rollovers), whether vested before or upon death, including the proceeds of insurance contracts, if any, on the Participant's life. The provisions of this Article shall apply to a Participant who is vested in amounts attributable to Employer Contributions, Employee contributions (or both) at the time of death or distribution. (g) Applicable Election Period: In the case of an election to waive the -------------------------- Qualified Joint and Survivor Annuity form of benefit, the Annuity Election Period, or in the case of an election to waive the Qualified Pre-retirement Survivor Annuity form of benefit, the Survivor Annuity Election Period. 12.5 NOTICE REQUIREMENTS (a) In the case of a Qualified Joint and Survivor Annuity, the Committee shall, no less than 30 days and no more than 90 days prior to the annuity starting date, provide each Participant a written explanation of: (i) the terms and conditions of a Qualified Joint and Survivor Annuity; (ii) the Participant's right to make and the effect of an election to waive the Qualified Joint and Survivor Annuity form of benefit; (iii) the rights of a Participant's spouse; and (iv) the right to make, and the effect of, a revocation of a previous election to waive the Qualified Joint and Survivor Annuity. (b) In the case of a Qualified Pre-retirement Survivor Annuity as described in Section 12.3 of this Article, the Committee shall provide each Participant within the applicable period for such Participant, a written explanation of the Qualified Pre-retirement Survivor Annuity in such terms and in such manner as would be comparable to the explanation provided for meeting the requirements of Section 12.5(a) applicable to a Qualified Joint and Survivor Annuity. (c) The applicable period for a Participant is whichever of the following periods ends last: (i) the period beginning with the first day of the Plan Year in which the Participant attains age 32 and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age 35; (ii) a reasonable period ending after the individual becomes a Participant; (iii) a reasonable period ending after the Annuity is no longer fully subsidized; (iv) a reasonable period ending after this Article first applies to the Participant. Notwithstanding the foregoing, notice must be provided within a reasonable period ending after separation from service in the case of a Participant who separates from service before attaining age 35. (d) For purposes of applying the preceding Section 12.5(c), a reasonable period ending after the enumerated events described in (ii), (iii) and (iv) is the end of the two-year period beginning one year prior to the date the applicable event occurs, and ending one year after 12-3 that date. In the case of a Participant who separates from service before the Plan Year in which age 35 is attained, notice shall be provided within the two- year period beginning one year prior to separation and ending one year after separation. If such a Participant thereafter returns to employment with the Employer, the applicable period for such Participant shall be redetermined. (e) Notwithstanding the other requirements of this Section 12.5, the respective notices prescribed by this Section need not be given to a Participant if (1) the Plan fully subsidizes: the costs of a Qualified Joint and Survivor Annuity or Qualified Pre-retirement Survivor Annuity and does not allow a married Participant to designate a nonspouse beneficiary. For purposes of this Section, a plan fully subsidizes the costs of a benefit if no increase in cost, or decrease in benefits to the Participant may result from the Participant's failure to elect another benefit. (f) Effective January 1, 1994, if a distribution is one to which Code Sections 401(a)(11) and 417 do not apply, such distribution may commence less than 30 days after the notice required under IRS Reg. Section 1.411(a)-11(c) is given, provided that: (1) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution. 12.6 SAFE HARBOR RULES (a) This Section shall apply to a Participant in a profit sharing plan, and to any distribution, made on or after the first day of the first Plan Year beginning after December 31, 1988, from or under a separate account attributable solely to accumulated deductible Employee contributions, as defined in Section 72(o)(5)(B) of the Code, and maintained on behalf of a Participant in a money purchase pension plan, (including a target benefit plan) if the following conditions are satisfied: (1) the Participant does not or cannot elect payments in the form of a life annuity; and (2) on the death of a Participant, the Participant's vested account balance will be paid to the Participant's surviving spouse, but if there is no surviving spouse, or if the surviving spouse has consented in a manner conforming to a qualified election, then to the Participant's designated Beneficiary. The surviving spouse may elect to have distribution of the vested account balance commence within the 90-day period following the date of the Participant's death. The account balance shall be adjusted for gains or losses occurring after the Participant's death in accordance with the provisions of the Plan governing the adjustment of account balances for other types of distributions. This Section shall not be operative with respect to a Participant in a profit sharing plan if the plan is a direct or indirect transferee of a defined benefit plan, money purchase plan, a target benefit plan, stock bonus, or profit sharing plan which is subject to the survivor annuity requirements of Section 401(a)(11) and Section 417 of the Code. If this Section is operative, then the provisions of this Article, other than Section 12.7, shall be inoperative. 12-4 (b) The Participant may waive the spousal death benefit described in this Section at any time provided that no such waiver shall be effective unless it satisfies the conditions (described in Section 12.4(c)) that would apply to the Participant's waiver of the Qualified Pre-retirement Survivor Annuity. (c) For purposes of this Section, vested account balance shall mean, in the case of a money purchase pension plan or a target benefit plan, the Participant's separate account balance attributable solely to accumulated deductible Employee contributions within the meaning of Section 72(o)(5)(B) of the Code. In the case of a profit sharing plan, vested account balance shall have the same meaning as provided in Section 12.4(f). 12.7 TRANSITIONAL RULES (a) Any living Participant not receiving benefits on August 23, 1984, who would otherwise not receive the benefits prescribed by the previous Sections of this Article must be given the opportunity to elect to have the prior Sections of this Article apply if such Participant is credited with at least one Hour of Service under this Plan or a predecessor Plan in a Plan Year beginning on or after January 1, 1976, and such Participant had at least ten (10) years of vesting service when the Participant separated from service. (b) Any living Participant not receiving benefits on August 23, 1984, who was credited with at least one Hour of Service under this Plan or a predecessor plan on or after September 2, 1974, and who is not otherwise credited with any service in a Plan Year beginning on or after January 1, 1976, must be given the opportunity to have the Participant's benefits paid in accordance with Section 12.7(d) of this Article. (c) The respective opportunities to elect (as described in Section 12.7(a) and Section 12.7(b) above) must be afforded to the appropriate Participants during the period commencing on August 23, 1984, and ending on the date benefits would otherwise commence to said Participants. (d) Any Participant who has elected pursuant to Section 12.7(b) of this Article and any Participant who does not elect under Section 12.7(a) or who meets the requirements of Section 12.7(a) except that such Participant does not have at least ten (10) years of vesting service when the Participant separates from service, shall have the Participant's benefits distributed in accordance with all of the following requirements if benefits would have been payable in the form of a life annuity: (1) Automatic joint and survivor annuity. If benefits in the form of ------------------------------------ a life annuity become payable to a married Participant who: (i) begins to receive payments under the Plan on or after Normal Retirement Age; or (ii) dies on or after Normal Retirement Age while still working for the Employer; or 12-5 (iii) begins to receive payments on or after the qualified early retirement age; or (iv) separates from service on or after attaining Normal Retirement Age (or the qualified early retirement age) and after satisfying the eligibility requirements for the payment of benefits under the Plan and thereafter dies before beginning to receive such benefits; then such benefits will be received under this Plan in the form of a Qualified Joint and Survivor Annuity, unless the Participant has elected otherwise during the election period. The election period must begin at least 6 months before the Participant attains qualified early retirement age and end not more than 90 days before the commencement of benefits. Any election hereunder will be in writing and may be changed by the Participant at any time. (2) Election of early survivor annuity. A Participant who is ---------------------------------- employed after attaining the qualified early retirement age will be given the opportunity to elect, during the election period, to have a survivor annuity payable on death. If the Participant elects the survivor annuity, payments under such annuity must not be less than the payments which would have been made to the spouse under the Qualified Joint and Survivor Annuity if the Participant had retired on the day before the Participant's death. Any election under this provision will be in writing and may be changed by the Participant at any time. The election period begins on the later of (1) the 90th day before the Participant attains the qualified early retirement age, or (2) the date on which participation begins, and ends on the date the Participant terminates employment. (3) For purposes of this Section 12.7(d): (i) Qualified early retirement age is the latest of: (a) the earliest date, under the Plan, on which the Participant may elect to receive retirement benefits, (b) the first day of the 120th month beginning before the Participant reaches Normal Retirement Age, or (c) the date the Participant begins participation. (ii) Qualified Joint and Survivor Annuity is an annuity for the life of the Participant with an survivor annuity for the life of the spouse as described in Section 2.41 of Article Two. 12.8 CASH-OUTS (a) If the value of a Participant's vested account balance derived from Employer and Employee contributions exceeds (or at the time of any prior distribution exceeded) $3,500, and the account balance is immediately distributable, the Participant and the Participant's spouse (or where either the Participant or the spouse has died, the survivor) must consent to any distribution 12-6 of such account balance. The consent of the Participant and the Participant's spouse shall be obtained in writing within the 90-day period ending on the annuity starting date. The annuity starting date is the first day of the first period for which an amount is paid as an annuity or any other form. The Committee shall notify the Participant and the Participant's spouse of the right to defer any distribution until the Participant's account balance is no longer immediately distributable. Such notification shall include a general description of the material features, and an explanation of the relative values of, the optional forms of benefit available under the Plan in a manner that would satisfy the notice requirements of Section 417(a)(3) of the Code, and shall be provided no less than 30 days and no more than 90 days prior to the annuity starting date. (b) Notwithstanding the foregoing, only the Participant need consent to the commencement of a distribution in the form of a Qualified Joint and Survivor Annuity while the account balance is immediately distributable. (Furthermore, if payment in the form of a Qualified Joint and Survivor Annuity is not required with respect to the Participant pursuant to Section 12.2 of the Plan, only the Participant need consent to the distribution of an account balance that is immediately distributable.) Neither the consent of the Participant nor the Participant's spouse shall be required to the extent that a distribution is required to satisfy Section 401(a)(9) or Section 415 of the Code. In addition, upon termination of this Plan if the Plan does not offer an annuity option (purchased from a commercial provider), the Participant's account balance may, without the Participant's consent, be distributed to the Participant or transferred to another defined contribution plan (other than an Employee stock ownership plan as defined in Section 4975(e)(7) of the Code) within the same controlled group. (c) An account balance is immediately distributable if any part of the account balance could be distributed to the Participant (or surviving spouse) before the Participant attains (or would have attained if not deceased) the later of Normal Retirement Age or age 62. (d) For purposes of determining the applicability of the foregoing consent requirements to distribution made before the first day of the first Plan Year beginning after December 31, 1988, the Participant's vested account balance shall not include amounts attributable to accumulated deductible Employee contributions within the meaning of Section 72(o)(5)(B) of the Code. 12-7 ARTICLE THIRTEEN PAYMENTS UPON DEATH 13.1 SELECTION OF BENEFICIARY If the Participant does not designate a Beneficiary, then the Committee shall select a Beneficiary in accord with the provisions of Section 2.6 to receive proceeds payable upon the death of such Participant and shall select any available method of payment. If the Beneficiary designated by the Participant is other than the Participant's spouse, the Participant must furnish to the Committee the written consent of the Participant's spouse in accordance with Section 12.4(c) of the Plan. 13.2 PROCEDURE UPON DEATH (a) Subject to Article One, upon the death of a Participant, or a terminated or retired Participant for whom benefits are still held hereunder by the Trustee, the Beneficiary or legal representative of the decedent shall make an application for benefits to the Committee. If the application for benefits is granted, the Committee shall cooperate with the Beneficiary so that the Beneficiary may receive the benefits so held by the Trustee for such present or former Participant and shall suitably direct the Trustee as to the action to be taken by the Trustee hereunder. If the death of a Participant occurs prior to the Participant's Normal Retirement Date and before receipt of any payment hereunder, the benefit payable to the surviving spouse or other Beneficiary designated in accordance with the terms of the Plan shall be (i) the amount payable under any insurance and annuity contracts, and (ii) an amount equal to the Participant's Account and Employee Contribution Account not attributable to such insurance or annuity contracts. Such death benefit shall be incidental and shall take into account amounts paid as a Qualified Pre-Retirement Survivor Annuity or a Qualified Joint and Survivor Annuity, if applicable under the Plan. (b) The Committee shall direct the Trustee to distribute the benefits so determined to the Beneficiary designated, if any, otherwise to the surviving spouse of the deceased Participant, if any, otherwise to the executor or administrator of the Participant's estate in a form equivalent to a Qualified Pre-retirement Survivor Annuity, unless otherwise elected in accordance with Article Twelve hereof. If so elected, then such distribution shall be in the form of an optional mode in accordance with Section 11.2 of the Plan. (c) If the Participant dies after distribution of the Participant's interest has commenced, the remaining portion of such interest will continue to be distributed at least as rapidly as under the method of distribution being used prior to the Participant's death. (d) If the Participant dies before distribution of the Participant's interest commences, the Participant's entire interest will be distributed no later than five (5) years after the Participant's death unless distribution is made in accordance with the following options: 13-1 (i) if any portion of the Participant's interest is payable to a designated Beneficiary, distributions may be made in substantially equal installments over the life or life expectancy of the designated Beneficiary commencing no later than one (1) year after the Participant's death; (ii) if the designated Beneficiary is the Participant's surviving spouse, the date distributions are required to begin in accordance with (i) above shall not be earlier than the date on which the Participant would have attained age seventy and one-half (70-1/2), and, if the spouse dies before payments begin, subsequent distributions shall be made as if the spouse had been the Participant. (e) For purposes of Section 13.2(d) above, payments will be calculated by use of the return multiples specified in Section 1.72-9 of the Regulations under the Code. Life expectancy of a surviving spouse may be recalculated annually, however, in the case of any other designated Beneficiary, such life expectancy will be calculated at the time payment first commences without further recalculation. (f) For purposes of this Section, any amount paid to a child of the Participant will be treated as if it had been paid to the surviving spouse if the amount becomes payable to the surviving spouse when the child reaches the age of majority. 13.3 PAYMENT OF TAXES If the whole or any portion of the Trust Fund shall become liable for the payment of any income, estate, inheritance or other tax, charge or assessment which the Trustee may be required to pay, the Trustee is hereby authorized to pay any such tax, charge or assessment from any money or other property held for the account of the person whose interest in the Trust Fund is still liable. At least ten (10) days prior to any such payment, the Trustee shall notify the Committee in writing of its intention to make such payment, and the Trustee may require such receipts, releases or other document from the taxing authority as it may deem necessary. 13-2 ARTICLE FOURTEEN SPECIAL RULES FOR TOP-HEAVY PLANS 14. CONTINGENT RULES If the Plan is or becomes top-heavy in any Plan Year beginning after December 31, 1983, the provisions of Sections 14.1(a), 14.1(d) and 14.1(h) will supersede any conflicting provisions in the Plan. (a) For any Plan Year in which this Plan is top-heavy, the minimum vesting schedule of Section 1.4(c) will automatically apply to the Plan. In no event shall the vesting schedule in Section 1.4(c) fail to satisfy the requirements of Code Section 416(b). The minimum vesting schedule applies to all benefits within the meaning of Section 411(a)(7) of the Code except those attributable to Employee contributions, including benefits accrued before the Effective Date of Section 416 and benefits accrued before the Plan became top-heavy. Further, no decrease in a Participant's nonforfeitable percentage may occur in the event the Plan's status as top-heavy changes for the Plan Year. However, this Section does not apply to the account balances of any Employee who does not have an Hour of Service after the Plan has Initially become top-heavy and such Employee's vested account balance attributable to Employer Contributions and forfeitures will be determined without regard to this Paragraph. (b) Except to the extent inconsistent with the provisions of this Section, the rules of Article Five shall apply for purposes of this Section. All Account Balances must be subject to the minimum vesting schedule including benefits accrued before January 1, 1984 and benefits accrued before the Plan becomes a Top-Heavy Plan. (c) In any Plan Year in which the Plan ceases to be a Top-Heavy Plan, the vesting schedule may change to the vesting schedule set forth in Section 1.4(b) herein. However, any portion of the Account Balance that was nonforfeitable before the Plan ceased to be a Top-Heavy Plan must remain nonforfeitable and any Participant with three (3) or more Years of Service must be given the option of remaining under the prior minimum vesting schedule set forth in this Article. An election by the Participant will be in accordance with the period provided under Section 5.6 of this Plan. (d) Except as otherwise provided in Sections 14.1(f) and 14.1(g) below, the Employer Contributions and forfeitures allocated on behalf of any Participant who is not a Key Employee shall not be less than the lesser of the amount set forth in Section 1.3(j) or in the case where the Employer has no defined benefit plan which designates this Plan to satisfy Section 401 of the Code, the largest percentage of Employer Contributions and forfeitures, which is allocated on behalf of any Key Employee for that year. The minimum allocation is determined without regard to any Social Security contribution. This minimum allocation shall be made even though, under other Plan provisions, the Participant would not otherwise be entitled to receive an allocation, or would have received a lesser allocation for the year because of (i) the Participant's failure to complete 1,000 Hours of Service (or any equivalent provided in the Plan), or (ii) the Participant's 14-1 failure to make mandatory Employee contributions to the Plan, or (iii) Compensation less than a stated amount. (e) For purposes of computing the minimum allocation, Compensation shall mean 415 Compensation as defined in Section 4.19(m)(1) of the Plan. However, the Employer may elect, on a uniform, consistent and nondiscriminatory basis, to define Compensation for purposes of this Section 14.1(e) as W-2 Compensation. For purposes of determining who is a Key Employee, Compensation shall be defined as Code Section 415(c)(3) compensation, including within such compensation amounts contributed by the Employer pursuant to a cash or deferred arrangement. (f) The provision in Section 14.1(d) above shall not apply to any Participant who was not employed by the Employer on the last day of the Plan Year unless otherwise required by Section 1.3(c)(5) and Section 1.3(d)(3). (g) The provision in 14.1(d) above shall not apply to any Participant to the extent the Participant is covered under any other plan or plans of the Employer and the Employer has provided in Section 1.3(e) that the minimum allocation or benefit requirement applicable to Top-Heavy Plans will be met in the other plan or plans. (1) For purposes of this subsection, all defined contribution plans required to be included in an Aggregation Group shall be treated as one plan. (2) This Paragraph shall not apply if the Plan is required to be included in an Aggregation Group and the Plan enables a defined benefit plan required to be included in such group to meet the requirements of Section 401(a)(4) or Section 410 of the Code. (3) All Employer Contributions attributable to salary reduction, Participant deferral or similar arrangement shall be taken into account in determining minimum contributions under this Section. (h) With respect to limitation on Compensation, the Plan meets the requirements of this Paragraph if the Compensation of each Participant taken into account under the Plan does not exceed the first Two Hundred Thousand Dollars ($200,000.00) for each Top-Heavy Plan Year. (i) The limitation on Compensation shall be automatically adjusted in accordance with Regulations under Section 416 of the Code. (j) The minimum allocation required (to the extent required to be nonforfeitable under Section 416(b) of the Code) may not be forfeited under Section 411(a)(3)(B) or 411(a)(3)(D) of the Code. 14-2 14.2 NO IMPUTED SOCIAL SECURITY BENEFITS A Top-Heavy Plan shall not be treated as meeting the minimum vesting and benefit requirements under this Article unless such Plan meets the requirements without taking into account contributions or benefits under Chapters 2 or 21 of the Code, Title II of the Social Security Act, or any other Federal or State law. 14.3 COORDINATION OF TWO OR MORE PLANS OF EMPLOYER A minimum contribution equal to the amount stated in Section 1.3(k) shall be made for all eligible Non-Key Employees. In the event that no election has been made under Section 1.3(k), where the Employer maintains a defined benefit plan and a defined contribution plan, Non-Key Employees who participate under both plans will be entitled to a guaranteed minimum contribution equal to five percent (5%) of Compensation from the defined contribution plan on a non- integrated basis; however, if no defined contribution plan is maintained by the Employer, or if the required defined contribution plan contribution is less than five percent (5%) of Compensation, then Non-Key Employees will be entitled to guaranteed minimum benefits from the Employer's defined benefit pension plan. 14.4 BENEFITS NOT TAKEN INTO ACCOUNT FOR PURPOSES OF DETERMINING WHETHER SUCH PLAN IS A TOP-HEAVY PLAN In determining whether such Plan is a Top-Heavy Plan (or whether any Aggregation Group which includes such Plan is a Top-Heavy Group), the following benefits shall not be taken into account: (a) Except to the extent provided in Regulations under the Code, any rollover contribution (or similar transfer) initiated by the Participant and made after December 31, 1983, to a Plan shall not be taken into account with respect to the transferee Plan; and (b) If any Participant is a Non-Key Employee with respect to the Plan for any Plan Year, but such Participant was a Key Employee with respect to such Plan for any prior Plan Year, the account of such Participant shall not be taken into account. 14.5 ADJUSTMENT TO SECTION 415 LIMITATIONS FOR TOP-HEAVY PLANS In any Plan Year in which the Plan is a Top-heavy Plan, and the Employer maintains both a defined benefit and a defined contribution plan, the Plan fractions, as set forth in the definitions of Defined Benefit Plan Fraction and Defined Contribution Plan Fraction hereof, shall be applied by substituting "1.0" for "1.25." 14-3 14.6 EXCEPTION WHERE BENEFITS FOR KEY EMPLOYEES DO NOT EXCEED 90% OF TOTAL BENEFITS AND ADDITIONAL CONTRIBUTIONS ARE MADE FOR NON-KEY EMPLOYEES Plan Section 14.5 Shall not apply with respect to any Plan Year in which the Plan is a Top-Heavy Plan if the requirements of Sections 14.6(a) and 14.6(b) below are met with respect to this Plan: (a) With respect to minimum benefit requirements, the Employer Contributions for the Plan Year for each Participant who is a Non-key Employee shall not be less than four percent (4%) of such Participant's Compensation. Except to the extent inconsistent with the provisions of this subsection, the rules of Section 14.1 of this Plan shall apply for purposes of this subsection. (b) With respect to minimum total benefits for Key Employees, the Plan will meet the requirements of this Section if the Plan would not be a Top-Heavy Plan if "90%" were substituted for "60%" each place it appears in the definition of Top-Heavy Plan herein. 14.7 TRANSITIONAL RULE If, but for this Section, Section 14.5 would begin to apply with respect to any Plan Year in which the Plan is a Top-Heavy Plan, the application of Section 14.5 shall be suspended with respect to any Participant so long as there are no Employer Contributions, forfeitures or voluntary nondeductible contributions allocated to such Participant. 14.8 TOP-HEAVY DEFINITIONS (a) Top-heavy ratio: --------------- (1) If the Employer maintains one or more defined contribution plans (including any simplified employee pension plan) and the Employer has not maintained any defined benefit plan which during the 5-year period ending on the Determination Date(s) has or has had accrued benefits, the top-heavy ratio for this Plan alone or for the required or permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the Determination Date(s) (including any part of any account balance distributed in the 5-year period ending on the Determination Date(s)), and the denominator of which is the sum of all account balances (including any part of any account balance distributed in the 5-year period ending on the Determination Date(s)), both computed in accordance with Section 416 of the Code and the regulations thereunder. Both the numerator and denominator of the top-heavy ratio are increased to reflect any contribution not actually made as of the Determination Date, but which is required to be taken into account on that date under Section 416 of the Code and the regulations thereunder. (2) If the Employer maintains one or more defined contribution plans (including any simplified employee pension plan) and the Employer maintains or has maintained 14-4 one or more defined benefit plans which during the 5-year period ending on the Determination Date(s) has or has had any accrued benefits, the top-heavy ratio for any required or permissive Aggregation Group as appropriate is a fraction, the numerator of which is the sum of account balances under the aggregated defined contribution plan or plans for all Key Employees, determined in accordance with (a) above, and the present value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees as of the Determination Date(s), and the denominator of which is the sum of the account balances under the aggregated defined contribution plan or plans for all Participants, determined in accordance with (a) above, and the present value of accrued benefits under the defined benefit plan or plans for all Participants as of the Determination Date(s), all determined in accordance with Section 416 of the Code and the regulations thereunder. The accrued benefits under a defined benefit plan in both the numerator and denominator of the top-heavy ratio are increased for any distribution of an accrued benefit made in the five-year period ending on the Determination Date. (3) For purposes of (a) and (b) above the value of account balances and the present value of accrued benefits will be determined as of the most recent valuation date that falls within or ends with the twelve (12) month period ending on the Determination Date, except as provided in Section 416 of the Code and the Regulations thereunder for the first and second plan years of a defined benefit plan. The account balances and accrued benefits of a Participant (1) who is not a Key Employee but who was a Key Employee in a prior year, or (2) who has not been credited with at least one Hour of Service with any Employer maintaining the Plan at any time during the 5-year period ending on the Determination Date will be disregarded. The calculation of the top-heavy ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Section 416 of the Code and the Regulations thereunder. Deductible Employee contributions will not be taken into account for purposes of computing the top-heavy ratio. When aggregating Plans the value of account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year. The accrued benefit of a Participant other than a Key Employee shall be determined under (a) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employer, or (b) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Section 411(b)(1)(C) of the Code. (4) Permissive Aggregation Group: The required Aggregation Group of Plans plus any other plan or plans of the Employer which, when considered as a group with the required Aggregation Group, would continue to satisfy the requirements of Sections 401(a)(4) and 410 of the Code. (5) Required Aggregation Group: (1) Each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the Plan has terminated), and (2) any other qualified plan of the Employer which enables a plan described in (1) to meet the requirements of Sections 401(a)(4) or 410 of the Code. 14-5 (6) Determination Date: For any Plan Year subsequent to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, the last day of that year. (7) Top-Heavy Group: Any Aggregation Group if the sum (as of the Determination Date) of (i) the present value of the cumulative accrued benefits for Key Employees under all defined benefit plans included in such group, and (ii) the aggregate of the accounts of Key Employees under all defined contribution plans included in such group, exceed sixty percent (60%) of a similar sum determined for all Employees, excluding former Key Employees. For purposes of determining the present value of the cumulative benefit for any Participant, or the amount of the account of any Participant, such present value or amount shall be determined in accordance with Regulations issued by the Department of Treasury and such present value or amount shall be increased by the aggregate distributions made with respect to such Participant under the Plan during the five (5) year period ending on the Determination Date. Account balances shall be determined as of the most recent valuation date occurring within a twelve (12) month period ending on the Determination Date and shall be adjusted for contributions due or made as of the Determination Date. If an Aggregation Group includes two (2) or more defined benefit plans, the same actuarial assumptions must be used with respect to all such plans and must be specified in such plans. (8) Top-heavy Plan shall mean for any Plan Year beginning after December 31, 1983, this Plan is top-heavy if any of the following conditions exists: (i) if the top-heavy ratio for this Plan exceeds 60 percent and this Plan is not part of any required Aggregation Group or permissive Aggregation Group of plans, or (ii) if this Plan is part of a required Aggregation Group of plans but not part of a permissive Aggregation Group and the top-heavy ratio for the group or plans exceeds sixty (60) percent, or (iii) if this Plan is part of a required Aggregation Group and part of a permissive Aggregation Group of plans and the top-heavy ratio for the permissive Aggregation Group exceeds 60 percent. 14-6 ARTICLE FIFTEEN AMENDMENT, TERMINATION AND MERGER 15.1 AMENDMENT OF PLAN The Employer shall have the right to amend this Plan from time to time, and to amend or cancel any amendments. Such amendments shall be stated in an instrument in writing, executed by the Employer in the same manner as this Plan. This Plan shall be amended in the manner and at the time therein set forth, and all Participants shall be bound thereby, subject to the following: (a) No amendment shall cause any of the assets of the Trust to be used for or diverted to purposes other than for the exclusive benefit of Participants or their Beneficiaries. The Trustee may however direct that assets be used to pay reasonable expenses of the Trust. (b) No amendment shall have any retroactive effect which deprives any Participant of any benefit already vested, except that such changes, if any, as may be required to permit the Plan to meet the requirements of the Code, or of the corresponding provisions of any subsequent revenue law, may be made to assure the deductibility for tax purposes of any Employer Contributions. (c) No amendment shall have the effect of reducing early retirement benefits or other optional retirement benefits under the Plan accrued to the date of the amendment for any Participant who at any time on or after the amendment satisfied the pre-amendment conditions for such benefits. (d) No amendment shall have the effect of eliminating "Code Section 411(d)(6) protected benefits" without preserving such benefits as of the later of the adoption or effective date of such amendment. (e) No amendment shall create or effect any discrimination in favor of Participants who are officers, shareholders or Highly Compensated Employees. (f) No amendment shall increase the duties or liabilities of the Trustee without the Trustee's written consent. (g) No amendment shall decrease a Participant's Account balance or eliminate an optional mode of distribution except to the extent permitted under Section 412(c)(8) of the Code. 15.2 DISCONTINUANCE AND TERMINATION (a) This Plan is irrevocable and it is the expectation of the Employer that this Plan and the payment of contributions hereunder will be continued indefinitely, but continuance of the Plan is not assumed as a contractual obligation of the Employer, and the right is reserved at any time to reduce, suspend or discontinue contributions hereunder. In the event of a complete discontinuance of Employer Contributions, each Participant shall have a one hundred percent (100%) vested interest in his Account. 15-1 (b) The Employer may terminate this Plan at any time upon fifteen (15) days' written notice to the Trustee. Upon termination, or partial termination, of the Plan or upon complete discontinuance of contributions to the Plan, the entire interest of each of the Participants shall immediately vest one hundred percent (100%). The Trustee shall, with reasonable promptness, liquidate all assets remaining in the Trust. Upon the liquidation of all assets and after deducting estimated expense for liquidation and distribution, the Committee shall make the allocations required under Article Four, where applicable, with the same effect as though the date of completion of liquidation was an Anniversary Date of the Plan. Following these allocations, the Trustee shall promptly distribute to each former Participant a benefit equal to the amount credited to the Participant's accounts as of the date of completion of liquidation, after receipt of appropriate instructions from the Committee. 15.3 MERGER AND CONSOLIDATION In the event that this Plan merges or consolidates with, or transfers its assets or liabilities to, any other qualified plan of deferred compensation, no Participant shall, solely on account of such merger, consolidation or transfer, be entitled to a benefit on the day following such event which is less than the benefit to which the Participant was entitled on the day preceding such event. For the purpose of this Section, the benefit to which a Participant is entitled shall be calculated based upon the assumption that a Plan termination and distribution of assets occurred on the day as of which the amount of the Participant's entitlement is being determined. 15-2 ARTICLE SIXTEEN MISCELLANEOUS PROVISIONS 16.1 LIMITATION ON EMPLOYEES' RIGHTS Participation in this Plan shall not give any Employee the right to be retained in the Employer's employ or any right or interest in the Plan or Trust other than as herein provided. The Employer reserves the right to dismiss any Employee without any liability for any claim either against the Plan or Trust, except to the extent provided herein, or against the Employer. 16.2 NON-ASSIGNABILITY (a) The policies and benefits hereunder are intended for the protection of the Participants and their Beneficiaries. No retirement income insurance or annuity policy or Trust property shall be transferable except by the Trustee as directed by the Committee. No part of or interest in or under this Trust shall be transferable or assignable in any manner, either by voluntary or involuntary act of such Employee or Beneficiary or by operation of law, nor shall the same be liable or be taken for any debt, liability, contract or any other obligation of any such Employee or Beneficiary, except that the Committee may permit the voluntary, revocable assignment of up to ten percent (10%) of any benefit payment by any Participant who is receiving benefits under the Plan. (b) No benefit or interest available hereunder will be subject to assignment or alienation, either voluntarily or involuntarily. The preceding sentence shall also apply to the creation, assignment, or recognition of a right to any benefit payable with respect to a Participant pursuant to a domestic relations order, unless such order is determined to be a qualified domestic relations order, as defined in Section 414(p) of the Code, or any domestic relations order entered before January 1, 1985. 16.3 QUALIFIED DOMESTIC RELATIONS ORDERS (a) In the case of any domestic relations order, regardless of whether such order is a "qualified domestic relations order," within the meaning of Section 414(p) of the Code, received by the Plan, the Committee shall notify the Participant to whom the order relates and any "alternate payee" of the receipt of such order and the Plan's procedures for determining whether such order is a "qualified domestic relations order", within the meaning of Section 414(p) of the Code. Within eighteen 18 months after receipt of such order, the Committee shall determine whether such order is a "qualified domestic relations order," within the meaning of Section 414(p) of the Code, and shall notify the Participant to whom the order relates and each "alternate payee" of such determination. (b) During any period in which the issue of whether a domestic relations order is a "qualified domestic relations order," within the meaning of Section 414(p) of the Code, is being determined (by the Committee, by a court of competent jurisdiction or otherwise), the Committee shall direct the Trustee to segregate in a separate account in the Plan or in an escrow account the 16-1 amounts which would have been payable to the "alternate payee" during such period if the order had been determined to be a "qualified domestic relations order," within the meaning of Section 414(p) of the Code. Such segregation is not required for amounts that would not otherwise be paid during the period of the determination. (c) If, within eighteen (18) months after receipt by the Plan of a domestic relations order, the order (or modification thereof) is determined to be a "qualified domestic relations order," within the meaning of Section 414(p) of the Code, the Committee shall direct the Trustee to pay the amounts segregated pursuant to Section 16.3(b) (plus any interest thereon) to the person or persons entitled thereto. If, however, within such eighteen (18) month period (i) it is determined that such order is not a "qualified domestic relations order," within the meaning of Section 414(p) of the Code, or (ii) the issue as to whether such order is a "qualified domestic relations order" is not resolved, the Committee may direct the Trustee: (1) to return the segregated amounts to the Participant's (Non-alternate payee) Account(s) - in the case of an active Participant; (2) to set up an account for the benefit of the alternate payee for such money until such time the issue is resolved; or, (3) to pay the amounts segregated pursuant to Section 16.3(b) (plus any interest thereon) to the person or persons who would have been entitled to such amounts if there had been no order, subject to the payee executing a release exempting the Plan and Trust from any future obligations resulting from the domestic relations proceedings. Any determination that an order is a "qualified domestic relations order" which is made after the close of such eighteen (18) month period shall be applied prospectively only. (d) The Committee shall establish reasonable procedures to determine whether domestic relations orders are "qualified domestic relations orders," within the meaning of Section 414(p) of the Code, and to administer distributions under "qualified domestic relations orders". Such procedures (i) shall be in writing, (ii) shall provide for the notification, at the address included in the domestic relations order, of each person specified in a domestic relations order as entitled to payment of benefits under the Plan of such procedures promptly upon receipt of the Plan of the domestic relations order and (iii) shall permit an "alternative payee" to designate a representative for receipt of copies of notices that are sent to the "alternate payee" with respect to a domestic relations order. (e) To the extent provided in any "qualified domestic relations order," within the meaning of Section 414(p) of the Code, the former spouse of a Participant shall be treated as a surviving spouse of such Participant for purposes of Sections 12.2 through Section 12.7 of this Plan (relating to Qualified Pre-retirement Survivor Annuities and Qualified Joint and Survivor Annuities) and, if married to the Participant for at least one (1) year, the surviving spouse shall be treated as meeting the requirements of Section 12.4(d) of this Plan. (f) Special Definitions - For purposes of this Section 16.3, the following terms are defined as follows: (1) "Alternate payee" shall mean any spouse, former spouse, child or other dependent of a Participant who is recognized by a domestic relations order as having a right to 16-2 receive all, or a portion, of the Account Balances payable under this Plan with respect to such Participant. (2) "Domestic relations order" shall mean any judgment, decree or order (including approval of a property settlement agreement) which (A) relates to the provision of child support, alimony payments, or marital property rights to a spouse, former spouse, child, or other dependent of a Participant and (B) is made pursuant to a State domestic relations law (including a community property law). (3) "Qualified domestic relations order" shall mean a domestic relations order which creates or recognizes the existence of an alternate payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the Account Balances payable with respect to a Participant under this Plan and which meets the requirements set forth in Sections 414(p)(2) and (3) of the Code. 16.4 CONTINUATION OF BUSINESS In the event of the termination of the business conducted by the Employer for any reason, this Trust may be terminated unless a successor to such business, by whatever form or manner results, notifies the Trustee and all of the Participants that it elects to continue this Plan and Trust, in which event it shall continue without the necessity of executing a supplemental agreement. The successor shall thereupon succeed to all rights, powers and duties of the Employer hereunder, and the employment of any Participant who is continued in the employ of such successor shall not be deemed to have terminated or severed for any purpose hereunder. Notwithstanding the foregoing, the Trustee shall have the right at any time to require any such successor to execute a supplemental agreement continuing the Plan and Trust. 16.5 CONTRIBUTIONS NOT RECOVERABLE (a) It shall be impossible at any time prior to the satisfaction of all liabilities with respect to Participants and their Beneficiaries for any part of the principal or income to be used for, or diverted to, purposes other than the exclusive benefit of Participants or their Beneficiaries. Under no circumstances or conditions whatsoever shall any Trust revert to or inure to the Employer's interest prior to the satisfaction of all liabilities under this Plan. Any cash or property of any kind in this Trust which is not payable to a Participant or to the Participant's Beneficiary or estate shall be applied by the Trustee toward the payment of the next succeeding premiums as they may become due. However, the Trustee may pay reasonable expenses relating to plan administration from the Trust assets. (b) Any contribution made by the Employer because of a mistake of fact may be returned to the Employer within one year of the contribution. (c) The Employer reserves the right to recover at termination of the Plan and Trust any balance remaining in the Trust which is due to erroneous actuarial computation. Further, amounts properly allocated to a suspense account may be returned to the Employer upon termination. 16-3 (d) In the event that the Commissioner of Internal Revenue determines that the Plan is not initially qualified under the Code, any contribution made incident to that initial qualification by the Employer must be returned to the Employer within one year after the date the initial qualification is denied, but only if the application for the qualification is made by the time prescribed by law for filing the Employer's return for the taxable year in which the Plan is adopted, or such later date as the Secretary of the Treasury may prescribe. 16.6 PAYMENTS TO DISABLED PERSONS The Trustee may make payments or assign policies to Participants or Beneficiaries under disability by making said payment or assigning said policies to the conservator or guardian of the persons of such Employees or Beneficiaries without the intervention of any Court, and the Trustee is hereby exonerated of and from all liability or responsibility for or by reason thereof. 16.7 FIDUCIARY RESPONSIBILITY (a) Each Fiduciary of the Plan shall discharge the Fiduciary's duties solely in the interests of the Participants and their Beneficiaries. Each Fiduciary of the Plan shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in conducting an enterprise of like character and with like aims. Fiduciaries shall diversify Plan assets to minimize risk of large losses, unless under the circumstances it is clearly prudent not to do so. (b) A Fiduciary of the Plan shall be liable for the breach of the Fiduciary standard of conduct by another Fiduciary if the Fiduciary knowingly participates in a breach of such standard committed by the other Fiduciary. A Fiduciary of the Plan shall be liable for breach of the Fiduciary standard of conduct by another Fiduciary of the Plan if the Fiduciary knowingly undertakes to conceal a breach committed by the other. Except as otherwise allowed by law or provided in this Plan, a Fiduciary shall not cause the Plan to engage in a transaction if such transaction is not exempt from the prohibited transaction rules of ERISA and if the Fiduciary knows or should know that such transaction constitutes a direct or indirect: (1) Sale or exchange, or leasing, of any property between the Plan and a Party-in-Interest; (2) Lending of money or other extension of credit between the Plan and a Party-in-Interest; (3) Furnishing of goods, services, or facilities between the Plan and a Party-in-Interest; (4) Transfer to, or use by or for the benefit of, a Party-in- Interest, of any assets of the Plan; or 16-4 (5) Acquisition, on behalf of the Plan, of any Employer security or Employer real property in violation of Section 407(a) of ERISA. (d) Except as otherwise allowed by law or provided in this Plan, a Fiduciary shall not: (1) Deal with the assets of the Plan in the Fiduciary's own interest or for the Fiduciary's own account; (2) In the fiduciary, individual or in any other capacity, act in any transaction involving the Plan on behalf of a party (or represent a party) whose interests are adverse to the interests of the Plan or the interests of the Plan's Participants or Beneficiaries; or (3) Receive any consideration for the Fiduciary's personal account from any party dealing with the Plan in connection with a transaction involving the assets of the Plan. 16.8 CONDITIONAL CONTRIBUTIONS Notwithstanding anything to the contrary herein contained, as of July 1, 1976, contributions of the Employer shall be, and hereby are, made subject to the conditions that (i) the Plan and Trust qualify as a tax exempt Plan under Section 401 of the Code and (ii) such contributions are deductible under Section 404 of the Code. In the event that it is determined that the Plan and Trust shall not so qualify, any contribution of the Employer made while the Plan and Trust shall not have qualified shall be repaid to the Employer, in whole or in part, by the Trustee within one (1) year after the date of the denial of qualification of the Plan and Trust. In the event that there is a determination that a deduction for the Employer's contribution shall be disallowed, the excess of such contribution over the amount that would have been contributed had there not occurred a mistake in determining the deductibility of the contribution shall be repaid to the Employer, in whole or in part, by the Trustee, within one (1) year after the disallowance of the deduction. In the case of a contribution of the Employer which is made by reason of mistake of fact, the excess of such contribution over the amount that would have been contributed had there not occurred a mistake of fact shall be repaid to the Employer, in whole or in part, by the Trustee, within one (1) year after the payment of the contribution. With respect to contributions for which a deduction is disallowed (or could be disallowed) or made by reason of mistake of fact, (i) earnings attributable to the excess contribution shall not be returned to the Employer, (ii) losses attributable thereto shall reduce the amount to be repaid and (iii) if the repayment of the excess would cause the balance of a Participant's account to be reduced to less than the amount of the Participant's account had the excess contributions not been made, the amount of the repayment shall be limited to the excess of the excess contribution over the amount of the Participant's account had the excess contribution not been made. Any amounts repaid to the Employer by the Trustee pursuant to this Paragraph shall be repaid without liability therefor on the part of the Trustee, to any Participant, Beneficiary or any other person whomsoever. 16-5 16.9 FORFEITURE OF BENEFITS UPON FAILURE TO LOCATE RECIPIENT In the event that the Committee, after reasonable effort, is unable to locate a Participant or Beneficiary entitled to a distribution of benefits hereunder, the Committee shall direct the Trustee that the amount that would otherwise be distributable be treated as a forfeiture. Should such Participant or Beneficiary subsequently notify the Committee of such individual's location and apply for benefits in accordance with Article Ten of the Plan, said Participant or Beneficiary may reclaim the amount which had been treated as a forfeiture hereunder. When said application to reclaim benefits is approved, the Committee shall direct that such amount, not including gains and losses that would otherwise be attributable thereto, be reinstated on behalf of such Participant or Beneficiary from Employer Contributions for the first Plan Year following such reclaim for which Employer Contributions are made. Distribution of such amount shall be made in accordance with Article Eleven of the Plan. 16.10 PARTICIPATING EMPLOYERS Notwithstanding anything herein to the contrary, with the consent of the Employer and Trustee, any other corporation or entity, whether an Affiliated Employer or not, may adopt this Plan and all of the provisions hereof, and participate herein and be known as a Participating Employer, by properly executing a document evidencing said intent and will of such Participating Employer to participate and by meeting the requirements set forth herein: (a) Each Participating Employer shall be required to select the same provisions as those selected by the Employer other than the Plan Year, the Fiscal Year, and such other items that must, by necessity, vary among employers. (b) Each such Participating Employer shall be required to use the same Trustee as provided in this Plan, or amendments thereto. (c) The transfer of any Participant from or to an Employer participating in this Plan, whether he be an Employee of the Employer or a Participating Employer, shall not affect such Participant's rights under the Plan, and all amounts credited to such Participant's Accounts as well as his accumulated service time with the transferor or predecessor, and his length of participation in the Plan, shall continue to his credit. The Participating Employer to which the Employee is transferred shall thereupon become obligated hereunder with respect to such Employee in the same manner as was the Participating Employer from whom the Employee was transferred. (d) Any expenses of the Plan which are to be paid by the Employer or reimbursed to the Trust by the Employer shall be paid by each Participating Employer in the same proportion that the total amount standing to the credit of all Participants employed by such Employer bears to the total standing to the credit of all Participants. (e) Each Participating Employer shall be deemed to be a part of this Plan and, unless indicated to the contrary, shall authorize the initial adopting Employer to act as its agent. 16-6 (f) Amendment of this Plan by the Employer at any time when there shall be a Participating Employer hereunder shall only be by the written action of each and every Participating Employer and with the consent of the Trustee where such consent is necessary in accordance with the terms of the Plan. (g) Any Participating Employer shall be permitted to discontinue or revoke its participation in the Plan at any time. The Participating Employer must deliver such notice of discontinuance or revocation in writing to the Trustee. The Trustee shall thereafter take such action as shall be necessary to transfer the Trust assets allocable to the Participants of such Participating Employer to the new retirement Trust established for such assets. No such transfer of assets shall be made in the event the newly established plan would eliminate or reduce any "Section 411(d)(6) protected benefits". In the event that the Participating Employer has not established a successor retirement trust, the assets allocable to the Participants of such Participating Employer shall be maintained in this Trust and distributed in accordance with Article Eleven hereof. (h) In the event a Participating Employer, which is a member of an affiliated group (as defined in Code Section 1504), is prevented from making a contribution which it would otherwise would have made under the Plan, then pursuant to Code Section 404(a)(3)(B), so much of the contribution of such Participating Employer may be made up by other Participating Employers, as may be decided by such other Employers. The Participating Employer(s) on whose behalf a contribution shall be made under this Section 16.10(h) shall not be required to reimburse the contributing Participating Employer(s). 16.11 HEADINGS NO PART OF AGREEMENT Headings and subheadings in this Plan are inserted for convenience of reference only. They constitute no part of the Plan. 16.12 INSTRUMENT IN COUNTERPARTS This Agreement has been executed in several counterparts, each of which shall be deemed an original, and said counterparts shall constitute but one and the same Instrument, which may be sufficiently evidenced by any one counterpart. 16.13 SUCCESSORS AND ASSIGNS This Plan shall inure to the benefit of, and be binding upon, the parties hereto and their successors and assigns. 16.14 GENDER The masculine gender shall include the feminine, and where appropriate, the singular shall include the plural or the plural may be read as the singular. 16-7 16.15 STATE LAW GOVERNS This Plan, and its corresponding Trust shall be construed, administered and governed in all respects under and by the laws of the State or Commonwealth in which the Employer's principal office is located, to the extent not pre-empted by federal law. If any provisions are susceptible to more than one interpretation, such Interpretation shall be given thereto as is consistent with this Plan being a qualified Plan of deferred compensation within the meaning of the Code, or corresponding provisions of subsequent revenue laws. If any provisions of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. 16-8 Internal Revenue Service Department of the Treasury District Director EP/EO Division 2 Cupania Circle Monterey Park, CA 91755-7406 Date: April 22, 1994 Advisory Letter Number: V1950129 Dun & Bradstreet Pension Services Type of Plan: 3415 Sepulveda Blvd., Suite 800 401(k) Plan Los Angeles, CA 90034 Person to Contact: David L. Beckerman Telephone Number: 213-725-0164 Refer Reply to: EP/EO:TB:TSS:DLB Dear Applicant: We have reviewed the amendment to your specimen document identified above as part of our Volume Submitter Program. It is our opinion that the amended document meets the requirements of the Internal Revenue Code as amended by the Tax Reform Act of 1986. This opinion may change based on the release of temporary and/or final regulations or other enhancements of the tax law, which would affect deferred compensation plans issued after the date of this letter. In the event this occurs, you will be notified by this office of the need for amendments to your document. This letter relates only to the amendment to the form of the plan. It is not a determination of any other amendment or of the form of the plan as a whole, or on the effect of other Federal or local statutes. This letter covers the provisions of Revenue Procedure 92-41. The acceptability of the form of this document does not constitute a determination of the qualification of an adopting employer's plan under section 401(a) of the Internal Revenue Code, or of the exemption of the related trust or custodial account under section 501(a). The qualification of the adopting employer may also be affected by the options or variables selected by the employer. An employer adopting this specimen document who wants such a determination and reliance on the volume submitter letter must file Form 5307, Short Form Application For Determination For Employee Benefit Plan, with the Key District Director. Adopting employers must individually amend the plan to remain in compliance. A copy of this letter must be submitted with each application. Any alteration made to the specimen document after the date of this letter must be indicated in a cover letter. This letter supersedes our letter dated May 29, 1991. If you have any questions, please contact the person whose name and telephone number are shown above. Sincerely, Chief, Technical Branch EP/EO Division Los Angeles Key District -2- EXECUTION --------- To record the adoption of this Plan, the Employer has caused this Plan to be executed on this 31st day of December, 1995. Applied Micro Circuits Corporation By: /s/ JOEL HOLLIDAY ---------------------------- By: __________________________ _______________________ Counsel for the Company RESOLUTION OF THE BOARD OF DIRECTORS OF APPLIED MICRO CIRCUITS CORPORATION I, Joel O. Holliday, do hereby certify that I am the duly elected and acting Secretary of Applied Micro Circuits Corporation, a Corporation; that the following is a true and correct copy of action of the Board of Directors taken at a special meeting held on the 25th day of March __, 1996, at which meeting all Directors were then and there present and voting; said Resolution pertaining to the amendment of the Applied Micro Circuits Corporation 401(k) Employee Savings and Retirement Plan ("Plan") and its corresponding Trust; that said Resolution is in full force and effect and has not been amended as of the date of this Certificate, to wit: RESOLVED, that, due to a clerical error in the preparation of the documents adopted on December 31, 1995, the Amendment effective January 1, 1995 to the Plan be, and the same hereby is, adopted in the form attached hereto; FURTHER RESOLVED, that the proper officers of the Corporation be, and they hereby are, authorized and directed to execute all forms and documents (including the amendment instrument attached hereto) and to perform such other acts as they, in their discretion, deem necessary or desirable to effectuate the intent of the foregoing resolutions, and to secure approval from the proper government agency, if necessary, to the effect that the Plan, as so amended, continues to satisfy the requirements of Section 401(a) of the Internal Revenue Code of 1986, as amended. WHEREOF, I have hereunto set my hand this 25th day of March, 1996. APPLIED MICRO CIRCUITS CORPORATION By: /s/ JOEL HOLLIDAY --------------------------------- Joel Holliday Title: V.P. Finance & Administration ----------------------------- AMENDMENT TO THE APPLIED MICRO CIRCUITS CORPORATION 401(K) EMPLOYEE SAVINGS AND RETIREMENT PLAN Pursuant to action of the Board of Directors of Applied Micro Circuits Corporation ("Employer") taken on March 25, 1996, it is hereby agreed that, due to a clerical error in the preparation of the documents adopted on December 31, 1995, the Applied Micro Circuits Corporation 401(k) Employee Savings and Retirement Plan and its corresponding Trust shall be amended to conform to the original plan specifications as follows: The first paragraph of Section 1.3(a) shall be amended to read: "COMPENSATION shall mean the total compensation paid to each Participant, ------------ but shall exclude commissions, bonuses, and auto allowances." The effective date of this Amendment shall be January 1, 1995. DATED this 25th day of March, 1996 APPLIED MICRO CIRCUITS CORPORATION By: /s/ JOEL HOLLIDAY -------------------------------- Joel Holliday Title: V.P. Finance & Administration ----------------------------- RESOLUTION OF THE BOARD OF DIRECTORS OF APPLIED MICRO CIRCUITS CORPORATION I, Joel O. Holliday , do hereby certify that I am the duly elected and acting Secretary of Applied Micro Circuits Corporation, a California Corporation; that the following is a true and correct copy of action of the Board of Directors taken at a special meeting held on the 31st day of March, 1995, at which meeting all Directors were then and there present and voting; said Resolution pertaining to the amendment of the Applied Micro Circuits Corporation 401(k) Employee Savings And Retirement Plan ("Plan") to add the model language on annual compensation limit under Rev. Proc. 94-13 to comply with IRC Section 401(a)(17) as amended by OBRA `93; that said Resolution is in full force and effect and has not been amended as of the date of this Certificate, to wit: RESOLVED, that the Amendment effective January 1, 1994 to the Plan be, and the same hereby is, adopted in the form attached hereto; FURTHER RESOLVED, that the proper officers of the Corporation be, and they hereby are, authorized and directed to execute all forms and documents (including the amendment instrument attached hereto) and to perform such other acts as they, in their discretion, deem necessary or desirable to effectuate the intent of the foregoing resolutions, and to secure approval from the proper government agency, if necessary, to the effect that the Plan, as so amended, continues to satisfy the requirements of Section 401(a) of the Internal Revenue Code of 1986, as amended. WHEREOF, I have hereunto set my hand this 31st day of March 1995. APPLIED MICRO CIRCUITS CORPORATION By: /s/ JOEL HOLLIDAY -------------------------------- Title: V.P. Finance & Administration ----------------------------- AMENDMENT TO THE APPLIED MICRO CIRCUITS CORPORATION 401(K) EMPLOYEE SAVINGS AND RETIREMENT PLAN Pursuant to action of Applied Micro Circuits Corporation (herein referred to as "Employer") or its Board of Directors taken on the ____ day of ________19__, it is hereby agreed that the Applied Micro Circuits Corporation Savings And Retirement Plan shall be amended to add the model language under Rev. Proc. 94-13 to comply with IRC Section 401(a)(17). Section I.(k) shall be amended by the addition of the following paragraph as follows: "In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual Compensation of each Employee taken into account under the Plan shall not exceed the OBRA `93 annual compensation limit. The OBRA `93 annual compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which Compensation is determined (determination period) beginning in such calendar year. If a determination period consists of fewer than 12 months, the OBRA `93 annual compensation limit shall be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under Code Section 401(a)(17) shall mean the OBRA `93 annual compensation limit set forth in this provision. If Compensation for any prior determination period is taken into account in determining an Employee's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to the OBRA `93 annual compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA `93 annual compensation limit is $150,000." The effective date of this Amendment shall be January 1, 1994. DATED this ___ day of __________, ____. APPLIED MICRO CIRCUITS CORPORATION By:_________________________ Title:______________________ CERTIFICATE OF THE EMPLOYER Applied Micro Circuits Corporation, the Sponsoring Employer of the Applied Micro Circuits Corporation 401(k) Employee Savings and Retirement Plan hereby adopts the attached Participant Loan Policy in compliance with the Final Regulations issued by the Department of Labor and Section 72(p) of the Internal Revenue Code. For the Employer: By:__________________________________ Date:___________________ Approved By Plan Administrator: By:__________________________________ Date:___________________ Approved By Loan Administrator: By:__________________________________ Date:___________________ Internal Revenue Service DEPARTMENT OF THE TREASURY District Director 2 Cupania Circle Monterey Park, CA 91755 Employer Identification Number: Date: Nov. 19, 1996 94-2586591 File Folder Number Applied Micro Circuits Corporation 331015326 6195 Lusk Boulevard Person to Contact: San Diego, CA 92121 LINDA J. HELTON Contact Telephone Number: 213-725-2531 Plan Name: APPLIED MICRO CIRCUITS CORPORATION EE SAVINGS & RETIREMENT PLAN Plan Number: 001 Dear Applicant: We have made a favorable determination on your plan, identified above, based on the information supplied. Please keep this letter in your permanent records. Continued qualification of the plan under its present form will depend on its effect in operation. (See section 1.401-1(b) (3) of the Income Tax Regulations.) We will review the status of the plan in operation periodically. The enclosed document explains the significance of this favorable determination letter, points out some features that may affect the qualified status of your employee retirement plan, and provides information on the reporting requirements for your plan. It also describes some events that automatically nullify it. It is very important that you read the publication. This letter relates only to the status of your plan under the Internal Revenue Code. It is not a determination regarding the effect of other federal or local statutes. This determination letter is applicable for the amendment(s) adopted on 12- 31-95, 03-27-96. This determination letter is also applicable for the amendment(s) adopted on 10-16-91, 03-31-95. This plan has been mandatorily disaggregated, permissively aggregated, or restructured to satisfy the nondiscrimination requirements. This plan satisfies the nondiscrimination in amount requirement of section 1.401 (a) (4)-l(b)(2) of the regulations on the basis of a design-based safe harbor described in the regulations. This letter is issued under Rev. Proc. 93-39 and considers the amendments required by the Tax Reform Act of 1986 except as otherwise specified in this letter. This plan satisfies the nondiscriminatory current availability requirements of section 1.401(a)(4)-4(b) of the regulations with respect to those benefits, rights, and features that are currently available to all employees in the plan's coverage group. For this purpose, the plan's coverage group consists of those employees treated as currently benefiting for purposes of demonstrating that the plan satisfies the minimum coverage requirements of section 410(b) of the Code. This letter may not be relied upon with respect to whether the plan satisfies the qualification requirements as amended by the Uruguay Round Agreements Act, Pub. L. 103-465. The information on the enclosed addendum is an integral part of this determination. Please be sure to read and keep it with this letter. We have sent a copy of this letter to your representative as indicated in the power of attorney. If you have questions concerning this matter, please contact the person whose name and telephone number are shown above. This plan also satisfies the requirements of Code section 401(k). Sincerely yours, Steven A. Jensen District Director Enclosure(s): Publication 794 Addendum -2- EX-10.7 13 CONVERTIBLE PREFERRED STOCK, SERIES 1 & 2 EXHIBIT 10.7 APPLIED MICRO CIRCUITS CORPORATION 5502 Oberlin Drive San Diego, California 92121 ____________________ CONVERTIBLE PREFERRED STOCK, SERIES 1 and SERIES 2, PURCHASE AGREEMENT As of December 8, 1983 ____________________ TABLE OF CONTENTS ----------------- PAGE ---- SECTION 1 Authorization, Purchase and Sale of the Shares................... 1 1.1 Authorization of the Shares....................................... 1 1.2 Sale and Purchase of the Shares................................... 1 SECTION 2 Closing, Payment and Delivery.................................... 2 2.1 Closing Date and Place of Closing................................. 2 2.2 Payment and Delivery.............................................. 2 SECTION 3 Representations and Warranties of the Company.................... 2 3.1 Organization and Standing; Articles and By-laws................... 2 3.2 Corporate Power................................................... 3 3.3 Subsidiaries...................................................... 3 3.4 Capitalization.................................................... 3 3.5 Authorization..................................................... 3 3.6 Financial Information............................................. 4 3.7 Outstanding Debt.................................................. 4 3.8 Absence of Undisclosed Liabilities................................ 4 3.9. Absence of Certain Changes....................................... 5 3.10 Taxes............................................................ 5 3.11 Contracts; Insurance............................................. 5 3.12 Shareholders, Directors and Officers; Indebtedness............... 6 3.13 Litigation and Bankruptcy Proceedings............................ 7 3.14 Consents......................................................... 7 3.15 Title to Properties; Liens and Encumbrances...................... 7 3.16 Leases........................................................... 7 3.17 Business of the Company.......................................... 8 3.18 Franchises, Licenses, Trademarks, Patents and Other Rights....... 8 3.19 Issuance Taxes................................................... 8 3.20 Offering......................................................... 8 3.21 Compliance with Other Instruments................................ 8 3.22 Employees........................................................ 9 3.23 Registration Rights.............................................. 9 3.24 Disclosure....................................................... 9 SECTION 4 Representations and Warranties of Purchasers..................... 9 4.1 Experience........................................................ 9 4.2 Investment........................................................ 9 4.3 Rule 144.......................................................... 9 4.4 Access to Data.................................................... 10 SECTION 5 Conditions to Closing of Purchasers.............................. 10 5.1 Representations and Warranties Correct............................ 10 5.2 Performance....................................................... 10 5.3 Opinion of Company's Counsel...................................... 10 5.4 Legal Investment.................................................. 10 5.5 Compliance Certificate............................................ 10 5.6 Proceedings and Documents......................................... 10 5.7 Invention Assignment and Secrecy Agreements....................... 11 5.8 Qualifications.................................................... 11 5.9 Restated Articles of Incorporation................................ 11 5.10 Minimum Investment............................................... 11 5.11 Amendment of By-Laws............................................. 11 5.12 Key Man Life Insurance........................................... 11 5.13 Legal Fees....................................................... 11 5.14 Notice of Limited Offering Exemption............................. 11 5.15 Amendment to Debenture Purchase Agreement........................ 12 SECTION 6 Conditions to Closing of Company................................. 12 6.1 Representations................................................... 12 6.2 Legal Investment.................................................. 12 6.3 Minimum Investment................................................ 12 SECTION 7 Covenants of the Company......................................... 12 7.1 Access and Information............................................ 12 7.2 Right of First Refusal............................................ 14 7.3 Prompt Payment of Taxes, etc...................................... 15 7.4 Maintenance of Properties and Leases.............................. 16 7.5 Insurance......................................................... 16 7.6 Key Man Life Insurance............................................ 16 7.7 Accounts and Records.............................................. 16 7.8 Independent Accountants........................................... 16 7.9 Compliance with Requirements of Governmental Authorities.......... 17 7.10 Maintenance of Corporate Existence, etc.......................... 17 7.11 Availability of Common Stock for Conversion...................... 17 7.12 Invention Assignment and Secrecy Agreements...................... 17 7.13 Further Stock Issuances.......................................... 17 7.14 Use of Proceeds.................................................. 17 7.15 Regulation D Filing.............................................. 17 7.16 Notice of Record Dates........................................... 17 7.17 Notice of Limited Offering Exemption............................. 18 7.18 Certain Restrictions............................................. 18 7.19 Compliance by Subsidiaries....................................... 19 SECTION 8 Restrictions on Transferability of Securities; Compliance with Securities Act................................................... 19 8.1 Restrictions on Transferability................................... 19 -iii- 8.2 Certain Definitions............................................... 19 8.3 Restrictive Legend................................................ 20 8.4 Notice of Proposed Transfers...................................... 21 8.5 Requested Registration............................................ 21 8.6 Company Registration.............................................. 23 8.7 Expenses of Registration.......................................... 24 8.8 Registration on Form S-2 or Form S-3.............................. 25 8.9 Registration Procedures........................................... 25 8.10 Indemnification.................................................. 26 8.11 Information by Holder............................................ 27 8.12 Limitations on Registration of Issues of Securities.............. 27 8.13 Rule 144 Reporting............................................... 28 8.14 Transfer or Assignment of Registration Rights.................... 28 8.15 "Market Stand-off" Agreement..................................... 28 SECTION 9 Miscellaneous.................................................... 29 9.1 Governing Law..................................................... 29 9.2 Survival.......................................................... 29 9.3 Successors and Assigns............................................ 29 9.4 Entire Agreement; Amendment....................................... 29 9.5 Notices, etc...................................................... 29 9.6 Delays or Omissions............................................... 30 9.7 Rights; Separability.............................................. 30 9.8 Agent's Fees...................................................... 30 9.9 Information Confidential.......................................... 30 9.10 Expenses......................................................... 31 9.11 Titles and Subtitles............................................. 31 9.12 Counterparts..................................................... 31 9.13 California Qualification......................................... 31 SCHEDULES AND EXHIBITS Schedule of Series 1 Purchasers Schedule of Series 2 Purchasers Schedule of Exceptions to Representations and Warranties Exhibit A - Restated Articles of Incorporation Exhibit B - Opinion of Luce, Forward, Hamilton & Scripps Exhibit C - Form of Invention Assignment and Secrecy Agreement and Invention and Secrecy Agreement Exhibit D - Second Amendment to 8% Convertible Subordinated Debentures Due 1988 Purchase Agreement, Security Agreement and Debenture Instrument, As Amended By the Amendment Agreement -iv- CONVERTIBLE PREFERRED STOCK, SERIES 1 AND SERIES 2, --------------------------------------------------- PURCHASE AGREEMENT ------------------ AGREEMENT made as of the 8th day of December, 1983, by and among APPLIED MICRO CIRCUITS CORPORATION (the "Company"), a California corporation having offices at 5502 Oberlin Drive, San Diego, California 92121, and each of the persons severally listed on the Schedule of Series 1 Purchasers and the Schedule of Series 2 Purchasers attached hereto (collectively, the "Schedule of Purchasers"). The persons listed on the Schedule of Purchasers are sometimes hereinafter referred to as the "Purchasers" and individually as a "Purchaser." WHEREAS, the Company desires to issue and sell, and the Purchasers desire to purchase, certain securities of the Company; NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions herein contained, the Company and each Purchaser, severally and not jointly, hereby agree as follows: SECTION 1 Authorization, Purchase and Sale of the Shares ---------------------------------------------- 1.1 Authorization of the Shares. The Company has, or before the Closing --------------------------- (as hereinafter defined) will have, authorized the sale and issuance of up to four hundred ten thousand (410,000) shares (the "Series 1 Shares") of its Preferred Stock, Series 1 ("Series 1 Preferred") and up to two hundred eighty- five thousand eight hundred (285,800) shares (the "Series 2 Shares") of its Preferred Stock, Series 2 ("Series 2 Preferred") having the respective rights, restrictions, privileges and preferences as set forth in the Restated Articles of Incorporation of the Company (the "Restated Articles") attached to this Agreement as Exhibit A. Both Series 1 Shares and Series 2 Shares are sometimes hereinafter collectively referred to as the "Shares," and the Series 1 Preferred and the Series 2 Preferred are sometimes hereinafter collectively referred to as the "Preferred." 1.2 Sale and Purchase of the Shares. At the Closing (as defined in ------------------------------- Section 2.1 hereof), and subject to the terms and conditions hereof and in reliance upon the representations, warranties and agreements contained herein, the Company will issue and sell (i) to the Purchasers listed on the Schedule of Series 1 Purchasers and each such Purchaser will purchase from the Company the number of Series 1 Shares set forth opposite its name in the column entitled "Total Shares" on the Schedule of Series 1 Purchasers at the price of $21.00 per share in the total amount set forth opposite its name in the column labelled "Total Investment" and (ii) to the Purchasers listed on the Schedule of Series 2 Purchasers and each such Purchaser will purchase from the Company the number of Series 2 Shares set forth opposite its name in the column entitled "Total Shares" on the Schedule of Series 2 Purchasers at the price of $21.00 per share in the total amount set forth opposite its name in the column labelled "Total Investment." SECTION 2 Closing, Payment and Delivery ----------------------------- 2.1 Closing Date and Place of Closing. The closing of the purchase and --------------------------------- sale of the Shares hereunder (the "Closing") in the amounts and to the persons specified in the Schedule of Purchasers shall be held immediately following the execution and delivery of this Agreement (the "Closing Date"). The place of the Closing (including the place of delivery to the Purchasers by the Company of the certificates evidencing all Shares being purchased and the place of payment to the Company by the Purchasers of the purchase price therefor) shall be at the offices of Luce, Forward, Hamilton & Scripps, 110 West A Street, San Diego California, or such other place as a majority in interest of the Purchasers shall designate by notice to the Company given at least five (5) business days prior to the Closing Date. 2.2 Payment and Delivery. At the Closing, (i) each Purchaser of Series -------------------- 1 Shares will pay for such shares by surrender of the Company's 8% Convertible Subordinated Debentures due 1988 (the "Debentures") held by such Purchaser for cancellation of a principal amount equal to the amount set forth next to such Purchaser's name on the Schedule of Series 1 Purchasers under the column "Total Investment" and (ii) each Purchaser of Series 2 Shares will pay for such Shares in cash or by check, wire transfer, cancellation of indebtedness or such other form of payment as shall be mutually agreed upon by the Company and that Purchaser, the amount set forth opposite its name in the column labelled "Total Investment" on the Schedule of Series 2 Purchasers; and the Company will deliver to each Purchaser a certificate or certificates representing the number of Series 1 and Series 2 Shares purchased as set forth opposite such Purchaser's name in the column labelled "Total Shares" on the Schedule of Series 1 Purchasers and the Schedule of Series 2 Purchasers. SECTION 3 Representations and Warranties of the Company --------------------------------------------- The Company hereby represents and warrants to the Purchasers as follows, except as set forth on the "Schedule of Exception" delivered to the Purchasers prior to the execution hereof and attached hereto. 3.1 Organization and Standing; Articles and By-laws. The Company is a ----------------------------------------------- corporation duly organized and existing under the laws of the State of California and is in good standing under such laws. The Company has requisite corporate power to own properties owned by it and to conduct business as being conducted by it and as contemplated by the Company's Confidential Private Placement Memorandum dated October 20, 1983 and the Supplement thereto dated as of November 10, 1983 with respect to the sale of the Shares (collectively referred to as the "Memorandum"). The Company is duly qualified to do business as a foreign corporation in good standing in each jurisdiction in which the character and location of its properties (owned or leased) or the nature of its business requires such qualification, except for such jurisdictions where the failure to so qualify would not materially and adversely affect -2- the business, operations or financial conditions of the Company. The Company has furnished special counsel to the Purchasers with true, correct and complete copies of its Restated Articles of Incorporation, By-Laws and all amendments to each to date and will furnish copies of any such documents to any Purchaser who so requests. Prior to the Closing, the Restated Articles shall have been properly adopted by all necessary corporate action and the Company shall have properly filed the Restated Articles with the Secretary of State of California. 3.2 Corporate Power. The Company has all requisite corporate power to --------------- enter into this Agreement and will have at the Closing Date all requisite corporate power to sell the Shares and to carry out and perform its obligations under the terms of this Agreement. 3.3 Subsidiaries. The Company has no subsidiaries and does not own of ------------ record or beneficially any capital stock or equity interest or investment in any corporation, association or business entity. 3.4 Capitalization. Immediately prior to the Closing, the Company's -------------- authorized capital stock will consist of (a) Twenty-five million (25,000,000) shares of Common Stock (the "Common Stock"), of which 1,288,918 shares will be issued and outstanding immediately prior to the Closing, and (b) Four hundred ten thousand (410,000) shares of Series 1 Preferred shares and Three hundred thousand (300,000) shares of Series 2 Preferred, no shares of which will be issued and outstanding prior to the Closing. All the aforesaid issued and outstanding shares will have been duly authorized and validly issued, will be fully paid and non-assessable, and have been offered, issued, sold and delivered by the Company in compliance with applicable federal and state securities laws. An aggregate of 12,666,334 shares of Common Stock have been reserved for issuance upon conversion of the Preferred. There are no outstanding preemptive, conversion or other rights, options, warrants or agreements granted or issued by or binding upon the Company for the purchase or acquisition of any shares of its capital stock, except with respect to the Preferred in accordance with the provisions of this Agreement, Debentures in the aggregate principal amount of $8,583,015 outstanding prior to the Closing which are convertible into an aggregate of 9,809,191 shares of Common Stock and other than as set forth in the Schedule of Exceptions. To the best of the Company's knowledge and belief, no shareholder has granted options or other rights to purchase any securities of the Company from such shareholder other than as set forth in the Schedule of Exceptions hereto. The Company holds no shares of its capital stock in its treasury. 3.5 Authorization. All corporate action on the part of the Company, its ------------- directors and shareholders necessary for the authorization, execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated herein, and for the authorization, issuance and delivery of the Shares and of the Common Stock issuable upon conversion thereof has been taken or will be taken prior to the Closing. This Agreement is a valid and binding obligation of the Company, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws of general application affecting enforcement of creditors' rights generally and principles of equity relating to specific enforcement of this Agreement. The execution, delivery and performance by -3- the Company of this Agreement and compliance therewith and the issuance and sale of the Shares and Common Stock issuable upon conversion of the Shares will not result in any violation of and will not conflict with, or result in a breach of any of the terms of, or constitute a default under, any provision of state or Federal law to which the Company is subject, the Restated Articles or the Company's By-Laws, as amended, or any mortgage, indenture, agreement, instrument, judgment, decree, order, rule or regulation or other restriction to which the Company is a party or by which it is bound, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company pursuant to any such term. No shareholder or other person has any preemptive rights or rights of first refusal by reason of the issuance of the Shares, except as set forth in the Schedule of Exceptions and all such rights, if any, have been complied with or validly waived. The Shares, when issued in compliance with the provisions of this Agreement, will be validly issued, fully paid and nonassessable, and will be free of any liens, charges or encumbrances subject to applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws of general application affecting enforcement of creditors' rights generally. The shares of Common Stock issuable upon conversion of the Shares have been duly and validly reserved and not subject to any preemptive rights or rights of first refusal not waived or validly complied with and, upon issuance, will be validly issued, fully paid and nonassessable. 3.6 Financial Information. The audited financial statements of the --------------------- Company as of March 31, 1983, and the unaudited interim financial statements as of September 30, 1983 and the respective notes thereto, included in the Memorandum, a copy of which has been delivered to each Purchaser (collectively, the "Financial Statements"), including the balance sheet as of September 30, 1983 (the "Balance Sheet") and a Statement of Income for the six month period ended September 30, 1983 (the "Income Statement"), present fairly the financial position and results of operations of the Company at the dates and for the periods to which they relate, have been prepared in accordance with generally accepted accounting principles consistently followed throughout the periods involved and show all material liabilities, absolute or contingent, of the Company required to be recorded thereon in accordance with generally accepted accounting principles as at the respective dates thereof. 3.7 Outstanding Debt. The Company has no outstanding indebtedness for ---------------- borrowed money except as reflected on the Balance Sheet and is not a guarantor or otherwise contingently liable for any such indebtedness. There exists no default under the provisions of any instrument evidencing such indebtedness or of any agreement relating thereto. 3.8 Absence of Undisclosed Liabilities. The Company has no material ---------------------------------- liabilities (fixed or contingent, including without limitation any tax liabilities due or to become due) which are not fully reflected or provided for on the Balance Sheet, except as listed on the Schedule of Exceptions. The Company does not know of any material liability of any nature, direct or indirect, contingent or otherwise, or in any amount not adequately reflected or reserved against in the Balance Sheet, except as set forth on the Schedule of Exceptions. -4- 3.9. Absence of Certain Changes. Except to the extent described in the -------------------------- Schedule of Exceptions, since September 30, 1983 there has not been: (a) any material adverse change in the condition, assets, liabilities or business of the Company from that shown on the Balance Sheet; (b) any damage, destruction or loss of any of the properties or assets of the Company (whether or not covered by insurance) materially adversely affecting the business or plans of the Company; (c) any declaration, setting aside or payment or other distribution in respect of any of the Company's capital stock, or any direct or indirect redemption, purchase or other acquisition of any of such stock by the Company; or (d) any labor dispute, or to the Company's knowledge or belief, any event or condition of any character, materially adversely affecting the business or plans of the Company. 3.10 Taxes. The Company has filed or will file within the time ----- prescribed by law (including extensions of time approved by the appropriate taxing authority) all tax returns and reports required to be filed with the United States Internal Revenue Service and with the State of California, and (except to the extent that the failure to file would not have a material adverse effect on the condition or operations of the Company) with all other jurisdictions where such filing is required by law; and the Company has paid, or made adequate provision in the Balance Sheet for the payment of, all taxes, interest, penalties, assessments or deficiencies shown to be due or claimed to be due on or in respect of such tax returns and reports. The Company knows of (i) no other tax returns or reports which are required to be filed which have not been so filed and (ii) no unpaid assessment for additional taxes for any fiscal period or any basis thereof. The Company's federal income tax returns have not been audited by the Internal Revenue Service. 3.11 Contracts; Insurance. Except as set forth in the Schedule of -------------------- Exceptions, the Company has no currently existing contract, obligation commitment (written or oral) of any material nature pursuant to which the Company's obligations exceed $100,000 or which has a term greater than five years, including without limitation the following: (a) Employment, bonus or consulting agreements, pension, profit sharing, deferred compensation, stock bonus, retirement, stock option, stock purchase, phantom stock or similar plans, including agreements evidencing rights to purchase securities of the Company and agreements among shareholders and the Company; (b) Loan or other agreements, notes, indentures, or instruments relating to or evidencing indebtedness for borrowed money, or mortgaging, pledging or granting or creating a lien or security interest or other encumbrance on any of the Company's property or any agreement or instrument evidencing any guaranty by the Company of payment or performance by any other person; -5- (c) Agreements with dealers, sales representatives, brokers or other distributors, jobbers, advertisers or sales agencies; (d) Agreements with any labor union or collective bargaining organization or other labor agreements; (e) Any contract or series of contracts with the same person for the furnishing or purchase of machinery, equipment, goods or services, including without limitation agreements with processors and subcontractors; (f) Any indenture, agreement or other document (including private placement brochures) relating to the sale or repurchase of shares; (g) Any joint venture contract or arrangement or other agreement involving a sharing of profits or expenses to which the Company is a party; (h) Agreements limiting the freedom of the Company to compete in any line of business or in any geographic area or with any person; (i) Agreements providing for disposition of the business, assets or shares of the Company, agreements of merger or consolidation to which the Company is a party or letters of intent with respect to the foregoing; (j) Agreements involving or letters of intent with respect to the acquisition of the business, assets or shares of any other business; and (k) Insurance policies. The Company has complied with all the material provisions of all said contracts, obligations, and commitments and is not in default of any such provision thereunder. The Company maintains insurance which is adequate to protect the Company against the risks involved in the business conducted by it as is customarily maintained by well-managed companies engaged in similar activities. 3.12 Shareholders, Directors and Officers; Indebtedness. Set forth on -------------------------------------------------- the Schedule of Exceptions is a correct and complete list or description of all indebtedness of the Company to its officers, directors or shareholders or any of their respective relatives and of all indebtedness of such persons to the Company. To the best of the Company's knowledge and belief, none of the officers, significant employees or consultants of the Company, or their respective spouses or relatives, owns directly or indirectly, individually or collectively, a material interest in any entity which is a competitor, customer or supplier of (or has any existing contractual relationship with) the Company. -6- 3.13 Litigation and Bankruptcy Proceedings. ------------------------------------- (a) There is neither pending nor, to the Company's knowledge and belief, threatened any action, suit, proceeding or claim, or any basis therefor or threat thereof, whether or not purportedly on behalf of the Company, to which the Company is or may be named as a party or its property is or may be subject and in which an unfavorable outcome, ruling or finding might have a material adverse effect on the condition, financial or otherwise, or operations of the Company; and the Company has no knowledge of any unasserted claim, the assertion of which is likely and which, if asserted, will seek damages, an injunction or other legal, equitable, monetary or nonmonetary relief which, if granted, would have a material adverse effect on the condition, financial or otherwise, or operations of the Company. (b) The Company has not admitted in writing its inability to pay its debts generally as they become due, filed or consented to the filing against it of a petition in bankruptcy or a petition to take advantage of any insolvency act, made an assignment for the benefit of creditors, consented to the appointment of a receiver for itself or for the whole or any substantial part of its property, or had a petition in bankruptcy filed against it, been adjudicated a bankrupt, or filed a petition or answer seeking reorganization or arrangement under the Federal bankruptcy laws or any other law or statute of the United States of America or any other jurisdiction. 3.14 Consents. All consents, approvals, qualifications, orders, -------- approvals or authorizations of, or filings with, any governmental authority, including the Commissioner of Corporations of the State of California, required in connection with the Company's valid execution, delivery and performance of this Agreement, and the offer, sale and issuance of the Shares by the Company, the conversion of the Shares, the issuance of Common Stock upon conversion of the Shares, the adoption of the Second Amendment to 8% Convertible Subordinated Debentures Due 1988 Purchase Agreement, Security Agreement and Debenture Instrument, As Amended By The Amendment Agreement in the form of Exhibit D hereto (the "Debenture Amendment"), and the consummation of any other transaction contemplated on the part of the Company hereby, shall have been duly obtained and shall be effective on and as of the Closing, except the recording of the Restated Articles with the Secretary of State of the State of California, the filing referred to in Section 7.17 hereof, notices of sale required to be filed pursuant to Regulation D under the Securities Act of 1933, and except such filings as have been made prior to the Closing. 3.15 Title to Properties; Liens and Encumbrances. The Company does not ------------------------------------------- have any ownership interest in real property. The Company has a valid and indefeasible ownership interest in all the property and assets recorded on the Balance Sheet, free from all pledges, liens, security interests, conditional sale agreements, encumbrances or charges, except as shown on the Balance Sheet or listed on the Schedule of Exceptions. 3.16 Leases. The Company's material lease obligations are disclosed in ------ the Financial Statements and there has been no material change in such obligations since September 30, 1983. -7- The Company enjoys peaceful and undisturbed possession under all its material leases of real or personal property, all such leases are valid and subsisting and none of them is in default in any material respect. 3.17 Business of the Company. The Company has no knowledge or belief ----------------------- that (i) there is pending or threatened any claim or litigation against or affecting the Company contesting its right to produce, manufacture, sell or use any product, process; method, substance, part or other material presently produced, manufactured, sold or used or planned to be produced, manufactured, sold or used by the Company in connection with the operations of the Company; or (ii) there exists, or there is pending or planned, any patent, invention, device, application or principle, or any statute, rule, law, regulation, standard or code which would materially adversely affect the condition, financial or otherwise, or the operations of the Company. The Company currently intends to engage in the business of the same general type as described in the Memorandum. 3.18 Franchises, Licenses, Trademarks, Patents and Other Rights. The ---------------------------------------------------------- Company has all franchises, permits, certificates, authorizations, licenses and other similar authority required by law or governmental regulations from all applicable Federal, state or local authorities and any other regulatory authorities or necessary for the conduct of its business as now being conducted by it and as planned to be conducted, the lack of which could materially and adversely affect the operations or condition, financial or otherwise, of the Company, and it is not in default in any material respect under any of such franchises, permits, certificates, authorizations, licenses or other similar authority. The Company possesses all patents, patent rights, trademarks, trademark rights, trade names, trade name rights and copyrights necessary to conduct its business as now being conducted and as planned to be conducted without conflict with or infringement upon any valid rights of others and the lack of which could materially and adversely affect the operations or condition, financial or otherwise, of the Company, and has not received any notice of infringement upon or conflict with the asserted rights of others. 3.19 Issuance Taxes. All taxes imposed by law in connection with the -------------- issuance, sale and delivery of the Shares shall have been fully paid, and all laws imposing such taxes shall have been fully complied with, prior to the Closing Date. 3.20 Offering. Subject in part to the truth and accuracy of the -------- Purchasers' representations set forth in this Agreement, the offer, sale and issuance of the Shares and the Common Stock issuable upon conversion of the Shares as contemplated by this Agreement are exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act", which term shall include any successor federal statute), and from the qualification requirements of the California Corporate Securities Law of 1968, as amended, and neither the Company nor anyone acting on its behalf will take any action hereafter that would cause the loss of such exemptions. 3.21 Compliance with Other Instruments. The Company is not in violation --------------------------------- of any term of its Articles of Incorporation as amended prior to the adoption of the Restated Articles, the -8- Restated Articles or its By-Laws, as amended. The Company is not in violation of any term of any mortgage, indenture, contract, agreement, instrument, judgment, decree, order, statute, rule or regulation to which the Company is subject and a violation of which would have a material adverse effect on the condition, financial or otherwise, or operations of the Company. 3.22 Employees. To the best of the Company's knowledge and belief, no --------- employee of the Company is, or is now expected to be, in violation of any term of any employment contract, patent disclosure agreement, non-competition agreement, or any other contract or agreement or any restrictive covenant relating to the right of any such employee to be employed by the Company because of the nature of the business conducted or to be conducted by the Company or to the use of trade secrets or proprietary information of others, and the employment of the Company's employees does not subject the Company or any Purchaser to any liability. The Company does not have any collective bargaining agreement covering any of its employees. 3.23 Registration Rights. Except as set forth in the Schedule of ------------------- Exceptions and as provided for in this Agreement, the Company is not under any obligation to register (as defined in Section 8.2 below) any of its currently outstanding securities or any of its securities which may hereafter be issued. 3.24 Disclosure. This Agreement, the Schedule of Exceptions, the ---------- Memorandum and the Financial Statements delivered to the Purchasers do not contain any untrue statement of a material fact and do not omit to state a material fact necessary in order to make the statements contained therein or herein not misleading in the light of the circumstances under which they were made. SECTION 4 Representations and Warranties of Purchasers -------------------------------------------- Each Purchaser represents and warrants to the Company, severally and not jointly, and only as to himself or itself, as follows: 4.1 Experience. He or it is experienced in evaluating and investing in ---------- newly organized, high technology companies such as the Company. 4.2 Investment. He or it is acquiring the Shares for investment or its ---------- own account and not with the view to, or for resale in connection with, any distribution thereof. He or it understands that the Shares and the shares of Common Stock issuable upon conversion of the Shares have not been registered under the Securities Act by reason of specified exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of his or its investment intent as expressed herein. 4.3 Rule 144. He or it acknowledges that the Shares must be held -------- indefinitely unless they are subsequently registered under the Act or an exemption from such registration is available. He or it has been advised or is aware of the provisions of Rule 144 promulgated under -9- the Act, which permits limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things: the availability of certain current public information about the Company, the resale occurring not less than two years after a party has purchased and paid for the security to be sold, the sale being through a "broker's transaction" and the number of shares being sold during any three- month period not exceeding specified limitations. 4.4 Access to Data. He or it has had an opportunity to discuss the -------------- Company's business, management and financial affairs with its management and has had the opportunity to review the Company's facilities. SECTION 5 Conditions to Closing of Purchasers ----------------------------------- The obligation of each Purchaser to purchase the Shares to be purchased at the Closing is subject to the fulfillment to their satisfaction on or prior to the Closing Date of each of the following conditions: 5.1 Representations and Warranties Correct. The representations and -------------------------------------- warranties made by the Company in Section 3 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date with the same force and effect as if they had been made on and as of the Closing Date. 5.2 Performance. All covenants, agreements and conditions contained in ----------- this Agreement to be performed or complied with by the Company on or prior to the Closing Date shall have been performed or complied with in all respects. 5.3 Opinion of Company's Counsel. Each Purchaser shall have received ---------------------------- from Luce, Forward, Hamilton & Scripps, counsel to the Company, an opinion addressed to it, dated the Closing Date, and in substantially the form attached as Exhibit B hereto. 5.4 Legal Investment. At the time of the Closing, the purchase of the ---------------- Shares to be purchased by each Purchaser hereunder shall be legally permitted by all laws and regulations to which the Purchasers and the Company are subject. 5.5 Compliance Certificate. The Company shall have delivered to each ---------------------- Purchaser a certificate of the President of the Company, dated the Closing Date, certifying to the fulfillment of the conditions specified in Sections 5.1 and 5.2 of this Agreement. 5.6 Proceedings and Documents. All corporate and other proceedings in ------------------------- connection with the transactions contemplated hereby and all documents and instruments incident to such transactions shall be satisfactory in substance and form to each Purchaser and its counsel. -10- 5.7 Invention Assignment and Secrecy Agreements. Each person employed ------------------------------------------- by the Company who has access to proprietary information concerning the Company shall have executed and delivered to the Company either an Invention Assignment and Secrecy Agreement or an Invention and Secrecy Agreement, the forms of which are annexed hereto as Exhibit C. 5.8 Qualifications. The Company shall have received a permit from the -------------- Commissioner of Corporations of the State of California qualifying the offer and sale of the Shares and the Common Stock issuable upon conversion of the Shares pursuant to this Agreement and authorizing the Debenture Amendment, which permit shall be effective on and as of the Closing. In addition, all other authorizations, approvals, notices or permits, if any, of any governmental authority or regulatory body that are required in connection with the lawful issuance and sale of the Shares pursuant to this Agreement, the conversion of the Shares into Common Stock, the issuance of such Common Stock upon such conversion, the approval of the Debenture Amendment and the consummation of all the transactions contemplated hereby shall have been duly obtained and shall be effective on and as of the Closing. 5.9 Restated Articles of Incorporation. The Restated Articles shall ---------------------------------- have been approved by all necessary corporate action and filed with the Secretary of State of the State of California and shall be in full force and effect. 5.10 Minimum Investment. At the Closing, the Purchasers shall purchase ------------------ Series 1 Shares and Series 2 Shares in aggregate purchase prices of not less than $8,153,864 and $4,000,000, respectively. 5.11 Amendment of By-Laws. The Company shall have amended its By-Laws -------------------- to provide that persons owning 20% or more of the Preferred and the Common Stock issued upon conversion of the Preferred, or any combination thereof, can call special meetings of shareholders and special meetings of the Board of Directors and that 25% of the directors can call special meetings of the Board of Directors. 5.12 Key Man Life Insurance. The Company agrees that it will obtain ---------------------- with financially sound and reputable insurers term life insurance on the lives of such officers and employees of the Company in such amounts as the majority of the members of the Board of Directors shall determine. 5.13 Legal Fees. The Company will pay the legal fees, disbursements and ---------- office charges and expenses of Reavis & McGrath, special counsel to the Purchasers, with respect to this Agreement and the transactions contemplated hereby. 5.14 Notice of Limited Offering Exemption. The Company shall have ------------------------------------ completed and executed a "Notice of Transaction pursuant to Corp. Code 25102(f)" in form suitable for filing with the Commissioner of Corporations of the State of California, or will have received a permit from the Commissioner of Corporations in lieu thereof with respect to the Shares and the shares of Common Stock issuable upon conversion of the Shares. -11- 5.15 Amendment to Debenture Purchase Agreement. The 8% Convertible ----------------------------------------- Subordinated Debentures due 1988 Purchase Agreement shall be amended in accordance with the form of Debenture Amendment attached hereto as Exhibit D and the Debenture Amendment shall be in full force and effect. SECTION 6 Conditions to Closing of Company -------------------------------- The Company's obligation to sell the Shares to be purchased at the Closing is subject to the fulfillment to its satisfaction on or prior to the Closing Date of each of the following conditions: 6.1 Representations. The representations made by the Purchasers --------------- pursuant to Section 4 hereof shall be true and correct when made and shall be true and correct on the Closing Date. 6.2 Legal Investment. At the time of the Closing, the conditions set --------------- forth in Sections 5.8, 5.9, 5.10, 5.11 and 5.15 shall have occurred and the purchase of the Shares to be purchased by the Purchasers hereunder shall be legally permitted by all laws and regulations to which each Purchaser and the Company are subject. 6.3 Minimum Investment. At the Closing, the Purchasers shall purchase ------------------ Series 1 Shares and Series 2 Shares in aggregate purchase prices of not less than $8,153,864 and $4,000,000, respectively. SECTION 7 Covenants of the Company ------------------------ The Company hereby covenants and agrees, so long as any Purchaser owns any Shares or any shares of Common Stock issued upon conversion of Preferred, as follows: 7.1 Access and Information. Until the earlier to occur of (i) the date ---------------------- on which the Company is subject to the reporting requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, or (ii) the date on which quotations for the Common Stock of the Company are reported by the automated quotations system operated by the National Association of Securities Dealers, Inc., or by an equivalent quotations system, the Company will permit any Purchaser who owns (or has been designated as the representative of holders of) Series 1 Shares (or shares of Common Stock issued upon conversion thereof) in the aggregate purchase price of $250,000 or more, or Series 2 Shares (or shares of Common Stock issued upon conversion thereof) in the aggregate purchase price of $250,000 or more, or any combination thereof, to visit and inspect any of the properties of the Company, including its books of account, and to discuss its affairs, finances and accounts with the Company's officers and its independent public accountants, all at such reasonable times and as often as any such person may reasonably request, and the Company will deliver the reports described below: -12- (a) To all Purchasers of the Shares, as soon as practicable after the end of each fiscal year of the Company, and in any event within ninety (90) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as at the end of such fiscal year, and consolidated statements of income and sources and applications of funds of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and certified by independent public accountants of recognized national standing selected by the Company; (b) To each Purchaser who owns (or has been designated as the representative of holders of) Series 1 Shares (or shares of Common Stock issued upon conversion thereof) in the aggregate purchase price of $250,000 or more, or Series 2 Shares (or shares of Common Stock issued upon conversion thereof) in the aggregate purchase price of $250,000 or more, or any combination thereof, as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within forty-five (45) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of each such quarterly period, and consolidated statements of income and sources and applications of funds of the Company and its subsidiaries for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles consistently applied and setting forth in comparative form the figures for the corresponding periods of the previous fiscal year, subject to changes resulting from year-end audit adjustments, all in reasonable detail and certified by the principal financial or accounting officer of the Company; (c) To each Purchaser who owns (or has been designated as the representative of holders of) Series 1 Shares (or shares of Common Stock issued upon conversion thereof) in the aggregate purchase price of $250,000 or more, or Series 2 Shares (or shares of Common Stock issued upon conversion thereof) in the aggregate purchase price of $250,000 or more, or any combination thereof, as soon as practicable after the end of each month and in any event within thirty (30) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as at the end of such month, and consolidated statements of income and of sources and applications of funds of the Company and its subsidiaries, for each month and for the current fiscal year of the Company to date, prepared in accordance with generally accepted accounting principles consistently applied, together with a comparison of such statements to the Company's operating plan then in effect and approved by its Board of Directors, and certified, subject to changes resulting from year-end audit adjustments, by the principal financial or accounting officer of the Company; and (d) To any Purchaser described in subparagraph (c) above, upon the written request of any such person, as soon as available (but in any event within sixty (60) days after the commencement of its fiscal year) a summary of the financial plan of the Company, as contained in its operating plan approved by the Company's Board of Directors. Any material changes in such financial plan shall be furnished as promptly as practicable after such changes have been approved by the Board of Directors. -13- In connection with the receipt of information to be provided in accordance herewith to the Purchasers, the Purchasers agree to use their best efforts to keep all such information confidential; provided, that a Purchaser shall not be restricted from the use of such information in a manner customary in the conduct of such Purchaser's business or in the management of its investments. The Purchasers agree that, upon request by the Company, they will enter into a confidentiality agreement with the Company upon such reasonable terms as are consistent with the foregoing. The foregoing provisions of this Section 7.1 shall not be in limitation of any rights which a Purchaser may have with respect to the books and records of the Company and its subsidiaries, or to inspect their properties or discuss their affairs, finances and accounts, under the laws of the jurisdictions in which they are incorporated. 7.2 Right of First Refusal. The Company hereby grants to each Purchaser ---------------------- the right of first refusal to purchase, pro rata, all (or any part) of New Securities (as defined in this Section 7.2) which the Company may, from time to time, propose to sell and issue. A Purchaser's pro rata share, for purposes of this right of first refusal, is the ratio of the number of shares of Common Stock which have been issued or are issuable upon conversion of all the Shares purchased by such Purchaser under this Agreement to the sum the total number of shares of Common Stock which have been issued upon conversion and the total number of shares of Common Stock then issuable upon conversion of all then outstanding Shares. Each Purchaser shall have a right of over-allotment such that if any Purchaser fails to exercise his right hereunder to purchase his pro rata portion of New Securities, the other Purchasers may purchase the non- purchasing Purchaser's portion on a pro rata basis (allocated equitably on the basis of the other Purchasers' relative holdings of shares of Common Stock issued or issuable upon conversion of the Shares and indications of interest on the applicable subscriptions) within five (5) days from the date such non- purchasing Purchaser fails to exercise his right hereunder to purchase his pro rata share of New Securities. This right of first refusal shall be subject to the following provisions: (a) "New Securities" shall mean any capital stock (including the Common Stock or the Preferred) of the Company whether now authorized or not, and rights, options or warrants to purchase capital stock, and securities of any type whatsoever that have voting rights or are, or may become, convertible into capital stock; provided that the term "New Securities" shall not include (i) securities purchased under this Agreement; (ii) securities offered to the public pursuant to a registration statement filed pursuant to the Securities Act; (iii) securities issued pursuant to the acquisition of another corporation by the Company by merger, purchase of substantially all the assets or other reorganization whereby the Company owns not less than fifty-one percent (51%) of the voting power of such corporation; (iv) any borrowings, direct or indirect, from financial institutions or other persons by the Company, whether or not presently authorized, including any type of loan or payment evidenced by any type of debt instrument, provided such borrowings do not have any equity features, including warrants, options or other rights to purchase capital stock, and are not convertible into capital stock of the Company; (v) securities issued to employees, constituting Management Stock (as such term is defined in -14- Section 7.13 hereof); or (vi) securities issued upon voluntary or involuntary conversion of, or in exchange for, outstanding securities of the Company. (b) In the event the Company proposes to undertake an issuance of New Securities, it shall give each Purchaser written notice of its intention, describing the type of New Securities, the price and the general terms upon which the Company proposes to issue the same. Each Purchaser shall have thirty (30) days from the date of receipt of any such notice to agree to purchase the Purchaser's pro rata share of such New Securities for the price and upon the general terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (c) In the event the Purchasers fail to exercise the right of first refusal within said thirty (30) day period and after the expiration of the 5-day period for the exercise of the over-allotment provisions of this Section 7.2, the Company shall have one hundred twenty (120) days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within one hundred twenty (120) days from the date of said agreement) to sell the New Securities respecting which the Purchasers' option was not exercised, at a price and upon general terms no more favorable to the purchases thereof than specified in the Company's notice. In the event the Company has not sold within said 120-day period or entered into an agreement to sell the New Securities within said 120-day period (or sold and issued New Securities in accordance with the foregoing within one hundred twenty (120) days from the date of said agreement), the Company shall not thereafter issue or sell any New Securities, without first offering such securities to the Purchasers in the manner provided above. (d) The right of first refusal granted under this Agreement shall expire upon the closing of the first sale of Common Stock of the Company to the public at an aggregate offering price of at least two times the aggregate amount paid for the Shares, which sale is effected pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission (the "Commission") under the Securities Act, with gross proceeds to the Company as seller of not less than $10,000,000. (e) The right of first refusal set forth in this Section 7.2 may be assigned by any Purchaser to a transferee or assignee in a transaction not involving a public offering; provided that the Company is given written notice at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and identifying the Purchaser whose right is being assigned; and provided further that the transferee or assignee of such right is not deemed by the Board of Directors of the Company, in its reasonable judgment, to be a competitor of the Company; and provided further that the transferee or assignee of such rights assumes the obligations of such Purchaser under this Section 7.2. 7.3 Prompt Payment of Taxes, etc. The Company will promptly pay and ---------------------------- discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon the income, profits, property or business of the Company or any subsidiary; provided, however, that any such tax, assessment, charge or levy -15- need not be paid if the validity thereof shall currently be contested in good faith by appropriate proceedings and if the Company shall have set aside on its books adequate reserves with respect thereto required to be established by generally accepted accounting principles, and provided, further, that the Company will pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefor. The Company will promptly pay or cause to be paid when due, or in conformance with customary trade terms, all other indebtedness incident to operations of the Company, unless such indebtedness is being contested in good faith, in which case the Company will establish an appropriate reserve to the extent required by generally accepted accounting principles. 7.4 Maintenance of Properties and Leases. The Company will keep its ------------------------------------ properties and those of its subsidiaries in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needful and proper repairs, renewals, replacements, additions and improvements thereto; and the Company and its subsidiaries will at all times comply with each provision of all leases to which any of them is a party or under which any of them occupies property if the breach of such provision might have a material adverse effect on the condition, financial or otherwise, or operations of the Company. 7.5 Insurance. The Company will keep its assets and those of its --------- subsidiaries which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion and other risks customarily insured against by companies in the Company's line of business, in amounts sufficient to prevent the Company or any subsidiary from becoming a co- insurer and not in any event less than 100% of the insurable value of the property insured; and the Company will maintain, with financially sound and reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner customary for companies in similar businesses similarly situated. 7.6 Key Man Life Insurance. The Company will cause the term life ---------------------- insurance required by Section 5.12 hereof to be maintained upon the terms and conditions set forth therein, as determined by a majority of the members of the Board of Directors. 7.7 Accounts and Records. The Company will keep true records and books -------------------- of account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and affairs in accordance with generally accepted accounting principles applied on a consistent basis. 7.8 Independent Accountants. The Company will retain independent public ----------------------- accountants of recognized national standing who shall certify the Company's financial statements at the end of each fiscal year. In the event the services of the independent public accountants, so selected, or any firm of independent public accounts hereafter employed by the Company are terminated, the Company will promptly thereafter notify the Purchasers and will request the firm of independent public accountants whose services are terminated to deliver to the Purchasers a letter of such firm setting forth the reasons for the termination of their services. In the event of such termination, the Company will promptly thereafter engage another such firm -16- of independent public accountants. In its notice to the Purchasers, the Company shall state whether the change of accountants was recommended or approved by the Board of Directors or any committee thereof. 7.9 Compliance with Requirements of Governmental Authorities. The -------------------------------------------------------- Company shall duly observe and conform to all valid requirements of governmental authorities relating to the conduct of their businesses or to their properties or assets. 7.10 Maintenance of Corporate Existence, etc. The Company shall maintain --------------------------------------- in full force and effect its corporate existence, rights and franchises and all licenses and other rights to use patents, processes, licenses, trademarks, trade names or copyrights owned or possessed by it or any subsidiary and deemed by the Company to be necessary to the conduct of their business. 7.11 Availability of Common Stock for Conversion. The Company will, from ------------------------------------------- time to time, in accordance with the laws of the state of its incorporation, increase the authorized amount of Common Stock if at any time the number of shares of Common Stock remaining unissued and available for issuance shall be insufficient to permit conversion of all the then outstanding shares of Preferred. 7.12 Invention Assignment and Secrecy Agreements. The Company and each ------------------------------------------- person hereafter employed by it with access to confidential information will enter into an Invention and Secrecy Agreement in substantially the form of Exhibit C hereto. 7.13 Further Stock Issuances. Other than the Preferred contemplated by ----------------------- this Agreement, the Company will not issue any of its capital stock, or grant an option to purchase any of its capital stock, after September 30, 1983, except that (i) the Company may issue, or grant options to purchase, up to an aggregate of 4,010,811 shares of Common Stock to employees of the Company or a subsidiary ("Management Stock") and (ii) securities may be issued upon the conversion of outstanding convertible securities. 7.14 Use of Proceeds. The Company will use the proceeds from the sale of --------------- the Shares for general corporate purposes and in accordance with the plans set forth in the Memorandum. 7.15 Regulation D Filing. The Company will file on a timely basis all ------------------- notices of sale required to be filed with the Securities and Exchange Commission pursuant to Regulation D under the Securities Act and simultaneously furnish copies of each report of sale to special counsel for the Purchasers and each Purchaser who so requests in writing. 7.16 Notice of Record Dates. In the event of any setting by the Company ---------------------- of a record of the holders of any class of securities (other than the Preferred) for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, the Company shall mail to each Purchaser at least twenty (20) days prior to such record date, specified herein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution. -17-
# in (S)7.13 Total # on Pg. 13 of Purchase Option Plan to Articles Agreement ------------ ------------ ------------ 9/30/93 - Option Plan 4,008,000 4,008,000 ----------------- - Option exercised as of 9/30/89 497,189 ---------- - Unexercised/ungranted options 3,510,811 3,510,811 12/8/83 - Additional options added to Pool as part of financing 12/8/83 500,000 500,000 ---------- ---------- - Total as of 12/8/83 4,508,000 4,010,811 1/31/85 - Shareholder consent to (a) Increase option pool 750,000 750,000 (b) Provided 25K shares to consultant 25,000 ---------- ---------- - Total as of 1/31/85 5,258,000 4,785,811 3/27/87 - Shareholder approval to increase option pool 350,000 350,000 ---------- ---------- - Total as of 1/31/85 5,608,000 5,135,811 5,135,811 9/14/87 Shareholder approval to increase option pool (Part of financing of 9/16) 1,300,000 1,300,000 4,201,365* ---------- ---------- - Total as of 9/1487 6,908,000 6,435,111 - Total option pool (6,908,000) less options outstanding 9/31/87 (2,706,635) Net available 4,201,365 As of 9/14/87
______________________ *This method created a 25,000 "discrepancy" between the Articles # of total "allowable" shares and the (S)7.13 limit (list the 25K shares) ----- 7 17 Notice of Limited Offering Exemption. If required by law, promptly ------------------------------------ after the Closing, but in no event later than thirty (30) days after the Closing Date, the Company shall file the Notice referred to in Section 5.14 hereof with the California Commissioner of Corporations. 7.18 Certain Restrictions. Without the prior written consent of the -------------------- holders of at least a majority of the total number of shares of Common Stock issued or issuable upon conversion of all the Shares, the Company (a) will not sell, lease or otherwise dispose of a material portion of its assets other than in the ordinary course of business; (b) will not sell or otherwise dispose of any stock of any subsidiary; and (c) will not permit any subsidiary to become a party to any -18- merger, consolidation, reorganization, acquisition or commitment to take any action; provided, that a subsidiary of the Company may be merged into or consolidated with another subsidiary of the Company. 7 19 Compliance by Subsidiaries. The Company will cause any subsidiary -------------------------- it may organize in the future to comply fully with the provisions of this Section 7 to the same extent as if such subsidiary or subsidiaries were the Company. SECTION 8 Restrictions on Transferability of Securities; Compliance with Securities Act ------------------------------------------ 8.1 Restrictions on Transferability. The Shares and the Common Stock ------------------------------- issued upon conversion of the Shares shall not be transferable, except upon the conditions specified in this Section 8, which conditions are intended to insure compliance with the provisions of the Securities Act or, in the case of Section 8.14 hereof, to assist in an orderly distribution. Each Purchaser will cause any proposed transferee of Shares or Common Stock issued on conversion of the Shares held by that Purchaser to agree to take and hold those securities subject to the provisions and upon the conditions specified in this Section 8. 8.2 Certain Definitions. As used in this Section 8, the following terms ------------------- shall have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Restricted Securities" shall mean the securities of the Company required to bear or bearing the legend set forth in Section 8.3 hereof. "Registrable Securities" shall mean (i) shares of Common Stock issued or issuable upon the conversion of Preferred and (ii) any Common Stock issued in respect of securities issued pursuant to the conversion of Shares upon any stock split, stock dividend, recapitalization or similar event. The terms "register", "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses incurred by the Company in compliance with Sections 8.5 and 8.6 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses, and the expense of any special audits or accounting services incident to or required by -19- any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company). "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and disbursements of counsel for any Holder. "Holder" shall mean any holder of the outstanding Shares or Registrable Securities which have not been sold to the public. "Initiating Holders" shall mean any Purchasers or their assignees under Section 8.14 hereof. 8.3 Restrictive Legend. Each certificate representing (i) the Shares, ------------------ or (ii) shares of the Company's Common Stock issued upon conversion of Preferred, or (iii) any other securities issued in respect of Preferred or the Common Stock issued upon conversion of Preferred, upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted or unless the securities evidenced by such certificate shall have been registered under the Securities Act) be stamped or otherwise imprinted with a legend in the following form (in addition to any legend required under applicable state securities laws): THESE SECURITIES AND THE SHARES OF COMMON STOCK OF APPLIED MICRO CIRCUITS CORPORATION (THE "COMPANY") INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 NOR ANY STATE SECURITIES LAWS. THEY MAY NOT BE PLEDGED, SOLD, OFFERED FOR SALE, ASSIGNED OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF LUCE, FORWARD, HAMILTON & SCRIPPS OR REAVIS & MCGRATH OR OTHER COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THE COMPANY'S PURCHASE AGREEMENT DATED AS OF DECEMBER 8 , 1983 WITH THE PURCHASERS (AS IDENTIFIED THEREIN) CONTAINS ADDITIONAL PROVISIONS PERTAINING TO THE TRANSFER OF, AND RIGHTS ASSOCIATED WITH, THESE SECURITIES AND SUCH COMMON STOCK. A COPY OF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE COMPANY'S PRINCIPAL OFFICES. Upon request of a holder of such a certificate, the Company shall remove the foregoing legend from the certificate or issue to such holder a new certificate therefor free of any transfer legend, if, with such request, the Company shall have received either the opinion referred to in Section 8.4(i) or the "no-action" letter referred to in Section 8.4(ii) to the effect that any transfer by such holder of the securities evidenced by such certificate will not violate the Securities Act and applicable state securities laws. -20- 8.4 Notice of Proposed Transfers. The holder of each certificate ---------------------------- representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provisions of this Section 8.4. Prior to any proposed transfer of any Restricted Securities (other than under circumstances described in Sections 8.5 and 8.6), the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and shall be accompanied (except in transactions in compliance with Rule 144) by either (i) a written opinion of Reavis & McGrath or Luce, Forward, Hamilton & Scripps or other legal counsel who shall be reasonably satisfactory to the Company, addressed to the Company and reasonably satisfactory in form and substance to the Company's counsel, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Commission to the effect that the distribution of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, where-upon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Company. Each certificate evidencing the Restricted Securities transferred as above provided shall bear the appropriate restrictive legend set forth in Section 8.3 above, except that such certificate shall not bear such restrictive legend if the opinion of counsel or "no-action" letter referred to above is to the further effect that such legend is not required in order to establish compliance with any provisions of the Securities Act. 8.5 Requested Registration. ---------------------- (a) Request for Registration. If the Company shall receive from ------------------------ Initiating Holders a written request that the Company effect any registration with respect to all or a part of the Registrable Securities and (i) if such request is made before the Company has had its initial underwritten public offering, provided such request is made by the holders of not less than 67% of the total number of shares of Common Stock issued or issuable upon conversion of the Shares; or (ii) if such request is made after the Company has already had an initial underwritten public offering, provided such request is made by the holders of not less than 40% of the total number of shares of Common Stock issued or issuable upon conversion of the Shares, the Company will: (i) promptly give written notice of the proposed registration to all other Holders; and (ii) as soon as practicable, use its diligent best efforts to effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request given within thirty (30) days after receipt of such written notice from the -21- Company; provided, that the Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 8.5: (A) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act or applicable rules or regulations thereunder; or (B) After the Company has effected two such registrations pursuant to this Section 8.5(a) and such registrations have been declared or ordered effective and the sales of such Registrable Securities shall have closed. (C) If the written demand results in the Company's initial underwritten public offering, at least $10,000,000 in Common Stock must be sold by the Initiating Holders. If the written request does not result in the Company's initial underwritten public offering, a minimum of $5,000,000 in Common Stock must be sold by the Initiating Holders. Subject to the foregoing clauses (A), (B) and (C), the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable, after receipt of the request or requests of the Initiating Holders. The registration statement filed pursuant to the request of the Initiating Holders may, subject to the provisions of Section 8.5(b) below, include other securities of the Company which are held by officers or directors of the Company or which are held by persons who, by virtue of agreements with the Company, are entitled to include their securities in any such registration. (b) Underwriting. If the Initiating Holders intend to distribute the ------------ Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 8.5 and the Company shall include such information in the written notice referred to in Section 8.5(a)(i) above. The right of any Holder to registration pursuant to Section 8.5 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder with respect to such participation and inclusion) to the extent provided herein. A Holder may elect to include in such underwriting all or a part of the Registrable Securities he holds. If officers or directors of the Company holding other securities of the Company shall request inclusion in any registration pursuant to Section 8.5, or if holders of securities of the Company who are entitled, by contract with the Company, to have securities included in such a registration (the "Other Shareholders") request such inclusion, the Initiating Holders shall, on behalf of all Holders, offer to include the securities of such officers, directors and Other -22- Shareholders in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Section 8. The Company shall (together with all Holders, officers, directors and Other Shareholders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders and reasonably acceptable to the Company. Notwithstanding any other provision of this Section 8.5, if the representative advises the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, the securities of the Company held by officers or directors (other than Registrable Securities) of the Company shall be excluded from such registration to the extent so required by such limitation and if a limitation of the number of shares is still required, the Initiating Holders shall so advise all Holders of Registrable Securities and Other Shareholders whose securities would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities and other securities that may be included in the registration and underwriting shall be allocated among all such Holders and Other Shareholders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities and other securities which they had requested to be included in such registration at the time of filing the registration statement. No Registrable Securities or any other securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any Holder of Registrable Securities, officer, director or Other Shareholder who has requested inclusion in such registration as provided above disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the Initiating Holders. The securities so withdrawn shall also be withdrawn from registration. If the underwriter has not limited the number of Registrable Securities or other securities to be underwritten, the Company may include its securities for its own account in such registration if the underwriter so agrees and if the number of Registrable Securities and other securities which would otherwise have been included in such registration and underwriting will not thereby be limited. 8.6 Company Registration. -------------------- (a) If the Company shall determine to register any of its securities either for its own account or the account of a security holder or holders exercising their respective demand registration rights, other than a registration relating solely to employee benefit plans, or a registration relating solely to a Commission Rule 145 transaction, or a registration on any registration form which does not permit secondary sales or does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities, the Company will: (i) promptly give to each Holder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and (ii) include in such registration (and any related qualification under blue sky laws or other compliance), and in any underwriting involved therein, all the Registrable -23- Securities specified in a written request or requests, made by any Holder within fifteen (15) days after receipt of the written notice from the Company described in clause (i) above, except as set forth in Section 8.6(b) below. Such written request may specify all or a part of a Holder's Registrable Securities. (b) Underwriting. If the registration of which the Company gives ------------ notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 8.6(a)(i). In such event the right of any Holder to registration pursuant to Section 8.6 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the Other Shareholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for underwriting by the Company. Notwithstanding any other provision of this Section 8.6, if the underwriter determines that marketing factors require a limitation on the number of shares to be underwritten, and (a) if such registration is the first registered offering of the Company's securities to the public, the underwriter may (subject to the allocation priority set forth below) exclude from such registration and underwriting some or all of the Registrable Securities which would otherwise be underwritten pursuant hereto, and (b) if such registration is other than the first registered offering of the sale of the Company's securities to the public, the underwriter may (subject to the allocation priority set forth below) limit the number of Registrable Securities to be included in the registration and underwriting to not less than fifty percent (50%) of the securities included therein (based on aggregate market values). The Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated in the following manner. The securities of the Company held by officers and directors of the Company (other than Registrable Securities) shall be excluded from such registration and underwriting to the extent required by such limitation, and, if a limitation on the number of shares is still required, the number of shares that may be included in the registration and underwriting shall be allocated among all such Holders and Other Shareholders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities and other securities which they had requested to be included in such registration at the time of filing the registration statement. If any Holder of Registrable Securities or any officer, director or Other Shareholder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. 8.7 Expenses of Registration. All Registration Expenses incurred in ------------------------ connection with any registration, qualification or compliance pursuant to this Section 8 shall be borne by the Company, and all Selling Expenses shall be borne by the holders of the securities so registered pro rata on the basis of the number of their shares so registered; provided, however, that the Company shall not be required to pay any Registration Expenses if, as a result of the withdrawal of a request for registration by Initiating Holders, the registration statement does not become -24- effective, in which case the Holders and Other Shareholders requesting registration shall bear such Registration Expenses pro rata on the basis of the number of their shares so included in the registration request, and provided, further, that if a sale is not concluded once a request for registration is made, such registration shall be counted as a registration pursuant to Section 8.5(a)(ii)(B). 8.8 Registration on Form S-2 or Form S-3. The Company shall use its ------------------------------------ best efforts to qualify for registration on Form S-2 and Form S-3 or any comparable or successor form or forms; and to that end the Company shall register (whether or not required by law to do so) the Common Stock under the Exchange Act in accordance with the provisions of that Act following the effective date of the first registration of any securities of the Company on Form S-1 or Form S-18 or any comparable or successor form or forms. After the Company has qualified for the use of either Form S-2 or Form S-3 or both, in addition to the rights contained in the foregoing provisions of this Section 8, the Holders of Registrable Securities shall have the right to request registrations on Form S-2 or Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended methods of disposition of such shares by such Holder or Holders). 8.9 Registration Procedures. In the case of each registration effected ----------------------- by the Company pursuant to Section 8, the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will: (a) Keep such registration effective for a period of one hundred twenty (120) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; provided, however, that (i) such 120-day periods shall be extended for a period of time equal to the period the Holder refrains from selling any securities included in such registration in accordance with provisions in paragraph 8.15 hereof; and (ii) in the case of any registration of Registrable Securities on Form S-3 which are intended to be offered on a continuous or delayed basis, such 120-day period shall be extended, if necessary, to keep the registration statement effective until all such Registrable Securities are sold, provided that Rule 415, or any successor rule under the Securities Act, permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Securities Act governing the obligation to file a post-effective amendment, permit, in lieu of filing a post-effective amendment which (y) includes any prospectus required by Section l0(a)(3) of the Securities Act or (z) reflects facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of information required to be included in (y) and (z) above to be contained in periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the registration statement; (b) Furnish such number of prospectuses and other documents incident thereto as a Holder from time to time may reasonably request; and (c) In connection with any underwritten offering pursuant to a registration statement filed pursuant to Section 8.5 hereof, the Company will enter into any underwriting -25- agreement reasonably necessary to effect the offer and sale of Common Stock, provided such underwriting agreement contains customary underwriting provisions and provided further that if the underwriter so requests the underwriting agreement will contain customary contribution provisions. 8.10 Indemnification. --------------- (a) The Company will indemnify each Holder, each of its officers, directors and partners, and each person controlling such Holder, with respect to which registration, qualification or compliance has been effected pursuant to this Section 8, and each underwriter, if any, and each person who controls any underwriter, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Holder or underwriter and stated to be specifically for use therein. (b) Each Holder and Other Shareholder will, if Registrable Securities held by him are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of the Securities Act and the rules and regulations thereunder, each other such Holder and Other Shareholder and each of their officers, directors and partners, and each person controlling such Holder or Other Shareholder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and such Holders, Other Shareholders, directors, officers, partners, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is -26- made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder or Other Shareholder and stated to be specifically for use therein; provided, however, that the obligations of such Holders and Other Shareholders hereunder shall be limited to an amount equal to the proceeds to each such Holder or Other Shareholder of securities sold as contemplated herein. (c) Each party entitled to indemnification under this Section 8.10 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 8. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. 8.11 Information by Holder. Each Holder of Registrable Securities, and --------------------- each Other Shareholder holding securities included in any registration, shall furnish to the Company such information regarding such Holder or Other Shareholder and the distribution proposed by such Holder or Other Shareholder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Section 8. 8.12 Limitations on Registration of Issues of Securities. From and --------------------------------------------------- after the date of this Agreement, the Company shall not enter into any agreement with any holder or prospective holder of any securities of the Company giving such holder or prospective holder the right to require the Company to initiate any registration of any securities of the Company, provided that this Section 8.12 shall not limit the right of the Company to enter any agreements with any holder or prospective holder of any securities of the Company giving such holder or prospective holder the right to require the Company, upon any registration of any of its securities, to include, among the securities which the Company is then registering, securities owned by such holder; and provided further that a majority of the representatives of the Purchasers on the Board of Directors may waive the requirement that the Company not enter into any agreement giving a holder of any securities of the Company the right to require the Company to initiate registration of any securities of the Company. Any right given by the Company to any holder or prospective -27- holder of the Company's securities in connection with the registration of securities shall be conditioned such that it shall be consistent with the provisions of this Section 8 and with the rights of the Holders provided in this Agreement. 8.13 Rule 144 Reporting. With a view to making available the benefits ------------------ of certain rules and regulations of the Commission which may permit the sale of the Restricted Securities to the public without registration, the Company agrees to: (a) Make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act, at all times from and after ninety (90) days following the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public; (b) Use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements; (c) So long as a Purchaser owns any Restricted Securities, furnish to the Purchaser forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after ninety (90) days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as a Purchaser may reasonably request in availing itself of any rule or regulation of the Commission allowing a Purchaser to sell any such securities without registration. 8.14 Transfer or Assignment of Registration Rights. The rights to cause --------------------------------------------- the Company to register securities granted to any Holder by the Company under Sections 8.5, 8.6 and 8.8 may be transferred or assigned by any Holder to a transferee or assignee, provided that the Company is given written notice at the time of or within a reasonable time after said transfer or assignment, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned, and provided further that the transferee or assignee of such rights is not deemed by the Board of Directors of the Company, in its reasonable judgment, to be a competitor of the Company; and provided further that the transferee or assignee of such rights assumes the obligations of such Purchaser under this Section 8. 8.15 "Market Stand-off" Agreement. Each Purchaser agrees, if requested ---------------------------- by the Company and an underwriter of Common Stock (or other securities) of the Company, not to sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by it during the ninety (90) day period following the effective date of a registration statement of the Company filed under the Securities Act, provided that: -28- (a) such agreement only applies to the first such registration statement of the Company including securities to be sold on its behalf to the public in an underwritten offering; and (b) all Holders, Other Shareholders and officers and directors of the Company enter into or are contractually obligated to enter into similar agreements. Such agreement shall be in writing in a form satisfactory to the Company and such underwriter. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of said ninety (90) day period. SECTION 9 Miscellaneous ------------- 9.1 Governing Law. This Agreement shall be governed in all respects by ------------- the laws of the State of California. 9.2 Survival. The representations, warranties, covenants and agreements ------- made herein shall survive (i) any investigation made by or on behalf of any Purchaser and (ii) the Closing. 9.3 Successors and Assigns. Except as otherwise expressly provided ---------------------- herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto; provided, however, the Company may not assign its rights hereunder. 9.4 Entire Agreement; Amendment. This Agreement (including the -------------------------- Schedules and Exhibits hereto) and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated, except by a written instrument signed by the Company and the Purchasers; provided, however, that holders of sixty percent (60%) or more of the Shares sold under this Agreement or such number of shares of Common Stock issued upon conversion of those sixty percent (60%) of the Shares, or any combination thereof, may by written instrument waive or modify any term or condition which operates for the benefit of the Purchasers, but in no event shall the obligation of any Purchaser hereunder to purchase Shares be increased, except upon the written consent of such Purchaser. 9.5 Notices, etc. All notices and other communications required or ------------ permitted hereunder shall be in writing and shall be mailed by first-class mail, postage prepaid, or delivered either by hand or by messenger, addressed (a) if to a Purchaser, as indicated on the Schedule of Purchasers attached hereto, or at such other address as such Purchaser shall have furnished to the Company in writing, or (b) if to any other holder of any Shares or any Common Stock issued upon conversion of Shares, at such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the -29- address of the last holder thereof who has so furnished an address to the Company, or (c) if to the Company, at its address set forth at the beginning of this Agreement, or at such other address as the Company shall have furnished to you and each such other holder in writing. 9.6 Delays or Omissions. No delay or omission to exercise any right, ------------------- power or remedy accruing to any holder of any Shares, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement, or any waiver on the part of any holder of any provisions or conditions of this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 9.7 Rights; Separability. Unless otherwise expressly provided herein, -------------------- each Purchaser's rights hereunder are several rights, not rights jointly held with any of the other Purchasers. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 9.8 Agent's Fees. ------------ (a) The Company hereby agrees to indemnify and to hold each Purchaser harmless of and from any liability for any commission or compensation in the nature of an agent's fee to any broker or other person or firm (and the costs and expenses of defending against such liability or asserted liability) arising from any act by the Company or any of its employees or representatives. (b) Each Purchaser (i) represents and warrants that it has retained no finder or broker in connection with the transactions contemplated by this Agreement and (ii) hereby agrees to indemnify and to hold the Company and the other Purchasers harmless from any liability for any commission or compensation in the nature of an agent's fee to any broker or other person or firm (and the costs and expenses of defending against such liability or asserted liability) for which it, or any of its employees or representatives, are responsible. 9.9 Information Confidential. Each Purchaser acknowledges that the ------------------------ information received by it pursuant hereto may be confidential and for its use only, and it will not use such confidential information in violation of the Exchange Act or reproduce, disclose, disseminate or make any use of such information to any other person (other than your employees or agents having a need to know the contents of such information, and your attorneys), except in connection with the exercise of rights under this Agreement, unless the Company has made such information available to the public generally or the Purchaser is required to disclose such information by a governmental body. -30- 9.10 Expenses. The Company shall bear its own expenses and legal fees -------- incurred on its behalf with respect to this Agreement and the transactions contemplated hereby, and the Company will pay the legal fees, disbursements and office expenses and charges, of Reavis & McGrath with respect to this Agreement and the transactions contemplated hereby to the extent provided in Section 5.13 hereof. 9.11 Titles and Subtitles. The titles of the paragraphs and -------------------- subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 9.12 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 9.13 California Qualification. The sale of the securities which are the ------------------------ subject of this Agreement has not been qualified with the Commissioner of Corporations of the State of California and the issuance of such securities or the payment or receipt of any part of the consideration therefor prior to such qualification is unlawful. The rights of all parties with respect to such securities are expressly conditioned upon such qualification being obtained. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the day and year first written above. APPLIED MICRO CIRCUITS CORPORATION By: ---------------------------------- President PURCHASERS: --------------------------------------- --------------------------------------- --------------------------------------- --------------------------------------- --------------------------------------- --------------------------------------- -31- SCHEDULE OF SERIES 1 PURCHASERS -------------------------------
Principal Amount Total of Debentures Total Name and Address Shares Being Tendered Investment - ------------------------ -------------------- ----------------------- -------------------- TOTAL ----------------------
TOTAL SCHEDULE OF SERIES 2 PURCHASERS -------------------------------------
Total Total Name and Address Shares Investment - -------------------------------------- --------------------- ----------------------- TOTAL ----------------------
SCHEDULE OF EXCEPTIONS ---------------------- The following list of exceptions refers to the paragraphs of the Applied Micro Circuits Corporation, Convertible Preferred Stock, Series 1 and Series 2, Purchase Agreement dated as of December 8, 1983. Paragraph Reference - --------- 3.4 As of October 31, 1983, options to purchase 3,352,147 common shares were outstanding to certain employees of the Company pursuant to the "1982 Employee Incentive Stock Option Plan of Applied Micro Circuits Corporation" ("ISO Plan"). The exercise price of these options is twelve and one half cents ($.125) per share. As of October 31, 1983, 227,307 of these outstanding options were exercisable. Additionally at that date there were options for 121,654 shares which were authorized under the ISO Plan but had not been granted. The outstanding options become exercisable over the next 5 years. As outlined in the Memorandum, after the completion of the present financing, management will request that up to 500,000 additional options be authorized for future grants. The number of outstanding common shares may change slightly by the Closing Date if some currently outstanding options are exercised between October 31, 1983 and the Closing Date. 3.6 The Company's largest order (in the amount of $5.5 million, of which $3.0 million was released as of 10/31/83) is from a military customer. Pursuant to government procurement regulations, this customer's purchase order was issued at a "not- to-exceed" price to permit shipments and acceptance and payment to proceed pending approval of the standard government cost justification documentation. AMCC carries this order in backlog at the "not-to-exceed" prices and has reported major sales in September and October, 1983 based on these "not-to-exceed" prices. The customer has also paid the September invoices as submitted. The Company does not feel that any material price adjustment will be made as a result of the final fixed price to be negotiated based on the cost disclosure information. 3.8 The Company leases facilities in San Diego and Cupertino. These lease obligations are not reflected on the Balance Sheet. 3.11 See disclosure of facilities leases in 3.16 below. 3.11(a) See disclosure of stock options in 3.4 above. 3.11(b) The existing outstanding 8% Convertible Subordinated Debentures have been disclosed elsewhere. 3.11(c) The Company has agreements with various sales representatives which provide for sales commissions generally ranging from five (5) to ten (10) percent of sales in the representatives territory. These are agreements that are typical in the industry. -2- 3.11(e) Outstanding Contractual Commitments ------------------------------------- As of November 11, 1983 the following contractual commitments were outstanding.
Vendor Item/Service P.O. Value - ------ ------------ -------------- Cambridge Instruments, Inc. Scanning Electron Microscope $ 99,190 Kyocera International, Inc. 64 1d. package for WINGS 333,850 Kyocera International, Inc. 84 PGA package for TULIP 151,630 Zylin Corporation Metal Etch System 255,000 Fairchild Test Systems Sentry 20 Test System 920,500 Signetics Corporation Junction Isolated Wafers 793,100 Daisy Workstations 110,000 Arrowhead Industrial Water D.I. Water 5 yr. contract with 54 months remaining at $5,000/month 270,000 Master Images Blanket order for masks 265,000 Pantronix Corporation Contract assembly service 125,000 Union Carbide Bulk gases (H2, 02, N2) 5 yr. contract with 56 months remaining at $7,500/mo. 412,500 Applied Materials Oxide Etch System 338,875 Ultratech Stepper 3 projection stepper (orders for 2 are cancellable at no charge until 6/84) $1,006,200
Note: B. A. Leasing, see Section 3.15. Building Leases, see Section 3.16. -3- 3.11(h) Thomson Agreement ----------------- AMCC has established Thomson-EFCIS as a nontransferrable European second source for Thomson Group needs as well as Thomson-EFCIS external markets. AMCC will not enter into a second source agreement for the Q700 family of a similar scope with any third party semiconductor manufacturer in France over the 5-year contract period which commenced June 1982. 3.12 As of October 31, 1983, non-recourse promissory notes to the Company were outstanding in the total amount of $338,960, representing the purchase price for 11,308 shares of common stock issued to employees under the Company's Key Employee Stock Purchase Plan. The Company currently subcontracts its PC board layout work to Southland Engineering, a company owned by an AMCC engineer. Competitive bids are reviewed routinely for this ongoing effort which is estimated to approximate $11,000 annually. The Company also subcontracts certain engineering prototype assembly work to United Semiconductor Assembly, a company partially owned by a Quality Assurance employee. Competitive bids are reviewed routinely for this on-going effort, which is estimated to approximate $4,000 annually. 3.13 On December 7, 1982, a customer, International Telemetrics, Ltd. filed a complaint against the Company alleging breach of contract and other related claims. These claims derived from a contract between International Telemetrics and the Company and involved engineering design work for an integrated circuit for an electronic metronome. The amount of this design contract was approximately $10,000. The aggregate amount claimed in the complaint is $1,510,000. The Company does not believe that there is substance to the claims, or that a material liability will result from this lawsuit. 3.15 As part of the $2 million lease line with B.A. Leasing, AMCC has agreed to maintain as collateral for the lease payments, cash equivalent instruments to be held by Bank of America, in the amount of 12 months of future lease payments. As of September 30, 1983 and November 11, 1983, such collateral amounted to approximately $301,000. This amount of the Company's cash and cash equivalents are restricted. These collateral amounts will be increased as the amount of leased equipment is increased. The collateral will be -4- released as certain levels of profitability, and lease payment coverage ratios are met. This collateral will be released during fiscal 1985 if the Company's projections are met. 3.16 The Company leases a 21,000 square foot facility at 5502 Oberlin Drive in San Diego, in which its offices and manufacturing are located. This lease is for 10 years from May, 1983, with initial monthly payments of approximately $17,500, which payments will be subject to inflation-related increases. This lease is for the land, building and a portion of the leasehold improvements. In November, 1983, the Company signed a lease for an additional 13,643 square foot facility at 5501 Oberlin Drive in San Diego, into which its engineering, design, and administrative offices will be relocated in approximately January 1984. The lease term is for three years with renewal options and monthly payments of approximately $11,000, which payments will be subject to inflation-related increases. The lease is for land, building and the majority of required leaseholder improvements. Additional leasehold improvements of approximately $67,000 will be installed and paid for in cash by the Company. The Company leases 2,000 square feet of space in Cupertino, CA at a cost of $2,094 per month and this lease expires in May, 1984. This space is not currently used by AMCC and is being sublet to a tenant at a monthly rent of $2,094. The Company has a $2 million equipment lease line with B.A. Leasing, a Bank of America affiliate, approximately $1.2 million of which was utilized as of September 30, 1983. The Company is currently completing negotiations for an additional $4.0 million lease line (for a total of $6.0 million) arranged through B.A. Leasing. These leases are reflected on the Company's balance sheet as they are concluded. The Company subleases approximately $600,000 of equipment from Solitron Devices. Solitron has asserted that certain additional lease payments are due from AMCC. The Company disputes this allegation, believes that it is without merit, and feels that there will be no material liability that will result from this allegation. 3.17 The Company has been given notice by Motorola and AT&T that they believe AMCC may be infringing certain patents held by their respective companies. The Company is evaluating the patent infringement claims and feels that there will be no material liability that will result from these claims. The purpose of the contacts by -5- these companies was to sign AMCC as a licensee of patents covering processes and circuits that may be used by AMCC. Such licensing agreements at modest royalty rates are typical in the industry and if AMCC were to enter such licensing agreements, they would not constitute a material liability to AMCC. 3.18 See Patent discussion in Section 3.17. 3.32 The currently outstanding Debentures have certain registration rights. -6- SCHEDULE OF EXCEPTIONS ---------------------- The following list of exceptions refers to the paragraphs of the Applied Micro Circuits Corporation, Convertible Preferred Stock, Series 1 and Series 2, Purchase Agreement dated as of December 8, 1983. Paragraph Reference - --------- 3.4 As of October 31, 1983, options to purchase 3,352,147 common shares were outstanding to certain employees of the Company pursuant to the "1982 Employee Incentive Stock Option Plan of Applied Micro Circuits Corporation" ("ISO Plan"). The exercise price of these options is twelve and one half cents ($.125) per share. As of October 31, 1983, 227,307 of these outstanding options were exercisable. Additionally at that date there were options for 121,654 shares which were authorized under the ISO Plan but had not been granted. The outstanding options become exercisable over the next 5 years. As outlined in the Memorandum, after the completion of the present financing, management will request that up to 500,000 additional options be authorized for future grants. The number of outstanding common shares may change slightly by the Closing Date if some currently outstanding options are exercised between October 31, 1983 and the Closing Date. 3.6 The Company's largest order (in the amount of $5.5 million, of which $3.0 million was released as of 10/31/83) is from a military customer. Pursuant to government procurement regulations, this customer's purchase order was issued at a "not- to-exceed" price to permit shipments and acceptance and payment to proceed pending approval of the standard government cost justification documentation. AMCC carries this order in backlog at the "not-to-exceed" prices and has reported major sales in September and October, 1983 based on these "not-to-exceed" prices. The customer has also paid the September invoices as submitted. The Company does not feel that any material price adjustment will be made as a result of the final fixed price to be negotiated based on the cost disclosure information. 3.8 The Company leases facilities in San Diego and Cupertino. These lease obligations are not reflected on the Balance Sheet. 3.11 See disclosure of facilities leases in 3.16 below. -7- 3.11(a) See disclosure of stock options in 3.4 above. 3.11(b) The existing outstanding 8% Convertible Subordinated Debentures have been disclosed elsewhere. 3.11(c) The Company has agreements with various sales representatives which provide for sales commissions generally ranging from five (5) to ten (10) percent of sales in the representative's territory. These are agreements that are typical in the industry. -8- 3.11(e) Outstanding Contractual Commitments ----------------------------------- As of November 11, 1983 the following contractual commitments were outstanding.
Vendor Item/Service P.O. Value - ------ ------------ -------------- Cambridge Instruments, Inc Scanning Electron Microscope $ 99,190 Kyocera International, Inc 64 1d. package for WINGS 333,850 Kyocera International, Inc. 84 PGA package for TULIP 151,630 Zylin Corporation Metal Etch System 255,000 Fairchild Test Systems Sentry 20 Test System 920,500 Signetics Corporation Junction Isolated Wafers 793,100 Daisy Workstations 110,000 Arrowhead Industrial Water D.I. Water 5 yr. contract with 54 months remaining at $5,000/month 270,000 Master Images Blanket order for masks 265,000 Pantronix Corporation Contract assembly service 125,000 Union Carbide Bulk gases (H2, 02, N2) 5 yr. contract with 56 months remaining at $7,500/mo. 412,500 Applied Materials Oxide Etch System 338,875 Ultratech Stepper 3 projection stepper (orders for 2 are cancellable at no charge until 6/84) $1,006,200
Note: B. A. Leasing, see Section 3.15. Building Leases, see Section 3.16. -9- 3.11(h) Thomson Agreement ----------------- AMCC has established Thomson-EFCIS as a nontransferrable European second source for Thomson Group needs as well as Thomson-EFCIS external markets. AMCC will not enter into a second source agreement for the Q700 family of a similar scope with any third party semiconductor manufacturer in France over the 5-year contract period which commenced June 1982. 3.12 As of October 31, 1983, non-recourse promissory notes to the Company were outstanding in the total amount of $338,960, representing the purchase price for 11,308 shares of common stock issued to employees under the Company's Key Employee Stock Purchase Plan. The Company currently subcontracts its PC board layout work to Southland Engineering, a company owned by an AMCC engineer. Competitive bids are reviewed routinely for this ongoing effort which is estimated to approximate $11,000 annually. The Company also subcontracts certain engineering prototype assembly work to United Semiconductor Assembly, a company partially owned by a Quality Assurance employee. Competitive bids are reviewed routinely for this on-going effort, which is estimated to approximate $4,000 annually. 3.13 On December 7, 1982, a customer, International Telemetrics, Ltd. filed a complaint against the company alleging breach of contract and other related claims. These claims derived from a contract between International Telemetrics and the Company and involved engineering design work for an integrated circuit for an electronic metronome. The amount of this design contract was approximately $10,000. The aggregate amount claimed in the complaint is $1,510,000. The Company does not believe that there is substance to the claims, or that a material liability will result from this lawsuit. 3.15 As part of the $2 million lease line with B.A. Leasing, AMCC has agreed to maintain as collateral for the lease payments, cash equivalent instruments to be held by Bank of America, in the amount of 12 months of future lease payments. As of September 30, 1983 and November 11, 1963, such collateral amounted to approximately $301,000. This amount of the Company's cash and cash equivalents are restricted. These collateral amounts will be increased as the amount of leased equipment is increased. The collateral will be -10- released as certain levels of profitability, and lease payment coverage ratios are met. This collateral will be released during fiscal 1985 if the Company's projections are met. 3.16 The Company leases a 21,000 square foot facility at 5502 Oberlin Drive in San Diego, in which its offices and manufacturing are located. This lease is for 10 years from May, 1983, with initial monthly payments of approximately $17,500, which payments will be subject to inflation-related increases. This lease is for the land, building and a portion of the leasehold improvements. In November, 1983, the Company signed a lease for an additional 13,643 square foot facility at 5501 Oberlin Drive in San Diego, into which its engineering, design, and administrative offices will be relocated in approximately January 1984. The lease term is for three years with renewal options and monthly payments of approximately $11,000, which payments will be subject to inflation-related increases. The lease is for land, building and the majority of required leaseholder improvements. Additional leasehold improvements of approximately $67,000 will be installed and paid for in cash by the Company. The Company leases 2,000 square feet of space in Cupertino, CA at a cost of $2,094 per month and this lease expires in May, 1984. This space is not currently used by AMCC and is being sublet to a tenant at a monthly rent of $2,094. The Company has a $2 million equipment lease line with B.A. Leasing, a Bank of America affiliate, approximately $1.2 million of which was utilized as of September 30, 1983. The Company is currently completing negotiations for an additional $4.0 million lease line (for a total of $6.0 million) arranged through B.A. Leasing. These leases are reflected on the Company's balance sheet as they are concluded. The Company subleases approximately $600,000 of equipment from Solitron Devices. Solitron has asserted that certain additional lease payments are due from AMCC. The Company disputes this allegation, believes that it is without merit, and feels that there will be no material liability that will result from this allegation. 3.17 The Company has been given notice by Motorola and AT&T that they believe AMCC may be infringing certain patents held by their respective companies. The Company is evaluating the patent infringement claims and feels that there will be no material liability that will result from these claims. The purpose of the contacts by -11- these companies was to sign AMCC as a licensee of patents covering processes and circuits that may be used by AMCC. Such licensing agreements at modest royalty rates are typical in the industry and if AMCC were to enter such licensing agreements, they would not constitute a material liability to AMCC. 3.18 See Patent discussion in Section 3.17. 3.32 The currently outstanding Debentures have certain registration rights. -12- EX-10.8 14 CONVERTIBLE PREFERRED STOCK SERIES 3 EXHIBIT 10.8 APPLIED MICRO CIRCUITS CORPORATION 5502 OBERLIN DRIVE SAN DIEGO, CALIFORNIA 92121 __________________________ CONVERTIBLE PREFERRED STOCK SERIES 3 PURCHASE AGREEMENT As of September 16, 1987 __________________________ TABLE OF CONTENTS ----------------- PAGE ---- SECTION 1 - Authorization, Purchase and Sale of the Shares.................. 1 1.1 Authorization of the Shares........................................ 1 1.2 Sale and Purchase of the Shares.................................... 1 SECTION 2 - Closing, Payment and Delivery................................... 1 2.1 Closing Date and Place of Closing.................................. 1 2.2 Payment and Delivery............................................... 2 SECTION 3 - Representations and Warranties of the Company................... 2 3.1 Organization and Standing; Certificate and Bylaws.................. 2 3.2 Corporate Power.................................................... 2 3.3 Subsidiaries....................................................... 3 3.4 Capitalization..................................................... 3 3.5 Authorization...................................................... 3 3.6 Financial Information.............................................. 4 3.7 Outstanding Debt................................................... 4 3.8 Absence of Undisclosed Liabilities................................. 4 3.9 Absence of Certain Changes......................................... 4 3.10 Taxes............................................................. 5 3.11 Contracts; Insurance.............................................. 5 3.12 Shareholders, Directors and Officers; Indebtedness................ 7 3.13 Litigation and Bankruptcy Proceedings............................. 7 3.14 Consents.......................................................... 7 3.15 Title to Properties; Liens and Encumbrances....................... 8 3.16 Leases............................................................ 8 3.17 Business of the Company........................................... 8 3.18 Franchises, Licenses, Trademarks, Patents and Other Rights........ 8 3.19 Issuance Taxes.................................................... 8 3.20 Offering.......................................................... 8 3.21 Compliance with Other Instruments................................. 9 3.22 Employees......................................................... 9 3.23 Registration Rights............................................... 9 3.24 Disclosure........................................................ 9 3.25 Invention Assignment and Secrecy Agreements....................... 9 3.26 Distributions or Sale of Assets................................... 9 3.27 Certain Transactions.............................................. 10 3.28 Labor Agreements and Actions...................................... 10 SECTION 4 - Representations and Warranties of Purchasers.................... 10 4.1 Experience......................................................... 10 4.2 Investment......................................................... 10 TABLE OF CONTENTS ----------------- (continued) PAGE ---- 4.3 Rule 144........................................................... 10 4.4 Access to Data..................................................... 11 4.5 Preexisting Relationship; Business Experience...................... 11 4.6 Ability to Bear Risk............................................... 11 4.7 Accredited Investor................................................ 11 SECTION 5 - Conditions to Closing of Purchasers............................. 11 5.1 Representations and Warranties Correct............................. 11 5.2 Performance........................................................ 11 5.3 Opinion of Company's Counsel....................................... 12 5.4 Legal Investment................................................... 12 5.5 Compliance Certificate............................................. 12 5.6 Proceedings and Documents.......................................... 12 5.7 Authorizations..................................................... 12 5.8 Restated Certificate of Incorporation.............................. 12 5.9 Minimum Investment................................................. 12 5.10 Key Man Life Insurance............................................ 12 5.11 Legal Fees........................................................ 12 5.12 Notice of Limited Offering Exemption.............................. 12 5.13 Registration Rights............................................... 13 5.14 Resignation....................................................... 13 SECTION 6 - Conditions to Closing of Company................................ 13 6.1 Representations.................................................... 13 6.2 Legal Investment................................................... 13 6.3 Minimum Investment................................................. 13 SECTION 7 - Covenants of the Company........................................ 13 7.1 Access and Information............................................. 13 7.2 Right of First Refusal............................................. 15 7.3 Prom first Payment of Taxes, etc................................... 16 7.4 Maintenance of Properties and Leases............................... 17 7.5 Insurance.......................................................... 17 7.6 Key Man Life Insurance............................................. 17 7.7 Accounts and Records............................................... 17 7.8 Independent Accountants............................................ 17 7.9 Compliance with Requirements of Governmental Authorities........... 18 7.10 Maintenance of Corporate Existence, etc........................... 18 7.11 Availability of Common Stock for Conversion....................... 18 7.12 Invention Assignment and Secrecy Agreements....................... 18 7.13 Further Stock Issuances........................................... 18 7.14 Use of Proceeds................................................... 18 7.15 Regulation D Filing............................................... 18 7.16 Notice of Record Dates............................................ 18 -ii- TABLE OF CONTENTS ----------------- (continued) PAGE ---- 7.17 Notice of Limited Offering Exemption.............................. 19 7.18 Certain Restrictions.............................................. 19 7.19 Compliance by Subsidiaries........................................ 19 SECTION 8 - Restrictions on Transferability of Securities; Compliance with Securities Act.............................................................. 19 8.1 Restrictions on Transferability.................................... 19 8.2 Certain Definitions................................................ 19 8.3 Restrictive Legend................................................. 20 8.4 Notice of Proposed Transfers....................................... 21 8.5 Requested Registration............................................. 21 8.6 Company Registration............................................... 24 8.7 Expenses of Registration........................................... 25 8.8 Registration on Form S-2 or Form S-3............................... 25 8.9 Registration Procedures............................................ 26 8.10 Indemnification................................................... 27 8.11 Information by Holder............................................. 28 8.12 Limitations on Registration of Issues of Securities............... 28 8.13 Rule 144 Reporting................................................ 29 8.14 Transfer or Assignment of Registration Rights..................... 29 8.15 "Market Stand-Off" Agreement...................................... 29 SECTION 9 - Miscellaneous................................................... 30 9.1 Governing Law...................................................... 30 9.2 Survival........................................................... 30 9.3 Successors and Assigns............................................. 30 9.4 Entire Agreement; Amendment........................................ 30 9.5 Notices, etc....................................................... 31 9.6 Delays or Omissions................................................ 31 9.7 Rights; Separability............................................... 31 9.8 Agent's Fees....................................................... 31 9.9 Information Confidential........................................... 32 9.10 Expenses.......................................................... 32 9.11 Titles and Subtitles.............................................. 32 9.12 Counterparts...................................................... 32 9.13 Aggregation....................................................... 32 -iii- TABLE OF CONTENTS ----------------- (continued) PAGE ---- Schedule of Purchasers Schedule of Exceptions to Representations and Warranties Exhibit A - Amended and Restated Certificate of Incorporation Exhibit B - Form of Invention Assignment and Secrecy Agreement and Invention and Secrecy Agreement Exhibit C - Rule 501(a) of Regulation D Exhibit D - Opinion of Luce, Forward, Hamilton & Scripps -iv- CONVERTIBLE PREFERRED STOCK SERIES 3 ------------------------------------ PURCHASE AGREEMENT ------------------ AGREEMENT made as of the 16th day of September 1987, by and among APPLIED MICRO CIRCUITS CORPORATION (the "Company"), a California corporation having offices at 5502 Oberlin Drive, San Diego, California 92121, and each of the persons severally listed on the Schedule of Purchasers attached hereto (the "Schedule of Purchasers"). The persons listed on the Schedule of Purchasers are sometimes hereinafter referred to as the "Purchasers" and individually as a "Purchaser." WHEREAS, the Company desires to issue and sell, and the Purchasers desire to purchase, certain securities of the Company; NOW, THEREFORE, in consideration of the promises and the mutual covenants and conditions herein contained, the Company and each Purchaser, severally and not jointly, hereby agree as follows: SECTION 1 Authorization, Purchase and Sale of the Shares ---------------------------------------------- 1.1 Authorization of the Shares. The Company has, or before the Closing --------------------------- (as hereinafter defined) will have, authorized the sale and issuance of up to Five hundred ninety-one thousand nine hundred and sixty-four (591,964) shares (the "Series 3 Shares") of its Preferred Stock, Series 3 ("Series 3 Preferred") having the respective rights, restrictions, privileges and preferences as set forth in the Amended and Restated Certificate of Incorporation of the Company (the "Restated Certificate") attached to this Agreement as Exhibit A. The Series 3 Shares are sometimes hereinafter referred to as the "Shares," and the Series 1, Series 2 and Series 3 Preferred Stock of the Company are sometimes hereinafter collectively referred to as the "Preferred." 1.2 Sale and Purchase of the Shares. At the Closing (as defined in ------------------------------- Section 2.1 hereof), and subject to the terms and conditions hereof and in reliance upon the representations, warranties and agreements contained herein, the Company will issue and sell to the Purchasers listed on the Schedule of Purchasers and each such Purchaser will purchase from the Company the number of Series 3 Shares set forth opposite its name in the column entitled "Total Shares" on the Schedule of Purchasers at the price of $21.00 per share in the total amount set forth opposite its name in the column labeled "Total Investment." SECTION 2 Closing, Payment and Delivery ----------------------------- 2.1 Closing Date and Place of Closing. The closing of the purchase an --------------------------------- sale of the Shares hereunder (the "Closing") in the amounts and to the persons specified in the Schedule of Purchasers shall be held immediately following the execution and delivery of this Agreement (the "Closing Date"). The place of the Closing (including the place of delivery to the Purchasers by the Company of the certificates evidencing all Shares being purchased and the place of payment to the Company by the Purchasers of the purchase price therefor) shall be at the offices of Luce, Forward, Hamilton & Scripps, 4250 Executive Square, La Jolla, California, or such other place as a majority in interest of the Purchasers shall designate by notice to the Company given at least five (5) business days prior to the Closing Date. 2.2 Payment and Delivery. At the Closing, each Purchaser of Series 3 -------------------- Shares will pay for such shares by surrender of the Company's 8 1/2% Promissory Notes (the "Notes") held by such Purchaser for cancellation of a principal amount equal to the amount set forth next to such purchaser's name on the Schedule of Purchasers under the column "Principal Amount of Notes Being Tendered" and/or by cash or by check, wire transfer, cancellation of other indebtedness or such other form of payment or combination thereof as shall be mutually agreed upon by the Company and each respective Purchaser. The Company will deliver to each Purchaser a certificate or certificates representing the number of Series 3 Shares purchased as set forth opposite such Purchaser's name in the column labeled "Total Shares" on the Schedule of Purchasers. SECTION 3 Representations and Warranties of the Company --------------------------------------------- The Company hereby represents and warrants to the Purchasers as follows, except as set forth on the "Schedule of Exceptions" delivered to the Purchasers prior to the execution hereof and attached hereto. 3.1 Organization and Standing; Certificate and Bylaws. The Company is a ------------------------------------------------- corporation duly organized and existing under the laws of the State of Delaware and is in good standing under such laws. The Company has requisite corporate power to own the properties owned by it and to conduct business as being conducted by it and as contemplated by the Company's Confidential Private Placement Memorandum dated June 10, 1987, and the Supplement thereto dated August 28, 1987, with respect to the sale of the Shares (collectively the "Memorandum"). The Company is duly qualified to do business as a foreign corporation in good standing in each jurisdiction in which the character and location of its properties (owned or leased) or the nature of its business requires such qualification, except for such jurisdictions where the failure to so qualify would not materially and adversely affect the business, operations or financial condition of the Company. The Company has furnished special counsel to the Purchasers with true, correct and complete copies of its Certificate of Incorporation, Bylaws and all amendments to each to date. Prior to the Closing, the Restated Certificate shall have been properly adopted by all necessary corporate action and the Company shall have properly filed the Restated Certificate with the Secretary of State of Delaware. 3.2 Corporate Power. The Company has all requisite corporate power to --------------- enter into this Agreement and will have at the Closing Date all requisite corporate power to sell the Shares and to carry out and perform its obligations under the terms of this Agreement. -2- 3.3 Subsidiaries. The sole subsidiary of the Company is AMCC (Europe) ------------ Ltd. ("Subsidiary"). The Subsidiary is a corporation duly organized and validly existing under the laws of the United Kingdom and is in good standing under such laws. All of the shares of capital stock of the Subsidiary have been duly and validly authorized and issued and, with the exception of one qualifying share beneficially owned for the benefit of the Company by Joel O. Holliday, Vice President, Finance and Administration of the Company, all of such shares of capital stock are held beneficially and of record by the Company, free and clear of any liens or encumbrances. The Company has no other subsidiaries and does not own of record or beneficially any capital stock or equity interest or investment in any corporation, association or business entity. 3.4 Capitalization. Immediately prior to the Closing, the Company's -------------- authorized capital stock will consist of (i) Twenty-eight million (28,000,000) shares of Common Stock (the "Common Stock"), of which 3,475,386 shares are currently issued and outstanding, and) (b) 1,350,000 shares of Preferred Stock, including: (i) Four hundred ten thousand (410,000) shares of Preferred Stock, Series 1 ("Series 1 Preferred"), of which 408,692 shares are currently issued and outstanding, (ii) Three hundred thousand (300,000) shares of Preferred Stock, Series 2 ("Series 2 Preferred"), 238,096 shares of which are currently issued and outstanding, and (iii) Five hundred ninety-one thousand nine hundred and sixty-four (591,964) shares of Series 3 Preferred, no shares of which will be issued and outstanding prior to the Closing. All the aforesaid issued and outstanding shares will have been duly authorized and validly issued, will be fully paid and nonassessable, and have been offered, issued, sold and delivered by the Company in compliance with applicable federal and state securities laws. An aggregate of 19,424,747 shares of Common Stock have been reserved for issuance upon conversion of the Series 1 Preferred, Series 2 Preferred and Series 3 Preferred. There are no outstanding preemptive, conversion or other rights, options, warrants or agreements granted or issued by or binding upon the Company for the purchase or acquisition of any shares of its capital stock, except with respect to the Series 3 Preferred in accordance with the provisions of this Agreement and with respect to the Series 1 and Series 2 Preferred as set forth in the Schedule of Exceptions. To the best of the Company's knowledge and belief, no shareholder has granted options or other rights to purchase any securities of the Company from such shareholder other than as set forth in the Schedule of Exceptions hereto. The Company holds no shares of its capital stock in its treasury. 3.5 Authorization. All corporate action on the part of the Company, its ------------- directors and shareholders necessary for the authorization, execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated herein, and for the authorization, issuance and delivery of the Shares and of the Common Stock issuable upon conversion thereof has been taken or will be taken prior to the Closing. This Agreement is a valid and binding obligation of the Company, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws of general application affecting enforcement of creditors rights generally and principles of equity relating to specific enforcement of this Agreement. The execution, delivery and performance by the Company of this Agreement and compliance therewith and the issuance and sale of the Shares and Common Stock issuable upon conversion of the Shares will not result in any violation of and will not conflict with, or result in a breach of any of the material terms of, or -3- constitute a default under, any provision of state or Federal law to which the Company is subject, the Company's Certificate of Incorporation, or Bylaws, as amended, or any mortgage, indenture, agreement, instrument, judgment, decree, order, rule or regulation or other restriction to which the Company is a party or by which it is bound, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company pursuant to any such term. No shareholder or other person has any preemptive rights or rights of first refusal by reason of the issuance of the Shares, except as set forth in the Schedule of Exceptions and all such rights, if any, have been complied with or validly waived. The Shares, when issued in compliance with the provisions of this Agreement, will be validly issued, fully paid and nonassessable, and will be free of any liens, charges or encumbrances subject to applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws of general application affecting enforcement of creditors rights generally. The shares of Common Stock issuable upon conversion of the Shares have been duly and validly reserved and are not subject to any preemptive rights or rights of first refusal not waived or validly complied with and, upon issuance, will be validly issued, fully paid and nonassessable. 3.6 Financial Information. The audited financial statements of the --------------------- Company as of March 31, 1987, and the unaudited interim financial statements as of July 31, 1987 and the respective notes thereto, included in the Memorandum, a copy of which has been delivered to each Purchaser (collectively, the "Financial Statements"), including the balance sheet as of July 31, 1987 (the "Balance Sheet") and a Statement of Income for the four month period ended July 31, 1987 (the "Income Statement"), present fairly the financial position and results of operations of the Company at the dates and for the periods to which they relate, have been prepared in accordance with generally accepted accounting principles consistently followed throughout the periods involved and show all material liabilities, absolute or contingent, of the Company required to be recorded thereon in accordance with generally accepted accounting principles as at the respective dates thereof. 3.7 Outstanding Debt. The Company has no outstanding indebtedness or ---------------- borrowed money except as reflected on the Balance Sheet or as set forth on the Schedule of Exceptions and is not a guarantor or otherwise contingently liable for any such indebtedness. There exists no material default under the provisions of any instrument evidencing such indebtedness or of any agreement relating thereto. 3.8 Absence of Undisclosed Liabilities. The Company has no material ---------------------------------- liabilities (fixed or contingent, including without limitation any tax liabilities due or to become due) which are not fully reflected or provided for on the Balance Sheet, except as listed on the Schedule of Exceptions. The Company does not know of any material liability of any nature, direct or indirect, contingent or otherwise, or in any amount not adequately reflected or reserved against in the Balance Sheet, except as set forth on the Schedule of Exceptions. 3.9 Absence of Certain Changes. Except to the extent described in the -------------------------- Schedule of Exceptions, since July 31, 1987 there has not been: -4- (a) any material adverse change in the condition, assets, liabilities or business of the Company from that shown on the Balance Sheet; (b) any damage, destruction or loss of any of the properties or assets of the Company (whether or not covered by insurance) materially and adversely affecting the business or plans of the Company; (c) any declaration, setting aside or payment or other distribution in respect of any of the Company's capital stock, or any direct or indirect redemption, purchase or other acquisition of any of such stock by the Company; (d) any labor dispute, or to the Company's knowledge or belief, any event or condition of any character, materially and adversely affecting the business or plans of the Company; (e) any material change or amendment to any material contract or arrangement by which the Company or any of its assets or properties is subject or is bound; or (f) any material change in any compensation arrangement or agreement with any employee. 3.10 Taxes. The Company has filed or will file within the time ----- prescribed by law (including extensions of time approved by the appropriate taxing authority) all tax returns and reports required to be filed with the United States Internal Revenue Service and with the State of California, and (except to the extent that the failure to file would not have a material adverse effect on the condition or operations of the Company) with all other jurisdictions where such filing is required by law; and the Company has paid, or made adequate provision in the Balance Sheet for the payment of, all taxes, interest, penalties, assessments or deficiencies shown to be due or claimed to be due on or in respect of such tax returns and reports. The Company knows of (i) no other tax returns or reports which are required to be filed which have not been so filed and (ii) no unpaid assessment for additional taxes for any fiscal period or any basis thereof. The Company's federal income tax returns have not been audited by the Internal Revenue Service. 3.11 Contracts; Insurance. Except as set forth in the Schedule of -------------------- Exceptions, the Company has no currently existing contract, obligation or commitment (written or oral) of any material nature pursuant to which the Company's obligations exceed $100,000 or which has a term greater than five years, including without limitation the following: (a) Employment, bonus or consulting agreements, pension, profit sharing, deferred compensation, stock bonus, retirement, stock option, stock purchase, phantom stock or similar plans, including agreements evidencing rights to purchase securities of the Company and agreements among shareholders and the Company; (b) Loan or other agreements, notes, indentures, or instruments relating to or evidencing indebtedness for borrowed money, or mortgaging, pledging or granting or creating a lien or security interest or other encumbrance on any of the Company's property or any -5- agreement or instrument evidencing any guaranty by the Company of payment or performance by any other Person; (c) Agreements with dealers, sales representatives, brokers or other distributors, jobbers, advertisers or sales agencies; (d) Agreements with any labor union or collective bargaining organization or other labor agreements; (e) Any contract or series of contracts with the same person for the furnishing or purchase of machinery, equipment, goods or services, including without limitation agreements with processors and subcontractors; (f) Any indenture, agreement or other document (including private placement brochures) relating to the sale or repurchase of shares; (g) Any joint venture contract or arrangement or other agreement involving a sharing of profits or expenses to which the Company is a party; (h) Agreements limiting the freedom of the Company to compete in any line of business or in any geographic area or with any person; (i) Agreements providing for disposition of the business, assets or shares of the Company, agreements of merger or consolidation to which the Company is a party or letters of intent with respect to the foregoing; (j) Agreements involving or letters of intent with respect to the acquisition of the business, assets or shares of any other business; and (k) Insurance policies. (1) Agreements, understandings, contracts or proposed transactions to which the Company is a party or by which it is bound which may involve the license of any patent, copyright, trade secret or other proprietary right to or from the Company. The Company has complied with all the material provisions of all said contracts, obligations, and commitments and is not in default of any such provision thereunder. The Company maintains insurance which is adequate to protect the Company against the risks involved in the business conducted by it as is customarily maintained by well-managed companies engaged in similar activities. The Company has in full force and effect fire and casualty insurance policies, with extended coverage, sufficient in amount (subject to reasonable deductibles) to allow it to replace any of its properties that might be damaged or destroyed. The Company is not a party to and is not bound by any contract, agreement or instrument, or subject to any restriction under its Certificate of Incorporation, which adversely affects its -6- business as now conducted or as proposed to be conducted, its properties or its financial condition. 3.12 Shareholders, Directors and Officers; Indebtedness. Set forth on -------------------------------------------------- the Schedule of Exceptions is a correct and complete list or description of all indebtedness of the Company to its officers, directors or shareholders or any of their respective relatives and of all indebtedness of such persons to the Company. To the best of the Company's knowledge and belief, none of the officers, significant employees or consultants of the Company, or their respective spouses or relatives, owns directly or indirectly, individually or collectively, a material interest in any entity which is a competitor, customer or supplier of (or has any existing contractual relationship with) the Company. 3.13 Litigation and Bankruptcy Proceedings. ------------------------------------- (a) There is neither pending nor, to the Company's knowledge and belief, threatened any action, suit, proceeding or claim, or any basis therefor or threat thereof, whether or not purportedly on behalf of the Company, to which the Company is or may be named as a party or its property is or may be subject and in which an unfavorable outcome, ruling or finding might have a material adverse effect on the condition, financial or otherwise, or operations of the Company; and the Company has no knowledge of any unasserted claim, the assertion of which is likely and which, if asserted, will seek damages, an injunction or other legal, equitable, monetary or nonmonetary relief which, if granted, would have a material adverse effect on the condition, financial or otherwise, or operations of the Company, nor is the Company aware of any basis for the foregoing. (b) The Company has not admitted in writing its inability to pay its debts generally as they become due, filed or consented to the filing against it of a petition in bankruptcy or a petition to take advantage of any insolvency act, made an assignment for the benefit of creditors, consented to the appointment of a receiver for itself or for the whole or any substantial part of its property, or had a petition in bankruptcy filed against it, been adjudicated a bankrupt, or filed a petition or answer seeking reorganization or arrangement under the Federal bankruptcy laws or any other law or statute of the united States of America or any other jurisdiction. 3.14 Consents. All consents, approvals, qualifications, orders, -------- approvals or authorizations of, or filings with, any governmental authority required in connection with the Company's valid execution, delivery and performance of this Agreement, and the offer, sale and issuance of the Shares by the Company, the conversion of the Shares and the consummation of any other transaction contemplated on the part of the Company hereby, shall have been duly obtained and shall be effective on and as of the Closing, except the filing referred to in Section 7.17 hereof, notices of sale required to be filed pursuant to Regulation D under the Securities Act of 1933, filings required by the State securities laws of jurisdictions other than California in which the Purchasers reside and except such filings as have been made prior to the Closing. -7- 3.15 Title to Properties; Liens and Encumbrances. The Company does not ------------------------------------------- have any ownership interest in real property. The Company has a valid and indefeasible ownership interest in all the property and assets recorded on the Balance Sheet, free from all pledges, liens, security interests, conditional sale agreements, encumbrances or charges, except as shown on the Balance Sheet or listed on the Schedule of Exceptions. 3.16 Leases. The Company's material lease obligations are disclosed in ------ the Financial Statements and there has been no material change in such obligations since July 31, 1987. The Company enjoys peaceful and undisturbed possession under all its material leases of real or personal property, all such leases are valid and subsisting and none of them is in default in any material respect. 3.17 Business of the Company. The Company has no knowledge or belief ----------------------- that (i) there is pending or threatened any claim or litigation against or affecting the Company contesting its right to produce, manufacture, sell or use any product, process, method, substance, part or other material presently produced, manufactured, sold or used or planned to be produced, manufactured, sold or used by the Company in connection with the operations of the Company; or (ii) there exists, or there is pending or planned, any patent, invention, device, application or principle, or any statute, rule, law, regulation, standard or code which would materially adversely affect the condition, financial or otherwise, or the operations of the Company. The Company currently intends to engage in the business of the same general type as described in the Memorandum. 3.18 Franchises, Licenses, Trademarks, Patents and Other Rights. The ---------------------------------------------------------- Company has all franchises, permits, certificates, authorizations, licenses and other similar authority required by law or governmental regulations from all applicable Federal, state or local authorities and any other regulatory authorities or necessary for the conduct of its business as now being conducted by it and as planned to be conducted, the lack of which could materially and adversely affect the operations or condition, financial or otherwise, of the Company, and it is not in default in any material respect under any of such franchises, permits, certificates, authorizations, licenses or other similar authority. The Company possesses all patents, patent rights, trademarks, trademark rights, trade names, trade name rights and copyrights necessary to conduct its business as now being conducted and as planned to be conducted without conflict with or infringement upon any valid rights of others and the lack of which could materially and adversely affect the operations or condition, financial or otherwise, of the Company, and has not received any notice of infringement upon or conflict with the asserted rights of others. 3.19 Issuance Taxes. All taxes imposed by law in connection with the -------------- issuance, sale and delivery of the Shares shall have been fully paid, and all laws imposing such taxes shall have been fully complied with, prior to the Closing Date. 3.20 Offering. Subject in part to the truth and accuracy of the -------- Purchasers' representations set forth in this Agreement, the offer, sale and issuance of the Shares and the Common Stock issuable upon conversion of the Shares as contemplated by this Agreement are exempt from the registration requirements of the Securities Act of 1933, as amended (the -8- "Securities Act", which term shall include any successor federal statute), and from the qualification requirements of the California Corporate Securities Law of 1968, as amended, and neither the Company nor anyone acting on its behalf will take any action hereafter that would cause the loss of such exemptions. 3.21 Compliance with Other Instruments. The Company is not in violation --------------------------------- of any term of its Certificate of Incorporation as amended prior to the adoption of the Restated Certificate, the Restated Certificate or its Bylaws, as amended. The Company is not in violation of any term of any mortgage, indenture, contract, agreement, instrument, judgment, decree, order, statute, rule or regulation to which the Company is subject and a violation of which would have a material adverse effect on the condition, financial or otherwise, or operations of the Company. 3.22 Employees. To the best of the Company's knowledge and belief, no --------- employee of the Company is, or is now expected to be, in violation of any term of any employment contract, patent disclosure agreement, non-competition agreement, or any other contract or agreement or any restrictive covenant relating to the right of any such employee to be employed by the Company because of the nature of the business conducted or to be conducted by the Company or to the use of trade secrets or proprietary information of others, and the employment of the Company's employees does not subject the Company or any Purchaser to any liability. The Company does not have any collective bargaining agreement covering any of its employees 3.23 Registration Rights. Except as set forth in the Schedule of ------------------- Exceptions and as provided for in this Agreement, the Company is not under any obligation to register (as defined in Section 8.2 below) any of its currently outstanding securities or any of its securities which may hereafter be issued. 3.24 Disclosure. The Company has provided each Purchaser with all ---------- information which such Purchaser has requested for deciding whether to purchase the Series 3 Preferred Stock and all information which the Company believes is reasonably necessary to enable each Purchaser to make such decision. This Agreement, the Schedule of Exceptions, the Memorandum and the Financial Statements delivered to the purchasers do not contain any untrue statement of a material fact and do not omit to state a material fact necessary in order to make the statements contained therein or herein not misleading in the light of the circumstances under which they were made. 3.25 Invention Assignment and Secrecy Agreements. Each person employed ------------------------------------------- by the Company who has access to proprietary information concerning the Company has executed and delivered to the Company either an Invention Assignment and Secrecy Agreement or an Invention and Secrecy Agreement, the forms of which are annexed hereto as Exhibit B. 3.26 Distributions or Sale of Assets. The Company has not (i) paid or ------------------------------- declared any dividends or authorized or made any distribution upon or with respect to any class or series of its capital stock, or (ii) exchanged or otherwise disposed of any material assets or rights, other than the sale of its inventory in the ordinary course of business. -9- 3.27 Certain Transactions. The Company has not engaged in the past -------------------- three (3) months in any discussion (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, coveyance or disposition of all or substantially all of the assets of the Company or a transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, or (iii) regarding any other form of acquisition, liquidation, dissolution or winding up of the Company. 3.28 Labor Agreements and Actions. The Company is not bound by or ---------------------------- subject to (and none of its assets or properties is bound by or subject to) any written or oral, express or implied, contract, commitment or arrangement with any labor union, and no labor union has requested or, to the knowledge of the Company, has sought to represent any of the employees, representatives or agents of the Company. There is no strike or other labor dispute involving the Company pending, or to the knowledge of the Company threatened, which could have a material adverse effect on the assets, properties, financial condition, operating results, or business of the Company (as such business is presently conducted and as it is proposed to be conducted), nor is the Company aware of any labor organization activity involving its employees. The Company is not aware that any officer or key employee, or that any group of key employees, intends to terminate their employment with the Company, nor does the Company have a present intention to terminate the employment of any of the foregoing. The employment of each officer and, to the best of the Company's knowledge, each employee of the Company is terminable at the will of the Company. SECTION 4 Representations and Warranties of Purchasers -------------------------------------------- Each Purchaser represents and warrants to the Company, severally and not jointly, and only as to himself or itself, as follows: 4.1 Experience. He or it is experienced in evaluating and investing in ---------- newly organized, high technology companies such as the Company. 4.2 Investment. He or it is acquiring the Shares for Investment for his ---------- or its own account and not with the view to, or for resale in connection with, any distribution thereof. He or it understands that the Shares and the shares of Common Stock issuable upon conversion of the Shares have not been registered under the Securities Act by reason of a specified exemption from the registration provisions of the Securities Act which depends upon, among other things, the bona fide nature of his or its investment intent as expressed herein. 4.3 Rule 144. He or it acknowledges that the Shares must be held -------- indefinitely unless they are subsequently registered under the Act or an exemption from such registration is available. He or it has been advised or is aware of the provisions of Rule 144 promulgated under the Securities Act, which permits limited resale of shares purchased in a private placement subject to the satisfaction of certain conditions, including, among other things, the availability of -10- certain current public information about the Company, the resale occurring not less than two years after a party has purchased and paid for the security to be sold, the sale being through a "broker's transaction" and the number of shares being sold during any three-month period not exceeding specified limitations. 4.4 Access to Data. He or it has had an opportunity to discuss the -------------- Company's business, management and financial affairs with its management and has had the opportunity to examine the Company's facilities. 4.5 Preexisting Relationship; Business Experience. He or it has either --------------------------------------------- (i) a preexisting personal or business relationship with the Company or any of its officers, directors or controlling persons of a nature and duration as would allow him or it to be aware of the character, business acumen, general business and financial circumstances of the Company or of the person with whom such relationship exists, or (ii) by reason of his or its business or financial experience or the business or financial experience of his or its professional advisor(s) who is (are) unaffiliated with and is (are) not compensated by the Company or any affiliate or selling agent of the Company, directly or indirectly, has the capacity to protect his or its interests in connection with the purchase of the Shares of the Company and Common Stock issuable upon conversion thereof. 4.6 Ability to Bear Risk. He or it is able to bear the economic risk of -------------------- his or its investment in the Shares of the Company and the Common Stock issuable upon conversion thereof. 4.7 Accredited Investor. He or it is an accredited investor as that ------------------- term is defined in Rule 501(a) of Regulation D under the Securities Act, a copy of which is attached hereto as Exhibit C. SECTION 5 Conditions to Closing of Purchasers ----------------------------------- The obligation of each Purchaser to purchase the Shares to be purchased at the Closing is subject to the fulfillment to their satisfaction on or prior to the Closing Date of each of the following conditions: 5.1 Representations and Warranties Correct. The representations an -------------------------------------- warranties made by the Company in Section 3 hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects on the Closing Date with the same force and effect as if they had been made on and as of the Closing Date. 5.2 Performance. All covenants, agreements and conditions contained in ----------- this Agreement to be performed or complied with by the Company on or prior to the Closing Date shall have been performed or complied with in all respects. -11- 5.3 Opinion of Company's Counsel. Each Purchaser shall have received ---------------------------- from Luce, Forward, Hamilton & Scripps, counsel to the Company, an opinion addressed to it, dated the Closing Date, and in substantially the form attached as Exhibit D hereto. 5.4 Legal Investment. At the time of the Closing, the purchase of the ---------------- Shares to be purchased by each Purchaser hereunder shall be legally permitted by all laws and regulations to which the Purchasers and the Company are subject. 5.5 Compliance Certificate. The Company shall have delivered to each ---------------------- Purchaser a certificate of the President of the Company, dated the Closing Date, certifying to the fulfillment of the conditions specified in Sections 5.1 and 5.2 of this Agreement. 5.6 Proceedings and Documents. All corporate and other proceedings in ------------------------- connection with the transactions contemplated hereby and all documents and instruments incident to such transactions shall be satisfactory in substance and form to each Purchaser and its counsel. 5.7 Authorizations. All authorizations, approvals, notices or permits, -------------- if any, of any governmental authority or regulatory body that are required in connection with the lawful issuance and sale of the Shares pursuant to this Agreement, the conversion of the Shares into Common Stock, the issuance of such Common Stock upon such conversion and the consummation of all the transactions contemplated hereby shall have been duly obtained and shall be effective on and as of the Closing. 5.8 Restated Certificate of Incorporation. The Restated Certificate ------------------------------------- shall have been approved by all necessary corporate action and filed with tile Secretary of State of the State of Delaware and shall be in full force and effect. 5.9 Minimum Investment. At the Closing, the Purchasers shall purchase ------------------ Series 3 Shares for an aggregate purchase price of not less than $10,000,000. 5.10 Key Man Life Insurance. The Company agrees that it will obtain ---------------------- with financially sound and reputable insurers term life insurance on the lives of such officers and employees of the Company in such amounts as the majority of the members of the Board of Directors shall determine. 5.11 Legal Fees. Company will pay the legal fees, disbursements and ---------- office charges and expenses of Brobeck, Phleger & Harrison special counsel to the Purchasers, with respect to this Agreement and the transactions contemplated hereby. 5.12 Notice of Limited Offering Exemption. The Company shall have ------------------------------------ completed and executed a "Notice of Transaction pursuant to Corp. Code 25102(f)" in form suitable for filing with the Commissioner of Corporations of the State of California with respect to the Shares and the shares of Common Stock issuable upon conversion of the Shares. -12- 5.13 Registration Rights. Registration rights of holders of Series 1 ------------------- Preferred and Series 2 Preferred shall have been modified to provide for rights identical to those set forth in Section 8 hereof. 5.14 Resignation. One current director of the Company shall have ----------- submitted his resignation to the Company. SECTION 6 Conditions to Closing of Company -------------------------------- The Company's obligation to sell the Shares to be purchased at the Closing is subject to the fulfillment to its satisfaction on or prior to the Closing Date of each of the following conditions: 6.1 Representations. The representations made by the Purchasers --------------- pursuant to Section 4 hereof shall be true and correct when made and shall be true and correct on the Closing Date. 6.2 Legal Investment. At the time of the Closing, the conditions set ---------------- forth in Sections 5.8, 5.9 and 5.10 shall have occurred and the purchase of the Shares to be purchased by the Purchasers hereunder shall be legally permitted by all laws and regulations to which each Purchaser and the Company are subject. 6.3 Minimum Investment. At the Closing, the Purchasers shall purchase ------------------ Series 3 Shares for an aggregate purchase price of not less than $10,000,000. SECTION 7 Covenants of the Company ------------------------ The Company hereby covenants and agrees, so long as any Purchaser owns any Shares or any shares of Common Stock issued upon conversion of the Shares, as follows: 7.1 Access and Information. Until the earlier to occur of (i) the date ---------------------- on which the Company is subject to the reporting requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, or (ii) the date on which quotations for the Common Stock of the Company are reported by the automated quotations system operated by the National Association of Securities Dealers, Inc., or by an equivalent quotations system, the Company will permit any Purchaser who owns (or has been designated as the representative of holders of) Series 3 Shares (or shares of Common Stock issued upon conversion thereof) in the aggregate purchase price of $250,000 or more to visit and inspect any of the properties of the Company, including its books of account, and to discuss its affairs, finances and accounts with the Company's officers and its independent public accountants, all at such reasonable times and as often as any such person may reasonably request, and the Company will deliver the reports described below: -13- (a) To all Purchasers of the Shares, as soon as practicable after the end of each fiscal year of the Company, and in any event within ninety (90) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as at the end of such fiscal year, and consolidated statements of income and sources and applications of funds of the Company and its subsidiaries, if any, for such year, prepared in accordance with generally accepted accounting principles consistently applied and setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and certified by independent public accountants of recognized national standing selected by the Company; (b) To each Purchaser who owns (or has been designated as the representative of holders of) Series 3 Shares (or shares of Common Stock issued upon conversion thereof) in the aggregate purchase price of $250,000 or more as soon as practicable after the end of the first, second and third quarterly accounting periods in each fiscal year of the Company, and in any event within forty-five (45) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of each such quarterly period, and consolidated statements of income and sources and applications of funds of the Company and its subsidiaries for such period and for the current fiscal year to date, prepared in accordance with generally accepted accounting principles consistently applied and setting forth in comparative form the figures for the corresponding periods of the previous fiscal year, subject to changes resulting from year-end audit adjustments, all in reasonable detail and certified by the principal financial or accounting officer of the Company; (c) To each Purchaser described in subparagraph (b) above, as soon as practicable after the end of each month and in any event within thirty (30) days thereafter, a consolidated balance sheet of the Company and its subsidiaries, if any, as of the end of such month, and consolidated statements of income and of sources and applications of funds of the Company and its subsidiaries, for each month and for the current fiscal year of the Company to date, prepared in accordance with generally accepted accounting principles consistently applied, together with a comparison of such statements to the Company's operating plan then in effect and approved by its Board of Directors, and certified, subject to changes resulting from year-end audit adjustments, by the principal financial or accounting officer of the Company; and (d) To any Purchaser described in subparagraph (b) above, upon the written request of any such person, as soon as available (but in any event within sixty (60) days after the commencement of its fiscal year) a summary of the financial plan of the Company, as contained in its operating plan approved by the Company's Board of Directors. Any material changes in such financial plan shall be furnished as promptly as practicable after such changes have been approved by the Board of Directors. In connection with the receipt of information to be provided in accordance herewith to the Purchasers, the Purchasers agree to use their best efforts to keep all such information confidential, provided that a Purchaser shall not be restricted from the use of such information in a manner customary in the conduct of such Purchaser's business or in the management of its investments. The Company shall not be obligated to provide access to any information which it reasonably considers to be a trade secret or similar confidential information unless the requesting -14- Purchaser shall consent to terms and conditions reasonably calculated to preserve the proprietary or confidential nature of the information. The foregoing provisions of this Section 7.1 shall not be in limitation of any rights which a Purchaser may have with respect to the books and records of the Company and its subsidiaries, or to inspect their properties or discuss their affairs, finances and accounts, under the laws of the jurisdictions in which they are incorporated. 7.2 Right of First Refusal. The Company hereby grants to each Purchaser ---------------------- the right of first refusal to purchase, pro rata with the holders of Series 1 and Series 2 Preferred, all (or any part) of New Securities (as defined in this Section 7.2) which the Company may, from time to time, propose to sell and issue. For purposes of this Section 7.2, "Purchaser" includes any general partners and affiliates of a Purchaser. A Purchaser shall be entitled to allocate the right of first refusal hereby granted it among itself, its partners and affiliates, as it deems appropriate. A Purchaser's pro rata share, for purposes of this right of first refusal, is the ratio of the number of shares of Common Stock which have been issued or are issuable upon conversion of all the Shares purchased by such Purchaser under this Agreement to the sum of the total number of shares of Common Stock which have been issued upon conversion and the total number of shares of Common Stock then issuable upon conversion of all then outstanding shares of Preferred. Each Purchaser shall have a right of over- allotment such that if any Purchaser fails to exercise his right hereunder to purchase his pro rata portion of New Securities, the other Purchasers may purchase the non-purchasing Purchaser's portion on a pro rata basis (allocated equitably on the basis of the other Purchasers' relative holdings of shares of Common Stock issued or issuable upon conversion of the Preferred and indications of interest on the applicable subscriptions) within ten (10) days from the date such non-purchasing Purchaser fails to exercise his right hereunder to purchase his pro rata share of New Securities, provided, that the Company shall provide prompt notice of such failure to exercise the right of first refusal after which such ten (10) day period shall begin. This right of first refusal shall be subject to the following provisions: (a) "New Securities" shall mean any capital stock (including the Common Stock or the Preferred) of the Company whether now authorized or not, and rights, options or warrants to purchase capital stock, and securities of any type whatsoever that have voting rights or are, or may become, convertible into capital stock; provided that the term "New Securities" shall not include (i) securities purchased under this Agreement; (ii) securities offered to the public pursuant to a registration statement filed pursuant to the Securities Act; (iii) securities issued pursuant to the acquisition of another corporation by the Company by merger, purchase of substantially all the assets or other reorganization whereby the Company owns not less than fifty-one percent (51%) of the voting power of such corporation; (iv) any borrowings, direct or indirect, from financial institutions or other persons by the Company, whether or not presently authorized, including any type of loan or payment evidenced by any type of debt instrument, provided such borrowings do not have any equity features, including warrants, options or other rights to purchase capital stock, and are not convertible into capital stock of the Company; (v) securities constituting Management Stock (as such term is defined in Section 7.13 hereof); (vi) securities issued upon voluntary or involuntary conversion of, or in exchange for, -15- outstanding securities of the Company, including, but not limited to, shares of Common Stock issued upon conversion of the Preferred or (vii) warrants to purchase an aggregate of 20,534 shares of the Series 3 Preferred to be issued to holders of the Notes (the "Warrants"); or (viii) the shares of Series 3 Preferred issued upon exercise of the Warrants, including shares of Common Stock issuable upon conversion thereof. (b) In the event the Company proposes to undertake an issuance of New Securities, it shall give each Purchaser written notice of its intention, describing the type of New Securities, the price and the general terms upon which the Company proposes to issue the same. Each Purchaser shall have thirty (30) days from the date of receipt of any such notice to agree to purchase the Purchaser's pro rata share of such New Securities for the price and upon the general terms specified in the notice by giving written notice to the Company and stating therein the quantity of New Securities to be purchased. (c) In the event the Purchasers fail to exercise the right of first refusal within said thirty (30) day period and after the expiration of the 5-day period for the exercise of the over-allotment provisions of this Section 7.2, the Company shall have one hundred twenty (120) days thereafter to sell or enter into an agreement (pursuant to which the sale of New Securities covered thereby shall be closed, if at all, within one hundred twenty (120) days from the date of said agreement), to sell the New Securities respecting which the Purchasers option was not exercised, at a price and upon general terms no more favorable to the purchasers thereof than specified in the Company's notice. In the event the Company has not sold within said 120-day period or entered into an agreement to sell the New Securities within said 120-day period (or sold and issued New Securities in accordance with the foregoing within one hundred twenty (120) days from the date of said agreement), the Company shall not thereafter issue or sell any New Securities, without first offering such securities to the Purchasers in the manner provided above. (d) The right of first refusal granted under this Agreement shall expire upon the closing of the first sale of Common Stock of the Company to the public at or above a per share offering price of at least $4.20 which sale is effected pursuant to a registration statement filed with, and declared effective by, the Securities and Exchange Commission (the "Commission") under the Securities Act, with gross proceeds to the Company as seller of not less than $10,000,000. (e) The right of first refusal set forth in this Section 7.2 may be assigned by any Purchaser to a transferee or assignee in a transaction not involving a public offering; provided that the Company is given written notice at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and identifying the purchaser whose right is being assigned; and provided further that the transferee or assignee of such right is not deemed by the Board of Directors of the Company, in its reasonable judgment, to be a competitor of the Company; and provided further that the transferee or assignee of such rights assumes the obligations of such Purchaser under this Section 7.2. 7.3 Prompt Payment of Taxes, etc. The Company will promptly pay and ----------------------------- discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and -16- governmental charges or levies imposed upon the income, profits, property or business of the Company or any subsidiary; provided, however, that any such tax, assessment, charge or levy need not be paid if the validity thereof shall currently be contested in good faith by appropriate proceedings and if the Company shall have set aside on its books adequate reserves with respect thereto required to be established by generally accepted accounting principles, and provided, further, that the Company will pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefor. The Company will promptly pay or cause to be paid when due, or in conformance with customary trade terms, all other indebtedness incident to operations of the Company, unless such indebtedness is being contested in good faith, in which case the Company will establish an appropriate reserve to the extent required by generally accepted accounting principles. 7.4 Maintenance of Properties and Leases. The Company will keep its ------------------------------------ properties and those of its subsidiaries in good repair, working order and condition, reasonable wear and tear excepted, and from time to time make all needful and proper repairs, renewals, replacements, additions and improvements thereto; and the Company and its subsidiaries will at all times comply with each provision of all leases to which any of them is a party or under which any of them occupies property if the breach of such provision might have a material adverse effect on the condition, financial or otherwise, or operations of the Company. 7.5 Insurance. The Company will keep its assets and those of its --------- subsidiaries which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion and other risks customarily insured against by companies in the Company's line of business, in amounts sufficient to prevent the Company or any subsidiary from becoming a co- insurer and not in any event less than 100% of the insurable value of the property insured; and the Company will maintain, with financially sound and reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner customary for companies in similar businesses similarly situated. 7.6 Key Man Life Insurance. The Company will cause the term life ---------------------- insurance required by Section 5.10 hereof to be maintained upon the terms and conditions set forth therein, as determined by a majority of the members of the Board of Directors. 7.7 Accounts and Records. The Company will keep true records and books -------------------- of account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and affairs in accordance with generally accepted accounting principles applied on a consistent basis. 7.8 Independent Accountants. The Company will retain independent public ----------------------- accountants of recognized national standing who shall certify the Company's financial statements at the end of each fiscal year. In the event the services of the independent public accountants, so selected, or any firm of independent public accounts hereafter employed by the Company are terminated, the Company will promptly thereafter notify the Purchasers and will request the firm of independent public accountants whose services are terminated to deliver to the Purchasers a letter of such firm setting forth the reasons for the termination of their services. -17- In the event of such termination, the Company will promptly thereafter engage another such firm of independent public accountants. In its notice to the Purchasers, the Company shall state whether the change of accountants was recommended or approved by the Board of Directors or any committee thereof. 7.9 Compliance with Requirements of Governmental Authorities. The -------------------------------------------------------- Company shall duly observe and conform to all valid requirements of governmental authorities relating to the conduct of their businesses or to their properties or assets. 7.10 Maintenance of Corporate Existence, etc. The Company shall ---------------------------------------- maintain in full force and effect its corporate existence, rights and franchises and all licenses and other rights to use patents, processes, licenses, trademarks, trade names or copyrights owned or possessed by it or any subsidiary and deemed by the Company to be necessary to the conduct of their business. 7.11 Availability of Common Stock for Conversion. The Company will, ------------------------------------------- from time to time, in accordance with the laws of the state of its incorporation, increase the authorized amount of Common Stock if at any time the number of shares of Common Stock remaining unissued and available for issuance shall be insufficient to permit conversion of all the then outstanding shares of Preferred. 7.12 Invention Assignment and Secrecy Agreements. The Company and each ------------------------------------------- person hereafter employed by it with access to confidential information will enter into an Invention and Secrecy Agreement in substantially the form of Exhibit B hereto. 7.13 Further Stock Issuances. Other than the Series 3 Preferred ----------------------- contemplated by this Agreement, the Company will not issue any of its capital stock, or grant an option to purchase any of its capital stock, after July 31, 1987, except that (i) the Company may issue, or grant options to purchase, up to an aggregate of 4,201,365 shares of Common Stock to employees, officers, directors, consultants or other persons performing services for the Company or a subsidiary pursuant to any stock option plan or arrangement approved by the Board of Directors ("Management Stock"), (ii) securities may be issued upon the conversion of outstanding convertible securities, (iii) the Company may issue the Warrants, and (iv) shares of Series 3 Preferred, including shares of Common Stock issuable upon the conversion thereof, may be issued upon exercise of the Warrants. 7.14 Use of Proceeds. The Company will use the proceeds from the sale --------------- of the Shares for general corporate purposes and in accordance with the plans set forth in the Memorandum. 7.15 Regulation D Filing. The Company will file on a timely basis all ------------------- notices of sale required to be filed with the Securities and Exchange Commission pursuant to Regulation D under the Securities Act and simultaneously furnish copies of each report of sale to special counsel for the Purchasers and each Purchaser who so requests in writing. 7.16 Notice of Record Dates. In the event of any setting by the Company ---------------------- of a record of the holders of any class of securities (other than the Preferred) for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, the Company -18- shall mail to each Purchaser at least twenty (20) days prior to such record date, specified herein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution. 7.17 Notice of Limited Offering Exemption. Promptly after the Closing, ------------------------------------ but in no event later than thirty (30) days after the Closing Date, the Company shall file the Notice referred to in Section 5.12 hereof with the California Commissioner of Corporations. 7.18 Certain Restrictions. Without the prior written consent of the -------------------- holders of at least a majority of the total number of shares of Common Stock issued or issuable upon conversion of all the Shares, the Series 1 Preferred and the Series 2 Preferred, taken as a class, the Company (a) will not sell, lease or otherwise dispose of a material portion of its assets other than in the ordinary course of business; (b) will not sell or otherwise dispose of any stock of any subsidiary; and (v) will not permit any subsidiary to become a party to any merger, consolidation, reorganization, acquisition or commitment to take any action; provided, that a subsidiary of the Company may be merged into or consolidated with another subsidiary of the Company. 7.19 Compliance by Subsidiaries. The Company will cause any subsidiary, -------------------------- whether now in existence or which it may organize or acquire in the future, to comply fully with the provisions of this Section 7 to the same extent as if such subsidiary or subsidiaries were the Company. SECTION 8 Restrictions on Transferability of ---------------------------------- Securities; Compliance with Securities Act ------------------------------------------ 8.1 Restrictions on Transferability. The Shares and the Common Stock ------------------------------- issued upon conversion of the Shares shall not be transferable, except upon the conditions specified in this Section 8, which conditions are intended to insure compliance with the provisions of the Securities Act or, in the case of Section 8.14 hereof, to assist in an orderly distribution. Each Purchaser will cause any proposed transferee of Shares or Common Stock issued on conversion of the Shares held by that Purchaser to agree to take and hold those securities subject to the provisions and upon the conditions specified in this Section 8. 8.2 Certain Definitions. As used in this Section 8, the following terms ------------------- shall have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act. "Restricted Securities" shall mean the securities of the Company required to bear or bearing the legend set forth in Section 8.3 hereof. "Registrable Securities" shall mean (i) shares of Common Stock issued or issuable upon the conversion of Series 1 Preferred, the Series 2 Preferred and the Series 3 Preferred and -19- (ii) any Common Stock issued in respect of securities issued pursuant to the conversion of the Shares, the Series 1 Preferred or the Series 2 Preferred upon any stock split, stock dividend, recapitalization or similar event. The terms "register", "registered" and "registration" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement. "Registration Expenses" shall mean all expenses incurred by the Company in compliance with Sections 8.5 and 8.6 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company, blue sky fees and expenses, and the expense of any special audits or accounting services incident to or required by any such registration (but excluding the compensation of regular employees of the Company, which shall be paid in any event by the Company). "Selling Expenses" shall mean all underwriting discounts and selling commissions applicable to the sale of Registrable Securities and all fees and disbursements of counsel for any Holder. "Holder" shall mean any holder of the outstanding Shares or Registrable Securities which have not been sold to the public. "Initiating Holders" shall mean any Purchasers or their transferees or assignees under Section 8.14 hereof, any persons listed on the Schedule of Series 1 Purchasers or Schedule of Series 2 Purchasers attached to the Convertible Preferred Stock Series 1 and Series 2 Purchase Agreement dated December 8, 1983 between the Company and the persons listed on such schedules (the "Series 1 and Series 2 Agreement") or the transferees or assignees of such persons under Section 8.14 of the Series 1 and Series 2 Agreement. 8.3 Restrictive Legend. Each certificate representing (i) the Shares, ------------------ or (ii) shares of the Company's Common Stock issued upon conversion of Preferred, or (iii) any other securities issued in respect of Preferred or the Common Stock issued upon conversion of preferred, upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event, shall (unless otherwise permitted or unless the securities evidenced by such certificate shall have been registered under the Securities Act) be stamped or otherwise imprinted with a legend substantially in the following form (in addition to any legend required under applicable state securities laws): THESE SECURITIES AND THE SHARES OF COMMON STOCK OF APPLIED MICRO CIRCUITS CORPORATION (THE "COMPANY") INTO WHICH THESE SECURITIES ARE CONVERTIBLE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 NOR ANY STATE SECURITIES LAWS. THEY MAY NOT BE PLEDGED, SOLD, OFFERED FOR SALE, ASSIGNED OR TRANSFERRED IN -20- THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAW OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THE COMPANY'S PURCHASE AGREEMENT DATED AS OF SEPTEMBER 16, 1987 WITH THE PURCHASERS (AS IDENTIFIED THEREIN) -- CONTAINS ADDITIONAL PROVISIONS PERTAINING TO THE TRANSFER OF, AND RIGHTS ASSOCIATED WITH, THESE SECURITIES AND SUCH COMMON STOCK. A COPY OF SUCH AGREEMENT IS AVAILABLE FOR INSPECTION AT THE COMPANY'S PRINCIPAL OFFICES. Upon request of a holder of such a certificate, the Company shall remove the foregoing legend from the certificate or issue to such holder a new certificate therefor free of any transfer legend, if, with such request, the Company shall have received either the opinion referred to in Section 8.4(i) or the "no-action" letter referred to in Section 8.4(ii) to the effect that any transfer by such holder of the securities evidenced by such certificate will not violate the Securities Act and applicable state securities laws. 8.4 Notice of Proposed Transfers. The holder of each certificate ---------------------------- representing Restricted Securities by acceptance thereof agrees to comply in all respects with the provision of this Section 8.4. Prior to any proposed transfer of any Restricted Securities (other than under circumstances described in Sections 8.5 and 8.6), the holder thereof shall give written notice to the Company of such holder's intention to effect such transfer. Each such notice shall describe the manner and circumstances of the proposed transfer in sufficient detail, and shall be accompanied (except in transactions in compliance with Rule 144) by either (i) a written opinion of legal counsel addressed to the Company and reasonably satisfactory in form and substance to the Company's counsel, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act, or (ii) a "no action" letter from the Commission to the effect that the distribution of such securities without registration will not result in a recommendation by the staff of the Commission that action be taken with respect thereto, whereupon the holder of such Restricted Securities shall be entitled to transfer such Restricted Securities in accordance with the terms of the notice delivered by the holder to the Company. Each certificate evidencing the Restricted Securities transferred as above provided shall bear the appropriate restrictive legend set forth in Section 8.3 above, except that such certificate shall not bear such restrictive legend if the opinion of counsel or "no-action" letter referred to above is to the further effect that such legend is not required in order to establish compliance with any provisions of the Securities Act. 8.5 Requested Registration. ---------------------- (a) Request for Registration. If the Company shall receive from ------------------------ Initiating Holders a written request that the Company effect any registration with respect to all or a part of -21- the Registrable Securities and (i) if such request is made before the Company has had its initial underwritten public offering, provided such request is made by the holders of not less than 67% of the total number of shares of Common Stock issued or issuable upon conversion of the Shares, the Series 1 Preferred and the Series 2 Preferred, or (ii) if such request is made after the Company has already had an initial underwritten public offering, provided such request is made by the holders of not less than 40% of the total number of shares of Common Stock issued or issuable upon conversion of the Shares, the Series 1 Preferred and the Series 2 Preferred, the Company will: (i) promptly give written notice of the proposed registration to all other Holders; and (ii) as soon as practicable, use its diligent best efforts to effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, effecting appropriate qualification or registration under applicable blue sky or other state securities laws and appropriate compliance with applicable regulations issued under the Securities Act) as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any Holder or Holders joining in such request as are specified in a written request given within thirty (30) days after receipt of such written notice from the Company; provided, that the Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 8.5: (A) In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act or applicable rules or regulations thereunder; or (B) After the Company has effected two such registrations pursuant to this Section 8.5(a) and such registrations have been declared or ordered effective and the sales of the Registrable Securities registered thereunder shall have closed. (C) If the written demand results in the Company's initial underwritten public offering, at least $10,000,000 in Common Stock must be sold by the Initiating Holders. If the written request does not result in the Company's initial underwritten public offering, a minimum of $5,000,000 in Common Stock must be sold by the Initiating Holders. Subject to the foregoing clauses (A), (B) and (C) the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable, after receipt of the request or requests of the Initiating Holders. The registration statement filed pursuant to the request of the Initiating Holders may, subject to the provisions of Section 8.5(b) below, include other securities of the Company which -22- are held by officers or directors of the Company or which are held by persons who, by virtue of agreements with the Company, are entitled to include their securities in any such registration. (b) Underwriting. If the Initiating Holders intend to distribute ------------ Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to Section 8.5 and the Company shall include such information in the written notice referred to in Section 8.5(a)(i) above. The right of any Holder to registration pursuant to Section 8.5 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder with respect to such participation and inclusion) to the extent provided herein. A Holder may elect to include in such underwriting all or a part the Registrable Securities he holds. If officers or directors of the Company holding other securities of the Company shall request inclusion in any registration pursuant to Section 8.5, or if holders of securities of the Company who are entitled, by contract with the Company, to have securities included in such a registration (the "Other Shareholders") request such inclusion, the Initiating Holders shall, on behalf of all Holders, offer to include the securities of such officers, directors and Other Shareholders in the underwriting and may condition such offer on their acceptance of the further applicable provisions of this Section 8. The Company shall (together with all Holders, officers, directors and Other Shareholders proposing to distribute their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders and reasonably acceptable to the Company. Notwithstanding any other provision of this Section 8.5, if the representative advises the Initiating Holders in writing that marketing factors require a limitation on the number of shares to be underwritten, the securities of the Company held by officers or directors (other than Registrable Securities) of the Company shall be excluded from such registration to the extent so required by such limitation and if a limitation of the number of shares is still required, the Initiating Holders shall so advise all Holders of Registrable Securities and Other Shareholders whose securities would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities and other securities that may be included in the registration and underwriting shall be allocated among all such Holders and Other Shareholders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities and other securities which they had requested to be included in such registration at the time of filing the registration statement. No Registrable Securities or any other securities excluded from the underwriting by reason of the underwriter's marketing limitation shall be included in such registration. If any Holder of Registrable Securities, officer, director or Other Shareholder who has requested inclusion in such registration as provided above disapproves of the terms of the underwriting, such person may elect to withdraw therefrom by written notice to the Company, the underwriter and the Initiating Holders. The securities so withdrawn shall also be withdrawn from registration. If the underwriter has not limited the number of Registrable Securities or other securities to be underwritten, the Company may include its securities for its own account in such registration if the underwriter so agrees and if -23- the number of Registrable Securities and other securities which would otherwise have been included in such registration and underwriting will not thereby be limited. 8.6 Company Registration. -------------------- (a) If the Company shall determine to register any of its securities either for its own account or the account of a security holder or holders exercising their respective demand registration rights, other than a registration relating solely to employee benefit plans, or a registration relating solely to a Commission Rule 145 transaction, or a registration on any registration form which does not permit secondary sales or does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities, the Company will: (i) promptly give to each Holder written notice thereof (which shall include a list of the jurisdictions in which the Company intends to attempt to qualify such securities under the applicable blue sky or other state securities laws); and (ii) include in such registration (and any related qualification under blue sky laws or other compliance) and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made by any Holder within thirty (30) days after receipt of the written notice from the Company described in clause (i) above, except as set forth in Section 8.6(b) below. Such written request may specify all or a part of a Holder's Registrable Securities. (b) Underwriting. If the registration of which the Company gives ------------ notice is for registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to Section 8.6(a)(i). In such event the right of any Holder to registration pursuant to Section 8.6 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the Other Shareholders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for underwriting by the Company. Notwithstanding any other provision of this Section 8.6, if the underwriter determines that marketing factors require a limitation on the number of shares to be underwritten, and (a) if such registration is the first registered offering of the Company's securities to the public, the underwriter may (subject to the allocation priority set forth below) exclude from such registration and underwriting some or all of the Registrable Securities which would otherwise be underwritten pursuant hereto, and (b) if such registration is other than the first registered offering of the sale of the Company's securities to the public, the underwriter may (subject to the allocation priority set forth below) limit the number of Registrable Securities to be included in the registration and underwriting to not less than fifty percent (50%) of the securities included therein (based on aggregate market values). The Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated in the following manner. The -24- securities of the Company held by officers and directors of the Company (other than Registrable Securities) shall be excluded from such registration and underwriting to the extent required by such limitation, and, if a limitation on the number of shares is still required, the number of shares that may be included in the registration and underwriting shall be allocated among all such Holders and Other Shareholders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities and other securities which they had requested to be included in such registration at the time of filing the registration statement. If any Holder of Registrable Securities or any officer, director or Other Shareholder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the underwriter. Any Registrable Securities or other securities excluded or withdrawn from such underwriting shall be withdrawn from such registration. 8.7 Expenses of Registration. All Registration Expenses incurred in ------------------------ connection with any registration, qualification or compliance pursuant to this Section 8 shall be borne by the Company, and all Selling Expenses shall be borne by the holders of the securities so registered pro rata on the basis of the number of their shares so registered; provided, however, that the Company shall not be required to pay any Registration Expenses if, as a result of the withdrawal of a request for registration by Initiating Holders, the registration statement does not become effective, in which case the Holders and Other Shareholders requesting registration shall bear such Registration Expenses pro rata on the basis of the number of their shares so included in the registration request, unless such withdrawal results from a material and adverse change in the business or financial condition of the Company, in which case the Initiating Holders and Other Shareholders requesting registration may elect to either (i) bear such Registration Expenses pro rata or (ii) have such registration counted as a registration pursuant to Section 8.5(a)(ii)(B); and provided, further, that if a sale is not concluded once a request for registration is made, such registration shall be counted as a registration pursuant to Section 8.5(a)(ii)(B). 8.8 Registration on Form S-2 or Form S-3. The Company shall use its ------------------------------------ best efforts to qualify for registration on Form S-2 and Form S-3 or any comparable or successor form or forms; and to that end the Company shall register (whether or not required by law to do so) the Common Stock under the Exchange Act in accordance with the provisions of that Act following the effective date of the first registration of any securities of the Company on Form S-1 or Form S-18 or any comparable or successor form or forms. After the Company has qualified for the use of either Form S-2 or Form S-3 or both, in addition to the rights contained in the foregoing provisions of this Section 8, the Holders of Registrable Securities shall have the right to request registrations on Form S-2 or Form S-3 (such requests shall be in writing and shall state the number of shares of Registrable Securities to be disposed of and the intended methods of disposition of such shares by such Holder or Holders), and the Company will: (a) promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and (b) as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are -25- specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within 30 days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance, pursuant to this Section 8.8: (1) if Form S-2 or Form S-3 is not available for such offering by the Holders; or (2) in any particular jurisdiction in which the Company would be required to qualify to do business or to execute a general consent to service of process in effecting such registration, qualification or compliance. (c) Subject to the foregoing, the Company shall file a registration statement covering the Registrable Securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. Registrations effected pursuant to this Section 8.8 shall not be counted as demands for registration or registrations effected pursuant to Section 8.5. 8.9 Registration Procedures. In the case of each registration effected ----------------------- by the Company pursuant to Section 8, the Company will keep each Holder advised in writing as to the initiation of each registration and as to the completion thereof. At its expense, the Company will: (a) Keep such registration effective for a period of one hundred twenty (120) days or until the Holder or Holders have completed the distribution described in the registration statement relating thereto, whichever first occurs; provided, however, that (i) such 120-day periods shall be extended for a period of time equal to the period the Holder refrains from selling any securities included in such registration in accordance with provisions in paragraph 8.15 hereof; and (ii) in the case of any registration of Registrable Securities on Form S-3 which are intended to be offered on a continuous or delayed basis, such 120-day period shall be extended, if necessary, to keep the registration statement effective until all such Registrable Securities are sold, provided that Rule 415, or any successor rule under the Securities Act permits an offering on a continuous or delayed basis, and provided further that applicable rules under the Securities Act governing the obligation to file a post-effective amendment, permit, in lieu of filing a post effective amendment which (y) includes any prospectus required by Section 10(a)(3) of the Securities Act or (z) reflects facts or events representing a material or fundamental change in the information set forth in the registration statement, the incorporation by reference of information required to be included in (y) and (z) above to be contained in periodic reports filed pursuant to Section 13 or 15(d) of the Exchange Act in the registration statement; (b) Furnish such number of prospectuses and other documents incident thereto as a Holder from time to time may reasonably request; and (c) In connection with any underwritten offering pursuant to a registration statement filed pursuant to Section 8.5 hereof, the Company will enter into any underwriting agreement reasonably necessary to effect the offer and sale of Common Stock, provided such underwriting agreement contains customary underwriting provisions and provided further that if the underwriter so requests the underwriting agreement will contain customary contribution provisions. -26- (d) Use its best efforts to register and qualify the securities covered by such registration statement under such securities or blue sky laws of such jurisdictions as shall reasonably be requested by the Holders, provided, that the Company shall not be obligated to effect any such registration or qualification in any jurisdiction in which it would be required to qualify to do business or to execute a general consent to service of process. 8.10 Indemnification. --------------- (a) The Company will indemnify each Holder, each of its officers, directors and partners, and each person controlling such Holder, with respect to which registration, qualification or compliance has been effected pursuant to this Section 8, and each underwriter, if any, and each person who controls any underwriter, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of the Securities Act, the Securities Exchange Act of 1934 or applicable state securities laws or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, qualification or compliance, and will reimburse each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any legal and any other expenses reasonably incurred in connection with investigating and defending any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Holder or underwriter and stated to be specifically for use therein. (b) Each Holder and Other Shareholder will, if Registrable Securities held by him are included in the securities as to which such registration, qualification or compliance is being effected, indemnify the Company, each of its directors and officers and each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the Company or such underwriter within the meaning of the Securities Act and the rules and regulations thereunder, each other such Holder and Other Shareholder and each of their officers, directors and partners, and each person controlling such Holder or Other Shareholder, against all claims, losses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and such Holders, Other Shareholders, directors, officers, partners, persons, underwriters or control persons for any legal or any other expenses reasonably incurred in connection with investigating or defending any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is -27- made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by such Holder or Other Shareholder and stated to be specifically for use therein; provided, however, that the obligations of such Holders and Other Shareholders hereunder shall be limited to an amount equal to the proceeds to each such Holder or Other Shareholder of securities sold as contemplated herein. (c) Each party entitled to indemnification under this Section 8.10 (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not unreasonably be withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 8. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom. (d) The obligations of the Company and the Holders under this Section 8.10 shall survive the completion of any offering of Registrable Securities in a registration under this Section 8. 8.11 Information by Holder. Each Holder of Registrable Securities, and --------------------- each Other Shareholder holding securities included in any registration, shall furnish to the Company such information regarding such Holder or Other Shareholder and the distribution proposed by such Holder or Other Shareholder as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Section 8. 8.12 Limitations on Registration of Issues of Securities. From and --------------------------------------------------- after the date of this Agreement, the Company shall not enter into any agreement with any holder or prospective holder of any securities of the Company giving such holder or prospective holder the right to require the Company to initiate any registration of any securities of the Company, provided that this Section 8.12 shall not limit the right of the Company to enter any agreements with any holder or prospective holder of any securities of the Company giving such holder or prospective holder the right to require the Company, upon any registration of any of its securities, to include, among the securities which the Company is then registering, securities owned by such holder; and provided further that a majority of the representatives of the Purchasers on the Board of -28- Directors may waive the requirement that the Company not enter into any agreement giving a holder of any securities of the Company the right to require the Company to initiate registration of any securities of the Company. Any right given by the Company to any holder or prospective holder of the Company's securities in connection with the registration of securities shall be conditioned such that it shall be consistent with the provisions of this Section 8 and with the rights of the Holders provided in this Agreement. 8.13 Rule 144 Reporting. With a view to making available the benefits ------------------ of certain rules and regulations of the Commission which may permit the sale of the Restricted Securities to the public without registration, the Company agrees to: (a) Make and keep public information available as those terms are understood and defined in Rule 144 under the Securities Act, at all times from and after ninety (90) days following the effective date of the first registration under the Securities Act filed by the Company for an offering of its securities to the general public; (b) Use its best efforts to file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements; (c) So long as a Purchaser owns any Restricted Securities, furnish to the Purchaser forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of Rule 144 (at any time from and after ninety (90) days following the effective date of the first registration statement filed by the Company for an offering of its securities to the general public), and of the Securities Act and the Exchange Act (at any time after it has become subject to such reporting requirements), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed as a Purchaser may reasonably request in availing itself of any rule or regulation of the Commission allowing a Purchaser to sell any such securities without registration. 8.14 Transfer or Assignment of Registration Rights. The rights to cause --------------------------------------------- the Company to register securities granted to Holder by the Company under Sections 8.5, 8.6 and 8.8 may be transferred or assigned by any Holder to a transferee or assignee, provided that the Company is given written notice at the time of or within a reasonable time after said transfer or assignment, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned, and provided further that the transferee or assignee of such rights is not deemed by the Board of Directors of the Company in its reasonable judgment, to be a competitor of the Company; and provided further that the transferee or assignee of such rights assumes the obligations of a Purchaser under this Section 8. 8.15 "Market Stand-Off" Agreement. Each Purchaser agrees, if requested --------------------------- by the Company and an underwriter of Common Stock (or other securities) of the Company, not to sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by it during the period specified by the Company and the underwriters following the effective date of a registration statement of the Company filed under the Securities Act, provided that: -29- (a) such agreement only applies to the first such registration statement of the Company including securities to be sold on its behalf to the public in an underwritten offering; and (b) all Holders, Other Shareholders and officers and directors of the Company enter into or are contractually obligated to enter into similar agreements. Such agreement shall be in writing in a form satisfactory to the Company and such underwriter, provided, that the terms of this Section 8.15 shall be enforceable notwithstanding the absence of a written agreement. The Company may impose stop-transfer instructions with respect to the shares (or securities) subject to the foregoing restriction until the end of said ninety (90) day period. SECTION 9 Miscellaneous ------------- 9.1 Governing Law. This Agreement shall be governed in all respects by ------------- the laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California. 9.2 Survival. The representations, warranties, covenants and agreements -------- made herein shall survive (i) any investigation made by or on behalf of any Purchaser and (ii) the Closing. 9.3 Successors and Assigns. Except as otherwise expressly provided ---------------------- herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto; provided, however, the Company may not assign its rights hereunder. 9.4 Entire Agreement; Amendment. This Agreement (including the --------------------------- Schedules and Exhibits hereto) and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof. Neither this Agreement nor any term hereof may be amended, waived, discharged or terminated, except by a written instrument signed by the Company and the purchasers; provided, however, that the holders of sixty percent (60%) or more of the Shares sold under this Agreement and the shares of Series 1 and Series 2 Preferred sold under the Preferred Stock, Series 1 and Series 2, Purchase Agreement dated December 8, 1983, acting together as a class, such number of shares of Common Stock issued upon conversion of those sixty percent (60%) of the Preferred, or any combination thereof, may by written instrument waive or modify any term or condition set forth in Section 7 hereof which operates for the benefit of the Purchasers; and provided further, that the terms and conditions of Section 8 hereof which operate for the benefit of the Purchasers may, by written instrument, be waived or modified by the holders of sixty percent (60%) or more of the Registrable Securities, as defined therein. Any other term or condition hereof which operates for the benefit of the Purchasers may, by written instrument, be modified by the holder of sixty percent (60%) or more of the Shares purchased under this Agreement, but in no event shall the -30- obligation of any Purchaser hereunder to purchase Shares be increased, except upon the written consent of such Purchaser. 9.5 Notices, etc. All notices and other communications required or ------------- permitted hereunder shall be in writing and shall be mailed by first-class mail, postage prepaid, or delivered either by hand or by messenger, addressed (a) if to a Purchaser, as indicated on the Schedule of Purchasers attached hereto, or at such other address as such Purchaser shall have furnished to the Company in writing, or (b) if to any other holder of any Shares or any Common Stock issued upon conversion of Shares, at such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder thereof who has so furnished an address to the Company, or (c) if to the Company, at its address set forth at the beginning of this Agreement, or at such other address as the Company shall have furnished to you and each such other holder in writing. 9.6 Delays or Omissions. No delay or omission to exercise any right, ------------------- power or remedy accruing to any holder of any Shares, upon any breach or default of the Company under this Agreement, shall impair any such right, power or remedy of such holder nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent or approval of any kind or character on the part of any holder of any breach or default under this Agreement, or any waiver on the part of any holder of any provisions or conditions of this Agreement must be made in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any holder, shall be cumulative and not alternative. 9.7 Rights; Separability. Unless otherwise expressly provided herein, -------------------- each Purchaser's rights hereunder are several rights, not rights jointly held with any of the other Purchasers. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 9.8 Agent's Fees. ------------ (a) The Company hereby agrees to indemnify and to hold each Purchaser harmless of and from any liability for any commission or compensation in the nature of an agent's fee to any broker or other person or firm (and the costs and expenses of defending against such liability or asserted liability) arising from any act by the Company or any of its employees or representatives. (b) Each Purchaser (i) represents and warrants that it has retained no finder or broker in connection with the transactions contemplated by this Agreement and (ii) hereby agrees to indemnify and to hold the Company and the other Purchasers harmless from any liability for any commission or compensation in the nature of an agent's fee to any broker or other person or firm (and the costs and expenses of defending against such liability or asserted liability) for which it, or any of its employees or representatives, are responsible. -31- 9.9 Information Confidential. Each Purchaser acknowledges that the ------------------------ information received by it pursuant hereto may be confidential and for its use only, and it will not use such confidential information in violation of the Exchange Act or reproduce, disclose, disseminate or make any use of such information to any other person (other than your employees or agents having a need to know the contents of such information, and your attorneys), except in connection with the exercise of rights under this Agreement, unless the Company has made such information available to the public generally or the Purchaser is required to disclose such information by a governmental body. 9.10 Expenses. The Company shall bear its own expenses and legal fees -------- incurred on its behalf with respect to this Agreement and the transactions contemplated hereby, and the Company will pay the legal fees, disbursements and office expenses and charges, of special counsel to the Purchasers with respect to this Agreement and the transactions contemplated hereby to the extent provided in Section 5.13 hereof. 9.11 Titles and Subtitles. The titles of the paragraphs and -------------------- subparagraphs of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 9.12 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 9.13 Aggregation. All shares of Preferred Stock held or acquired by ----------- affiliated entities or persons may be aggregated for the purpose of determining the availability of rights under this Agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered as of the day and year first written above. APPLIED MICRO CIRCUITS CORPORATION By: ------------------------------------------ Albert J. Martinez, President PURCHASERS --------------------------------------------- --------------------------------------------- -32- Modification of Section 7.2 Effective 12/13/90 the preferred shareholders waived their rights of first refusal pursuant to this Section 7.2 of the Preferred Stock Purchase Agreement with respect to an additional 1,100,000 shares of common stock issuable pursuant to the grant of options to employees, officers and persons performing services for the Company. This is in addition to the waiver with respect to 750,000 shares effective 10/19/89. See Stockholder meeting of 12/13/90. Modification of Section 7.2 Effective 10/19/89 the preferred shareholders waived their rights of first refusal pursuant to this Section 7.2 of the Preferred Stock Purchase Agreement with respect to up to 750,000 shares of common stock, issuable pursuant to the grant of warrants, options, or other stock acquisition rights subsequent to 10/19/89. See preferred shareholder consent letter of September 29, 1989, effective as of October 19, 1989. Modification of Section 7.13 Effective 12/13/90 the preferred shareholders waived their rights to limit the issuance of additional equity, with respect to 1,100,000 shares of common stock. This is in addition to the waiver with respect to 750,000 shares effective 10/19/89. See Stockholder meeting of 12/13/90. Modification of Section 7.13 Effective 10/19/89 the preferred shareholders waived their rights to limit the issuance of additional equity, with respect to 750,000 shares of common stock. See preferred shareholder consent letter dated September 29, 1989 and effective as of October 19, 1989. EX-10.9 15 INDUSTRIAL REAL ESTATE LEASE 10/29/96 EXHIBIT 10.9 LEASE ADI MESA PARTNERS - AMCC, L.P., A CALIFORNIA LIMITED PARTNERSHIP Landlord APPLIED MICRO CIRCUITS CORPORATION, A DELAWARE CORPORATION Tenant TABLE OF CONTENTS ARTICLE I TERM OF LEASE 1.1 Initial Term............................................................... 1 1.2 Option to Extend........................................................... 1 ARTICLE II CONSTRUCTION OF THE IMPROVEMENTS 2.1 The Improvements........................................................... 2 2.2 Plans and Specifications................................................... 2 2.3 Substantial Completion of the Improvements................................. 5 2.4 Delay in Substantial Completion or Lease Execution......................... 6 2.5 Liquidated Damages for Delay in Substantial Completion..................... 6 2.6 Building Permit for the Improvements....................................... 7 2.7 Construction Warranties.................................................... 7 2.8 Condition of Demised Premises; Limited Warranty............................ 7 2.9 Tenant Improvement Allowance; Tenant Responsibility........................ 7 2.10 Responsibility for Excess Shell Costs and Excess Tenant Improvement Costs.. 8 2.11 Contractor................................................................. 9 2.12 Tenant's Entry Into the Building Prior to Substantial Completion........... 9 ARTICLE III RENT 3.1 Base Rent.................................................................. 10 3.2 Base Rent During Option Term............................................... 10 3.3 Additional Obligations; Additional Rent.................................... 12 3.4 Delinquent Rental Payments................................................. 12 ARTICLE IV USED OF DEMISED PREMISES 4.1 Permitted Use.............................................................. 12 4.2 Preservation of Demised Premises........................................... 13 4.3 Hazardous Substances....................................................... 13
ARTICLE V PAYMENT OF TAXES, ASSESSMENTS, ETC. 5.1 Payment of Impositions.................................................. 15 5.2 Tenant's Right to Contest Impositions................................... 16 5.3 Levies and Other Taxes.................................................. 16 5.4 Evidence of Payment..................................................... 16 5.5 Escrow for Taxes and Assessments........................................ 17 5.6 Landlord's Right to Contest Impositions................................. 17 ARTICLE VI INSURANCE 6.1 Casualty Insurance...................................................... 17 6.2 Public Liability Insurance.............................................. 18 6.3 Other Insurance......................................................... 18 6.4 Certain Insurance Provisions............................................ 18 6.5 Waiver of Subrogation................................................... 19 6.6 Tenant's Indemnification of Landlord.................................... 19 6.7 Unearned Premiums....................................................... 19 6.8 Blanket Insurance Coverage.............................................. 19 6.9 Landlord's Liability Insurance Coverage................................. 19 ARTICLE VII UTILITIES 7.1 Payment of Utilities.................................................... 19 7.2 Additional Charges...................................................... 19 7.3 Landlord's Responsibility for Utility Hook-Up Charges and Fees.......... 20 ARTICLE VIII REPAIRS AND MAINTENANCE OF DEMISED PREMISES 8.1 Tenant's Responsibilities............................................... 20 8.2 Landlord's Responsibilities............................................. 20 8.3 Sharing of Expenses of Capital Items.................................... 20 8.4 Tenant's Waiver of Claims Against Landlord.............................. 21 8.5 Prohibition Against Waste............................................... 21
ARTICLE IX COMPLIANCE WITH APPLICABLE LAWS AND RESTRICTIONS 9.1 Compliance with Applicable Laws and Restrictions...................... 21 9.2 Tenant's Obligations.................................................. 22 9.3 Tenant's Right to Contest Laws and Ordinances......................... 22 ARTICLE X MERCHANIC'S LIENS AND OTHER LIENS 10.1 Mechanic's Liens...................................................... 22 10.2 Landlord's Indemnification............................................ 23 10.3 Removal of Liens...................................................... 23 10.4 Equipment and Trade Fixtures.......................................... 23 ARTICLE XI LANDLORD'S PERFORMANCE OF TENANT'S OBLIGATIONS........................ 23 ARTICLE XII DEFAULTS OF TENANT 12.1 Events of Default..................................................... 24 12.2 Landlord's Remedies................................................... 24 12.3 Right to Collect Rent as Due.......................................... 25 12.4 New Lease Following Termination....................................... 25 12.5 Cumulative Rights; No Waiver.......................................... 25 12.6 Surrender of Demised Premises......................................... 25 12.7 Interest on Unpaid Amounts............................................ 26 ARTICLE XIII DESTRUCTION AND RESTORATION 13.1 Destruction and Restoration........................................... 26 13.2 Application of Insurance Proceeds..................................... 26 13.3 Continuance of Tenant's Obligations................................... 27 13.4 Availability of Insurance Proceeds.................................... 27 13.5 Completion of Restoration............................................. 27 13.6 Termination of Lease.................................................. 27
ARTICLE XIV CONDEMNATION 14.1 Condemnation of Entire Demised Premises................................ 28 14.2 Partial Condemnation/Termination of Lease.............................. 28 14.3 Partial Condemnation/Continuation of Lease............................. 29 14.4 Continuance of Obligations............................................. 29 14.5 Adjustment of Rent..................................................... 29 ARTICLE XV ASSIGNMENT, SUBLETTING, ETC. 15.1 Restriction on Transfer................................................ 30 15.2 Transfer to Affiliates; Sale or Merger................................. 30 15.3 Restriction Against Further Assignment................................. 31 15.4 Tenant's Failure to Comply............................................. 31 ARTICLE XVI SUBORDINATION, NONDISTURBANCE, NOTICE TO MORTGAGEE AND ATTORNMENT 16.1 Subordination by Tenant................................................ 31 16.2 Landlord's Default..................................................... 31 16.3 Attornment............................................................. 32 ARTICLE XVII SIGNS..................................... 33 ARTICLE XVIII FINANCIAL STATEMENTS OF TENANT....................... 33 ARTICLE XIX CHANGES AND ALTERATIONS........................... 33 ARTICLE XX MISCELLANEOUS PROVISIONS 20.1 Entry by Landlord...................................................... 35 20.2 Exhibition of Demised Premises......................................... 35
20.3 Indemnification by Tenant............................................ 35 20.4 Notices.............................................................. 36 20.5 Quiet Enjoyment...................................................... 36 20.6 Landlord's Continuing Obligations.................................... 36 20.7 Estoppel............................................................. 37 20.8 Delivery of Corporate Documents...................................... 37 20.9 Memorandum of Lease.................................................. 38 20.10 Severability......................................................... 38 20.11 Successors and Assigns............................................... 38 20.12 Captions............................................................. 38 20.13 Relationship of Parties.............................................. 38 20.14 Entire Agreement..................................................... 38 20.15 No Merger............................................................ 38 20.16 Possession and Use................................................... 38 20.17 Surrender of Demised Premises........................................ 38 20.18 Holding Over......................................................... 38 20.19 Survival............................................................. 39 20.20 Broker's Commission.................................................. 39 20.21 Applicable Law....................................................... 39 20.22 Counterparts......................................................... 39 20.23 Attorneys' Fees...................................................... 39 Exhibit "A" LEGAL DESCRIPTION OF PROPERTY........................40 Exhibit "B" PRELIMINARY PLANS AND SPECIFICATIONS.....................41 Exhibit "C" TENANT IMPROVEMENTS BUDGET ESTIMATE......................42 Exhibit "D" MEMORANDUM OF LEASE.............................43
LEASE THIS LEASE ("Lease") is made this 29th day of October, 1996, by and between ADI MESA PARTNERS-AMCC, L.P., a California limited partnership ("Landlord"), and APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation ("Tenant"). WITNESSETH: "LAND" means an approximately 5.0 acre-sized parcel of land situated in the Lusk Mira Mesa Business Park East II, Unit 2, in San Diego, California, together with any appurtenant easements, which shall be a separate legal parcel created from a portion of the property which is described in Exhibit "A" ----------- attached hereto and made a part hereof, and which is located on Sequence Drive in San Diego, California. Landlord is currently pursuing creation of such separate legal parcel. "BUILDING" means the headquarters, research and development, assembly, light manufacturing and distribution facility, which shall consist of approximately 90,000 square feet (as measured in accordance with the method established by the American Industrial Real Estate Association for measuring the "gross" size of buildings of similar type and character, provided that up to 300 square feet of "drip-line" may be included in such calculation) and which shall be constructed on the Land by Landlord in accordance with the Preliminary Plans and Specifications and the Plans and Specifications, as those terms are defined in Section 2.2 of this Lease. "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) of the Improvements, 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 September 18, 1997 (the "TARGET COMMENCEMENT DATE"); provided, however, that in no event shall the Commencement Date occur (or be deemed to occur) prior to September 18, 1997. In ----- the event the Commencement Date is September 18, 1997, the Initial Term of this Lease would end on September 17, 2007. 1.2 Option to Extend. Tenant shall have two (2) 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. 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 3 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 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 2.9(a) hereof) and a second "track" related to the creation of Plans and Specifications for the Tenant Improvements (as defined in Section 2.9(b) hereof). (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), 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 have agreed on a set of preliminary plans and specifications for the Shell Improvements prepared by Pacific Cornerstone Associates which (i) describe and depict the Shell Improvements, (ii) specify the components of the Shell Improvements, and (iii) preliminarily depict the Tenant Improvements. These preliminary plans and specifications (the 'Preliminary Plans and Specifications') are attached to this Lease as Exhibit "B" and Landlord and Tenant intend that they shall serve as the basis upon which the Shell Improvements Plans and Specifications will be prepared and finalized, in accordance with the provisions of this Section 2.2 (a). (iii) As soon as is reasonably possible following execution of this Lease, 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 consistent with the Preliminary Plans and Specifications. Within five (5) business days after Landlord delivers to Tenant the Shell 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 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 five (5) business days after delivery of Tenant's notice disapproving the Schematic Shell Improvements Design Drawings, Landlord shall have the right to terminate this Lease by giving Tenant written notice of its election to do so. 4 (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"). Within five (5) 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 five (5) business days after delivery of Tenant's notice disapproving the Shell Improvements Design Development Drawings, Landlord shall have the right to terminate this Lease by giving Tenant written notice of its election to do so. (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"). These Construction Drawings shall include all information reasonably necessary to construct the Shell Improvements. Within five (5) 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 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 five (5) business days after delivery of Tenant's notice disapproving the Shell Improvements Construction Drawings, Landlord shall have the right to terminate this Lease by giving Tenant written notice of its election to do so. (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 and Specifications," the "Tenant Improvements Schematic Design Drawings," the "Tenant Improvements Design Development Drawings", the "Tenant Improvements Construction Drawings" (all as defined herein), 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 execution of this Lease, 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 Tenant Improvements Plans and Specifications. Within five (5) 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 five (5) business days after delivery of Tenant's notice disapproving the Tenant Improvements Schematic Design Drawings, Landlord shall have the right to terminate this Lease by giving Tenant written 5 notice of its election to do so. (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"). Within five (5) 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 five (5) business days after delivery of Tenant's notice disapproving the Tenant Improvements Design Development Drawings, Landlord shall have the right to terminate this Lease by giving Tenant written notice of its election to do so. (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"). These Construction Drawings shall include all information reasonably necessary to construct the Tenant Improvements. Within five (5) 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 five (5) business days after delivery of Tenant's notice disapproving the Tenant Improvements Construction Drawings, Landlord shall have the right to terminate this Lease by giving Tenant written notice of its election to do so. (v) Upon approval of the Tenant Improvements Construction Drawings, the Tenant Improvements Plans and Specifications shall be deemed approved by 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 ------------------------------ Plan 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 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 6 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. (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 2.4, 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. 2.4 Delay in Substantial Completion or Lease Execution. Landlord -------------------------------------------------- shall diligently proceed 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, 7 (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 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. 2.5 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 Section 2.4, above, then Landlord shall pay Tenant liquidated damages of Two Thousand Five Hundred Dollars ($2,500) 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 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: ____________ Landlord:___________ 2.6 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. 2.7 Construction Warranties. Landlord shall obtain the ----------------------- manufacturer's warranties for the elements or 8 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. 2.8 Condition of Demised Premises; Limited Warranty. Except as ----------------------------------------------- specifically provided in this Section 2.8, 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. 2.9 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 in the Preliminary Plans and Specifications, which are attached to this Lease, and ultimately in the final Plans and Specifications, 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 $2.00 per square foot, payable to Landlord, or an affiliate (with no direct obligation to Tenant to pay such fee). (b) Landlord shall be responsible for constructing, subject to the provisions of this Section 2.9 and 2.10, 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 identified in the Preliminary Plans and Specifications (or ultimately the final Plans and Specifications) as part of the Shell 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"), which shall be comprised of (i) fees and reimbursables for project programming, design, architecture and engineering, reimbursables, (ii) One Hundred Forty Six Thousand Dollars ($146,000) in leasing commissions and (iii) the direct construction cost (excluding any overhead or profit to Landlord or any affiliate) of the Tenant Improvements paid to the Contractor (as defined below) or others performing such construction work. The allowance shall be in the amount of Two Million Three Hundred Seventy Thousand Dollars ($2,370,000) (the "ALLOWANCE"). The Allowance shall not be used, nor shall Shell Improvements include, the costs of building signage, security systems, specialized cabling (except as set forth above) or Tenant's moving expenses, such items being Tenant's sole financial responsibility; provided, however, that Tenant may utilize the Allowance to pay for building signage to the extent there is Allowance remaining available and unused after paying all other Tenant Improvement Costs. (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 2.10 below. 9 (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. An estimate of the Tenant Improvements Cost which has been prepared based on the Preliminary Plans and Specifications, is attached to this Lease as Exhibit "C" (the "TENANT IMPROVEMENTS BUDGET ESTIMATE"). 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 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 Period 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. 2.10 Responsibility for Excess Shell Costs and Excess Tenant ------------------------------------------------------- Improvement Costs. - ------------------ (a) The Base Rent has been determined based on the assumption (i) that the Preliminary Plans and Specifications will not be materially altered at Tenant's request during the preparation of the final Plans and Specifications, (ii) that the final Plans and Specifications will not be altered as a result of Tenant Change Orders, and (iii) 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 2.9(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 2.9(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. (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, provided that date shall not be before December 1, 1996, (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 2.9|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 cover all the Tenant Improvements Costs which have been incurred, or (iv) as otherwise required by Landlord's construction lender, but in no event before December 1, 1996. (d) Landlord shall deposit the funds paid to it by Tenant under subsections (b) or (c) of this Section 2.10 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 10 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 2.10 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 the product of (i) the amount paid to Landlord by Tenant under subsections (b)(i) and (c)(i) of this Section 2.10, (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. 2.11 Contractor. Reno Contracting, Inc., a California corporation ---------- ("Contractor"), shall act as the general contractor for the construction of the Shell Improvements and the Tenant Improvements. 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 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. 2.12 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 2.12, 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 2.12. 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: ADI Mesa Partners - AMCC, L.P. c/o The Allen Group 4365 Executive Drive, Suite 850 San Diego, CA 92121-2130 Attention: Mr. Steven L. Black 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 continuing on the first day of each month thereafter for the succeeding months during the balance of the Term ("Base Rent"). 11
Period Annual Base Rent Monthly Base Rent - ------ ---------------- ----------------- Months 1-36 $847,858 $70,655 Months 37-72 $889,358 $74,113 Months 73-108 $931,358 $77,613 Months 109-120 $973,858 $81,155
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. 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) ninety five percent (95%) of 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 1.05. The Option Term Base Rent shall be increased to an amount equal to 1.04 times the then applicable Option Term Base Rent, as may have been previously adjusted pursuant to this Section 3.2, every twenty-four (24) months during the Option Term. 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 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 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 headquarters, assembly and research and development facility located in the northern portion 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 the equipment which Tenant is entitled to remove at the expiration or termination of the Term of this Lease. 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. 12 (f) If a single appraiser is chosen, then such appraiser shall determine the Fair Market Rental Value of the Demised Premises. Otherwise, the Fair Market Rental Value of the 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. 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 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 13 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 corporate headquarters, research and development, assembly, light manufacturing and distribution 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 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 biphenyIs, 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 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 14 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 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 15 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 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. 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 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 16 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 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 Iieu of income tax. 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 17 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 (S).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 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 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 18 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 portion thereof, with limits of not less than One Million Dollars ($1,000,000), with "umbrella" or excess liability coverage of not less than Four Million Dollars ($4,000,000) coverage on an occurrence basis. 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 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 cancelled 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. 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 19 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 (a) specify therein the amounts thereof exclusively allocated to the Demised Premises (or Tenant shall furnish Landlord and the holder of any fee mortgage with a written statement from the insurers under such policies specifying the amounts of the total insurance exclusively allocated to the Demised Premises), and (b) 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. 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 20 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 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 1 941 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. (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 and which has a five-year "useful" life would be assigned a $10,000 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 21 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 XlII 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 9, 1996), and the appropriate departments, commissions, boards, associations and officers enforcing them, and the orders, rules 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 22 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 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. (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. 23 (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. 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 Xll 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 24 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 (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. 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 25 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. 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. 26 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 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 1 3.1 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 monies 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 monies, plus the amount deposited by the parties (as applicable) after payment of the sum requested in such certificate. If the insurance monies 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 monies or other monies 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 27 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 monies 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 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 28 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). 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. 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 29 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 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 in a public offering. 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 30 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 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 1 5.1, 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 CompIy. 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. 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 31 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 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 2.9(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 32 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, 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 and No/100ths Dollars ($50,000) 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), 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 2.11 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, 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, 33 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 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 34 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 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 Indemnification 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 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: ADI Mesa Partners - AMCC, L.P. c/o The Allen Group 4365 Executive Drive, Suite 850 San Diego, California 92122-2130 Attention: Mr. Steven L. Black Facsimile: 619-550-1935 35 To Tenant: Applied Micro Circuits Corporation 61 95 Lusk Boulevard San Diego, California 92121-2793 Attention: Mr. Joel O. Holliday Facsimile: 619-535-6800 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, Allen Development, Inc., a California corporation, shall be fully and personally liable for claims by Tenant relating to Landlord's obligations under Sections 2.1 (The Improvements), 2.5 (Liquidated Damages for Delay in Substantial Completion) and 2.8 (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: (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. 36 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. 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 "D" 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. 37 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, 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 (i) The Irving Hughes Group, Inc., and (ii) CB Commercial Real Estate Group, Inc., as brokers in connection with this Lease. Landlord shall be responsible for paying the commissions owing to such brokers under separate written agreements between Landlord and such brokers in the amount of Three Hundred Seventy Six Thousand Dollars ($376,000), which shall be shared equally between them. 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. 20.23 Attorneys' 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. 38 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: ADI MESA PARTNERS - AMCC, L.P., a California limited partnership By: Allen Development, Inc.,a California corporation Its General Partner By: ---------------------------------- Steven L. Black Its: President TENANT: APPLIED MICRO CIRCUITS CORPORATION, A Delaware Corporation By: ---------------------------------- JOEL O. HOLLIDAY Its: Vice President, Finance and Administration By: Allen Development, Inc., a Califoration Corporation Its General Partner By: /s/ S L Black ------------------------ Steven L. Black Its: President TENANT: APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation By: /s/ Joel O. Holliday -------------------------- Joel O. Holliday Its: Vice President, Finance and Administartion 39 EXHIBIT "A" LEGAL DESCRIPTION OF PROPERTY Parcel 2 of Parcel Map No. 17755 in the City of San Diego, County of San Diego, State of California, filed in the Office of the County Recorder of San Diego County September 17, 1996, as File No. 1996-474607 of Official Records. A-1 EXHIBIT "B" PRELIMINARY PLANS AND SPECIFICATIONS PACIFIC CORNERSTONE ARCHITECTS, INC. LEASE EXHIBIT B SHELL BUILDING & SITEWORK OUTLINE SPECIFICATIONS A BUILD-TO-SUIT FOR AMCC OCTOBER 17, 1996 PACIFIC CORNERSTONE ARCHITECTS, INC. 8810 REHCO ROAD, SUITE 'C' SAN DIEGO, CA 92121 (619) 677-9880 B-1 PROJECT DATA PROJECT: AMCC Parcel 2 of Parcel Map 17755 LOCATION: Lusk/Mira Mesa Business Park East II, Unit 2 DATE: May 6, 1996 July 30, 1996 AND REVISED OCTOBER 17, 1996 1. Construction Type IIIN - Tilt Up Concrete and steel Frame with Glass Curtainwall 2. Number of Stories One Story with Mezzanine 3. Use Office, Manufacturing, Warehouse 4. Use Zone Planned Industrial Development #88-0499 5. Square Footage 89,190 sf (Gross) 6. Est. Site Area 4.901 acres (gross) 7. Est. Site Coverage 42% 8. Parking Data 297 cars (3.33/1000) 9. Loading Provide one 12'x14' grade level door 10.Trash and Recycling Provide two enclosures for two standard (4'x7') trash bins. 11. Floor Height 14'-0" 12. Clear Height 9'-12' ceiling height in manufacturing area 9'-23' ceiling height in office area 24' clear in warehouse 13. Panel Height 34' to parapet 14. Drive Aisle Widths 24'/26' as shown 15. Fire Sprinklers Fully Fire Sprinklered to serve a density of .33 GPM over the most remote 3,000 s.f. of Warehouse area and .15/2000 s.f. at Office areas with provision for .33 gpm over 3,000 sf 16. Skylights Provide one (1) 8x8 at lobby and six (6) 4x8 acrylic skylights in the open office areas. Any additional skylights shall be included within the T.I. allowance 17.Electrical 277/480 3000 amp, 3 phase, 4 wire service DESCRIPTION: The project consists of a build-to-suit on Lot 2. SCOPE: All building improvements shall be complete in every respect as defined by, but not limited to, the content of the schematic drawings and outline B-2 specifications. AMCC is making a move toward an "open interactive teaming" environment from its current compartmentalized atmosphere. An emphasis will be placed on flexible space where natural light, vision to outdoors and white board meeting areas will be important to a desirable workplace. CODES: The building shall be Type III non-rated, B occupancy. All construction shall conform to local and state codes and regulations in effect at the time of construction. All placement of concrete, reinforcing steel in masonry units and/or concrete and all field weld plates and field welding shall be inspected by an independent testing laboratory. VALUE ENGINEERING: Contractor(s) are encouraged to provide value engineering alternates to the attention of the Architect for review and consideration. DIVISION I GENERAL REQUIREMENTS All work shall be in conformance with all applicable codes and regulations. Contractor shall be responsible for coordination of all work to be performed and for conformance to the contract documents. DIVISION 2 SITEWORK Earthwork Provide all grading and reshaping of existing site as required to achieve conformance with new finish grade elevations. A balanced site is assumed. Site Utilities Provide all sewer, gas, water, storm drain, electrical, telephone and cable television services as required. Irrigation All landscaped areas to be fully irrigated and be operated by a central automatic controller. Proposed parkway landscaping is included. Provide planter drainage per minimum design guideline standards. Landscaping Provide plant material and soil amendments per minimum guidelines standards. Walkway Finishes Provide an allowance of 8000 s.f. of natural color, 4" nominal thickness over natural grade Finishes enhanced paving. Enriched paving at entry plaza and patio area as shown on landscape plan. Finishes to be selected by Architect. Asphalt Concrete Asphalt concrete paving over class II crushed aggregate base minimum thickness to be 3" A.C. over 5" base at parking; 31/=" A.C. over 6" base at drives and 4" A.C. over 7" base at heavy truck traffic areas; 6" concrete with #3 at 24" O.C. at truck areas, or as specified per soils report. Provide sand seal finish. Paving Curb Mow Strips All curb and gutters shall be constructed of concrete in accordance to City of San Diego & Standards. B-3 DIVISION 3 CONCRETE Foundations Continuous and pad footings of reinforced concrete at slab on grade, columns and shear walls as required. Floors Slab-on-grade minimum 6" thick 3,000 P.S.I., concrete slab on grade, reinforced with #3 rebar at 18" o.c., over 4" sand. Include visqueen at all areas. Walls 61/2" minimum thick, natural color, reinforced concrete tilt-up panels with 3/4" deep recesses and reveals. Sandblasted and/or painted finish where indicated on the drawings. Columns 1'-0'x3'-0" natural color, concrete columns. Paint to match building. Trash Enclosures 6'-0" high tilt-up concrete with finish to match buildings. Mechanical 9'-0" high tilt-up concrete with finish to match building, Iouvers and Iouvered gates as required by mechanical equipment. Enclosures DIVISION 4 MASONRY Split faced natural color concrete as required for retaining wall. Deep strike and flush strike joints for pattern in the stacked bond arrangement. (See civil and architectural drawings.) DIVISION 5 METALS Columns 7"x7" steel columns, base plates and connection as required.(bay spacing per plan) Miscellaneous Metals Concrete panel embeds, steel guards and metal pipe crash posts, steel roof access ladder and trash enclosure hardware will be provided under this section of work. (See Division 7 for roof access hatch). Preformed Metal Sidings Provide 22 gauge galvanized steel siding with ribbed pattern P-13 by Curoco or equal for trash enclosure gate covering. Roof Screen None provided. Roof screening to be achieved by building parapet. Metal Roof 24 ga. galvalum standing seam metal roof over one layer, 5/8" duraboard substrate. Framing per structural drawings. DIVISION 6 WOOD AND PLASTICS Glue Laminated Lumber & Wood Trusses All major roof framing to consist of members as determined by contractor. Size and length as required. All lumber to comply with regulations as specified in rough carpentry regulations below. B-4 Roof 1/2" nominal plywood over 2 x 6's at 24" o.c. panelized roof system. Rough Carpentry All soffit-framing, roof framing and bracing shall conform to applicable requirements for lumber grading as specified in West Coast Lumber Inspection Bureau Grading and Dressing Rule No. 16, the Western Wood Products Association, and the American Plywood Association. In addition to complying with applicable codes and regulation, comply with pertinent recommendations contained in the 1994 edition of the UBC. Finish Carpentry Included in Tenant Improvement Allowance. DIVISION 7 MOISTURE AND THERMAL PROTECTION Membrane All roofs shall have a four-ply fiberglass built-up roofing system with capsheet (i.e., Manville Roofing specification roofing 4 GNC). Provide 10 year guarantee/maintenance plan. Building/Sound & Thermal Insulation Included in Tenant Improvement Allowance. Roof Drainage Provide internal roof and overflow drains. Roof drains to connect to below grade storm drain where accessible or daylight at face of curb or building wall in loading areas. Minimum roof slope to be 1/4" per foot. Sealants Utilize silicone base sealant at all glazing conditions. Concrete panel joints are to receive polyurethane sealant with 1" polyurethane backer rod. Sealants used in walking surfaces shall be polyurethane type. Colors to be selected by Architect/Tenant. Sheet Metal Provide all sheet metal work for the building, complete; including reglets, and counter flashings for roofing. Materials to be galvanized sheet metal, 24 gauge minimum thickness. Roof Accessories Provide roof hatch by "Bilco" Type S-20 (2'-6" X 3'-0"). Locate in telephone room. Skylights Provide twenty nine (29) skylights by Bristol Fiberlite Industries model. 4896 ALCMDD (4'-0" x 8'-0") at conditioned areas. Skylight at Lobby to be (3) 8 x 8 pyramid type double dome skylights by Bristol Fiberlite Industries. Additional skylights to be included in the Tenant Improvement Allowance. Draft Curtains Included in Tenant Improvement Allowance. DIVISION 8 DOORS AND WINDOWS Custom Interior Doors Included in Tenant Improvement Allowance. Entry Doors Provide (1) pair of herculite doors at lobby. Provide total of 2 pair and 10 single 3'-0" X 8'-10" X 1-3/4" narrow stile aluminum and glass system. Frame finish to be as specified in "Aluminum Framing" below. B-5 Steel Doors Provide 18-gauge 3'-0" X 8'-10"X 1-3/4" hollow metal steel doors, frames and stops. Prime and paint (see Division 9, painting). At all manufacturing areas typical. All fire-rated doors and frames to comply with UBC sec. 4306 All fire-rated doors and entry doors shall be equipped with closers. Hardware All builder's hardware shall be 626 finish (satin stainless steel finish). Lock and latch sets shall be equal to Schlage Series L, Full mortise with lever handle design. All fire rated doors and storefront entry doors shall be equipped with closures. All hardware shall meet state Title 24 requirements for handicapped accessibility. Provide 12" high satin stainless kick plates at toilet room doors. Overhead Coiling Doors Provide one (1) 12'x14' overhead coiling doors, constructed of 20-gauge minimum slats. Provide hand-operated chain drive opening and closing mechanism. Prime and paint (see Division 9, painting). Aluminum Framing All extruded aluminum sections shall be 2"x 4-1/2" off-set flush glazed (silicone butt joint) system. Interior finish to be black silicone polyester powder coat. Exterior custom color finish to be factory applied, oven baked, Color to be selected by the Architect/Owner. Exterior Glass & Glazing Glass to be noted on drawings from the following categories: Curtain Wall Glass: 1/4" High Performance. Storefront Glass: 1/4" Greylite 14% by PPG Industries. Glass selections are for general reference only. See plans for specific glass types and locations. Interior Glass & Glazing Included in Tenant Improvement Allowance. DIVISION 9 FINISHES Carpeting Included in Tenant Improvement Allowance. Vinyl Flooring Included in Tenant Improvement Allowance. Interior Painting Included in Tenant Improvement Allowance. Wood Caps Included in Tenant Improvement Allowance. Exterior Wall Finish Concrete tilt-up panels and concrete columns to receive painted finish. Reveals to be smoothed finished. B-6 Metal Framing & Furring Steel studs shall be 16,20 and 25 gauge as indicated on drawings or required. Drywall furring channels shall be 25 gauge "hat" sections. Backing plates shall be 1/8" steel of proper size to accommodate fastenings and shall be welded to 20 gauge steel studs, See drawings for specific size and locations, Gypsum & Drywall Provide gypsum wallboard at designated locations as required in Shell Building. Board thickness to be 5/8" at vertical and 5/8" at horizontal surface applications, In areas requiring fire ratings, wall board shall be 5/8" "Type X". In areas subject to moisture, use water resistant (WR) gypsum board. All gypsum board surfaces shall be finished as smooth wall to receive a Lo-GIo satin sheen type paint. Ceramic Tile Included in Tenant Improvement Allowance. Slate Tile Included in Tenant Improvement Allowance. Exterior Soffits Soffits to be constructed from 5/8" moisture resistant gypsum board. Provide 1/8" thick plaster skim coat. Color by Architect. Provide allowance of 300 s.f. in Shell Building. Suspended Acoustical Ceilings Included in Tenant Improvement Allowance. Warehouse Floors Included in Tenant Improvement Allowance. DIVISION 10 SPECIALTIES Toilet Accessories Included in Tenant Improvement Allowance. Window Coverings Included in Tenant Improvement Allowance. Monument Signage Included in Tenant Improvement Allowance. Signage Provide all site and building signage necessary for proper identification of handicapped parking areas, fire lanes and building address and identification. Fire Extinguishers Provide as required by Code as part of the Shell Building. DIVISIONS 11 Lunch Room Equipment All lunch room and related food preparation appliances to be provided by Tenant. Athletic Equipment All athletic and recreational equipment to be provided by Tenant. Projection Screen Included in the Tenant Improvement Allowance. DIVISION 12 Furnishings All interior and exterior desks, tables, chairs, system furniture, whiteboards, etc. to be provided by Tenant. B-7 DIVISION 13 NOT USED DIVISION 14 NOT USED DIVISION 15 MECHANICAL Shell Plumbing Provide water stubbed to building and one single sewer line extending the length of the building. Fire Protection System Provide on-site fire hydrants as required by local jurisdictions. Entire Shell Building to be fire sprinklered with a density of .33 GPM over the most remote 3,000 square feet of warehouse area and .15/2000 sf in all other areas with provision for .33 gpm over 3,000 sf. Gas Service Stubbed pending design. Utilities Owner to pay for water and sewer hookups. Heating, Ventilating & Air Conditioning Included in Tenant Improvement Allowance. Nitrogen Tank and Piping Tank provided by Tenant. All gas piping, fittings, etc included in Tenant Improvement Allowance. DIVISION 16 ELECTRICAL General Shell electrical work shall include a complete service and distribution system of metering facilities, conduit, conductors, main switch board, sub-panels, branch circuits, and exterior lighting fixtures. Main service to the building to be 277/480 volt 3 phase 4 wire 3000 amp. minimum voltage. Building Power and Lighting Electric room and telephone room will be provided. Provide electrical per plans and outline. Electrical work shall include a pull section and main switchgear, conduit, conductors, main switch board, house panel, branch circuits, lighting fixtures, wall switches, receptacles, etc. as required for outdoor lighting. Power for Equipment Included in Tenant Improvement Allowance. Installation All electrical work to be in accordance with applicable codes. All necessary outlets, conduit, wiring, trenching, and concrete encasing shall be provided as required. Interior Lighting Included in Tenant Improvement Allowance. B-8 Exterior Lighting Provide low pressure sodium pole mounted light fixtures on 24" diameter concrete bases as required throughout the surface parking areas. Use formliner to avoid candy striping. No candy striping will be allowed. Provide low pressure sodium wall mounted light fixtures at rear of building for truck doors only. Provide incandescent round bollard fixtures and upright fixtures at walkways and landscape areas. A system of outdoor landscape, illumination fixtures shall be provided. Future power for security systems shall be provided. Telephone & Data Communications Included in Tenant Improvement Allowance. Security System Tenant to provide all necessary devices, conduit, wiring, access door hardware, etc., for installation, operation and monitoring of a security system. UPS system A UPS system to be provided by Tenant, if required. Fire Suppression @ Computer Room Special fire suppression system to be provided by Tenant, if required. END OF OUTLINE SPECIFICATIONS B-9 EXHIBIT "C" TENANT IMPROVEMENTS BUDGET ESTIMATE EX-10.10 16 INDUSTRIAL REAL ESTATE LEASE 4/8/92 EXHIBIT 10.10 MIRA MESA BUSINESS PARK STANDARD SINGLE-TENANT CENTER LEASE ARTICLE ONE BASIC TERMS This Article One contains the Basic Terms of this lease between the Landlord and Tenant named below. Other Articles, Sections and Paragraphs of this Lease referred to in this Article One explain and define the Basic Terms and are to be read in conjunction with the Basic Terms. Section 1.01 - Date of Lease. April 8, 1992 ---------------------------- Section 1.02 - Landlord. MIRA MESA BUSINESS PARK JOINT VENTURE NO. 326162, ----------------------- a Joint Venture Address of Landlord: 5897, Oberlin Drive, Suite 204, San Diego, CA 92121 Section 1.03 - Tenant. APPLIED MICRO CIRCUITS CORPORATION, a California ---------------------- Corporation. Address of Tenant: 5502 Oberlin Drive, San Diego, CA 92121 Section 1.04 - Premises. 5502 Oberlin Drive / Lots 12 & 13 of Lusk ----------------------- Industrial Park, Unit I, in the City of San Diego, San Diego California, consisting Of 20,771 square feet of office and industrial space, shown on the Site Plan attached hereto as Exhibit "A". Section 1.05 - Lease Term. - Six (6) years beginning on April 1, 1992 or ------------------------- such other date as specified in this Lease, and ending on March 31, 1998 Section 1.06 - Permitted Uses. (See Section 5.01) General offices, the ----------------------------- Production, assembly and warehousing of semiconductor products and related activities, general manufacturing, and research and development. Section 1.07 - Tenant's Guarantor (If none, So State) None. --------------------------------- Section 1.08 - Initial Security Deposit. (See Section 3.03 and Paragraph ---------------------------------------- 13.03(c)) Seventeen Thousand Four Hundred Fifty and no/100 Dollars ($ 17,450 00 * ),* on account. Section 1.09 - Vehicle Parking Space Allocated to Tenant. N/A -------------------------------------------------------- Section 1.10 - Rent and Other Charges Payable by Tenant. ------------------------------------------------------- (a) Base Rent. Twelve Thousand Four Hundred Sixty Two & 60/100 --------- Dollars ($12,462.60 ) per month for the first 24 months, as provided in Section 3.01, and shall be increased on the twenty fifth (25th) lease month to $13,501.15 per month for the next 24 months of the Lease Term; and on the forty- ninth lease month to $14,539.70 per month for the remainder of the Lease Term months (the "Adjustment Months") after the Commencement Date. 1 (b) Other Periodic Payments - (i) Real Property Taxes. (See Section 4.02); (ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section 4.04); (iv) Common Area Expense (See Section 4.05). The initial monthly common area charge is to be based upon estimates by Landlord of monthly operating costs under paragraph (4.05d); and (v) Repairs and Alterations (See Article Six). Section 1.11 - Riders. The following Riders are attached to and made --------------------- a part of this Lease: (If none, so state.) None. ARTICLE 2 LEASE TERM Section 2.01 - Lease of Premises For Lease Term. Landlord leases the ------------------------------------------------ Premises to Tenant and Tenant leases the Premises from Landlord for the Lease Term. The Lease Term is for the period stated in Section 1.05 above and shall begin and end on the dates specified in Section 1.05 above, unless the beginning or end of the lease Term is changed under any provision of this lease. The "Commencement Date" shall be the date specified in Section 1.05 above for the beginning of the Lease Term, unless advanced or delayed under any provision of this Lease. Section 2.02 -DELETED --------------------- Section 2.03 - Early Occupancy. If Tenant occupies the Premises prior to ------------------------------ the Commencement Date, tenant's occupancy of the Premises shall be subject to all of the provisions of this Lease. Early occupancy of the premises, shall not advance the expiration date of this Lease. Tenant shall pay Base Rent and all other charges specified in this Lease for the early occupancy period. Section 2.04 - Holding Over. Tenant shall vacate the Premises upon the --------------------------- expiration or earlier termination of this lease. Tenant shall reimburse Landlord for and indemnify Landlord against usual and customary damages recognized by law and incurred by Landlord from any delay by Tenant in vacating the Premises. If Tenant does not vacate the Premises upon the expiration or earlier termination of this Lease and Landlord thereafter accepts rent from Tenant, Tenant's occupancy of the Premises shall be a "month-to-month" tenancy, subject to all the terms of this Lease applicable to a month-to-month tenancy, except that the Base Rent then in effect shall be increased by twenty-five percent (25%). ARTICLE THREE BASE RENT Section 3.01 - Time and Manner of Payment. Upon execution of this Lease, ----------------------------------------- Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph 1.10(a) above for the first month of the Lease Term. On the first day of each month thereafter, Tenant shall pay Landlord the Base Rent, in advance, without offset, deduction or prior demand. The Base Rent shall be payable at Landlord's address or at such other place as Landlord may designate in writing. Landlord does hereby grant to Tenant the right to abate the payment of $6,231.30 per month of the Rent which would otherwise be due under the Lease, for the period of six (6) months commencing on April 1, 1992 and ending on September 30, 1992, amounting to the total sun of Thirty-seven Thousand Three Hundred Eighty-seven and 80/100 Dollars ($37,387.80). Section 3.02 - Cost of Living Increases. The Base Rent for any option --------------------------------------- period adjusted by way of increase every twenty-four (24) months commencing on the first day of the twenty-fifth (25th) month of the 2 option period, shall be in proportion to the increase in the Index which has occurred between the first month of the option period and the first Adjustment Month in which the Base Rent is to be increased, and in the second and succeeding Adjustment Months. in proportion to the increase in the Index which has occurred between the immediately preceding Adjustment Month and the Adjustment Month for which the Base Rent increase is being calculated. Landlord shall notify Tenant of each increase by delivering a written statement setting forth (i) the Index for the first month of the option period, with respect to the first Adjustment Month Base Rent increase, or the Index for the immediately preceding Adjustment Month, with respect to the second and succeeding rental adjustments; (ii) the Index for the Adjustment Month in which the Base Rent is to be increased; (iii) the percentage increase between those two Indices; and (iv) the new Base Rent amount. The Base Rent shall not be reduced from the last previous adjusted Base Rent by reason of any decrease in the Index Tenant shall pay the new Base Rent from its effective date until the next Adjustment Month. Landlord's notice may be given after the effective date of the increase since the Index for the appropriate month may be unavailable on the effective date. In such event, Tenant shall pay Landlord the necessary rental adjustment for the months elapsed between the effective date of the increase and Landlord's notice of such increase within ten (10) days after Landlord's notice. If the format or components of the Index are materially changed after the Date of Lease, Landlord shall substitute an index which is published by the Bureau of Labor Statistics or similar agency and which is most nearly equivalent to the Index in effect on the Date of Lease. Landlord shall notify Tenant of the substituted index, which shall be used to calculate the increase In the Base Rent unless Tenant objects in writing within fifteen (15) days after receipt of Landlord's notice. If Tenant objects, the substitute index shall be determined in accordance with the rules and regulations of the American Arbitration Association. The cost of such arbitration shall be borne equally by Landlord and Tenant. Section 3.03 -DELETED --------------------- Section 3.04 - Termination: Advance Payments. Upon termination of this -------------------------------------------- Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation) or any other termination not resulting from Tenant's default, and after Tenant has vacated the Premises in the manner required by this Lease, an equitable adjustment shall be made concerning advance rent and any other advance payments made by Tenant to Landlord, and Landlord shall refund the unused portion of the Security Deposit to Tenant or Tenant's Successor. Notwithstanding the terms contained in this Section 3.04, the Security Deposit shall be applied pursuant to California Civil Code Section 1950.7. ARTICLE FOUR OTHER CHARGES PAYABLE BY TENANT Section 4.01 - Additional Rent. All charges payable by Tenant other than ------------------------------ Base Rent are called "Additional Rent." Unless this Lease provides otherwise, all Additional Rent shall be paid with the next monthly installment of Base Rent. The term "rent" shall mean Base Rent and Additional Rent. Section 4.02 - Real Property Taxes. ----------------------------------- (a) Payment of Taxes. Tenant shall pay to Landlord the real property ---------------- tax on the Premises during the Lease Term. Such tax for any partial year of the Lease Term shall be prorated on a time basis. Landlord shall notify Tenant in writing of the real property taxes and immediately upon receipt of the tax bill furnish Tenant with a copy of the tax bill. Tenant shall pay the real property taxes semi-annually to Landlord not later than thirty (30) days before the taxing authority's delinquency date. Landlord shall 3 reimburse or credit the account of Tenant for any real property taxes by Tenant covering any period of time prior to or after the Lease Term. If Tenant fails to pay any such taxes, Landlord may pay the same, in which case Tenant shall repay such amount to Landlord with Tenant's next monthly payment of rent, together with interest at the rate set forth in Section 4.07 of the Lease. Further, if Tenant fails to pay any such taxes, Landlord may declare that the collection of real property taxes as a portion of the Operating Expenses is to be reinstated pursuant to Paragraphs 4.05(d) and 4.05(e) of the Lease, by delivering to Tenant a revised estimate and bill for Operating Expenses which reflects monthly real property tax installments. Tenant shall retain the right, at its sole cost, to challenge any real property tax on the Premises upon compliance with challenge procedures of the taxing authority imposing the tax, and Landlord shall execute any documents it deems necessary for Tenant to maintain such a challenge. (b) Definition of "Real Property Tax". "Real property tax" means: -------------------------------- (i) any fee, license fee, license tax, business license fee, commercial rental tax, levy, charge, assessment, penalty or tax imposed by any taxing authority against the Premises; (ii) any tax on the Landlord's right to receive, or the receipt of rent or income from the Premises or against Landlord's business of leasing the Premises; (iii) any tax or charge for fire protection, streets, sidewalks, road maintenance, refuse or other services provided by any governmental agency; (iv) any tax imposed upon this transaction, or based upon a re-assessment due to a change in ownership or transfer of all or part of Landlord's interest in the Premises; and (v) any charge or fee replacing any tax previously included within the definition of real property tax. "Real Property tax" does not, however, include Landlord's federal or state income, franchise, inheritance or estate taxes. Real Property Tax shall not include the increased amount of any tax based upon reassessment of the Premises due to a change in ownership or transfer of all or part of Landlord's interest in the Premises occurring during the first sixty (60) months of the Lease Term. Commencing in the 61st month of the Lease Term and continuing until the end of the Lease Term, excluding any extension period, "Real Property Tax" shall include the increased amount of any tax based upon a reassessment of the Premises due to a single change in ownership of transfer of Landlord's interest. Subsequent increases in the amount of the tax due to any additional change in ownership or transfer of interest, occurring from the 61st month through the end of the Lease Term, shall not be included within the meaning of "Real Property Tax" (c) Personal Property Taxes ---------------------------- (i) Tenant shall pay all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Tenant. Tenant shall exercise its best efforts to have personal property taxed separately from the Premises. (ii) If any of Tenant's personal property is taxed with the Premises, Tenant shall pay Landlord the taxes for the personal property in the same manner as provided for the payment of real property taxes in Paragraph 4.02(a), above. Tenant shall retain the right, at its sole cost, to challenge any real property tax on the Premises upon compliance with challenge procedures of the taxing authority imposing the tax, and Landlord shall execute any documents it deems reasonably necessary for Tenant to maintain such a challenge. Section 4.03 - Utilities. Tenant shall pay, directly to the appropriate ------------------------ supplier, the cost of all natural gas, heat, light, power, sewer service, telephone, water, refuse disposal and other utilities and services supplied to the Premises. Section 4.04 - Insurance Premiums. --------------------------------- 4 (a) Liability Insurance. During the Lease Term, Tenant shall ------------------- maintain apolicy of comprehensive public liability insurance, at Tenant's expense, insuring Landlord and Tenant against liability arising out of the ownership, use, occupancy or maintenance of the Premises and all common areas. The Initial amount of such insurance shall be at least $3,000,000 combined single limit bodily injury, personal Injury, death and property damage liability per occurrence, and shall be subject to periodic increase based upon inflation, increased liability awards, recommendation of professional insurance advisers, and other relevant factors. However, the amount of such insurance shall not limit Tenant's liability nor relieve Tenant of any obligation hereunder. The policy shall contain cross-liability endorsements if applicable, and shall insure Tenant's performance of the provisions of Section 5.04 with respect to indemnification for bodily Injury or property damage. Such policy shall contain a provision which prohibits cancellation or modification of the policy except upon thirty (30) days' prior written notice to Landlord. Tenant may discharge its obligations under this Paragraph by naming Landlord as an additional insured under a policy of comprehensive liability insurance maintained by Tenant and containing the coverage and provisions described in this Paragraph. Tenant shall deliver a copy of such policy or certificate (or a renewal thereof) to Landlord prior to the Commencement Date and prior to the expiration of any such policy during the Lease Term. If Tenant fails to maintain such policy, Landlord may elect to maintain such insurance at Tenant's expense. Landlord may also elect to maintain, at Landlord's expense, a Landlord's protective liability endorsement with respect to the Premises. Tenant shall, at Tenant's expense, maintain such other liability insurance as Tenant deems necessary to protect Tenant. Notwithstanding the terms contained in this Paragraph, the requirement that the policy of comprehensive public liability insurance insure Tenant's performance of the indemnity provisions of Sections 5.04(c) and (d) of the Lease, shall not include any obligation on the part of Tenant to maintain a policy insuring Tenant's actual performance of the Lease, including the payment of rent. The coverage requirements of Section 5.04 with respect to the acts and omissions of Tenant shall extend only to such costs, claims and liability as are generally considered to be within the broadest scope of comprehensive public liability insurance. (b) Property Insurance. During the Lease Term, Landlord shall ------------------ maintain at Tenant's expense, as provided in Section 4.04(c), policies of property liability insurance covering loss of or damage to the Premises and all common areas, in an amount not less than eighty percent (80%) of the replacement value of the Premises, to include the building shell (general office and warehouse improvements), landscaping, irrigation, and all other interior and exterior improvements constructed by Landlord. Said Tenant expense shall represent Landlord's cost of maintaining such insurance. Tenant shall have the right to maintain, at its own cost, a separate policy or policies of property damage liability insurance in the amount of the replacement value of all improvements in and to the Premises constructed by Tenant. If Tenant maintains such a separate policy of insurance, Tenant shall be required to name Landlord as an additional insured and to deliver to Landlord a certificate evidencing the existence, amounts and named insureds of such policy or policies. Such policies shall provide standard "all risk" protection as that term is used in the insurance industry, and any other perils which Landlord deems necessary excluding flood and earthquake, unless same are required by the beneficiary of a first trust deed encumbering the Premises. Tenant shall, at Tenant's expense, maintain such primary or additional insurance on its fixtures, equipment and building improvements as Tenant deems necessary to protect its interest. Tenant shall not do or permit to be done anything which invalidates any such insurance policies. If Tenant maintains a separate policy of insurance, Tenant shall name Landlord, as an additional insured and deliver to Landlord a certificate evidencing the existence, amounts and named insured of such policy or policies. Landlord and Tenant each hereby agree to release and relieve the other, and waive their entire right of recovery against the other for loss or damage arising out of or incident to the perils to be insured against under this Paragraph 4.04(b), and occurring in or about the Premises. Landlord and Tenant shall give notice to the respective insurance carriers that the foregoing mutual waiver of subrogation is contained in this Lease. 5 (c) Payment of Premiums: Insurance Policies: Tenant shall pay --------------------------------------- Landlord the amount of the insurance premiums for all policies maintained by Landlord under Paragraph 4.04(b), including the full amount, if any, by which such insurance premiums may increase over the Lease Term, whether such increases result from the nature of Tenant's occupancy, any act or omission of Tenant, the requirement of any lender referred to in Article Eleven (Protection of Lenders), the increased value of the Premises, general rate increases or increases in the amount of insurance carried or the percentage of insured value. Tenant shall pay Landlord the amount of such premium in accordance with Paragraphs 4.05(d) and 4.05(e). If the Lease Term expires before the expiration of the insurance period, Tenant's liability shall be prorated on an annual basis. Section 4.05 - Common Area operation. Use and Expenses. ------------------------------------------------------- (a) Common Area Defined. All areas within the exterior boundaries ------------------- of the Premises, including without limiting the generality of the foregoing, parking areas, driveways, truckways, delivery passages, loading docks, sidewalks. ramps, landscaped and planted areas, exterior stairways, retaining walls, fences, signs and other areas and improvements provided by Landlord for the use of Tenant and Tenant's employees and invitees, shall be deemed "common areas". Landlord may make changes at any time and from time to time in the size, shape, location, number and extent of the common areas or any of them, so far as necessary for the maintenance and repair of the common, areas or other property owned by Landlord, and without the consent of Tenant so long as such changes do not interfere with Tenant's permitted use of the Premises. No such change shall entitle Tenant to any abatement of rent. (b) Operation and Maintenance of Common Area. ----------------------------------------- (i) Landlord's Obligation. Landlord agrees to operate, --------------------- maintain and repair during the Lease Term all landscaping and landscape irrigation systems within the common areas. (ii) Tenant's Obligation. Tenant shall operate, maintain ------------------- and repair during the Lease Term all common areas excluding landscaping and landscape irrigation systems. Tenant's obligation shall include general maintenance, repair and replacement, cleaning, lighting, repaving, resurfacing, painting, trash removal, security, fire protection, compliance with the requirements of any federal, state or local government agency regulating the Premises, and contributions to necessary reserves for repair and replacement of portions of the common area which Tenant is required to maintain and repair. Tenant shall perform its obligation to repair and maintain the common area in conformance with (i) the Covenants, Conditions and Restrictions for the Lusk/Mira Mesa Industrial Park, recorded in the Office of the San Diego County Recorder, California, (ii) the Architectural Standards/Association Rules of the Lusk/Mira Mesa Industrial Park Association, a California nonprofit corporation, and (iii) rules and regulations for repair and maintenance of common areas as may be prescribed from time to time by Landlord. In the event that Tenant fails, refuses or neglects to maintain and repair promptly and adequately its obligation as herein specified, Landlord may, but shall not be required to do so, undertake or complete such acts of maintenance, repair and replacement of the common area as Landlord deems necessary, without prior notice and at Tenant's sole cost and expense. At Landlord's option, Tenant shall reimburse Landlord for all costs and expenses of Landlord thereby incurred in either of the following manners: (i) Payment within twenty (20) days after receipt by Tenant from Landlord of a statement setting forth such costs and expenses, or (ii) the estimated monthly cost to Landlord for providing 6 such maintenance and repair services shall be included as a portion of the Operating Expenses, defined in Paragraph 4.05(d)(i) below, and paid by Tenant pursuant to Paragraph 4.05(e) below. Such costs and expenses shall be deemed to be Additional Rent. (a) Use of Common Areas. The use and occupancy by Tenant of ------------------- the Premises shall include the use of common areas. (b) Operating Expenses. Tenant shall pay to Landlord all ------------------ costs and expenses (the "Operating Expenses") incurred by Landlord in the performance of its obligation for the operation, management , repair and maintenance of the Premises (including the common areas) during the Lease Term. Such expenses shall include, without limitation, the following: (i) expenses incurred by Landlord pursuant to Articles Four and Six of this Lease; (ii) expenses incurred by Landlord in connection with the Premises for general landscaping, gardening and irrigation maintenance and repair; (iii) contributions toward any reasonable reserves for repairs and replacements of those portions of the Premises which Landlord is required to maintain and repair under this Lease and the actual, cost of any repair or replacement in excess of the amount of any such reserve therefor; (iv) all charges, surcharges and other levies imposed by, and all costs (whether or not capital in nature) of compliance with the requirements of any federal, state or local government agency regulating the Premises; (v) regular and special assessments levied by the Lusk/Mira Mesa Industrial Park Association against the Premises. Notwithstanding the terms contained in this Paragraph, in no event shall the Common Area expenses increase by more than four percent (4%) per annum, on a cumulative basis, during the Lease Term, as defined in Section 4.05. Landlord shall notify Tenant annually in writing of the collection and application of funds for such reserves described in subparagraph (iii) above. (c) Billing and Payment of Operating Expenses Tenant shall retain ----------------------------------------- the right, at its sole cost, to challenge any real property tax on the Premises upon compliance with challenge procedures of the taxing authority imposing the tax, and Landlord shall execute any documents it deems reasonably necessary for Tenant to maintain such a challenge. (i) Notice. Landlord shall notify Tenant at least annually of the ------ Operating Expenses. The notice shall include a written estimate of Operating Expenses for the coming period, which period shall be for a number of full calendar months not to exceed twelve (12) in number, and shall also include the estimated Operating Expenses for the coming period divided by the number of calendar months in the period, which shall be the amount of each installment which Tenant shall thereafter be required to pay on account of Operating Expenses until Tenant is notified of a different amount. (ii) Time of Payment. Tenant shall pay to Landlord (without --------------- demand), on or before the first (1st) day of each calendar month of the Lease Term, Tenant's monthly installment of Operating Expenses as shown on the notice which Tenant has most recently received from Landlord pursuant to subparagraph (i) above or at Landlord's option as actually incurred and billed by Landlord, either in advance or in arrears, from time to time, but not more often than monthly. These item shall be deemed to be Additional Rent and the failure of Tenant to pay any such installment on or before such due date, and without any deduction or offset, shall carry with it the same consequences as Tenant's failure to pay rent under this Lease. 7 (iii) Estimated Operating Expenses. Until Tenant has received its ---------------------------- first notification from Landlord pursuant to subparagraph (i) above, Tenant shall pay its monthly installments of the initial Common area charge set forth in Article One of this lease. (iv) Annual Adjustment. Subsequent to the end of each calendar year, ----------------- Landlord shall furnish Tenant with a statement of the actual amount of Operating Expenses for the preceding calendar year. If the total amount paid by Tenant is less than the actual amount due from Tenant, Tenant shall pay to Landlord the difference within twenty (20) days after the date of the statement. Any excess of the amount paid by Tenant aver the actual due from Tenant shall be credited against installments of Operating Expenses thereafter due from Tenant. (v) Revised Estimates. Nothing contained in this Section shall be ----------------- construed to limit the right of Landlord from time to time during any calendar year to revise its estimates of the Operating Expenses and to (i) submit a revised bill to Tenant containing increased monthly installments to be payable by Tenant for the remainder of such period pursuant to this Section; and/or (ii) to bill Tenant for the difference between the aggregate amount of the monthly installments for the preceding months of the period which would have been payable by Tenant hereunder if based upon the revised estimates and the aggregate amount of the monthly installments for the preceding months payable by Tenant on the due date for each such installment. If Landlord elects to proceed pursuant to clause (ii) of the preceding sentence, Tenant shall pay to Landlord the amount shown on any such bill within ten (10) days of Tenant's receipt thereof. (vi) Taxes. The taxes payable by Tenant to Landlord under this ----- Section and Section 4.02 of this Lease which are levied or assessed for the fiscal tax year in which the Lease Term commenced, or which are levied or assessed for the fiscal tax year in which the lease Term expires, shall be prorated. Landlord shall have the right to notify Tenant of any amount payable by Tenant to Landlord for taxes payable to Landlord in accordance with this Section. Landlord may notify Tenant prior to Landlord's receipt of assessment notices and/or tax statements or bills covering any and all taxes. In the event that the amount of any tax for any fiscal tax year is not known to Landlord at the time of any of Landlord's notices to Tenant, Landlord may estimate the amount and base the notice upon the estimated amount. Landlord and Tenant shall adjust the estimated amount in accordance with the provisions of subparagraph (v) above when the actual amount of the tax is known to Landlord. Section 4.06 - Late Charges. Tenant's failure to pay rent promptly may --------------------------- cause Landlord to incur unanticipated costs. The exact amount of such costs are impractical or extremely difficult to ascertain. Such costs may include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by any ground lease, mortgage or trust deed encumbering the Premises. Therefore, if Landlord does not receive any rent payment within ten (10) days after it becomes due, Tenant shall pay Landlord a late charge equal to six percent, (6%) of the overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of such late payment. Section 4.07 - Interest on Past Due Obligations. Any amount owed by Tenant ----------------------------------------------- to Landlord which is not paid when due shall bear interest at the maximum rate allowed by law, not to exceed the discount rate of the Federal Reserve Bank of San Francisco, plus five percent (5%), from the due date of such amount. However, interest shall not be payable on late charges to be paid by Tenant under this Lease. The payment of interest on such amounts shall not excuse or cure any default by Tenant under this Lease. 8 ARTICLE FIVE USE OF PREMISES Section 5.01 - Permitted Uses. Tenant may use the Premises only for the ----------------------------- Permitted Uses set forth in Section 1.06 above. Section 5.02 - Manner of Use. The Covenants, Conditions and Restrictions ---------------------------- of Lusk Industrial Park are attached to, and made a part of, this lease. Tenant shall not cause or permit the Premises to be used in any way which constitutes a violation of any law, ordinance, governmental regulation or order, or any Covenants, Conditions and Restrictions, or any amendment, supplement or restatement thereof, recorded against the real property of which the Premises are a part, which interferes with the rights of tenants of the development of which the Premises are a part, or which constitutes a nuisance or waste. Tenant shall obtain and pay for all permits, including a Certificate of Occupancy, required for Tenant's occupancy of the Premises and shall promptly take all substantial and non-substantial actions necessary to comply with all applicable statutes, ordinances, rules, regulations, orders, covenants, conditions and restrictions of record, and requirements regulating the use by Tenant of the Premises, including the Occupational Safety and Health Act. Section 5.03 - Signs and Auctions. Tenant shall not place any signs on or --------------------------------- about the Premises or common areas without Landlord's prior written consent, which consent shall not be unreasonably withheld. Tenant shall not conduct or permit any auctions or sales at the Premises. Section 5.04 - Indemnity. Tenant shall indemnify Landlord against and hold ------------------------ Landlord harmless from any and all costs, claim or liability arising from: (a) Tenant's use of the Premises; (b) the conduct of Tenant's business or anything else done or permitted by Tenant to be done in or about the Premises; (c) any breach or default in the performance of Tenant's obligations under this lease; (d) any misrepresentation or breach of warranty by Tenant under this lease; or (e) other acts or omissions of Tenant. Tenant shall defend Landlord against any such cost, claim or liability at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any reasonable legal fees or costs incurred by Landlord in connection with any such claim. As a material part of the consideration to Landlord, Tenant hereby assumes all risk of damage to property or injury to persons in or about the Premises arising from any cause, except for any damage to property or injury to persons arising from acts or omissions of Landlord, and Tenant hereby waives all claims in respect thereof against Landlord, except for any claim arising out of Landlord's gross negligence or willful misconduct, to the extent not covered by insurance provided under the term of this lease. Landlord shall indemnify Tenant against and hold Tenant harmless from any and all costs, claims or liability arising form the negligent acts or intentional misconduct of Landlord, to the extent not covered by insurance provided under the terms of the Lease. Landlord shall indemnify Tenant against and hold Tenant harmless from any and all costs, claims or liability arising from the negligent acts or intentional misconduct of Landlord, to the extent not covered by insurance provided under the terms of the lease. Billing and Payment of ---------------------- Operating Expenses. Tenant shall retain the right, at its sole cost to - ----------------------------------------------------------------------- challenge any real property tax on the Premises upon compliance with challenge - ------------------------------------------------------------------------------ procedures of reasonably necessary for Tenant to maintain such a challenge. - --------------------------------------------------------------------------- Section 5.05 - Landlord's Access. Landlord or its agents may enter the -------------------------------- Premises at all reasonable times to show the Premises to potential buyers, investors or tenants or other parties, or for any other purpose Landlord deems necessary, provided that, Tenant has given its consent to such entry, after being given reasonable notice, except in the case of an emergency. Tenant shall not unreasonably withhold its consent. Tenant may refuse entry where such entry would disrupt essential operations. Landlord may also place 9 customary "For Sale" or "For Lease" signs on the Premises which do not unreasonably interfere with Tenant's permitted use of the Premises, upon written approval from Tenant which shall not be unreasonably withheld. Section 5.06 - Quiet Possession. If Tenant pays the rent and complies with ------------------------------- all other terms of this lease, Tenant may occupy and enjoy the Premises for the full lease Term, subject to the provisions of this Lease. ARTICLE SIX CONDITION OF PREMISES: MAINTENANCE, REPAIRS AND ALTERATIONS Section 6. 01 - Existing Conditions. Tenant accepts the Premises in their ----------------------------------- condition as of the execution of this Lease, subject to all recorded matters, laws, ordinances, and governmental regulations and orders. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation, as to the condition of the Premises or the suitability of the Premises for Tenant's intended use. Section 6.02 - Exemption Of Landlord from Liability. Landlord shall not be --------------------------------------------------- liable for any damage or injury to any person, business (or any loss of income therefrom), goods, wares, merchandise or other property of Tenant, Tenant's employees, invitees, customers or any other person, in or about the Premises, whether such damage or injury is caused by or results from: (a) fire, steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires. appliances, plumbing, air conditioning or lighting fixtures or any other cause; or (c) conditions arising in or about the Premises, or from other sources or places. Landlord shall not be liable for any such damage or injury even though the cause of or the means of repairing such damage or injury are not accessible to Tenant. The provisions of this Section 6.02 shall not, however, exempt Landlord from liability for Landlord's negligence or willful misconduct, to the extent not covered by insurance that is provided under the terms of this Lease. Section 6.03 - Tenant's Obligations. ------------------------------------ (a) Except for the obligations of Landlord under Paragraph 4.05(b), Tenant shall keep in good order, condition and repair the Premises and every part, structural and nonstructural (whether or not such portion of the Premises requiring repair, or the means of repairing the same are reasonably or readily accessible to Tenant, and whether or not the need for such repairs occurs as a result of Tenant's use, any prior use, the elements or the age of such portion) including, without limiting the generality of the foregoing, all plumbing, heating, air conditioning, ventilating, electrical, lighting facilities and equipment within the Premises, fixtures, walls (interior and exterior), floors, windows, doors, plate glass and skylights located within the Premises, and all common areas, driveways, parking areas, truck ways, delivery passages, loading docks, sidewalks, ramps, exterior stairways, retaining walls, fences, signs and other areas and improvements of the Premises. (b) If Tenant fails, refuses or neglects to perform its obligations under this Section 6.03, Landlord may, but shall not be required to do so, perform such obligations on Tenant's behalf as Landlord deems necessary to put the Premises in good order, condition and repair, without prior notice and at Tenant's sole cost and expense. At Landlord's option, Tenant shall reimburse Landlord all costs and expenses of landlord thereby incurred in either of the following manners: (i) payment within 20 days after receipt by Tenant from Landlord of a statement setting forth such costs and expenses, or (ii) the estimated monthly cost to Landlord for performing such obligation of Tenant shall be included as a portion of the Operating 10 Expenses, defined in Paragraph 4.05(d)(i) above, and paid by Tenant pursuant to Paragraph 4.05(e) above. Such costs and expenses shall be deemed to be Additional Rent. Section 6.04 - Landlord's Obligations. Except for the obligations of ------------------------------------- Landlord under Paragraph 4.05(b), Article Seven (Damage or Destruction) and Article Eight (Condemnation), it is intended by the parties hereto that Landlord have no obligation, in any manner whatsoever, to repair and maintain the Premises and the common areas nor the equipment therein, whether structural or nonstructural, all of which obligations are intended to be that of the Tenant under Section 6.03 hereof. Tenant, expressly waives the benefit of any statute now or hereinafter in effect which would otherwise afford Tenant the right to make repairs at Landlord's expense or to terminate this Lease because of landlord's failure to keep the Premises and the common areas in good order, condition and repair. Section 6.05 - Alterations, Additions, Improvements and Repairs. ---------------------------------------------------------------- (a) Tenant shall not make any alterations, additions, improvements or repairs to the Premises without Landlord's prior written consent, except for nonstructural alterations which do not exceed Three Hundred Thousand Dollars ($300,000.00) cumulative total cost over the Lease Term, and which are not visible from the outside of the Premises. Landlord may require Tenant to provide demolition and/or lien and completion bonds in form and amount satisfactory to Landlord. Tenant shall promptly remove any alterations, additions, improvements or repairs constructed in violation of this Paragraph 6.05(a) upon Landlord's written request. All alterations, additions, improvements and repairs will be accomplished in a good and workmanlike manner, in conformity with all applicable laws and regulations, and by a contractor approved by Landlord. Upon completion of any such work, including any improvements undertaken by Tenant prior to the Commencement Date, Tenant shall provide Landlord with "as-built" plans, copies of all construction contracts, and proof of payment for all labor and materials. The parties recognize that substantial interior alterations and improvements will be made from time to time by Tenant during the course of the Lease Term. Landlord shall not unreasonably withhold its consent to such alterations and improvements. (b) Tenant shall pay when due all claims for labor and material furnished to the Premises. Tenant shall give Landlord at least ten (10) days' prior written notice of the commencement of any work on the Premises. Landlord may elect to record and post notices of non-responsibility on the Premises. Section 6.06 - Condition upon Termination. Upon the termination of this ----------------------------------------- Lease, Tenant shall surrender the Premises to Landlord, broom clean and in the same condition as received except for ordinary wear and tear which Tenant was not otherwise obligated to remedy under any provision of this Lease. However, Tenant shall not be obligated to repair any damage which Landlord is required to repair under Article Seven (Damage or Destruction). In addition, Landlord may require Tenant to remove any alterations, additions or improvements or any portion thereof, other than the original Tenant improvements constructed and to restore the Premises to their prior condition, all at Tenant's expense. Landlord shall exercise this right to require removal by Tenant upon the earlier of: (a) Landlord's issuance of written consent to make alteration, additional improvements or repairs; (b) if Landlord's consent is not required, thirty (30) days after Tenant's delivery of "as-built" plans to Landlord; or (c) if Landlord's consent is not requested and Tenant fails to provided Landlord with "as-built" plans at any time prior to the termination of the Lease. All alterations, additions and improvements which Landlord has not required Tenant to remove shall become landlord's property and shall be surrendered to Landlord upon the termination of this Lease, except that Tenant may remove any of Tenant's trade fixtures, personal property, machinery or equipment which can be removed without material damage to the Premises. Tenant shall repair, at Tenant's expense, any damage to the Premises caused by the removal of any such trade fixtures, personal property, machinery or equipment. 11 In no event, however, shall Tenant remove any of the following materials or equipment without Landlord's prior written consent: any power wiring or power panels; lighting or lighting fixtures; wall coverings; drapes, blinds or other window coverings; carpets or other floor coverings; heaters, air conditioners or any other heating or air conditioning equipment; fencing or security gates; or other similar building operating equipment and decorations. ARTICLE SEVEN DAMAGE OR DESTRUCTION Section 7.01 - Partial Damage to Property. Tenant shall notify Landlord in ----------------------------------------- writing immediately upon the occurrence of any damage to the Premises. For purposes of this Lease, partial damage shall be defined to include destruction of or damage to the Premises, the repair of which would cost 33-1/3% or less of the replacement cost. If the Premises are only partially damaged and if the proceeds received by Landlord from the insurance policies described in Paragraph 4.04(b) are sufficient to pay for the necessary repairs, this Lease shall remain in effect and Landlord shall repair the damage as soon as reasonably possible. Landlord may elect to repair any damage to Tenant's fixtures, equipment, or improvements. If the insurance proceeds received by Landlord are not sufficient to pay the entire cost of repair, or if the damage was due to a cause not covered by the insurance policies which Landlord maintains under Paragraph 4.04(b), Landlord may elect to (a) repair the damage as soon as reasonably possible in which case this Lease shall remain in full force and effect, or (b) terminate this Lease as of the date the damage occurred. Landlord shall notify Tenant within thirty (30) days after receipt of notice of the occurrence of the damage, whether Landlord elects to repair the damage or terminate this Lease. If Landlord elects to repair the damage and if the damage was due to an act or omission of Tenant, Tenant shall pay Landlord upon demand the difference between the actual cost of repair and any insurance proceeds received by Landlord. If Landlord elects to terminate this lease, Tenant way elect to continue this Lease in full force and effect, in which case Tenant shall repair any damage to the Premises and any building in which the Premises are located. Tenant shall pay the cost of such repairs, except that, Landlord shall deliver to Tenant insurance proceeds received by Landlord for the damage repaired by Tenant. Disbursement of insurance proceeds shall be according to the same terms and procedures provided under Section 7.02. Tenant shall give landlord written notice of such election within ten (10) days after receiving Landlord's termination notice. If the damage to the Premises occurs during the last six (6) months of the Lease Term, Landlord may elect to terminate this Lease as of the date the damage occurred regardless of the sufficiency of any insurance proceeds. In such event, Landlord shall not be obligated to repair or restore the Premises and Tenant shall have no right to continue this Lease. Landlord shall notify Tenant of its election, within thirty (30) days after receipt of notice of the occurrence of the damage. Section 7.02 - Total or Substantial Destruction. For purposes of this ----------------------------------------------- Lease, total or substantial destruction shall be defined to include destruction of or damage to the Premises, the repair of which would cost in excess of 33- 1/3% of the replacement cost. If the Premises are totally or substantially destroyed by any cause whatsoever, or if the Premises are in a building which is substantially destroyed (even though the Premises are not totally or substantially destroyed), this Lease shall terminate as of the date the destruction occurred regardless of whether Landlord receives any insurance proceeds. However, if the Premises can be rebuilt within one (1) year after the date of destruction, Landlord may elect to rebuild the Premises at Landlord's own expense, in which case, this Lease shall remain in full force and effect. Landlord shall notify Tenant of such election within thirty (30) days after the occurrence of total or substantial destruction. If the Premises are totally or substantially destroyed, and Landlord does not elect to rebuild within thirty (30) days of the occurrence of the destruction and Tenant may elect to continue to Lease in full force and effect, in which case Tenant shall repair any damage to the Premises at Tenant's expense. Tenant shall make its 12 election within thirty (30) days after the date of Landlord's notice. Provided that Landlord gives timely notice to Tenant, as required, of its election not to rebuild, Tenant shall have one (1) year from the date of destruction to complete the rebuilding of the Premises. Disbursement of any insurance proceeds shall be made to Tenant in stages during the course of rebuilding, or in accordance with such other procedure as may be the policy of the insurer, and shall be subject to Landlord's right to demand customary assurances that the work to date has been completed according to plans and specifications, and lien free. If the destruction was caused by an act or omission of Tenant, Tenant shall pay Landlord the difference between the actual cost of rebuilding and any insurance proceeds received by Landlord. Section 7.03 - Temporary Reduction of Rent. If the Premises are partially ------------------------------------------ destroyed or damaged and Landlord or Tenant repairs or restores the Premises pursuant to the provisions of this Article Seven, the Base Rent payable during the period of such damage, repair and/or restoration shall be reduced according to the degree, if any, to which Tenant's use of the Premises is impaired. However, the reduction shall not exceed the sum of one year's payment of Base Rent. Except for such possible reduction in Base Rent, Tenant shall not be entitled to any compensation, reduction, or reimbursement from Landlord as a result of any damage, destruction, repair, or restoration of or to the Premises. If the Premises are totally destroyed and Landlord or Tenant rebuilds pursuant to the provisions of Article 7, the Base Rent payable during the period of destruction of rebuilding shall be reduced according to the degree to which Tenant's use of the Premises is impaired. However, the reduction shall neither exceed the sum of the (1) year's payment of Base Rent nor continue for a period in excess of one (1) year after the date of destruction. Section 7.04 - Waiver. Tenant waives the protection of any statute, code --------------------- or judicial decision which grants a tenant the right to terminate a lease in the event of the substantial destruction of the leased property. Tenant agrees that the provisions of Section 7.02 above shall govern the rights and obligations of Landlord and Tenant in the event of any substantial or total destruction to the Premises. ARTICLE EIGHT CONDEMNATION If all or any portion of the Premises are taken under the power of eminent domain or sold under the threat of that power (all of which are called "Condemnation"), this Lease shall terminate as to the part taken or sold on the date the condemning authority takes title or possession, whichever occurs first. If more than twenty percent (20%) of the floor area of the building in which the Premises are located, or which is located on the Premises, is taken, either Landlord or Tenant may terminate this Lease as of the date the authority takes title or possession, by delivering written notice to the other within ten (10) days after receipt of written notice of such taking (or in the absence of such written notice to the other within ten (10) days after the condemning authority takes possession). If neither Landlord nor Tenant terminates this Lease, this lease shall remain in effect as to the portion of the Premises not taken, except that the Base Rent shall be reduced in proportion to the reduction in the floor area of the Premises. Any Condemnation award or payment shall be distributed in the following order: (a) first, to any ground lessor, mortgagee or, under a deed of trust encumbering the Premises, the amount of its interest in the Premises; and (b) second, to Landlord, the remainder of such award, whether as compensation for reduction in the value of the leasehold, the taking of the fee, or otherwise. If this Lease is not terminated, Landlord shall repair any damage to the Premises caused by the Condemnation, except that Landlord shall not be obligated to repair any damage for which Tenant has been reimbursed by the condemning authority. If the severance damages received by Landlord are not sufficient to pay for such repair, Landlord shall have the right to either terminate this lease or make such repair at Landlord's expense. Tenant shall be entitled to the amount of any award specifically designated 13 by the condemning authority as compensation for loss or damage to (i) the value of Tenant's right of occupancy of the Premises under the Lease; (ii) Tenant's unamortized leasehold improvements and (iii) depreciation to, and the cost of removal of, Tenant's personal property and fixtures. ARTICLE NINE ASSIGNMENT AND SUBLETTING Section 9.01 - Landlord's Consent Required. No portion, of the Premises or ------------------------------------------ of Tenant's interest in this Lease may be acquired by any other person or entity, whether by assignment, mortgage, sublease, transfer, operation of law, or act of Tenant, without Landlord's prior written consent, except as provided in Section 9.02 below. Landlord shall grant or withhold its consent as provided in Section 9.04 below. Any attempted transfer without consent shall be void and shall constitute a non-curable breach of this Lease. If Tenant is a partnership, any cumulative transfer of more than twenty percent (20%) of the partnership interests shall require Landlord's consent. Section 9.02 Tenant's Affiliate. Tenant may assign this lease or sublease ------------------------------- the Premises, without Landlord's consent, to any corporation which controls, is controlled by or is under common control with Tenant, or to any corporation resulting from the merger of or consolidation with Tenant ("Tenant's Affiliate"). In such case, any Tenant's Affiliate shall assume in writing all of Tenant's obligations under this lease. Section 9.03 - No Release of Tenant. No transfer permitted by this Article ----------------------------------- Nine, whether with or without Landlord's consent, shall release Tenant or change Tenant's primary liability to pay the rent and to perform all other obligations of Tenant under this Lease. Landlord's acceptance of rent from any other person is not a waiver of any provision of this Article Nine. Consent to one transfer is not a consent to any subsequent transfer. If Tenant's transferee defaults under this lease, Landlord may proceed directly against the transferee. Landlord, shall obtain Tenant's consent to subsequent assignments of modifications of this lease by Tenant's transferee which consent shall not be unreasonably withheld. Section 9.04 Landlord's Election. Tenant's request for consent to any -------------------------------- transfer described in Section 9.01 above shall be accompanied by a written statement setting forth the details of the proposed transfer, including the name, business and financial condition of the prospective transferee, financial details of the proposed transfer (e.g., the term of and rent and security deposit payable under any assignment or sublease), and any other information Landlord deems relevant. Landlord shall have the right (a) to withhold consent, if reasonable; (b) to grant consent; or (c) if the transfer is a sublease of the Premises or an assignment of this Lease, to condition its consent on the written agreement of all parties that Landlord shall receive a one-half share of any rent to be paid by the assignee or sub-tenant which is in excess of the rent paid by Tenant under the terms of the Lease. Such one-half share shall be deemed Additional Rent for purposes of the Lease. Section 9.05 - No Merger. No merger shall result from Tenant's sublease of ------------------------ the Premises under this Article Nine, Tenant's surrender of this Lease or the termination of this lease in any other manner. In any such event, Landlord may terminate any or all subtenancies or succeed to the interest of Tenant as sublandlord thereunder. 14 ARTICLE TEN DEFAULTS: REMEDIES Section 10.01 - Covenants and Conditions. Tenant's performance of each of ---------------------------------------- Tenant's obligations under this Lease is a option as wall as a covenant. Tenant's right to continue in possession of the Premises is conditioned upon such performance. Time is of the essence in the performance of all covenants and conditions. Section 10.02 - Defaults. Tenant shall be in material default under this ------------------------ Lease: (a) If Tenant abandons the Premises or if Tenant's vacation of the Premises results in the cancellation of any insurance described in Section 4.04. (b) If Tenant fails to pay rent or any other charges required to be paid by Tenant, as and when due, and such failure continues for a period of three (3) days after receipt of written notice from Landlord to Tenant. (c) If Tenant fails to perform any of Tenant's non-monetary obligations under this Lease for a period of thirty (30) days after written notice from Landlord; provided that if more than thirty (30) days are required to complete such performance, Tenant shall not be in default if Tenant commences such performance within the thirty (30) day period and thereafter diligently pursues its completion. (d) (i) If Tenant makes a general assignment or general arrangement for the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or for reorganization or rearrangement is filed by or against Tenant and is not dismissed within ninety (90) days; (iii) if a trustee or receiver is appointed to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease and possession is not restored to Tenant within forty-five (45) days; or (iv) if substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease is subjected to attachment, execution or other judicial seizure which is not discharged within forty-five (45) days. If a court of competent jurisdiction determines that any of the acts described in this subparagraph (d) is not a default under this Lease, and a trustee is appointed to take possession (or if Tenant remains a debtor in possession) and such trustee or Tenant transfers Tenant's interest hereunder, then Landlord shall receive, as Additional Rent, the difference between the rent (or any other consideration) paid in connection with such assignment or sublease and the rent payable by Tenant hereunder. Section 10.03 - Remedies. On the occurrence of any material default by ------------------------ Tenant, Landlord may, at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may have: (a) Terminate Tenant's right to possession of the Premises by any lawful means, in which case this lease shall terminate and Tenant shall immediately surrender possession of the Premises to Landlord. In such event, Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including (i) the worth at the time of the award of the unpaid Base Rent, Additional Rent and other charges which had been earned at the time of the termination; (ii) the worth at the time of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which would have been earned after termination until the time of the award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (iii) the worth at the time of the award of the amount by which the unpaid Base Rent, Additional Rent and other charges which would have been paid for the balance of the term after the time of 15 award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; and (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, including, but not limited to, any costs or expenses incurred by Landlord in maintaining or preserving the Premises after such default, the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation or alteration of the Premises, Landlord's reasonable attorneys' fees incurred in connection therewith, and any real estate commission paid or payable. As used in subparts (i) and (ii) above, the "worth at the time of the award" is computed by allowing interest on unpaid amounts at the maximum lawful rate. As used in subpart (iii) above, the "worth at the time of the award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of the award, plus 1%. If Tenant shall have abandoned the Premises, Landlord shall have the option of (i) retaking possession of the Premises and recovering from Tenant the amount specified in this Paragraph 10.03(a), or (ii) proceeding under Paragraph 10.03(b); (b) Maintain Tenant's right to possession, in which case this lease shall continue in effect whether or not Tenant shall have abandoned the Premises. In such event, Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the rent as it becomes due hereunder; (c) Pursue any other remedy now or hereafter available to Landlord under the laws or judicial decisions of the state in which the Premises are located. Section 10.04 - Cumulative Remedies. Landlord's exercise of any right or ----------------------------------- remedy shall not prevent it from exercising any other right or remedy. ARTICLE ELEVEN PROTECTION OF LENDERS Section 11.01 - Subordination. Landlord shall not have the right to ----------------------------- subordinate this Lease to any ground lease, deed of trust or mortgage encumbering the Premises, any advances made on the security thereof and any renewals, modifications, consolidations, replacements or extensions thereof, whenever made or recorded subsequent to the date hereof, unless the ground lessor, beneficiary of the Deed of Trust or mortgage agrees that Tenant's right to quiet possession of the Premises during the Lease Term shall not be disturbed if Tenant pays the rent and performs all of Tenant's obligations under this lease and is not otherwise in default. If any ground lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of its ground lease, deed of trust or mortgage and gives written notice thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or mortgage whether this Lease is dated prior or subsequent to the date of said ground lease, deed of trust or mortgage or the date of recording thereof. The Lease shall be subordinate to the lien of the permanent loan Deed of Trust in favor of the Northwestern Life Insurance Company, Beneficiary, to be recorded against the Premises prior to the Commencement Date of the Lease, and Tenant agrees to execute such customary documents as may be necessary to effect said subordination. Section 11.02 - Attornment. If Landlord's interest in the Premises are -------------------------- acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or successor to Landlord's interest in the premises and recognize such transferee or successor as Landlord under this Lease provided that such transferee agrees that Tenant's right to quiet possession of the 16 Premises during the Lease Term shall not be disturbed if Tenant pays rent and performs all of Tenant's obligations under the Lease and is not otherwise in default. Section 11.03 - Signing of Documents. Tenant shall sign and deliver any ------------------------------------ instrument or documents necessary or appropriate to evidence any such attornment or subordination or agreement to do so. If Tenant fails to do so within fifteen (15) business days after written request, Tenant hereby makes, constitutes and irrevocably appoints Landlord or any transferee or successor of Landlord, the attorney-in-fact of Tenant to execute and deliver any such instrument or document. Section 11.04 - Estoppel Certificates. -------------------------------------- (a) Upon Landlord's written request, Tenant shall execute, acknowledge and deliver to Landlord a written statement certifying: (i) that none of the terms or provisions of this Lease have been changed (or if they have been changed, stating how they have been changed); ii) that this lease has not been, canceled or terminated; (iii) the last date of payment of the Base Rent and other charges and the time period covered by such payment; and (iv) that Landlord is not in default under this Lease (or, if Landlord is claimed to be in default, stating why). Tenant's certification that Landlord is not in default under the Lease shall be limited to defaults which are known, to the best of Tenant's knowledge, and shall not constitute a waiver of any default by Landlord not known to Tenant. Tenant shall deliver such statement to Landlord within fifteen (15) days after Landlord's request. Any such statement by Tenant may be given by Landlord to any prospective purchaser or encumbrancer of the Premises. Such purchaser or encumbrancer may rely conclusively on such statement as true and correct. (b) If Tenant does not deliver such statement to Landlord within such fifteen day period, Landlord, and any prospective purchaser or encumbrancer may conclusively presume and rely upon, the following facts: (i) that the term and provisions of this lease have not been changed except as otherwise represented by Landlord; (ii) that this Lease has not been canceled or terminated except as otherwise represented by Landlord; (iii) that not more than one (1) month's Base Rent or other charges have been paid in advance; and (iv) that landlord is not in default under this lease. In such event, Tenant shall be estopped from denying the truth of such facts. The presumption and reliance of a prospective purchaser or encumbrancer that Landlord is not in default under the Lease shall be limited to defaults which are known to the best of Tenant's knowledge. (c) Upon Tenant's written request, Landlord shall execute, acknowledge and deliver to Tenant written statement certifying: (i) that none of the terms of the Lease have been changed (or if they have been changed stating how they have been changed); (ii) that the Lease has not been canceled or terminated; (iii) the last date of payment of the Base Rent and other charges in the time period covered by such payment; and (iv) that, to the best of Landlord's knowledge and without waiving any default not known to Landlord, Tenant is not in default under the Lease (or, if Tenant is claimed to be in default, stating why). Landlord shall deliver such statement to Tenant within fifteen (15) business days after Tenant's request. Tenant may use such statement for whatever purpose it deems appropriate. (d) If Landlord does not deliver the statement described above to Tenant within such fifteen-business-day following facts: (i) that the terms and conditions of this Lease have not changed except as otherwise represented by Tenant; (ii) that this Lease has not been canceled or terminated except as otherwise represented by Tenant; and (iii) that, to the best of Landlord's knowledge, Tenant is not in default under the Lease. 17 Section 11.05 - Tenant's Financial Condition. Within fifteen (15) business -------------------------------------------- days after written request from Landlord, Tenant shall deliver to Landlord Tenant's most recent fiscal year and financial statement or the current annual financial statement of any assignee or subtenant. Tenant shall deliver to any lender designated by Landlord any financial statement required by such lender to facilitate the financing or refinancing of the Premises. Tenant represents and warrants to Landlord that (a) each such financial statement is a true and accurate statement as of the date of such statement. Within fifteen (15) business days from the date hereof, Tenant shall deliver to Landlord a copy of Tenant's most recent quarterly financial report. ARTICLE TWELVE LEGAL COSTS Section 12.01 - Legal Proceedings. Tenant shall reimburse Landlord, upon --------------------------------- demand for any reasonable attorney fees and costs incurred by Landlord from any claim or litigation for which Landlord is required to retain legal counsel in order to protect its rights as owner of the Premises. Furthermore, if any action for breach or to enforce the provisions of this Lease is commenced, the court in such action shall award to the party in whose favor a judgment is entered, a reasonable sum as attorneys' fees and costs. Such attorneys' fees and costs shall be paid by the losing party in such action. Tenant shall also indemnify Landlord against and hold Landlord harmless from all costs, expenses, demands and liability incurred by Landlord if Landlord becomes or is made a party to any claim or action (a) instituted by Tenant, or by any third party against Tenant; (b) for foreclosure of any lien for labor or material furnished to or for Tenant or such other person; (c) otherwise arising out of or resulting from any act or transaction of Tenant or such other person; or (d) necessary to protect Landlord's interest under this Lease in a bankruptcy proceeding, or other proceeding under Title 11 of the United States Code, as amended. Tenant shall defend Landlord against any such claim or action at Tenant's expense with counsel reasonably acceptable to Landlord or, at Landlord's election, Tenant shall reimburse landlord for any legal fees or costs incurred by landlord in any such claim or action. Section 12.02 - Landlord's Consent Tenant shall pay Landlord's reasonable ---------------------------------- out of pocket attorney's fees incurred in connection with Tenant's request for Landlord's consent under Article Nine (Assignment and Subletting), or in connection with any other act which Tenant proposes to do and which requires Landlord's consent. ARTICLE THIRTEEN MISCELLANEOUS PROVISIONS Section 13.01 - Non-Discrimination. Tenant promises, and it is a ----------------------------------- condition to the continuance of this lease, that there will be no discrimination against, or segregation of, any person or group of persons on the basis of race, color, sex, creed, national origin or ancestry in the leasing, subleasing, transferring, occupancy, tenure or use of the Premises or any portion thereof. Tenant shall not be held in default under the Lease for violation of this Section 13.01 unless a court of competent jurisdiction finds that Tenant has engaged in discrimination and, in addition, Tenant fails to provide reasonable means to remedy past discrimination and to assure that the past discrimination will not continue. Section 13.02 - Waiver of Subrogation. Landlord and Tenant each hereby ------------------------------------- waive any and all rights of recovery against the other, or against the officers, employees, agents or representatives of the other, for loss 18 of or damage to its property or the property of others under its control, if such loss or damage is covered by any insurance policy in force (whether or not described in this Lease) at the time of such loss or damage. Upon obtaining the policies of insurance described herein, Landlord and Tenant shall give notice to the insurance carrier or carriers of the foregoing mutual waiver of subrogation. Section 13.03 - Landlord's Liability: Certain Duties. ---------------------------------------------------- (a) As used in this Lease, the term Landlord means only the current owner or owners of the fee title to the Premises or the leasehold estate under a ground lease of the Premises at the time in question. Each Landlord is obligated to perform the obligations of Landlord under this lease only during the time such Landlord owns such interest or title. Any Landlord who transfers its title or interest is relieved of all liability with respect to the obligations of Landlord under this Lease to be performed on or after the date of transfer. However, each Landlord shall deliver to its transferee all funds previously paid by Tenant if such funds have not yet been applied under the term of this lease. Any Landlord who obtains title or interest from a transferor subject to the obligations of the Lease shall take such title or interest subject to all obligations upon Landlord established under the Lease and shall recognize and fully credit funds prior to any predecessor Landlord or Tenant. (b) Tenant shall give written notice of any failure by Landlord to perform any of its obligations under this Lease to Landlord and to any ground lessor, mortgagee or beneficiary under any deed of trust encumbering the Premises whose name and address have been furnished to Tenant in writing. Landlord shall not be in default under this Lease unless Landlord (or such ground lessor, mortgagee or beneficiary) fails to cure such non-performance within thirty (30) days after receipt of Tenant's notice. However, if such nonperformance reasonably requires more than thirty (30) days to cure, Landlord shall not be in default if such cure is commenced within such thirty (30) day period and thereafter diligently pursued to completion. (c) Upon the execution of this Lease, Tenant shall deposit with Landlord a cash Security Deposit in the amount set forth in Section 1.08 above. Landlord may apply all or part of the Security Deposit to any unpaid rent or other charges due from Tenant or to cure any other defaults of Tenant. if Landlord uses any part of the Security Deposit, Tenant shall restore the Security Deposit to its full amount within ten (10) days after Landlord's written request. Tenant's failure to do so shall be a material default under this Lease. No interest shall be paid on the Security Deposit. Landlord shall not be required to keep the Security Deposit separate from its other amounts and no trust relationship is created with respect to the Security Deposit. Section 13.04 - Severability. A determination by a court of competent ---------------------------- jurisdiction that any provision of this Lease or any part thereof is illegal or unenforceable shall not cancel or invalidate the remainder of such provision or this lease, which shall remain in full force and effect. Section 13.05 - Interpretation. The captions of the Articles or Sections ------------------------------ of this Lease are to assist the parties in reading this Lease and are not a part of the term or provisions of this Lease. Whenever required by the context of this Lease, the singular shall include the plural and the plural shall include the singular. The masculine, feminine and neuter genders shall each include the other. In any provision relating to the conduct, acts or omissions of Tenant, the term "Tenant" shall include Tenant's agents, employees, contractors, invitees, successors or others using the Premises with Tenant's expressed or implied permission. Section 13.06 - Incorporation of Prior Agreements: Modifications. This ---------------------------------------------------------------- Lease is the only agreement between the parties pertaining to the lease of the Premises and no other agreements are effective. All 19 amendments to this Lease shall be in writing and signed by all parties. Any other attempted amendment shall be void. Section 13.07 - Notices. All notices required or permitted under this ----------------------- Lease shall be in writing and shall be personally delivered or sent by certified mail, return-receipt-requested, postage prepaid. Notices to Tenant shall be delivered to the address specified in Section 1.03 above, except that upon Tenant's taking possession of the Premises, the Premises shall be Tenant's address for notice purposes. Notices to Landlord shall be delivered to the address specified in Section 1.02 above. All notices shall be effective upon delivery. Either party may change its notice address upon written notice to the other party. Section 13.08 - Waivers. All waivers must be in writing and signed by the ----------------------- waiving party. Landlord's failure to enforce any provision of this lease or its acceptance of rent shall not be a waiver and shall not prevent Landlord from enforcing that provision or any other provision of this lease in the future. No statement on a payment check from Tenant or in a letter accompanying a payment check shall be binding on Landlord. Landlord may, with or without notice to Tenant, negotiate such check without being bound to the conditions of such statement. Section 13.09 - No Recordation. Tenant shall not record this Lease without ------------------------------ prior written consent from landlord. However, Landlord and Tenant agree that concurrent with the execution of the Lease, the parties shall execute a "short form" memorandum of this Lease to be recorded within ten (10) days of its execution. The short form memorandum of this lease shall be prepared by the party requesting the recordation, and approved by both parties, which approval shall not be unreasonably withheld. Section 13.10 - Binding Effect: Choice of Law. This Lease binds any party --------------------------------------------- who legally acquires any rights or interest in this Lease from Landlord or Tenant. However, Landlord shall have no obligation to Tenant's successor unless the rights or interest of Tenant's successor are acquired in accordance with the terms of this Lease. The laws of the State of California shall govern this Lease. Section 13.11 - Corporate Authority: Partnership Authority. If Tenant is a ---------------------------------------------------------- corporation, each person signing this Lease on behalf of Tenant represents and warrants that he has full authority to do so and that this Lease binds the corporation. Within thirty (30) days after this Lease is signed, Tenant shall deliver to Landlord a certified copy of a resolution of Tenant's Board of Directors authorizing the execution of this Lease or other evidence of such authority reasonably acceptable to Landlord. If Tenant is a partnership, each person signing this Lease for Tenant represents and warrants that he is a general partner of the partnership, that he has full authority to sign for the partnership and that this Lease binds the partnership and all general partners of the partnership. Tenant shall give written notice to Landlord of any general partner's withdrawal or addition. Within thirty (30) days after this Lease is signed, Tenant shall deliver to Landlord a copy of Tenant's recorded statement of partnership or certificate of limited partnership. Section 13.12 - Joint and Several Liability. All parties signing this ------------------------------------------- lease as Tenant shall be jointly and severally liable for all obligations of Tenant. Section 13.13 Force Majeure If either party to the Lease cannot for a ----------------------------- period of up to six (6)months perform any of its obligations due to events beyond its control, the time provided for performing such obligations shall be extended by a period of time equal to the duration of such events, not to exceed six (6) months for such delay. Events beyond the party's control include, but are not limited to. acts of God, war, civil commotion, labor disputes, strikes, fire, flood, or other casualty, shortage of labor or material, government regulation or restriction and weather conditions. The provisions of this paragraph shall not operate to excuse Tenant from prompt payment of rent as required under the terms of the Lease. If such 20 delay shall continue for a period in excess of six (6) months, then Tenant may terminate the Lease if such delay shall constitute a substantial interference with Tenant's right to quiet possession of the Premises, and Landlord may terminate the Lease if such delay prevents the performance of Tenant's obligations under the Lease. Section 13.14 - Title Insurance. Tenant shall have the right to request ------------------------------- and receive, at Tenant's sole cost, a leasehold policy of title insurance from Title Insurance and Trust Company, insuring Tenant's leasehold as of the Commencement Date in a manner approved by Tenant. If requested by Tenant at the time of the execution of the Lease, and at Tenant's sole cost, Landlord shall request that a preliminary title report on the Premises be immediately delivered to Tenant by Title Insurance and Trust Company. ARTICLE FOURTEEN HAZARDOUS SUBSTANCES Section 14.01 - Hazardous Substances The term "Hazardous Substance(s)" as ------------------------------------ used in the Lease, is defined as follows: Any element, compound, mixture, solution, particle or substance, which presents danger or potential danger for damage or injury to health, welfare or to the environment including, but not limited to: (a) Those substances which are inherently or potentially radioactive, explosive, ignitable, corrosive, reactive, carcinogenic or toxic; and (b) Those substances which have been recognized as dangerous or potentially dangerous to health, welfare or to the Environment by any federal, municipal, state, county or other governmental or quasi-governmental authority and/or any department or agency thereof. Section 14.02 - Tenant's Indemnity Obligations. Tenant represents and ---------------------------------------------- warrants to Landlord that at all times during the term of the Lease and any extensions or renewals thereof, Tenant shall: (a) Promptly comply, at Tenant's own cost and expense, with all laws, orders, rules, regulations, certificates of occupancy, or other requirements, as the same now exist or may hereafter be enacted, amended or promulgated, of any federal, municipal, state, county or other governmental or quasi-governmental authorities and/or any department or agency thereof relating to the manufacturing, processing, distributing, using, producing, treating, storing (above or below ground level), disposing of Hazardous Substance(s) by Tenant or its agents and employees on or about the Premises; (b) Indemnify and hold landlord, its agents and employees, harmless from any and all demands, claims, causes of action, penalties, liabilities, judgments, damages (including consequential damages) and expenses including, without limitation, court costs and reasonable attorneys' fees incurred by Landlord as a result of (i) Tenant's failure or unreasonable delay in properly complying with such law, order, rule, regulation, certificate of occupancy or other requirement referred to in Section 14.02(a) above, or (ii) any adverse effect which results from the presence of any Hazardous Substance(s) in or about the Premises, where Tenant or Tenant's agents, employees, contractors, subtenants or lease assignees, with or without Tenant's consent has caused, either intentionally or unintentionally, Hazardous Substance(s) to be released, discharged, emitted, or disposed of on or about the Premises in violation of applicable law. If any action or proceeding is brought against Landlord, Landlord's agents or employees by reason of any such claim, Tenant, upon notice from Landlord, will defend such claim at Tenant's expense with counsel reasonably 21 satisfactory to Landlord. This indemnification by Tenant of Landlord shall survive the termination of the lease; (c) Promptly disclose to Landlord by delivering, in the manner prescribed for delivery of notice in the Lease, a copy of any forms, submissions, notices, reports, or other written documentation ("Communications") alleging that the Premises are contaminated by a Hazardous Substance(s) in or about the Premises, whether such communications are delivered to Tenant or are requested of Tenant by any federal, municipal, state, county or other government or quasi-governmental authority and/or any department or agency thereof; and (d) Notwithstanding any other provisions of the Lease, (i) allow Landlord, and Landlord's agents, access and the right to enter and inspect the Premises for the presence of any Hazardous Substance(s), at any reasonable time and in a reasonable manner so as not to distract Tenant's enjoyment of the premises and after reasonable notice to Tenant; and (ii) in the event a release of Hazardous Substance(s) occurs on or affects the Premises, Tenant shall Permit Landlord or Landlord's agents to enter the Premises at a reasonable time and in a reasonable manner so as not to distract Tenant's enjoyment of the premises and after reasonable notice to Tenant, to inspect, monitor, take emergency or long term remedial action, discharge Tenant's obligations hereunder if Tenant has failed to do so, or take any other action to restore the Premises to its original condition. (e) If all or any portion of the Premises should become unsuitable for Tenant's use as a consequence of the presence of any Hazardous Substance not released, emitted or discharged to the Premises by Tenant or its agents, employees or contractors, then Tenant shall be entitled to an abatement of all Rent and additional Rent payable hereunder to the extent of the interference with Tenant's use of the Premises occasioned thereby and, if such interference cannot be corrected or the damage resulting therefrom repaired so that the Premises will be reasonably suitable for Tenant's intended use within (one hundred twenty (120) days following the occurrence of such event, then Tenant also shall be entitled to terminate this Lease by delivery of written notice of termination to Landlord within thirty (30) days following the date on which the Premises becomes unsuitable for Tenant's use as provided above. Compliance by Tenant with any provision of this Section 14.02 shall not be deemed a waiver of any other provision hereof. Without limiting the foregoing, Landlord's consent to the Presence of any Hazardous Substance(s) shall not relieve Tenant of its indemnity obligations under the term of this Section 14.02. ARTICLE 15 FIRST OPTION TO EXTEND Tenant shall have the right to extend the Lease immediately upon the expiration of the Lease Term as set forth herein, provided that Tenant has not at any time during the Lease Term been in default of any obligation for the payment of rent under the Lease or committed any act or omission to act constituting a material breach of the Lease. The extension shall be for a period of five (5) years, and hereinafter referred to as the "First Option Period." Tenant shall give written notice of exercise of the option ("Option Notice") to Landlord no earlier than one hundred and twenty (120) days and no later than ninety (90) days prior to the expiration of the Lease Term ("Notice Period"). If Tenant fails to exercise this option to extend during the Notice Period, Tenant's option to extend shall be deemed to be extinguished upon the expiration of the Notice Period. 22 EX-10.11 17 SECURITY AGREEMENTS EXHIBIT 10.11 APPLIED MICRO CIRCUITS CORPORATION SECURITY AGREEMENT ------------------ THIS SECURITY AGREEMENT, is made as of January 30, 1992 between APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation (the "Pledgee"), and Roger A. Smullen ("Pledgor"). RECITALS -------- Pursuant to Pledgor's election to purchase 291,450 shares of the Common Stock of Pledgee (the "Shares") under the Stock Option Agreement dated March 21, 1983 (the "Option Agreement"), between Pledgor and Pledgee under Pledgor's 1982 Employee Incentive Stock Option Plan, and Pledgor's election under the terms of the Option Agreement to pay for the Shares with his promissory note (the "Note"), Pledgor has purchased the Shares at a price of $0.125 per share, for an aggregate purchase price of $36,431.25. NOW, THEREFORE, it is agreed as follows: 1. Creation and Description of Security Interest. In consideration of the --------------------------------------------- transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant to the Commercial Code of the State of California, hereby pledges all of the Shares (herein sometimes referred to as the "Collateral") represented by certificate number 612, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Note, and any extensions or renewals thereof, to be executed by Pledgor pursuant to the terms of the option Agreement, and the Pledgeholder shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. Pledgor's Representations and Covenants. To induce Pledgee to inter --------------------------------------- into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: (a) Payment of Indebtedness. Pledgor will pay the principal sum of ----------------------- the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. (b) Encumbrances. The Shares are free of all other encumbrances, ------------ defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee. (c) Margin Regulations. In the event that Pledgee's Common Stock ------------------ becomes margin-listed by the Federal Reserve Board subsequent to the execution of this Security Agreement, and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulations G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or providing any additional collateral as may be necessary to comply with such regulations. 3. Voting Rights. During the term of this pledge and so long as all ------------- payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. Stock Adjustments. In the event that, during the term of the pledge, ----------------- any stock dividend, reclassification, readjustment or other changes declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. Warrants and Rights. In the event that, during the term of the pledge, ------------------- subscription warrants or other rights or options shall be issued in connection with the Shares, such rights, warrants and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock and other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the Shares. 6. Default. Pledgor shall be deemed to be in default of the Note and of ------- this Security Agreement in the event: (a) Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; or (b) Pledgor fails to perform any of the covenants set forth in the Option Agreement or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee. In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate payment of the note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue his remedies under the California Commercial Code. 7. Release of Collateral. Subject to any applicable contrary rules under --------------------- Regulation G, there shall be released from this pledge a portion of the Shares held by Pledgeholder hereunder upon payments of the principal of the Note. The number of Shares that shall be released shall be that number of full Shares that bears the same proportion to the initial number of Shares pledged hereunder as the payment of principal bears to the initial full principal amount of the Note. 8. Withdrawal or Substitution of Collateral. Pledgor shall not sell, ---------------------------------------- withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 9. Term. The pledge of Shares herein shall continue until the payment of ---- all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency ---------- proceeding is instituted by or against it, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the event of Default. 11. Pledgeholder Liability. In the absence of willful or gross negligence, ----------------------- Pledgeholder shall not be labile to any party for any of his acts, or omissions to act, as Pledgeholder. 12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that ----------------------------------- the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein unenforceable or invalid. 13. Successors or Assigns. Pledgor and Pledgee agree that all of the terms --------------------- of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. 14. Governing Law. This Security Agreement shall be interpreted and ------------- governed under the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Security Agreement as of the day and year first above written. PLEDGOR: ______________________________________________ (Signature) ______________________________________________ (Typed or Printed Name) PLEDGEE: APPLIED MICRO CIRCUITS CORPORATION a Delaware corporation By:___________________________________________ Title:________________________________________ PLEDGEHOLDER: ______________________________________________ Secretary of Pledgor APPLIED MICRO CIRCUITS CORPORATION SECURITY AGREEMENT ------------------ THIS SECURITY AGREEMENT, is made as of January 30, 1992 between APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation (the "Pledgee"), and Roger A. Smullen ("Pledgor"). RECITALS -------- Pursuant to Pledgor's election to purchase 10,000 shares of the Common Stock of Pledgee (the "Shares") under the Stock Option Agreement dated November 26, 1981 (the "Option Agreement"), between Pledgor and Pledgee under Pledgor's 1982 Employee Incentive Stock Option Plan, and Pledgor's election under the terms of the Option Agreement to pay for the Shares with his promissory note (the "Note"), Pledgor has purchased the Shares at a price of $0.30 per share, for an aggregate purchase price of $3,000.00. NOW, THEREFORE, it is agreed as follows: 1. Creation and Description of Security Interest. In consideration of the --------------------------------------------- transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant to the Commercial Code of the State of California, hereby pledges all of the Shares (herein sometimes referred to as the "Collateral") represented by certificate number 614, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Note, and any extensions or renewals thereof, to be executed by Pledgor pursuant to the terms of the option Agreement, and the Pledgeholder shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. Pledgor's Representations and Covenants. To induce Pledgee to inter --------------------------------------- into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: (a) Payment of Indebtedness. Pledgor will pay the principal sum of ----------------------- the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. (b) Encumbrances. The Shares are free of all other encumbrances, ------------ defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee. (c) Margin Regulations. In the event that Pledgee's Common Stock ------------------ becomes margin-listed by the Federal Reserve Board subsequent to the execution of this Security Agreement, and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulations G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or providing any additional collateral as may be necessary to comply with such regulations. 3. Voting Rights. During the term of this pledge and so long as all ------------- payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. Stock Adjustments. In the event that, during the term of the pledge, ----------------- any stock dividend, reclassification, readjustment or other changes declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. Warrants and Rights. In the event that, during the term of the pledge, ------------------- subscription warrants or other rights or options shall be issued in connection with the Shares, such rights, warrants and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock and other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the Shares. 6. Default. Pledgor shall be deemed to be in default of the Note and of ------- this Security Agreement in the event: (a) Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; or (b) Pledgor fails to perform any of the covenants set forth in the Option Agreement or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee. In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate payment of the note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue his remedies under the California Commercial Code. 7. Release of Collateral. Subject to any applicable contrary rules ---------------------- under Regulation G, there shall be released from this pledge a portion of the Shares held by Pledgeholder hereunder upon payments of the principal of the Note. The number of Shares that shall be released shall be that number of full Shares that bears the same proportion to the initial number of Shares pledged hereunder as the payment of principal bears to the initial full principal amount of the Note. 8. Withdrawal or Substitution of Collateral. Pledgor shall not sell, ---------------------------------------- withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 9. Term. The pledge of Shares herein shall continue until the payment of ---- all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency ---------- proceeding is instituted by or against it, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the event of Default. 11. Pledgeholder Liability. In the absence of willful or gross negligence, ---------------------- Pledgeholder shall not be labile to any party for any of his acts, or omissions to act, as Pledgeholder. 12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that ----------------------------------- the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein unenforceable or invalid. 13. Successors or Assigns. Pledgor and Pledgee agree that all of the terms --------------------- of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. 14. Governing Law. This Security Agreement shall be interpreted and ------------- governed under the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Security Agreement as of the day and year first above written. PLEDGOR: ______________________________________________ (Signature) ______________________________________________ (Typed or Printed Name) PLEDGEE: APPLIED MICRO CIRCUITS CORPORATION a Delaware corporation By:___________________________________________ Title:________________________________________ PLEDGEHOLDER: ______________________________________________ Secretary of Pledgor APPLIED MICRO CIRCUITS CORPORATION SECURITY AGREEMENT ------------------ THIS SECURITY AGREEMENT, is made as of January 30, 1992 between APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation (the "Pledgee"), and Roger A. Smullen ("Pledgor"). RECITALS -------- Pursuant to Pledgor's election to purchase 20,000 shares of the Common Stock of Pledgee (the "Shares") under the Stock Option Agreement dated January 14, 1988 (the "Option Agreement"), between Pledgor and Pledgee under Pledgor's 1982 Employee Incentive Stock Option Plan, and Pledgor's election under the terms of the Option Agreement to pay for the Shares with his promissory note (the "Note"), Pledgor has purchased the Shares at a price of $0.30 per share, for an aggregate purchase price of $6,000.00. NOW, THEREFORE, it is agreed as follows: 1. Creation and Description of Security Interest. In consideration of the --------------------------------------------- transfer of the Shares to Pledgor under the Option Agreement, Pledgor, pursuant to the Commercial Code of the State of California, hereby pledges all of the Shares (herein sometimes referred to as the "Collateral") represented by certificate number 613, duly endorsed in blank or with executed stock powers, and herewith delivers said certificate to the Secretary of Pledgee ("Pledgeholder"), who shall hold said certificate subject to the terms and conditions of this Security Agreement. The pledged stock (together with an executed blank stock assignment for use in transferring all or a portion of the Shares to Pledgee if, as and when required pursuant to this Security Agreement) shall be held by the Pledgeholder as security for the repayment of the Note, and any extensions or renewals thereof, to be executed by Pledgor pursuant to the terms of the option Agreement, and the Pledgeholder shall not encumber or dispose of such Shares except in accordance with the provisions of this Security Agreement. 2. Pledgor's Representations and Covenants. To induce Pledgee to inter --------------------------------------- into this Security Agreement, Pledgor represents and covenants to Pledgee, its successors and assigns, as follows: (a) Payment of Indebtedness. Pledgor will pay the principal sum of ----------------------- the Note secured hereby, together with interest thereon, at the time and in the manner provided in the Note. (b) Encumbrances. The Shares are free of all other encumbrances, ------------ defenses and liens, and Pledgor will not further encumber the Shares without the prior written consent of Pledgee. (c) Margin Regulations. In the event that Pledgee's Common Stock ------------------ becomes margin-listed by the Federal Reserve Board subsequent to the execution of this Security Agreement, and Pledgee is classified as a "lender" within the meaning of the regulations under Part 207 of Title 12 of the Code of Federal Regulations ("Regulations G"), Pledgor agrees to cooperate with Pledgee in making any amendments to the Note or providing any additional collateral as may be necessary to comply with such regulations. 3. Voting Rights. During the term of this pledge and so long as all ------------- payments of principal and interest are made as they become due under the terms of the Note, Pledgor shall have the right to vote all of the Shares pledged hereunder. 4. Stock Adjustments. In the event that, during the term of the pledge, ----------------- any stock dividend, reclassification, readjustment or other changes declared or made in the capital structure of Pledgee, all new, substituted and additional shares or other securities issued by reason of any such change shall be delivered to and held by the Pledgee under the terms of this Security Agreement in the same manner as the Shares originally pledged hereunder. In the event of substitution of such securities, Pledgor, Pledgee and Pledgeholder shall cooperate and execute such documents as are reasonable so as to provide for the substitution of such Collateral and, upon such substitution, references to "Shares" in this Security Agreement shall include the substituted shares of capital stock of Pledgor as a result thereof. 5. Warrants and Rights. In the event that, during the term of the ------------------- pledge, subscription warrants or other rights or options shall be issued in connection with the Shares, such rights, warrants and options shall be the property of Pledgor and, if exercised by Pledgor, all new stock and other securities so acquired by Pledgor as it relates to the pledged Shares then held by Pledgeholder shall be immediately delivered to Pledgeholder, to be held under the terms of this Security Agreement in the same manner as the Shares. 6. Default. Pledgor shall be deemed to be in default of the Note and ------- of this Security Agreement in the event: (a) Payment of principal or interest on the Note shall be delinquent for a period of 10 days or more; or (b) Pledgor fails to perform any of the covenants set forth in the Option Agreement or contained in this Security Agreement for a period of 10 days after written notice thereof from Pledgee. In the case of an event of Default, as set forth above, Pledgee shall have the right to accelerate payment of the note upon notice to Pledgor, and Pledgee shall thereafter be entitled to pursue his remedies under the California Commercial Code. 7. Release of Collateral. Subject to any applicable contrary rules ---------------------- under Regulation G, there shall be released from this pledge a portion of the Shares held by Pledgeholder hereunder upon payments of the principal of the Note. The number of Shares that shall be released shall be that number of full Shares that bears the same proportion to the initial number of Shares pledged hereunder as the payment of principal bears to the initial full principal amount of the Note. 8. Withdrawal or Substitution of Collateral. Pledgor shall not sell, ---------------------------------------- withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of Pledgee. 9. Term. The pledge of Shares herein shall continue until the payment of ---- all indebtedness secured hereby, at which time the remaining pledged stock shall be promptly delivered to Pledgor, subject to the provisions for prior release of a portion of the Collateral as provided in paragraph 7 above. 10. Insolvency. Pledgor agrees that if a bankruptcy or insolvency ---------- proceeding is instituted by or against it, or if a receiver is appointed for the property of Pledgor, or if Pledgor makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable, and Pledgee may proceed as provided in the event of Default. 11. Pledgeholder Liability. In the absence of willful or gross negligence, ---------------------- Pledgeholder shall not be labile to any party for any of his acts, or omissions to act, as Pledgeholder. 12. Invalidity of Particular Provisions. Pledgor and Pledgee agree that ----------------------------------- the enforceability or invalidity of any provision or provisions of this Security Agreement shall not render any other provision or provisions herein unenforceable or invalid. 13. Successors or Assigns. Pledgor and Pledgee agree that all of the --------------------- terms of this Security Agreement shall be binding on their respective successors and assigns, and that the term "Pledgor" and the term "Pledgee" as used herein shall be deemed to include, for all purposes, the respective designees, successors, assigns, heirs, executors and administrators. 14. Governing Law. This Security Agreement shall be interpreted and ------------- governed under the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have executed this Security Agreement as of the day and year first above written. PLEDGOR: ______________________________________________ (Signature) ______________________________________________ (Typed or Printed Name) PLEDGEE: APPLIED MICRO CIRCUITS CORPORATION a Delaware corporation By:___________________________________________ Title:________________________________________ PLEDGEHOLDER: ______________________________________________ Secretary of Pledgor EX-10.12 18 PROMISSORY NOTES DATED 1/20/92 EXHIBIT 10.12 APPLIED MICRO CIRCUITS CORPORATION THIRD AMENDMENT TO PROMISSORY NOTE THIS THIRD AMENDMENT TO PROMISSORY NOTE (the "Amendment"), effective as of January 30, 1997, is entered into by and between Applied Micro Circuits Corporation, a California corporation (the "Company"), and Roger A. Smullen ("Optionee"), and is entered into with respect to the Promissory Note (the "Note") dated as of January 30, 1992, pursuant to which the Company loaned Optionee an aggregate principal amount of $6,000. The parties wish to amend the Note. NOW, THEREFORE, the Company and Optionee hereby agree as follows: 1. The principal and accrued interest under the Note shall be due and payable in full on January 30, 1998. 2. Interest shall accrue on the unpaid principal balance of the Note following the date of this Amendment at the rate of 5.91% per annum, compounded annually (the minimum applicable federal rate necessary to avoid imputation of interest as a result of this Amendment). 3. Except as expressly modified herein, the Note shall remain in full force and effect . 4. This Amendment may be signed in one or more counterparts, each of which shall be deemed an original and all of which, taken together, shall be deemed one and the same document. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. APPLIED MICRO CIRCUITS CORPORATION BY: [SIGNATURE] [SIGNATURE] ----------- ----------- Roger A. Smullen TITLE:___________________________ APPLIED MICRO CIRCUITS CORPORATION THIRD AMENDMENT TO PROMISSORY NOTE THIS THIRD AMENDMENT TO PROMISSORY NOTE (the "Amendment"), effective as of January 30, 1997, is entered into by and between Applied Micro Circuits Corporation, a California corporation (the "Company"), and Roger A. Smullen ("Optionee"), and is entered into with respect to the Promissory Note (the "Note") dated as of January 30, 1992, pursuant to which the Company loaned Optionee an aggregate principal amount of $3,000. The parties wish to amend the Note. NOW, THEREFORE, the Company and Optionee hereby agree as follows: 1. The principal and accrued interest under the Note shall be due and payable in full on January 30, 1998. 2. Interest shall accrue on the unpaid principal balance of the Note following the date of this Amendment at the rate of 5.91% per annum, compounded annually (the minimum applicable federal rate necessary to avoid imputation of interest as a result of this Amendment). 3. Except as expressly modified herein, the Note shall remain in full force and effect . 4. This Amendment may be signed in one or more counterparts, each of which shall be deemed an original and all of which, taken together, shall be deemed one and the same document. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. APPLIED MICRO CIRCUITS CORPORATION BY: [SIGNATURE] [SIGNATURE] ---------------- ---------------- Roger A. Smullen TITLE:_______________________ APPLIED MICRO CIRCUITS CORPORATION THIRD AMENDMENT TO PROMISSORY NOTE THIS THIRD AMENDMENT TO PROMISSORY NOTE (the "Amendment"), effective as of January 30, 1997, is entered into by and between Applied Micro Circuits Corporation, a California corporation (the "Company"), and Roger A. Smullen ("Optionee"), and is entered into with respect to the Promissory Note (the "Note") dated as of January 30, 1992, pursuant to which the Company loaned Optionee an aggregate principal amount of $36,431.25. The parties wish to amend the Note. NOW, THEREFORE, the Company and Optionee hereby agree as follows: 1. The principal and accrued interest under the Note shall be due and payable in full on January 30, 1998. 2. Interest shall accrue on the unpaid principal balance of the Note following the date of this Amendment at the rate of 5.91% per annum, compounded annually (the minimum applicable federal rate necessary to avoid imputation of interest as a result of this Amendment). 3. Except as expressly modified herein, the Note shall remain in full force and effect . 4. This Amendment may be signed in one or more counterparts, each of which shall be deemed an original and all of which, taken together, shall be deemed one and the same document. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. APPLIED MICRO CIRCUITS CORPORATION BY: [SIGNATURE] [SIGNATURE] ------------------ ------------------ Roger A. Smullen TITLE:__________________________ EX-10.13 19 LOAN AGREEMENT DATED 5/1/96 EXHIBIT 10.13 LOAN AGREEMENT SECURED BY SHARES -------------------------------- This Loan Agreement ("Agreement") dated effective as of May 1, 1996, is by and between APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation (the "Company"), and DAVID M. RICKEY (the "Borrower"). The Borrower desires to borrow and the Company is willing to lend to the Borrower the amount of $750,000 on a secured basis under the terms and conditions of this Agreement. The Company and the Borrower agree as follows: 1. The Loan. Subject to the terms and conditions contained herein, the Company -------- will lend to the Borrower the amount of $750,000 (the "Loan"). 2. The Note. In consideration of the Company's delivery of the Loan, the -------- Borrower will execute a promissory note (the "Note") in the form attached hereto as Exhibit A in the principal amount of the Loan and bearing interest at the minimum applicable Federal rate. 3. Pledge Agreement. The Borrower will additionally execute the pledge ---------------- agreement in the form attached hereto as Exhibit B (the "Pledge Agreement") as security for the Borrower's obligation to repay the Loan, and will deliver, or cause to be delivered, 46,500 shares of Advanced Micro Devices Common Stock to be pledged under the terms and conditions of the Pledge Agreement (the "Shares") to the Company or its designee as pledgeholder of the Shares, together with such other documents of assignment and other documents as may be reasonably requested by the Company. 4. Representations of Borrowers. The Borrower hereby makes the following ---------------------------- representations and warranties to the Company, and acknowledges that the Company is re lying on such representations in making the Loan: a) The Borrower has good and marketable title to the Shares free and clear of all security interests, liens, encumbrances and rights of others. b) The consent of no other party or entity is required to grant the security interests in the Shares as provided for in this Agreement. The creation of the security interest referenced herein, and performance of the obligations of Borrower hereunder, will not violate or cause a conflict with any other agreement to which Borrower is a party, or to which the Shares are subject. Borrower will perform all obligations of Borrower in connection with the Loan, and a default thereunder will constitute a default hereunder. c) Other than the Loan, there are no security interests or liens on the Shares that could be perfected or obtained by filing a financing statement or 1 notice with any state filing office. d) There are no actions, proceedings, claims or disputes pending or, to the Borrower's knowledge, threatened against or affecting the Borrower or the Shares except as disclosed to the Company in writing prior to the date of this Agreement. 5. Salary Deductions. To the extent permitted by law, the Company may, but ----------------- shall not be obligated to, offset from Borrower's salary, bonuses, vacation pay or other amounts due to Borrower from the Company, any amounts due and payable by the Borrower under the Note. 6. No Employment Rights. Nothing contained in this Agreement or in any of the -------------------- attachments or exhibits hereto is intended or shall be construed to confer upon the Borrower any rights to employment or continued employment with the Company, or shall alter in any way the nature of Borrower's current employment with the Company. 7. Successors and Assigns. This Agreement shall inure to the benefit of the ---------------------- respective heirs, personal representatives, successors and assigns of the parties hereto. The Borrower may not assign his rights and/or duties under this Agreement to a third party without the prior written consent of the Company, which may be withheld in its sole discretion. 8. Governing Law. This Agreement and all acts and transactions pursuant hereto ------------- and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California. 9. Entire Agreement. This Agreement constitutes the entire agreement of the ---------------- parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings related to such subject matter. 10. Modification. This Agreement shall not be amended without the written ------------ consent of both parties hereto. 11. Severability. In the event that any provision hereof becomes or is declared ------------ by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision. 12. Construction. This Agreement is the result of negotiations between and has ------------ been reviewed by each of the parties hereto and their respective counsel; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto. The Borrower acknowledges that the Company has made no representation or warranty to the Borrower concerning the income tax consequences of the Loan, and the Borrower shall be solely responsible for 2 ascertaining and bearing such tax consequences. 13. Titles and Subtitles. The titles and subtitles used in this Agreement are -------------------- used for convenience only and are not to be considered in construing or interpreting this Agreement. 14. Notices. Any notice required or permitted by this Agreement shall be in ------- writing and shall be personally delivered or sent by prepaid registered or certified mail, return receipt requested, addressed to the other party at the address shown below or at such other address for which such party gives notice hereunder. Notices sent by mail shall be deemed to have been given 72 hours after deposit in the United States mail. 15. Counterparts. This Agreement may be executed in two or more counterparts, ------------ each of which shall be deemed an original and all of which together shall constitute one instrument. 16. Further Acts. Each party hereto agrees to execute, acknowledge and deliver ------------ or to cause to have executed, acknowledged and delivered, such other and further instruments and documents as may reasonably be requested by the other to carry out the purposes of this Agreement. 17. Voluntary Execution; Legal Counsel. This Agreement and the exhibits hereto ------------------- are executed voluntarily and without any duress or undue influence on the part or behalf of the parties hereto, with the full intent of creating the obligations and security interests described herein and therein. The parties acknowledge that: (a) they have read this agreement and the exhibits hereto; (b) they have been represented in the preparation, negotiation, and execution of this Agreement and exhibits hereto by legal counsel of their own choice or they have voluntarily declined to seek such counsel; (c) they understand the terms and consequences of this Agreement and the exhibits hereto and of the obligations and security interests they create; and (d) they are fully aware of the legal and binding effect of this Agreement and the exhibits hereto. 18 Survival. Each of the obligations of Borrower hereunder, and the liability -------- of Borrower for any failure of the representations or warranties set forth herein to be accurate and complete, shall survive the closing of the Loan described herein for the entire term of the Loan. The undersigned have executed this Agreement as of the date first written above. 3 BORROWER: COMPANY: [SIGNATURE] - ----------- DAVID M. RICKEY APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation Address: ______________ By: [SIGNATURE] -------------------- ______________ Title: _________________ Address: 6195 Lusk Blvd. San Diego, CA 92121 4 EXHIBIT A --------- NON-RECOURSE NOTE SECURED BY PLEDGE AGREEMENT May 1,1996 1. Obligation. For value received, DAVID M. RICKEY (the "Borrower") ----------- promises to pay to APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation (the "Company"), the sum of $750,000 (the "Loan"), together with interest on the unpaid principal hereof from the date hereof at the rate of 5.76% per annum, compounded annually. 2. Payment. Principal and interest shall be due and payable in full on -------- May 1, 1999 unless accelerated as provided in Section 3 below. Payments of principal and interest shall be made in lawful money of the United States of America and shall be credited first to the accrued interest, with the remainder applied to principal. Prepayment of the Loan may be made at any time without penalty. 3. Acceleration of Obligation. The Loan shall immediately become due and --------------------------- payable in full upon the earliest of the following: (i) an event of default under the Loan Agreement (the "Loan Agreement") between the Company and the Borrower dated as of May 1, 1996 relating to the indebtedness represented hereby, this promissory note, or the Pledge Agreement (the "Pledge Agreement") between the Company and the Borrower dated as of May 1, 1996; (ii) in the event any required payment hereunder or under any other promissory note delivered by the Borrowers to the Company is not made when due; (iii) in the event of a voluntary or involuntary termination of David Rickey's employment with the Company for any reason, with or without cause (including death or disability); or (iv) May 1, 1999. In addition, if Borrower sells any portion of the Shares (as defined below), an equal portion of the original principal amount of the Loan shall immediately become due and payable, together with all interest accrued on such principal portion. 4. Security. This Note shall be secured by the Pledge Agreement, pursuant --------- to which the Borrowers shall pledge 46,500 shares of Common Stock of Advanced Micro Devices (the "Shares") as security for Borrower's obligations under this Note. Except as otherwise provided herein, the Loan shall be non-recourse. 5. Non-Recourse. This note is non-recourse. ------------- 6. Governing Law; Waiver. This Note shall be governed by and construed in ---------------------- accordance with the laws of California, without reference to conflict of laws principles. The Borrower waives presentment, notice of nonpayment, notice of dishonor, protest, demand and diligence. 5 7. Attorneys' Fees. If suit is brought for collection of this Note, the --------------- Borrower agrees to pay all reasonable expenses, including attorneys' fees, incurred by the Company in connection therewith whether or not such suit is prosecuted to judgment. IN WITNESS WHEREOF, the Borrower has caused this Note to be executed as of the date and year first above written. [SIGNATURE] __________________________________ David M. Rickey 2 EXHIBIT B --------- PLEDGE AGREEMENT This Agreement is entered into as of May 1, 1996, by and between Applied Micro Circuits Corporation, Inc., a Delaware corporation (the "Company"), and David M. Rickey ("Pledgor"). The Company and Pledgor have entered into a loan agreement (the "Loan Agreement") dated as of the date hereof. In consideration of the mutual promises contained herein and in the Loan Agreement, and as an inducement to the Company to lend Pledgor funds as provided for in the Loan Agreement, Pledgor wishes to grant the security interest provided for herein, to secure the Obligations (as defined below). The parties agree as follows: 1. Creation of Security Interest. Pursuant to the provisions of the ----------------------------- California Commercial Code, Pledgor hereby grants to the Company, and the Company hereby accepts, a present security interest in the certain shares as collateral to secure the payment of Pledgor's obligations to the Company under the Loan Agreement and the promissory note (the "Note") delivered to the Company pursuant thereto (the "Obligations"). Pledgor herewith delivers to the Company Common Stock of Advanced Micro Devices certificate No. Shares held in AMCC name in Paine Webber Account No. K025126-77 representing a total of 46,500 shares of the Company's Common Stock, together with a stock power in the form attached hereto as Attachment A, duly executed (with the date and number of shares left blank) by Pledgor. For purposes of this Agreement, the Shares pledged hereby shall hereinafter be collectively referred to as the "Collateral." 2. Representations and Warranties. Pledgor hereby represents and warrants ------------------------------ to the Company that Pledgor has good title (both of record and beneficially) to the Collateral, free and clear of all claims, pledges and liens or encumbrances of every nature whatsoever, and that Pledgor has the right to pledge the Collateral as provided herein. Pledgor further agrees not to grant or create, nor attempt to grant or create, any security interest, claim, lien, pledge or other encumbrance with respect to the Collateral until the entire principal sum due under the Loan Agreement has been paid in full. 3. Default. An Event of Default shall be deemed to occur under this ------- Agreement and the Loan shall immediately become due and payable in full upon (a) nonpayment of the Obligations, or any portion thereof, when due; (b) nonperformance of any covenant agreed to be performed by the Pledgor under this Agreement, the Loan Agreement or the Note or any other obligation of Borrowers to the Company in connection with funds borrowed from the Company; (c) sale, transfer, or disposition of the Collateral or any interest therein without the written consent of the Company, except as provided in the Note; or (d) assignment by the Pledgor for the benefit of creditors, or admission in writing of his inability to pay his debts as they become due, or filing a voluntary petition 1 in bankruptcy, or adjudication as a bankrupt or insolvent, or filing any petition or answer seeking any reorganization, arrangement, composition, readjustment, dissolution or similar relief under any present or future statute, law or regulation, or filing any answer admitting or failing to deny the material allegations of a petition filed against them for any such relief. 4. Rights on Default. Upon an Event of Default, the Company and its ------------------ assigns shall have full power to sell, assign and deliver the whole or any part of the Collateral at any broker's exchange or elsewhere, at public or private sale, at the option of the Company or its assigns, in order to satisfy any part of the Obligations. On any such public sale, the Company and its assigns may purchase all or any part of the Collateral. In addition, at its sole option, the Company may elect to retain the Collateral in satisfaction of Obligations, in accordance with the provisions and procedures set forth in the California Commercial Code. 5. Additional Remedies. The rights and remedies granted to the Company -------------------- herein upon an Event of Default shall be in addition to all the rights, powers and remedies of the Company under the California Commercial Code and applicable law and such rights, powers and remedies shall be exercisable by the Company with respect to all of the Collateral. The Company's reasonable expenses of holding the Collateral, preparing it for resale or other disposition, and selling or otherwise disposing of the Collateral, including attorneys' fees and other legal expenses, will be deducted from the proceeds of any sale or other disposition and will be included in the amounts Pledgor must tender to redeem the Collateral. All rights, powers and remedies of the Company shall be cumulative and not alternative. Any forbearance or failure or delay by the Company in exercising any right, power or remedy hereunder shall not be deemed to be a waiver of any such fight, power or remedy and any single or partial exercise of any such right, power or remedy hereunder shall not preclude the further exercise thereof. 6. Dividends; Voting. All dividends hereinafter declared on or payable ----------------- with respect to the Collateral during the term of this pledge (excluding only ordinary cash dividends, which shall be payable to Pledgor so long as there has not occurred an Event of Default) shall be immediately delivered to the Company to be held in pledge hereunder. Pledgor shall be entitled to receive cash dividends so long as there has not occurred an Event of Default. Notwithstanding this Agreement, Pledgor shall be entitled to vote any Shares comprising the Collateral, subject to any proxies granted by Pledgor. 7. Adjustments. In the event that during the term of this pledge, any ----------- stock dividend, reclassification, readjustment, stock split or other change is declared or made with respect to the Collateral, or if warrants or any other rights or options are issued in connection with the Collateral, all new, substituted and/or additional shares or other securities issued by reason of such change or by reason of the exercise of such warrants, rights or options, shall be immediately pledged to the Company to be held under the terms of this Agreement in the same manner as the Collateral is held hereunder. 2 8. Successors and Assigns. This Agreement shall inure to the benefit of ---------------------- the respective heirs, personal representatives, successors and assigns of the parties hereto. 9. Governing Law. This Agreement and all acts and transactions pursuant ------------- hereto and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California. 10. Entire Agreement. This Agreement constitutes the entire agreement of ---------------- the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings related to such subject matter. 11. Modification. This Agreement shall not be amended without the written ------------ consent of both parties hereto. 12. Severability. In the event that any provision hereof becomes or is ------------ declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision. 13. Construction. This Agreement is the result of negotiations between and ------------ has been reviewed by each of the parties hereto and their respective counsel; accordingly, this Agreement shall be deemed to be the product of all of the parties hereto, and no ambiguity shall be construed in favor of or against any one of the parties hereto. 14. Titles and Subtitles. The titles and subtitles used in this Agreement -------------------- are used for convenience only and are not to be considered in construing or interpreting this Agreement. 15. Notices. Any notice required or permitted by this Agreement shall be ------- in writing and shall be personally delivered or sent by prepaid registered or certified mail, return receipt requested, addressed to the other party at the address shown below or at such other address for which such party gives notice hereunder. Notices sent by mail shall be deemed to have been given 72 hours after deposit in the United States mail. 16. Counterparts. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. The parties have executed this Agreement as of the date first written above. 3 BORROWER: COMPANY: [SIGNATURE] APPLIED MICRO CIRCUITS CORPORATION, a Delaware _________________________________ corporation DAVID M. RICKEY By: [SIGNATURE] ----------- Title: _________________ Address: ______________ Address: 6195 Lusk Blvd. San Diego, CA 92121 _______________ 4 ATTACHMENT A ------------ ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ____________( ) shares of the Common Stock of Applied Micro Devices standing in my name on the books of such corporation, represented by Certificate No. _______ herewith, and does hereby irrevocably constitute and appoint ______________ to transfer such stock on the books of such corporation with full power of substitution in the premises. Dated: ,19 _______. Signature: [SIGNATURE] ----------- David M. Rickey This Assignment Separate from Certificate was executed in conjunction with the terms of a Pledge Agreement between the above assignor and Applied Micro Circuits Corporation dated May 1, 1996. 1 APPLIED MICRO CIRCUITS CORPORATION INCENTIVE STOCK OPTION EXERCISE NOTICE AND RESTRICTED STOCK PURCHASE AGREEMENT Applied Micro Circuits Corporation 6195 Lusk Blvd. San Diego, CA 92121-2793 Attention: Corporate Secretary THIS AGREEMENT is made between David M. Rickey (the "Purchaser") and Applied Micro Circuits Corporation, a Delaware corporation (the "Company") as of July ---- 23, 1997. - -------- RECITALS -------- (1) Pursuant to the exercise of a stock option granted to the Purchaser under the Company's 1992 Stock Option Plan (the "Plan"), and pursuant to the Incentive Stock Option Agreement (the "Option Agreement") dated as of April 9, -------- 1997 by and between the Company and the Purchaser, the Purchaser has elected to - ---- purchase shares 100,000 (the "Shares"). ------- (2) As set forth in the Option Agreement and the Plan, this Agreement grants the Company a right of first refusal to purchase the Shares upon certain conditions. 1. Company's Right of First Refusal. Before any Shares held by Purchaser --------------------------------- or any transferee (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (the "Right of First Refusal"). (a) The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (i) the Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares at the Offered Price to the Company or its assignee(s). (b) At any time within 30 days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (c) below. (c) The purchase price ("Purchase Price") for the Shares purchased by the Company or its assignee(s) under this Section shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non- cash consideration shall be determined by the Board of Directors of the Company in good faith. (d) Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice. (e) If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 120 days after the date of the Notice and provided further that any such sale or other transfer is effected in accordance with any applicable securities laws and the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. (f) Anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Purchaser's lifetime or on the Purchaser's death by will or intestacy to the Purchaser's immediate family or a trust for the benefit of the Purchaser's immediate family shall be exempt from the provisions of this Section, "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section. (g) The Right of First Refusal shall terminate as to any Shares 90 days after the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the 1933 Act. 2. Transferability of the Shares. ------------------------------ (a) Purchaser hereby authorizes and directs the Secretary of the Company, or such other person designated by the Company, to transfer the Shares from Purchaser to the Company. Purchaser further authorizes the Company to refuse, or to cause its transfer agent to refuse, to transfer any stock attempted to be transferred in violation of this Agreement. (b) The certificate or certificates evidencing any of the shares purchased hereunder shall be endorsed with a legend substantially as follows (together with any other legend(s) restricting the transfer of the Unvested Shares necessary or appropriate under applicable Federal or State securities laws): "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN OPTION AGREEMENT AND A RESTRICTED STOCK PURCHASE AGREEMENT PURSUANT TO WHICH SUCH SHARES WERE PURCHASED, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE CORPORATION." (c) The Company, or its designee, shall not be liable for any act it may do or omit to do with respect to holding the Unvested Shares in escrow and while acting in good faith and in the exercise of its judgment. 3. Ownership, Voting Rights, Duties. This Agreement shall not affect in --------------------------------- any way the ownership, voting rights or other rights or duties of Purchaser, except as specifically provided herein. 4. Market Standoff Agreement. Purchaser hereby agrees that if so -------------------------- requested by the Company or any representative of the underwriters in connection with any registration of the offering of any securities of the Company under the 1933 Act, Purchaser shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period following the effective date of a registration statement of the Company filed under the 1933 Act; provided, however, that such restriction shall only apply to the first two registration statements of the Company to become effective under the 1933 Act which include securities to be sold on behalf of the Company to the public in an underwritten public offering under the 1933 Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such 180-day period. 5. Delivery of Payment. Purchaser herewith delivers to the Company full -------------------- payment for the exercise of the Shares, by check rendered to the Company in the amount of $ -0-, and by delivery to the Company of Purchaser's full recourse --- promissory note (the "Note") for the balance of the purchase price, if any, in the form attached here to as Exhibit A-4, bearing interest at the then current minimum applicable federal rate. 6. Security Interest. ------------------ With respect to the Note, the parties agree to the following: (a) The Note shall become payable in full upon the earlier of voluntary or involuntary termination or cessation of employment of Purchaser with the Company for any reason, or the completion of vesting. Purchaser agrees that if a bankruptcy or insolvency proceeding is instituted by or against it, or if a receiver if appointed for the property of Purchaser, or if Purchaser makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable. (b) Purchaser shall deliver to the Secretary of the Company (hereinafter referred to as the "Pledge Holder") all certificates representing the Shares purchased with the Note and an executed blank assignment separate from certificate in the form attached hereto as Exhibit A-1, for use in transferring all or a portion of said Shares to the Company if, as and when required under this Section 6 or under any other provision of this Agreement. (c) As security for the payment of the Note and any renewal, extension or modification thereof, Purchaser hereby grants to the Company a security interest in and pledges with and delivers to the Company Purchaser's Shares purchased with the Note (sometimes referred to herein as the "Collateral"). Purchaser shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of the Company. (d) In the event of any foreclosure of the security interest, the Company may sell the Collateral at a private sale or may repurchase the Collateral itself. The parties agree that, prior to the establishment of a public market for the Shares of the Company, the securities laws affecting sale of the Shares make a public sale of the Collateral commercially unreasonable. The parties further agree that the repurchasing of said Shares by the Company, or by any person to whom the Company may have assigned its rights hereunder, is commercially reasonable if made at a price determined by the Board of Directors in its discretion, fairly exercised, representing what would be the fair market value of the Shares reduced by any limitation on transferability, whether due to the size of the block of Shares or the restrictions of applicable securities laws. (e) In the event of default in payment when due of any indebtedness under Purchaser's Note, or in the event that Purchaser fails to perform any of the covenants set forth in the Option Agreement or in this Agreement for a period of ten days after written notice thereof from the Company, the Company may elect then, or at any time thereafter, to exercise all rights available to a secured party under the California Commercial Code including the right to sell the Collateral at a private or public sale or repurchase the Shares as provided above. The proceeds of any sale shall be applied in the following order: (1) To pay all reasonable expenses of the Company in enforcing this Agreement, including without limitation reasonable attorney's fees and legal expenses incurred by the Company. (2) In satisfaction of the remaining indebtedness under Purchaser's Note. (3) To Purchaser, any remaining proceeds. (f) Upon full payment by Purchaser of all amounts due on the Note, Pledge Holder shall deliver to Purchaser all Shares in Pledge Holder's possession belonging to Purchaser, and Pledge Holder shall thereupon be discharged of all further obligations hereunder. The Shares purchased for cash shall be delivered to Purchaser upon request. 7. Notices. Notices required hereunder shall be given in person or by -------- first class mail to the address of Purchaser shown on the records of the Company, and to the Company at its principal executive office. 8. Survival of Terms. This Agreement shall apply to and bind Purchaser ------------------ and the Company and their respective permitted assignees and transferees, heirs, legatees, executors, administrators and legal successors. 9. Tax Consequences. The Purchaser understands that upon the sale of ----------------- shares acquired upon exercise of an incentive stock option at least two years after the grant of the option and at least one year after exercise of the option, any gain will be taxed to the Purchaser as long-term capital gain, which under current law is taxed at the same rates as ordinary income. If these holding periods are not satisfied, the Purchaser will recognize ordinary income on the date of disposition. However, there may also be tax consequences to the Purchaser under the alternative minimum tax in the year of exercise or in the year that certain restrictions imposed on the shares lapse (i.e., the year the stock is fully vested). Such restrictions include the Company's right to repurchase unvested shares at cost in the event of termination of employment, and, include the potential liability of any "insider" (as defined below) of the Company to forfeit to the Company any profits from any purchase and sale of Common Stock of the Company within a six month period, pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended. If unvested shares (i.e., shares subject to a repurchase option of the Company) are purchased upon exercise of an incentive stock option, or if shares are purchased by a Purchaser who could be subject to suit under Section 16(b) of the Securities Exchange Act of 1934 in the event Purchaser disposed of such shares, and the Purchaser subsequently disposes of such shares prior to the expiration of the two-year and one-year holding periods, under proposed regulations issued by the Internal Revenue Service the shares will be treated as if they had been acquired by the Purchaser pursuant to a nonstatutory option. See "Nonstatutory Options" below. It may be possible for a Purchaser to file a "protective" election with the Internal Revenue Service under Section 83(b) within 30 days after the date of exercise of an incentive stock option. However, the Internal Revenue Service has never considered the question of whether a Section 83(b) election can be filed with respect to the exercise of an incentive stock option, and there can be no assurance that any such "protective" election, even if properly and timely filed, would be recognized as effective by the Internal Revenue Service. Therefore, a Purchaser should consult such Purchaser's own tax advisor prior to exercising an incentive stock option with respect to unvested shares, or prior to any exercise of an incentive stock option in the event that Purchaser could be subject to Section 16(b) of the Securities Exchange Act of 1934 upon disposing of such shares, concerning the advisability of filing a "protective" election under Section 83(b) of the Code. A Section 83(b) election also commences the Purchaser's holding period in the acquired property (for capital gain purposes) and affects the characterization of gain or loss incurred upon disposition of such property. Capital losses are allowed against up to $3,000 of ordinary income, and the excess of net long-term capital loss over net short-term capital gain is allowed in full for this purpose. In addition, the existence of capital gains or losses will affect the limitation or the deductibility of a Purchaser's investment interest. The Purchaser understands that the tax consequences of exercising an option and disposing of shares acquired thereunder depend on the Purchaser's individual circumstances. Purchaser represents that Purchaser has had the opportunity to consult a tax advisor and is not relying upon the Company for tax advice in this regard. 10. Representations. The Purchaser has had the opportunity to review with ---------------- ---------------------------------------------------- such Purchaser's own tax advisors the federal, state, local and foreign tax - --------------------------------------------------------------------------- consequences of this investment and the transactions contemplated by this - ------------------------------------------------------------------------- Agreement. The Purchaser is relying solely on such advisors and not on any - --------------------------------------------------------------------------- statements or representations of the Company or any of its agents. The - ----------------------------------------------------------------------- Purchaser understands that Purchaser (and not the Company) shall be responsible - ------------------------------------------------------------------------------- for such Purchaser's own tax liability that may arise as a result of this - ------------------------------------------------------------------------- investment or the transactions contemplated by this Agreement. - -------------------------------------------------------------- 11. Governing Law. This Agreement shall be governed by and construed and -------------- enforced in accordance with the laws of the State of California. Purchaser represents that Purchaser has read this Agreement and is familiar with its terms and provisions. Purchaser hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Agreement. IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set forth above. APPLIED MICRO CIRCUITS CORPORATION a Delaware corporation By: /s/ [signature] --------------------------------------------- Joel O. Holliday Title: Vice President, Finance & Administration PURCHASER /s/ [signature] ------------------------------------------------ David M. Rickey EXHIBIT A-1 ----------- ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, hereby sell, assign and transfer unto Applied Micro Circuits Corporation (__________) shares of the Common Stock of Applied Micro Circuits Corporation standing in my name of the books of said corporation represented by Certificate No. _____ herewith and do hereby irrevocably constitute and appoint____________to transfer said stock on the books of the within-named corporation with full power of substitution in the premises. Dated: /s/ [signature] ---------------------------- David M. Rickey This Assignment Separate from Certificate was executed in conjunction with the terms of a Restricted Stock Purchase Agreement between the above assignor and Applied Micro Circuits Corporation dated April 9, 1997. ------------- EXHIBIT A-2 ----------- CONSENT OF SPOUSE I, Jan E. Nielsen, spouse of David M. Rickey, have read and approved the foregoing Agreement. In consideration of granting of the right to my spouse to purchase shares of Applied Micro Circuits Corporation as set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights under such Agreement or in any shares issued pursuant thereto under the community property laws of the State of California or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: July 23, 1997 /s/ [signature] --------------------------- Jan E. Nielsen EXHIBIT A-3 ----------- INCENTIVE STOCK OPTION ELECTION UNDER SECTION 83(B) OF THE INTERNAL REVENUE CODE OF 1986 The undersigned taxpayer ("Taxpayer") has acquired property pursuant to the exercise of an incentive stock option within the meaning of Section 422 of the Code. Taxpayer hereby elects, pursuant to Section 83(b) of the Code and subject to the limitations set forth herein (1) to include in the computation of such Taxpayer's alternative minimum taxable income for the current taxable year an amount equal to the excess of the fair market value of the property described below (as of the time of transfer) over the amount paid for such property. 1. The name, address, Social Security number and taxable year of Taxpayer and such Taxpayer's spouse are as follows: Name: David M. Rickey Taxpayer: David M. Rickey Spouse: Jan E. Nielsen Address: 15629 Boulder Mountain Road Poway, CA 92064 Social Security No.: Taxpayer: ###-##-#### Spouse: ###-##-#### Taxable Year: 1997 2. The property with respect to which the election is made is 100,000 shares of ------- the Common Stock of Applied Micro Circuits Corporation, a Delaware corporation (the Company ). 3. The date on which the property was transferred is: July 23, 1997. ------------- 4. The property is subject to the restrictions checked below: [_] the right of the Company to repurchase the property at the initial purchase price in the event that Taxpayer ceases to perform substantial services for the Company within a certain period of time; [_] restrictions imposed by Section 16(b) of the Securities Exchange Act of 1934, as amended. 5. The fair market value of the property at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, was $.35. ---- 6. The amount (if any) paid for the property was $.35. ---- Taxpayer has submitted a copy of this statement to the Company and to the IRS Service Center where Taxpayer files such Taxpayer's federal income tax returns. A copy will also be filed with Taxpayer's federal income tax return for the taxable year to which this election relates. The transferee of the property is the person performing the services in connection with the transfer of the property. This election is made to the same effect, and with the same limitations, for purposes of any applicable state statute corresponding to Section 83(b) of the Code. Taxpayer understands that the foregoing election may not be revoked except with the consent of the Commissioner. Dated: July 23, 1997 /s/ [signature] ----------------------------- David M. Rickey The undersigned spouse of Taxpayer joins in this election. Dated: July 23, 1997 /s/ [signature] ----------------------------- Jan E. Nielsen EXHIBIT A-4 ----------- PROMISSORY NOTE $35,000 July 23, 1997 ------ At the times hereinafter stated, for value received, the undersigned promises to pay APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation (the "Company"), the sum of $35,000, with interest from the date hereof at a rate of 6.54% per annum, compounded semiannually, on the unpaid balance of said principal sum. Said principal and interest shall be due and payable on the earlier of April 9, 2001 or termination of the employment of the undersigned by the Company. Principal and interest are payable in lawful money of the United States of America. AT ANY TIME, THE PRIVILEGE IS RESERVED TO PAY MORE THAN THE SUM DUE. Should the interest not be so paid, it shall be added to the principal and thereafter bear interest at the rate payable on the principal hereof, but such unpaid interest so compounded shall not exceed an amount equal to simple interest on the unpaid principal at the maximum rate permitted by law. Should default be made in the payment of any installment of principal or interest when due, then the whole sum of principal and interest shall become immediately due and payable at the option of the holder of this Note. Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The makers and endorsers have severally waived presentment for payment, protest, notice of protest, and notice of non-payment of this Note. This Note, which is full recourse, is secured by a pledge of certain shares of Common Stock of the Company and is subject to the terms of a Purchaser's Common Stock Purchase Agreement between the maker and the Company. /s/ [SIGNATURE] ----------------------------- David M. Rickey APPLIED MICRO CIRCUITS CORPORATION EXERCISE NOTICE AND RESTRICTED STOCK PURCHASE AGREEMENT Applied Micro Circuits Corporation 6195 Lusk Blvd. San Diego, CA 92121-2793 Attention: Corporate Secretary THIS AGREEMENT is made between David Rickey (the "Purchaser") and Applied Micro Circuits Corporation, a Delaware corporation (the "Company") as of July 23, -------- 1997. - ----- RECITALS -------- (1) Pursuant to the exercise of a stock option granted to the Purchaser under the Company's 1992 Stock Option Plan (the "Plan"), and pursuant to the Incentive Stock Option Agreement (the "Option Agreement") dated as of February 12, 1996 by and between the Company and the Purchaser, the Purchaser - ----------------- has elected to purchase 380,952 of those shares which have become vested under -------- the vesting schedule set forth in Section 3(i) of the Option Agreement ("Vested Shares") and 761,904 shares which have not yet vested under such schedule ------- ("Unvested Shares") (the "Shares"). (2) As set forth in the Option Agreement and the Plan, this Agreement gives the Company the right to repurchase at cost the Unvested Shares in the event of a termination of the Purchaser's employment or consultancy with the Company prior to the date upon which they would have vested under the Option Agreement and also grants the Company a right of first refusal to purchase the Shares upon certain conditions. 1. Company's Option to Repurchase. If the Purchaser's employment or ------------------------------ consultancy with the Company is terminated for any reason (a "Termination"), the Company (or its assignee under this Agreement) shall have the right and option to purchase from the Purchaser, or the Purchaser's legal representative, as the case may be (the "Company Option"), at the price paid by Purchaser for such shares (the "Option Price"), up to that number of shares which would, if the option had not been so exercised, have been unvested as of the date of termination. The Option Agreement and the Plan are hereby incorporated by reference and made a part of this Agreement. 2. Procedure for Exercise of Company Option. ---------------------------------------- (i) Upon the occurrence of a Termination, the Company may exercise the Company Option by delivering personally or by first class mail, to Purchaser (or such Purchaser's transferee or legal representative, as the case may be), within 60 days of the Termination, a notice in writing indicating the Company's intention to exercise the Company Option and setting forth a date for closing (the "Closing") not later than thirty (30) days from the mailing of such notice. The Closing shall take place at the Company's principal executive offices. At the Closing, the holder of the certificates for the Unvested Shares being transferred shall deliver the stock certificate or certificates evidencing the Unvested Shares, and the Company shall deliver the purchase price therefor. (ii) Whenever the Company shall have the right to purchase the Unvested Shares pursuant to this Agreement, the Company may, upon written notice to the Purchaser, assign to one or more persons the right to exercise all or part of the Company's purchase rights. Each such assignee shall have the right to exercise such right in its own name and for its own account. If the Company Option is assigned by the Company and the fair market value of the shares, as determined by the Board of Directors of the Company, exceeds the repurchase price, and such assignee exercises the Company Option, then the assignee shall pay to the Company the difference between the fair market value of the shares repurchased and the aggregate repurchase price. (iii) If the Company does not elect to exercise the Company Option conferred above by giving the requisite notice within sixty (60) days following the Termination, the Company Option shall terminate. 3. Termination of Company Option. The Company Option provided for in ----------------------------- Section 1 of this Agreement shall terminate upon the first date on which there are no longer any Unvested Shares which are the subject of the Company Option. 4. Company's Right of First Refusal. Before any Shares held by Purchaser -------------------------------- or any transferee (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (the "Right of First Refusal"). (a) The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (i) the Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares at the Offered Price to the Company or its assignee(s). (b) At any time within 30 days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (c) below. (c) The purchase price ("Purchase Price") for the Shares purchased by the Company or its assignee(s) under this Section shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. (d) Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any -2- combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice. (e) If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 120 days after the date of the Notice and provided further that any such sale or other transfer is effected in accordance with any applicable securities laws and the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. (f) Anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Purchaser's lifetime or on the Purchaser's death by will or intestacy to the Purchaser's immediate family or a trust for the benefit of the Purchaser's immediate family shall be exempt from the provisions of this Section, "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section. (g) The Right of First Refusal shall terminate as to any Shares 90 days after the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the 1933 Act. 5. Transferability of the Shares; Escrow. ------------------------------------- (a) Purchaser hereby authorizes and directs the Secretary of the Company, or such other person designated by the Company, to transfer the Shares from Purchaser to the Company. Purchaser further authorizes the Company to refuse, or to cause its transfer agent to refuse, to transfer any stock attempted to be transferred in violation of this Agreement. (b) Except as required to effectuate the exercise of the Company Option, none of the Unvested Shares which are subject to the Company Option under Section 1 may be sold, transferred, pledged, hypothecated or otherwise disposed of by Purchaser. The certificate or certificates evidencing any of the shares purchased hereunder shall be endorsed with a legend substantially as follows (together with any other legend(s) restricting the transfer of the Unvested Shares necessary or appropriate under applicable Federal or State securities laws): "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN OPTION AGREEMENT AND A RESTRICTED STOCK PURCHASE AGREEMENT PURSUANT TO WHICH SUCH SHARES WERE PURCHASED, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE CORPORATION." -3- (c) To ensure the availability for delivery of the Purchaser's Unvested Shares upon repurchase by the Company pursuant to the Company Option under Section 1, the Purchaser shall, upon execution of this Agreement, deliver and deposit with the Secretary of the Company, or such other person designated by the Company, the share certificates representing the Unvested Shares. Purchaser shall further deliver to the Company a stock power, duly endorsed in blank, attached hereto as Exhibit A-1, that will be used only in accordance with ----------- the transfer of Shares pursuant to the Company Option and the Right of First Refusal. The Unvested Shares shall be held by the Secretary in escrow, until such time as the Company's rights of repurchase pursuant to the Company Option no longer are in effect. As a further condition to the Company's obligations under this Agreement, the spouse of Purchaser, if any, shall execute and deliver to the Company the Consent of Spouse attached hereto as Exhibit A-2. ----------- (d) The Company, or its designee, shall not be liable for any act it may do or omit to do with respect to holding the Unvested Shares in escrow and while acting in good faith and in the exercise of its judgment. (e) Transfer or sale of said Unvested Shares is subject to restrictions on transfer imposed by any applicable State and Federal securities laws. Any transferee shall hold such Unvested Shares subject to all the provisions hereof and shall acknowledge the same by signing a copy of this Agreement. 6. Ownership, Voting Rights, Duties. This Agreement shall not affect in -------------------------------- any way the ownership, voting rights or other rights or duties of Purchaser, except as specifically provided herein. 7. Adjustment of Unvested Shares. The Unvested Shares subject to this ----------------------------- Agreement shall be proportionately adjusted for any increase or decrease in the number of issued shares of the Company, resulting from a subdivision or consolidation of shares or the payment of a stock dividend or any other increase or decrease in the number of said shares effected without receipt of consideration by the Company. 8. Market Standoff Agreement. Purchaser hereby agrees that if so ------------------------- requested by the Company or any representative of the underwriters in connection with any registration of the offering of any securities of the Company under the 1933 Act, Purchaser shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period following the effective date of a registration statement of the Company filed under the 1933 Act; provided, however, that such restriction shall only apply to the first two registration statements of the Company to become effective under the 1933 Act which include securities to be sold on behalf of the Company to the public in an underwritten public offering under the 1933 Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such 180-day period. 9. Delivery of Payment. Purchaser herewith delivers to the Company full ------------------- payment for the exercise of the Shares by delivery to the Company of Purchaser's full recourse promissory note in the principal amount of $ 399,999.60 (the ---------- "Note") in the form attached here to as Exhibit A-4, bearing interest at the then current minimum applicable federal rate. -4- 10. Security Interest. ----------------- With respect to the Note, the parties agree to the following: (a) The Note shall become payable in full upon the earlier of voluntary or involuntary termination or cessation of employment of Purchaser with the Company for any reason, or the completion of vesting. Purchaser agrees that if a bankruptcy or insolvency proceeding is instituted by or against it, or if a receiver if appointed for the property of Purchaser, or if Purchaser makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable. (b) Purchaser shall deliver to the Secretary of the Company (hereinafter referred to as the "Pledge Holder") all certificates representing the Shares purchased with the Note and an executed blank assignment separate from certificate in the form attached hereto as Exhibit A-1, for use in transferring all or a portion of said Shares to the Company if, as and when required under this Section 6 or under any other provision of this Agreement. (c) As security for the payment of the Note and any renewal, extension or modification thereof, Purchaser hereby grants to the Company a security interest in and pledges with and delivers to the Company Purchaser's Shares purchased with the Note (sometimes referred to herein as the "Collateral"). Purchaser shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of the Company. (d) In the event of any foreclosure of the security interest, the Company may sell the Collateral at a private sale or may repurchase the Collateral itself. The parties agree that, prior to the establishment of a public market for the Shares of the Company, the securities laws affecting sale of the Shares make a public sale of the Collateral commercially unreasonable. The parties further agree that the repurchasing of said Shares by the Company, or by any person to whom the Company may have assigned its rights hereunder, is commercially reasonable if made at a price determined by the Board of Directors in its discretion, fairly exercised, representing what would be the fair market value of the Shares reduced by any limitation on transferability, whether due to the size of the block of Shares or the restrictions of applicable securities laws. (e) In the event of default in payment when due of any indebtedness under Purchaser's Note, or in the event that Purchaser fails to perform any of the covenants set forth in the Option Agreement or in this Agreement for a period of ten days after written notice thereof from the Company, the Company may elect then, or at any time thereafter, to exercise all rights available to a secured party under the California Commercial Code including the right to sell the Collateral at a private or public sale or repurchase the Shares as provided above. The proceeds of any sale shall be applied in the following order: (1) To pay all reasonable expenses of the Company in enforcing this Agreement, including without limitation reasonable attorney's fees and legal expenses incurred by the Company. (2) In satisfaction of the remaining indebtedness under Purchaser's Note. -5- (3) To Purchaser, any remaining proceeds. (f) Upon full payment by Purchaser of all amounts due on the Note, Pledge Holder shall deliver to Purchaser all Shares in Pledge Holder's possession belonging to Purchaser, and Pledge Holder shall thereupon be discharged of all further obligations hereunder. The Shares purchased for cash shall be delivered to Purchaser upon request. 11. Notices. Notices required hereunder shall be given in person or by ------- first class mail to the address of Purchaser shown on the records of the Company, and to the Company at its principal executive office. 12. Survival of Terms. This Agreement shall apply to and bind Purchaser ----------------- and the Company and their respective permitted assignees and transferees, heirs, legatees, executors, administrators and legal successors. 13. Section 83(b) Election. Purchaser understands that Section 83(a) of ---------------------- the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary ---- income for a nonstatutory stock option and as alternative minimum taxable income for an incentive stock option the difference between the amount paid for the Shares and the fair market value of the Shares as of the date any restrictions on the Shares lapse. In this context, "restriction" means the right of the ----------- Company to buy back the Shares pursuant to the Repurchase Option set forth in Section 3(a) of this Agreement. Purchaser understands that Purchaser may elect to be taxed at the time the Shares are purchased, rather than when and as the Repurchase Option expires, by filing an election under Section 83(b) (an "83(b) ----- Election") of the Code with the Internal Revenue Service within 30 days from the - -------- date of purchase. Even if the fair market value of the Shares at the time of the execution of this Agreement equals the amount paid for the Shares, the election must be made to avoid income and alternative minimum tax treatment under Section 83(a) in the future. Purchaser understands that failure to file such an election in a timely manner may result in adverse tax consequences for Purchaser. Purchaser further understands that an additional copy of such election form should be filed with his or her federal income tax return for the calendar year in which the date of this Agreement falls. Purchaser acknowledges that the foregoing is only a summary of the effect of United States federal income taxation with respect to purchase of the Shares hereunder, and does not purport to be complete. Purchaser further acknowledges that the Company has directed Purchaser to seek independent advice regarding the applicable provisions of the Code, the income tax laws of any municipality, state or foreign country in which Purchaser may reside, and the tax consequences of Purchaser's death. The form for making this election is attached as Exhibit A-3 ----------- hereto. THE PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO TIMELY FILE THE ELECTION UNDER SECTION 83(B), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE THIS FILING ON THE PURCHASER'S BEHALF. 14. Tax Consequences. The Purchaser understands that upon the sale of ---------------- shares acquired upon exercise of an incentive stock option at least two years after the grant of the option and at least one year after exercise of the option, any gain will be taxed to the Purchaser as long-term capital gain, which under current law is taxed at the same rates as ordinary income. If these holding periods are not satisfied, the Purchaser will recognize ordinary income on the date of disposition. However, there may -6- also be tax consequences to the Purchaser under the alternative minimum tax in the year of exercise or in the year that certain restrictions imposed on the shares lapse (i.e., the year the stock is fully vested). Such restrictions include the Company's right to repurchase unvested shares at cost in the event of termination of employment, and, include the potential liability of any "insider" (as defined below) of the Company to forfeit to the Company any profits from any purchase and sale of Common Stock of the Company within a six month period, pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended. If unvested shares (i.e., shares subject to a repurchase option of the Company) are purchased upon exercise of an incentive stock option, or if shares are purchased by a Purchaser who could be subject to suit under Section 16(b) of the Securities Exchange Act of 1934 in the event Purchaser disposed of such shares, and the Purchaser subsequently disposes of such shares prior to the expiration of the two-year and one-year holding periods, under proposed regulations issued by the Internal Revenue Service the shares will be treated as if they had been acquired by the Purchaser pursuant to a nonstatutory option. See "Nonstatutory Options" below. It may be possible for a Purchaser to file a "protective" election with the Internal Revenue Service under Section 83(b) within 30 days after the date of exercise of an incentive stock option. However, the Internal Revenue Service has never considered the question of whether a Section 83(b) election can be filed with respect to the exercise of an incentive stock option, and there can be no assurance that any such "protective" election, even if properly and timely filed, would be recognized as effective by the Internal Revenue Service. Therefore, a Purchaser should consult such Purchaser's own tax advisor prior to exercising an incentive stock option with respect to unvested shares, or prior to any exercise of an incentive stock option in the event that Purchaser could be subject to Section 16(b) of the Securities Exchange Act of 1934 upon disposing of such shares, concerning the advisability of filing a "protective" election under Section 83(b) of the Code. A Section 83(b) election also commences the Purchaser's holding period in the acquired property (for capital gain purposes) and affects the characterization of gain or loss incurred upon disposition of such property. Capital losses are allowed against up to $3,000 of ordinary income, and the excess of net long-term capital loss over net short-term capital gain is allowed in full for this purpose. In addition, the existence of capital gains or losses will affect the limitation or the deductibility of a Purchaser's investment interest. The Purchaser understands that the tax consequences of exercising an option and disposing of shares acquired thereunder depend on the Purchaser's individual circumstances. Purchaser represents that Purchaser has had the opportunity to consult a tax advisor and is not relying upon the Company for tax advice in this regard. 15. Representations. The Purchaser has had the opportunity to review with --------------- ---------------------------------------------------- such Purchaser's own tax advisors the federal, state, local and foreign tax - --------------------------------------------------------------------------- consequences of this investment and the transactions contemplated by this - ------------------------------------------------------------------------- Agreement. The Purchaser is relying solely on such advisors and not on any - --------------------------------------------------------------------------- statements or representations of the Company or any of its agents. The - ----------------------------------------------------------------------- Purchaser understands that Purchaser (and not the Company) shall be responsible - ------------------------------------------------------------------------------- for such Purchaser's own tax liability that may arise as a result of this - ------------------------------------------------------------------------- investment or the transactions contemplated by this Agreement. - ------------------------------------------------------------- -7- 16. Governing Law. This Agreement shall be governed by and construed and ------------- enforced in accordance with the laws of the State of California. Purchaser represents that Purchaser has read this Agreement and is familiar with its terms and provisions. Purchaser hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Agreement. IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set forth above. APPLIED MICRO CIRCUITS CORPORATION a Delaware corporation By: /s/ [signature] -------------------------------------- Title: Vice President Finance & Administration PURCHASER /s/ [signature] ----------------------------------------- David M. Rickey -8- EXHIBIT A-1 ----------- ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, hereby sell, assign and transfer unto ______________ _______________________________________________________________________________ (________) shares of the Common Stock of Applied Micro Circuits Corporation standing in my name of the books of said corporation represented by Certificate No. _____ herewith and do hereby irrevocably constitute and appoint __________ ___________________ to transfer said stock on the books of the within-named corporation with full power of substitution in the premises. Dated: Signature: /s/ [SIGNATURE] --------------------------------------- David M. Rickey This Assignment Separate from Certificate was executed in conjunction with the terms of a Restricted Stock Purchase Agreement between the above assignor and Applied Micro Circuits Corporation dated February 12, 1996. ----------------- -9- EXHIBIT A-2 ----------- CONSENT OF SPOUSE I, Jan E. Nielsen, spouse of David Rickey, have read and approved the foregoing Agreement. In consideration of granting of the right to my spouse to purchase shares of Applied Micro Circuits Corporation as set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights under such Agreement or in any shares issued pursuant thereto under the community property laws of the State of California or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: July 23, 1997 /s/ [SIGNATURE] --------------------------------------- Jan E. Nielsen EXHIBIT A-3 ----------- INCENTIVE STOCK OPTION ELECTION UNDER SECTION 83(b) --------------------------------------------------- OF THE INTERNAL REVENUE CODE OF 1986 ------------------------------------ The undersigned taxpayer ("Taxpayer") has acquired property pursuant to the exercise of an incentive stock option within the meaning of Section 422 of the Code. Taxpayer hereby elects, pursuant to Section 83(b) of the Code and subject to the limitations set forth herein (1) to include in the computation of such Taxpayer's alternative minimum taxable income for the current taxable year an amount equal to the excess of the fair market value of the property described below (as of the time of transfer) over the amount paid for such property. 1. The name, address, Social Security number and taxable year of Taxpayer and such Taxpayer's spouse are as follows: Name: Taxpayer: David M. Rickey Spouse: Jan E. Nielsen Address: 15629 Boulder Mountain Road Poway, CA 92064 Social Security No.: Taxpayer: ###-##-#### Spouse: ###-##-#### Taxable Year: 1997 2. The property with respect to which the election is made is 1,142,856 shares ---------- of the Common Stock of Applied Micro Circuits Corporation, a Delaware corporation ( the "Company" ). 3. The date on which the property was transferred is: July 23, 1997 4. The property is subject to the restrictions checked below: [_] the right of the Company to repurchase the property at the initial purchase price in the event that Taxpayer ceases to perform substantial services for the Company within a certain period of time; [_] restrictions imposed by Section 16(b) of the Securities Exchange Act of 1934, as amended. 5. The fair market value of the property at the time of transfer, determined without regard to any restriction other than a restriction which by its terms will never lapse, was $.35. --- 6. The amount (if any) paid for the property was $ .35. ---- Taxpayer has submitted a copy of this statement to the Company and to the IRS Service Center where Taxpayer files such Taxpayer's federal income tax returns. A copy will also be filed with Taxpayer's federal income tax return for the taxable year to which this election relates. The transferee of the property is the person performing the services in connection with the transfer of the property. This election is made to the same effect, and with the same limitations, for purposes of any applicable state statute corresponding to Section 83(b) of the Code. Taxpayer understands that the foregoing election may not be revoked except with - ------------------------------------------------------------------------------- the consent of the Commissioner. - ------------------------------- Dated: July 23, 1997 /s/ [SIGNATURE] -------------------------------- David M. Rickey The undersigned spouse of Taxpayer joins in this election. Dated: July 23, 1997 /s/ [SIGNATURE] -------------------------------- Jan E. Nielsen -2- EXHIBIT A-4 ----------- PROMISSORY NOTE $ 399,999.60 July 23, 1997 ---------- At the times hereinafter stated, for value received, the undersigned promises to pay APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation (the "Company"), the sum of $399,999.60, with interest from the date hereof at a rate ---------- of 5.98% per annum, compounded semiannually, on the unpaid balance of said principal sum. Said principal and interest shall be due and payable on the earlier of February 12, 2000 or termination of the employment of the undersigned by the Company. Principal and interest are payable in lawful money of the United States of America. AT ANY TIME, THE PRIVILEGE IS RESERVED TO PAY MORE THAN THE SUM DUE. Should the interest not be so paid, it shall be added to the principal and thereafter bear interest at the rate payable on the principal hereof, but such unpaid interest so compounded shall not exceed an amount equal to simple interest on the unpaid principal at the maximum rate permitted by law. Should default be made in the payment of any installment of principal or interest when due, then the whole sum of principal and interest shall become immediately due and payable at the option of the holder of this Note. Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The makers and endorsers have severally waived presentment for payment, protest, notice of protest, and notice of non-payment of this Note. This Note, which is full recourse, is secured by a pledge of certain shares of Common Stock of the Company and is subject to the terms of a Purchaser's Common Stock Purchase Agreement between the maker and the Company. /s/ [SIGNATURE] -------------------------------- David M. Rickey EXHIBIT B --------- INVESTMENT REPRESENTATION STATEMENT PURCHASER : David M. Rickey SELLER : APPLIED MICRO CIRCUITS CORPORATION COMPANY : APPLIED MICRO CIRCUITS CORPORATION SECURITY : COMMON STOCK AMOUNT : 1,142,856 DATE : July 23, 1997 In connection with the purchase of the above-listed Securities, I, the Purchaser, represent to the Seller and to the Company the following: (a) I am aware of the Company's business affairs and financial condition, and have acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. I am purchasing these Securities for my own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "Securities Act"). (b) I understand that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of my investment intent as expressed herein. In this connection, I understand that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if my representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (c) I further understand that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. Moreover, I understand that the Company is under no obligation to register the Securities. In addition, I understand that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel for the Company. (d) I am familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof, in a non-public offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of issuance of the Securities, such issuance will be exempt from registration under the Securities Act. In the event the Company later becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter the securities exempt under -2- Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including among other things: (1) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company, and the amount of securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), if applicable. Notwithstanding this paragraph (d), I acknowledge and agree to the restrictions set forth in paragraph (e) hereof. In the event that the Company does not qualify under Rule 701 at the time of issuance of the Securities, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires among other things: (1) the availability of certain public information about the Company, (2) the resale occurring not less than two years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and, in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, (3) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. (e) I agree, in connection with the Company's initial underwritten public offering of the Company's securities, (1) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock of the Company held by me (other than those shares included in the registration) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for one hundred eighty (180) days from the effective date of such registration, and (2) I further agree to execute any agreement reflecting (1) above as may be requested by the underwriters at the time of the public offering, provided however that the officers and directors of the Company ----------------- who own the stock of the Company also agree to such restrictions. (f) I further understand that in the event all of the applicable requirements of Rule 144 or Rule 701 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required, and that, notwithstanding the fact that Rule 144 and Rule 701 are not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 or Rule 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. (g) I understand that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities without the consent of the Commissioner of Corporations of California. I have read the applicable Commissioner's Rules with respect to such restriction, a copy of which is attached. Dated this 23rd day of July, 1997. Signature of Purchaser: /s/ [SIGNATURE] -------------------------------------- David M. Rickey -3- STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CEDE ---------------------------------------------------- Title 10. Investment - Chapter 3. Commissioner of Corporations 260.141.11: Restriction on Transfer. [a) The issuer of any security upon --------------------------- which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee. (b) It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to Section 260.141.12 of these rules), except: (1) to the issuer; (2) pursuant to the order or process of any court; (3) to any person described in Subdivision (i) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferror's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferror or the transferror's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors. descendants or spouse; (5) to holders of securities of the same class of the same issuer; (6) by way of gift or donation inter vivos or on death; (7) by or through a broker-dealer Licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities Law of the foreign state, territory or country concerned; (8) to a broker-dealer Licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group; (9) if the interest sold or transferred is a pledge or other lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written Consent is obtained or under this rule not required; (10) by way of a sale qualified under Sections 25111, 25112, 25113 or 25121 of the Code, of the securities to be transferred, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification; (11) by a corporation to a wholly owned subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation; (12) by way of an exchange qualified under Section 25111, 25112 or 25113 of the c ode, provided that no order under Section 25140 or Subdivision (a) of Section 25143 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; (14) to the State controller pursuant to the unclaimed Property Law or to the administrator of the unclaimed property Law of another state; (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property Law of another state if, in either such case, such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; or (17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the Legend required by this section. (c) The certificates representing all such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a Legend, prominently stamped or printed thereon in capital Letters of not Less than 10-point size, reading as follows: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." APPLIED MICRO CIRCUITS CORPORATION EXERCISE NOTICE AND RESTRICTED STOCK PURCHASE AGREEMENT Applied Micro Circuits Corporation 6195 Lusk Boulevard San Diego, CA 92121-2793 Attention: Corporate Secretary THIS AGREEMENT is made between David Rickey (the "Purchaser") and Applied Micro Circuits Corporation, a Delaware corporation (the "Company") as of July ---- 23, 1997. - --------- RECITALS (1) Pursuant to the exercise of a stock option granted to the Purchaser under the Company's 1992 Stock Option Plan (the "Plan"), and pursuant to the Nonstatutory Stock Option Agreement (the "Option Agreement") dated as of February 12, 1996 by and between the Company and the Purchaser, the Purchaser - ------------------ has elected to purchase 19,408 of these shares which have become vested under ------- the vesting schedule set forth in Section 3(i) of the Option Agreement ("Vested Shares") and 38,096 shares which have not yet vested under such schedule ------- ("Unvested Shares") (the "Shares"). (2) As set forth in the Option Agreement and the Plan, this Agreement grants the Company the right to repurchase at cost the Unvested Shares in the event of a termination of the Purchaser's employment or consultancy with the Company prior to the date upon which they would have vested under the Option Agreement and also a right of first refusal to purchase the Shares upon certain conditions. 1. Company's Option to Repurchase. If the Purchaser's employment or ------------------------------ consultancy with the Company is terminated for any reason (a "Termination"), the Company (or its assignee under this Agreement) shall have the right and option to purchase from the Purchaser, or the Purchaser's legal representative, as the case may be (the "Company Option"), at the price paid by Purchaser for such shares (the "Option Price"), up to that number of shares which would, if the option had not been so exercised, have been unvested as of the date of termination. The Option Agreement and the Plan are hereby incorporated by reference and made a part of this Agreement. 2. Procedure for Exercise of Company Option. ---------------------------------------- (i) Upon the occurrence of a Termination, the Company may exercise the Company Option by delivering personally or by first class mail, to Purchaser (or such Purchaser's transferee or legal representative, as the case may be), within 60 days of the Termination, a notice in writing indicating the Company's intention to exercise the Company Option and setting forth a date for closing (the "Closing") not later than thirty (30) days from the -1- mailing of such notice. The Closing shall take place at the Company's principal executive offices. At the Closing, the holder of the certificates for the Unvested Shares being transferred shall deliver the stock certificate or certificates evidencing the Unvested Shares, and the Company shall deliver the purchase price therefor. (ii) Whenever the Company shall have the right to purchase the Unvested Shares pursuant to this Agreement, the Company may, upon written notice to the Purchaser, assign to one or more persons the right to exercise all or part of the Company's purchase rights. Each such assignee shall have the right to exercise such right in its own name and for its own account. If the Company Option is assigned by the Company and the fair market value of the shares, as determined by the Board of Directors of the Company, exceeds the repurchase price, and such assignee exercises the Company Option, then the assignee shall pay to the Company the difference between the fair market value of the shares repurchased and the aggregate repurchase price. (iii) If the Company does not elect to exercise the Company Option conferred above by giving the requisite notice within sixty (60) days following the Termination, the Company Option shall terminate. 3. Termination of Company Option. The Company Option provided for in ----------------------------- Section 1 of this Agreement shall terminate upon the first date on which there are no longer any Unvested Shares which are the subject of the Company Option. 4. Company's Right of First Refusal. Before any Shares held by Purchaser -------------------------------- or any transferee (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company or its assignee(s) shall have a right of first refusal to purchase the Shares on the terms and conditions set forth in this Section (the "Right of First Refusal"). (a) The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (i) the Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the name of each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposes to transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares at the Offered Price to the Company or its assignee(s). (b) At any time within 30 days after receipt of the Notice, the Company and/or its assignee(s) may, by giving written notice to the Holder, elect to purchase all, but not less than all, of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the purchase price determined in accordance with subsection (c) below. (c) The purchase price ("Purchase Price") for the Shares purchased by the Company or its assignee(s) under this Section shall be the Offered Price. If the Offered Price includes consideration other than cash, the cash equivalent value of the non-cash consideration shall be determined by the Board of Directors of the Company in good faith. -2- (d) Payment of the Purchase Price shall be made, at the option of the Company or its assignee(s), in cash (by check), by cancellation of all or a portion of any outstanding indebtedness of the Holder to the Company (or, in the case of repurchase by an assignee, to the assignee), or by any combination thereof within 30 days after receipt of the Notice or in the manner and at the times set forth in the Notice. (e) If all of the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee(s) as provided in this Section, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within 120 days after the date of the Notice and provided further that any such sale or other transfer is effected in accordance with any applicable securities laws and the Proposed Transferee agrees in writing that the provisions of this Section shall continue to apply to the Shares in the hands of such Proposed Transferee. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company and/or its assignees shall again be offered the Right of First Refusal before any Shares held by the Holder may be sold or otherwise transferred. (f) Anything to the contrary contained in this Section notwithstanding, the transfer of any or all of the Shares during the Purchaser's lifetime or on the Purchaser's death by will or intestacy to the Purchaser's immediate family or a trust for the benefit of the Purchaser's immediate family shall be exempt from the provisions of this Section. "Immediate Family" as used herein shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. In such case, the transferee or other recipient shall receive and hold the Shares so transferred subject to the provisions of this Section, and there shall be no further transfer of such Shares except in accordance with the terms of this Section. (g) The Right of First Refusal shall terminate as to any Shares 90 days after the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the 1933 Act. 5. Transferability of the Shares; Escrow ------------------------------------- (a) Purchaser hereby authorizes and directs the Secretary of the Company, or such other person designated by the Company, to transfer the Shares from Purchaser to the Company. Purchaser further authorizes the Company to refuse, or to cause its transfer agent to refuse, to transfer any stock attempted to be transferred in violation of this Agreement. (b) Except as required to effectuate the exercise of the Company Option, none of the Unvested Shares which are subject to the Company Option under Section 1 may be sold, transferred, pledged, hypothecated or otherwise disposed of by Purchaser. The certificate or certificates evidencing any of the shares purchased hereunder shall be endorsed with a legend substantially as follows (together with any other legend(s) restricting the transfer of the Unvested Shares necessary or appropriate under applicable Federal or State securities laws): -3- "THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH THE TERMS OF AN OPTION AGREEMENT AND A RESTRICTED STOCK PURCHASE AGREEMENT PURSUANT TO WHICH SUCH SHARES WERE PURCHASED, COPIES OF WHICH ARE ON FILE WITH THE SECRETARY OF THE CORPORATION." (c) To ensure the availability for delivery of the Purchaser's Unvested Shares upon repurchase by the Company pursuant to the Company Option under Section 1, the Purchaser shall, upon execution of this Agreement, deliver and deposit with the Secretary of the Company, or such other person designated by the Company, the share certificates representing the Unvested Shares. Purchaser shall further deliver to the Company a stock power, duly endorsed in blank, attached hereto as Exhibit A-1, that will be used only in accordance with ----------- the transfer of Shares pursuant to the Company Option and the Right of First Refusal. The Unvested Shares shall be held by the Secretary in escrow, until such time as the Company's rights of repurchase pursuant to the Company Option no longer are in effect. As a further condition to the Company's obligations under this Agreement, the spouse of Purchaser, if any, shall execute and deliver to the Company the Consent of Spouse attached hereto as Exhibit A-2. ----------- (d) The Company, or its designee, shall not be liable for any act it may do or omit to do with respect to holding the Unvested Shares in escrow and while acting in good faith and in the exercise of its judgment. (e) Transfer or sale of said Unvested Shares is subject to restrictions on transfer imposed by any applicable State and Federal securities laws. Any transferee shall hold such Unvested Shares subject to all the provisions hereof and shall acknowledge the same by signing a copy of this Agreement. 6. Ownership, Voting Rights, Duties. This Agreement shall not affect in -------------------------------- any way the ownership, voting rights or other rights or duties of Purchaser, except as specifically provided herein. 7. Adjustment of Unvested Shares. The Unvested Shares subject to this ----------------------------- Agreement shall be proportionately adjusted for any increase or decrease in the number of issued shares of the Company, resulting from a subdivision or consolidation of shares or the payment of a stock dividend or any other increase or decrease in the number of said shares effected without receipt of consideration by the Company. 8. Market Standoff Agreement. Purchaser hereby agrees that if so ------------------------- requested by the Company or any representative of the underwriters in connection with any registration of the offering of any securities of the Company under the 1933 Act, Purchaser shall not sell or otherwise transfer any Shares or other securities of the Company during the 180-day period following the effective date of a registration statement of the Company filed under the 1933 Act; provided, however, that such restriction shall only apply to the first two registration statements of the Company to become effective under the 1933 Act which include securities to be sold on -4- behalf of the Company to the public in an underwritten public offering under the 1933 Act. The Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such 180-day period. 9. Delivery of Payment. Purchaser herewith delivers to the Company full ------------------- payment for the exercise of the Shares by delivery to the Company of Purchaser's full recourse promissory note in the principal amount of $20,000.40 (the "Note") ---------- in the form attached hereto as Exhibit A-4, bearing interest at the then current minimum applicable federal rate. 10. Security Interest. ----------------- With respect to the Note, the parties agree to the following: (a) The Note shall become payable in full upon the earlier of voluntary or involuntary termination or cessation of employment of Purchaser with the Company for any reason, or the completion of vesting. Purchaser agrees that if a bankruptcy or insolvency proceeding is instituted by or against it, or if a receiver if appointed for the property of Purchaser, or if Purchaser makes an assignment for the benefit of creditors, the entire amount unpaid on the Note shall become immediately due and payable. (b) Purchaser shall deliver to the Secretary of the Company (hereinafter referred to as the "Pledge Holder") all certificates representing the Shares purchased with the Note and an executed blank assignment separate from certificate in the form attached hereto as Exhibit A-1, for use in transferring all or a portion of said Shares to the Company if, as and when required under this Section 6 or under any other provision of this Agreement. (c) As security for the payment of the Note and any renewal, extension or modification thereof, Purchaser hereby grants to the Company a security interest in and pledges with and delivers to the Company Purchaser's Shares purchased with the Note (sometimes referred to herein as the "Collateral"). Purchaser shall not sell, withdraw, pledge, substitute or otherwise dispose of all or any part of the Collateral without the prior written consent of the Company. (d) In the event of any foreclosure of the security interest, the Company may sell the Collateral at a private sale or may repurchase the Collateral itself. The parties agree that, prior to the establishment of a public market for the Shares of the Company, the securities laws affecting sale of the Shares make a public sale of the Collateral commercially unreasonable. The parties further agree that the repurchasing of said Shares by the Company, or by any person to whom the Company may have assigned its rights hereunder, is commercially reasonable if made at a price determined by the Board of Directors in its discretion, fairly exercised, representing what would be the fair market value of the Shares reduced by any limitation on transferability, whether due to the size of the block of Shares or the restrictions of applicable securities laws. (e) In the event of default in payment when due of any indebtedness under Purchaser's Note, or in the event that Purchaser fails to perform any of the covenants set forth in -5- the Option Agreement or in this Agreement for a period of ten days after written notice thereof from the Company, the Company may elect then, or at any time thereafter, to exercise all rights available to a secured party under the California Commercial Code including the right to sell the Collateral at a private or public sale or repurchase the Shares as provided above. The proceeds of any sale shall be applied in the following order: (1) To pay all reasonable expenses of the Company in enforcing this Agreement, including without limitation reasonable attorney's fees and legal expenses incurred by the Company. (2) In satisfaction of the remaining indebtedness under Purchaser's Note. (3) To Purchaser, any remaining proceeds. (f) Upon full payment by Purchaser of all amounts due on the Note, Pledge Holder shall deliver to Purchaser all Shares in Pledge Holder's possession belonging to Purchaser, and Pledge Holder shall thereupon be discharged of all further obligations hereunder. The Shares purchased for cash shall be delivered to Purchaser upon request. 11. Notices. Notices required hereunder shall be given in person or by ------- first class mail to the address of Purchaser shown on the records of the Company, and to the Company at its principal executive office. 12. Survival of Terms. This Agreement shall apply to and bind Purchaser ----------------- and the Company and their respective permitted assignees and transferees, heirs, legatees, executors, administrators and legal successors. 13. Section 83(b) Election. The Purchaser understands that Section 83 of ---------------------- the Internal Revenue Code taxes as ordinary income the difference between the amount paid for the Shares and the fair market value of the Shares as of the date any restrictions on the Shares lapse. In this context, "restriction" means the right of the Company to buy back the stock pursuant to the Company Option and/or, with respect to officers, directors and 10% stockholders, "restriction" also means the six-month period after the date hereof during which such officers, directors and 10% stockholders are subject to suit under Section 16(b) of the Securities Exchange Act of 1934, as amended. The Purchaser understands that Purchaser may elect to be taxed at the time the Shares are purchased rather than when and as the Purchase Option or six-month period expires by filing with the Internal Revenue Code, within 30 days from the date of purchase. The form for making this election is attached as Exhibit A-3 hereto. HOWEVER, THE CHANGES IN THE TAX RATES IMPLEMENTED BY THE TAX REFORM ACT OF 1986 NECESSITATE REVIEW OF PURCHASER'S SPECIFIC SITUATION TO DETERMINE HOW THE PURCHASER'S ULTIMATE TAX LIABILITY MIGHT BE AFFECTED AS A RESULT OF FILING AN ELECTION UNDER SECTION 83(b). -6- THE PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND NOT THE COMPANY'S TO TIMELY FILE THE ELECTION UNDER SECTION 83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO HAKE THIS FILING ON THE PURCHASER'S BEHALF. 14. Representations. The Purchaser has had the opportunity to review with --------------- ---------------------------------------------------- such Purchaser's own tax advisors the federal, state, local and foreign tax - --------------------------------------------------------------------------- consequences of this investment and the transactions contemplated by this - ------------------------------------------------------------------------- Agreement. The Purchaser is relying solely on such advisors and not on any - --------------------------------------------------------------------------- statements or representations of the Company or any of is agents. The Purchaser - -------------------------------------------------------------------------------- understands that Purchaser (and not the Company) shall be responsible for such - ------------------------------------------------------------------------------ Purchaser's own tax liability that may arise as a result of this investment or - ------------------------------------------------------------------------------ the transactions contemplated by this Agreement. - ----------------------------------------------- 15. Governing Law. This Agreement shall be governed by and construed and ------------- enforced in accordance with the laws of the State of California. Purchaser represents that Purchaser has read this Agreement and is familiar with its terms and provisions. Purchaser hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Agreement. -7- IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set forth above. APPLIED MICRO CIRCUITS CORPORATION a Delaware corporation By: /s/ [SIGNATURE] --------------------------------------------- Title: Vice President, Finance & Administration PURCHASER /s/ [SIGNATURE] ------------------------------------------------ David M. Rickey -8- EXHIBIT A-1 ----------- ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED I, hereby sell, assign and transfer unto _____________ ______________________________________________________________________________ (___________) shares of the Common Stock of Applied Micro Circuits Corporation standing in my name of the books of said corporation represented by Certificate No. ___ herewith and do hereby irrevocably constitute and appoint ____________ _______________________ to transfer said stock on the books of the within-named corporation with full power of substitution in the premises. Dated: Signature: /s/ [SIGNATURE] ---------------------------------- David M. Rickey This Assignment Separate from Certificate was executed in conjunction with the terms of a Restricted Stock Purchase Agreement between the above assignor and Applied Micro Circuits Corporation dated February 12, 1996. ------------------ -9- EXHIBIT A-2 ----------- CONSENT OF SPOUSE I, Jan E. Nielsen, spouse of David Rickey, have read and approved the foregoing Agreement. In consideration of granting of the right to my spouse to purchase shares of Applied Micro Circuits Corporation as set forth in the Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the exercise of any rights under the Agreement and agree to be bound by the provisions of the Agreement insofar as I may have any rights under such Agreement or in any shares issued pursuant thereto under the community property laws of the State of California or similar laws relating to marital property in effect in the state of our residence as of the date of the signing of the foregoing Agreement. Dated: July 23, 1997 ---------------------------------- Jan E. Nielsen -1- EXHIBIT A-3 ------------ ELECTION UNDER SECTION 83(b) OF -------------------------------- THE INTERNAL REVENUE CODE OF 1986 --------------------------------- The undersigned Taxpayer hereby elects, pursuant to the provisions of the federal income tax law noted above, to include in gross income for the Taxpayer's current taxable year, as compensation for services, the excess, if any, of the fair market value of the property described below at the time of transfer over the amount paid for such property. 1. The name, address, Social Security number and taxable year of Taxpayer and such Taxpayer's spouse are as follows: Name: Taxpayer: David M. Rickey Spouse: Jan E. Nielsen Address: 15629 Boulder Mountain Road Poway, CA 92064 Social Security No.: Taxpayer: ###-##-#### Spouse: ###-##-#### Taxable Year: 1997 2. The property with respect to which the election is made is described as follows: 57,144 shares of Common Stock of Applied Micro Circuits ------ Corporation, a Delaware corporation (the "Company"), which is Taxpayer's ------- employer or the corporation for whom the Taxpayer has performed services. 3. The date on which the shares were transferred was July 23, 1997. -------------- 4. The shares are subject to the following restrictions: The Company may repurchase all or a portion of the shares at the Taxpayer's original purchase price under certain conditions at the time of Taxpayer's termination of employment or services. 5. The fair market value of the shares (without regard to restrictions other than restrictions which by their terms will never lapse) was $.35 per share --- at the time of transfer. 6. The amount paid for such shares was $.35 per share. --- 7. The Taxpayer has submitted a copy of this statement to the Company as the Taxpayer's employer or the corporation for whom the Taxpayer has performed services. -1- This Election must be filed with the Internal Revenue Service ("IRS") (at the office where the taxpayer files annual income tax returns) within 30 days after --------------- the date of transfer of the property, and must also be filed with the taxpayer's income tax returns for the calendar year above stated. The Election cannot be revoked without the consent of the IRS. Dated: July 23, 1997 /s/ [SIGNATURE] ---------------------------------- David M. Rickey The undersigned spouse of Taxpayer joins in this election. Dated: July 23, 1997 /s/ [SIGNATURE] ---------------------------------- Jan E. Nielsen -2- EXHIBIT A-4 ----------- PROMISSORY NOTE $20,000.40 July 23, 1997 --------- ------------- At the times hereinafter stated, for value received, the undersigned promises to pay APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation (the "Company"), the sum of $ 20,000.40, with interest from the date hereof at a rate --------- of 5.98% per annum, compounded semiannually, on the unpaid balance of said principal sum. Said principal and interest shall be due and payable on the earlier of February 12, 2000 or termination of the employment of the undersigned by the Company. Principal and interest are payable in lawful money of the United States of America. AT ANY TIME, THE PRIVILEGE IS RESERVED TO PAY MORE THAN THE SUM DUE. Should the interest not be so paid, it shall be added to the principal and thereafter bear interest at the rate payable on the principal hereof, but such unpaid interest so compounded shall not exceed an amount equal to simple interest on the unpaid principal at the maximum rate permitted by law. Should default be made in the payment of any installment of principal or interest when due, then the whole sum of principal and interest shall become immediately due and payable at the option of the holder of this Note. Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The makers and endorsers have severally waived presentment for payment, protest, notice of protest, and notice of non-payment of this Note. This Note, which is full recourse, is secured by a pledge of certain shares of Common Stock of the Company and is subject to the terms of a Purchaser's Common Stock Purchase Agreement of even date herewith between the maker and the Company. /s/ [SIGNATURE] ---------------------------------- David Rickey -1- EXHIBIT B --------- INVESTMENT REPRESENTATION STATEMENT PURCHASER : David M. Rickey SELLER : APPLIED MICRO CIRCUITS CORPORATION COMPANY : APPLIED MICRO CIRCUITS CORPORATION SECURITY : COMMON STOCK AMOUNT : 57,144 DATE : July 23, 1997 In connection with the purchase of the above-listed Securities, I, the Purchaser, represent to the Seller and to the Company the following: (a) I am aware of the Company's business affairs and financial condition, and have acquired sufficient information about the Company to reach an informed and knowledgeable decision to acquire the Securities. I am purchasing these Securities for my own account for investment purposes only and not with a view to, or for the resale in connection with, any "distribution" thereof for purposes of the Securities Act of 1933, as amended (the "Securities Act"). (b) I understand that the Securities have not been registered under the Securities Act in reliance upon a specific exemption therefrom, which exemption depends upon, among other things, the bona fide nature of my investment intent as expressed herein. In this connection, I understand that, in the view of the Securities and Exchange Commission (the "SEC"), the statutory basis for such exemption may be unavailable if my representation was predicated solely upon a present intention to hold these Securities for the minimum capital gains period specified under tax statutes, for a deferred sale, for or until an increase or decrease in the market price of the Securities, or for a period of one year or any other fixed period in the future. (c) I further understand that the Securities must be held indefinitely unless subsequently registered under the Securities Act or unless an exemption from registration is otherwise available. Moreover, I understand that the Company is under no obligation to register the Securities. In addition, I understand that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities unless they are registered or such registration is not required in the opinion of counsel for the Company. (d) I am familiar with the provisions of Rule 701 and Rule 144, each promulgated under the Securities Act, which, in substance, permit limited public resale of "restricted securities" acquired, directly or indirectly, from the issuer thereof, in a non-public -1- offering subject to the satisfaction of certain conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the time of issuance of the Securities, such issuance will be exempt from registration under the Securities Act. In the event the Company later becomes subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter the securities exempt under Rule 701 may be resold, subject to the satisfaction of certain of the conditions specified by Rule 144, including among other things: (1) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of certain public information about the Company, and the amount of securities being sold during any three month period not exceeding the limitations specified in Rule 144(e), if applicable. Notwithstanding this paragraph (d), I acknowledge and agree to the restrictions set forth in paragraph (e) hereof. In the event that the Company does not qualify under Rule 701 at the time of issuance of the Securities, then the Securities may be resold in certain limited circumstances subject to the provisions of Rule 144, which requires among other things: (1) the availability of certain public information about the Company, (2) the resale occurring not less than two years after the party has purchased, and made full payment for, within the meaning of Rule 144, the securities to be sold; and, in the case of an affiliate, or of a non-affiliate who has held the securities less than three years, (3) the sale being made through a broker in an unsolicited "broker's transaction" or in transactions directly with a market maker (as said term is defined under the Securities Exchange Act of 1934) and the amount of securities being sold during any three month period not exceeding the specified limitations stated therein, if applicable. (e) I agree, in connection with the Company's initial underwritten public offering of the Company's securities, (1) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock of the Company held by me (other than those shares included in the registration) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for one hundred eighty (180) days from the effective date of such registration, and (2) I further agree to execute any agreement reflecting (1) above as may be requested by the underwriters at the time of the public offering, provided however that the officers and directors of the Company ----------------- who own the stock of the Company also agree to such restrictions. (f) I further understand that in the event all of the applicable requirements of Rule 144 or Rule 701 are not satisfied, registration under the Securities Act, compliance with Regulation A, or some other registration exemption will be required; and that, notwithstanding the fact that Rule 144 and Rule 701 are not exclusive, the Staff of the SEC has expressed its opinion that persons proposing to sell private placement securities other than in a registered offering and otherwise than pursuant to Rule 144 or Rule 701 will have a substantial burden of proof in establishing that an exemption from registration is available for such offers or sales, and that such persons and their respective brokers who participate in such transactions do so at their own risk. -2- (g) I understand that the certificate evidencing the Securities will be imprinted with a legend which prohibits the transfer of the Securities without the consent of the Commissioner of Corporations of California. I have read the applicable Commissioner's Rules with respect to such restriction, a copy of which is attached. Dated this 23rd day of July, 1997. Signature of Purchaser: /s/ [SIGNATURE] ---------------------------------- David M. Rickey STATE OF CALIFORNIA - CALIFORNIA ADMINISTRATIVE CODE ---------------------------------------------------- Title 10. Investment - Chapter 3. Commissioner of Corporations 260.141.11. Restriction on Transfer. (a) The issuer of any security upon ---------- ----------------------- which a restriction on transfer has been imposed pursuant to Sections 260.102.6, 260.141.10 or 260.534 shall cause a copy of this section to be delivered to each issuee or transferee of such security at the time the certificate evidencing the security is delivered to the issuee or transferee. (b] It is unlawful for the holder of any such security to consummate a sale or transfer of such security, or any interest therein, without the prior written consent of the Commissioner (until this condition is removed pursuant to section 260.141.12 of these rules), except: (1] to the issuer; (2] pursuant to the order or process of any court; (3] to any person described in Subdivision (1) of Section 25102 of the Code or Section 260.105.14 of these rules; (4) to the transferor's ancestors, descendants or spouse, or any custodian or trustee for the account of the transferor or the transferor's ancestors, descendants, or spouse; or to a transferee by a trustee or custodian for the account of the transferee or the transferee's ancestors. descendants or spouse; (5) to holders of securities of the same class of the same issuer; (6) by way of gift or donation inter vivos or on death; (7) by or through a broker-dealer Licensed under the Code (either acting as such or as a finder) to a resident of a foreign state, territory or country who is neither domiciled in this state to the knowledge of the broker-dealer, nor actually present in this state if the sale of such securities is not in violation of any securities Law of the foreign state, territory or country concerned; (8) to a broker-dealer Licensed under the Code in a principal transaction, or as an underwriter or member of an underwriting syndicate or selling group; (9) if the interest sold or transferred is a pledge or other Lien given by the purchaser to the seller upon a sale of the security for which the Commissioner's written consent is obtained or under this rule not required; (10) by way of a sale qualified under Sections 25111, 25112, 25113 or 25121 of the Code, of the securities to be transferred, provided that no order under Section 251/,0 or Subdivision (a) of Section 251/.3 is in effect with respect to such qualification; (11) by a corporation to a wholly obtained subsidiary of such corporation, or by a wholly owned subsidiary of a corporation to such corporation, (12) by way of an exchange qualified under Section 25111. 25112 or 25113 of the Cede, provided that no order under Section 251/,0 or Subdivision (a) of Section 251/,3 is in effect with respect to such qualification; (13) between residents of foreign states, territories or countries who are neither domiciled nor actually present in this state; (14) to the State Controller pursuant to the Unclaimed Property Law or to the administrator of the unclaimed property law of another state; (15) by the State Controller pursuant to the Unclaimed Property Law or by the administrator of the unclaimed property law of another state if, in either such case. such person (i) discloses to potential purchasers at the sale that transfer of the securities is restricted under this rule, (ii) delivers to each purchaser a copy of this rule, and (iii) advises the Commissioner of the name of each purchaser; (16) by a trustee to a successor trustee when such transfer does not involve a change in the beneficial ownership of the securities; or (17) by way of an offer and sale of outstanding securities in an issuer transaction that is subject to the qualification requirement of Section 25110 of the Code but exempt from that qualification requirement by subdivision (f) of Section 25102; provided that any such transfer is on the condition that any certificate evidencing the security issued to such transferee shall contain the Legend required by this section. (c) The certificates representing a[t such securities subject to such a restriction on transfer, whether upon initial issuance or upon any transfer thereof, shall bear on their face a legend, prominently stamped or printed thereon in capital Letters of not Less than 10-point size, reading as follows: "IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES." EX-10.14 20 PROMISSORY NOTES DATED 2/12/96 EXHIBIT 10.14 FULL RECOURSE UNSECURED PROMISSORY NOTE $53,000 San Diego, California February 12, 1996 FOR VALUE RECEIVED, the undersigned promises to pay APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation, or order, at San Diego, California, the principle sum of $53,000 with interest from the date hereof on the unpaid principal balance of this note at the rate of 5.32% per annum, compounded annually. The principle amount of this note plus all accrued interest shall be repaid on or before February 12, 1999. All payments shall be made in lawful currency of the United States of America. If action is instituted on this Note, the undersigned promises to pay such sum as the court may adjudge as attorneys' fees. The undersigned reserves the right to repay the principal and interest, or any portion thereof, at any time, without penalty, and upon prepayment, interest shall be adjusted accordingly. In the event of the undersigned ceases to be an employee of APPLIED MICRO CIRCUITS CORPORATION, for any reason, the holder hereof may, at its election, declared the entire balance of principle and interest thereon immediately due and payable, together with attorneys' fees and costs; provided, however that such election shall be made within ninety (90) days after the date the undersigned ceases to be an employee of APPLIED MICRO CIRCUITS CORPORATION. This note is unsecured. This Note shall be governed by and construed in accordance with the laws of the State of California. Executed this 12th day of February, 1996 at San Diego, California. [SIGNATURE] - ------------------------- David Rickey 2-12-96 - ------------------------- Date NON-RECOURSE NOTE SECURED BY PLEDGE AGREEMENT May 1,1996 1. Obligation. For value received, DAVID M. RICKEY (the "Borrower") ----------- promises to pay to APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation (the "Company"), the sum of $750,000 (the "Loan"), together with interest on the unpaid principal hereof from the date hereof at the rate of 5.76% per annum, compounded annually. 2. Payment. Principal and interest shall be due and payable in full on -------- May 1, 1999 unless accelerated as provided in Section 3 below. Payments of principal and interest shall be made in lawful money of the United States of America and shall be credited first to the accrued interest, with the remainder applied to principal. Prepayment of the Loan may be made at any time without penalty. 3. Acceleration of Obligation. The Loan shall immediately become due and --------------------------- payable in full upon the earliest of the following: (i) an event of default under the Loan Agreement (the "Loan Agreement") between the Company and the Borrower dated as of May 1, 1996 relating to the indebtedness represented hereby, this promissory note, or the Pledge Agreement (the "Pledge Agreement") between the Company and the Borrower dated as of May 1, 1996; (ii) in the event any required payment hereunder or under any other promissory note delivered by the Borrowers to the Company is not made when due; (iii) in the event of a voluntary or involuntary termination of David Rickey's employment with the Company for any reason, with or without cause (including death or disability); or (iv) May 1, 1999. In addition, if Borrower sells any portion of the Shares (as defined below), an equal portion of the original principal amount of the Loan shall immediately become due and payable, together with all interest accrued on such principal portion. 4. Security. This Note shall be secured by the Pledge Agreement, pursuant --------- to which the Borrowers shall pledge 46,500 shares of Common Stock of Advanced Micro Devices (the "Shares") as security for Borrower's obligations under this Note. Except as otherwise provided herein, the Loan shall be non-recourse. 5. Non-Recourse. This note is non-recourse. ------------- 6. Governing Law; Waiver. This Note shall be governed by and construed in ---------------------- accordance with the laws of California, without reference to conflict of laws principles. The Borrower waives presentment, notice of nonpayment, notice of dishonor, protest, demand and diligence. 2 7. Attorneys' Fees. If suit is brought for collection of this Note, the --------------- Borrower agrees to pay all reasonable expenses, including attorneys' fees, incurred by the Company in connection therewith whether or not such suit is prosecuted to judgment. IN WITNESS WHEREOF, the Borrower has caused this Note to be executed as of the date and year first above written. [SIGNATURE] __________________________________ David M. Rickey 3 FULL RECOURSE UNSECURED PROMISSORY NOTE REAL ESTATE BRIDGE LOAN $12,391.64 San Diego, California April 1, 1997 FOR VALUE RECEIVED, the undersigned promises to pay APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation, at San Diego, California, the principle sum of $12,391.64 with interest from the date hereof on the unpaid principal balance of this note at the rate of 5.91% per annum, compounded annually. The principle amount of this note plus all accrued interest shall be due and payable on March 31, 1998. All payments shall be made in lawful currency of the United States of America. If action is instituted on this Note, the undersigned promises to pay such sum as the court may adjudge as attorneys' fees. The undersigned reserves the right to repay the principal and interest, or any portion thereof, at any time, without penalty, and upon prepayment, interest shall be adjusted accordingly. In the event of the undersigned ceases to be an employee of APPLIED MICRO CIRCUITS CORPORATION, for any reason, the holder hereof may, at its election, declared the entire balance of principle and interest thereon immediately due and payable, together with attorneys' fees and costs; provided, however, that such election shall be made within ninety (90) days after the date the undersigned ceases to be an employee of APPLIED MICRO CIRCUITS CORPORATION. This note is unsecured. This Note shall be governed by and construed in accordance with the laws of the State of California. Executed this 1st day of April, 1997 at San Diego, California. [SIGNATURE] - ---------------------------- David Rickey 2-12-96 - ---------------------------- Date PROMISSORY NOTE $20,000 July 23, 1997 ------ At the times hereinafter stated, for value received, the undersigned promises to pay APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation (the "Company"), the sum of $20,000.40, with interest from the date hereof at a rate ---------- of 5.98% per annum, compounded semiannually, on the unpaid balance of said principal sum. Said principal and interest shall be due and payable on the earlier of February 12, 2000 or termination of the employment of the undersigned by the Company. Principal and interest are payable in lawful money of the United States of America. AT ANY TIME, THE PRIVILEGE IS RESERVED TO PAY MORE THAN THE SUM DUE. Should the interest not be so paid, it shall be added to the principal and thereafter bear interest at the rate payable on the principal hereof, but such unpaid interest so compounded shall not exceed an amount equal to simple interest on the unpaid principal at the maximum rate permitted by law. Should default be made in the payment of any installment of principal or interest when due, then the whole sum of principal and interest shall become immediately due and payable at the option of the holder of this Note. Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The makers and endorsers have severally waived presentment for payment, protest, notice of protest, and notice of non-payment of this Note. This Note, which is full recourse, is secured by a pledge of certain shares of Common Stock of the Company and is subject to the terms of a Purchaser's Common Stock Purchase Agreement between the maker and the Company. /s/ David Rickey ----------------------------- David Rickey PROMISSORY NOTE $35,000 July 23, 1997 ------ At the times hereinafter stated, for value received, the undersigned promises to pay APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation (the "Company"), the sum of $35,000, with interest from the date hereof at a rate of 6.54% per annum, compounded semiannually, on the unpaid balance of said principal sum. Said principal and interest shall be due and payable on the earlier of April 9, 2001 or termination of the employment of the undersigned by the Company. Principal and interest are payable in lawful money of the United States of America. AT ANY TIME, THE PRIVILEGE IS RESERVED TO PAY MORE THAN THE SUM DUE. Should the interest not be so paid, it shall be added to the principal and thereafter bear interest at the rate payable on the principal hereof, but such unpaid interest so compounded shall not exceed an amount equal to simple interest on the unpaid principal at the maximum rate permitted by law. Should default be made in the payment of any installment of principal or interest when due, then the whole sum of principal and interest shall become immediately due and payable at the option of the holder of this Note. Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The makers and endorsers have severally waived presentment for payment, protest, notice of protest, and notice of non-payment of this Note. This Note, which is full recourse, is secured by a pledge of certain shares of Common Stock of the Company and is subject to the terms of a Purchaser's Common Stock Purchase Agreement between the maker and the Company. /s/ David M. Rickey ----------------------------- David M. Rickey PROMISSORY NOTE $399,999.60 July 23, 1997 - ----------- At the times hereinafter stated, for value received, the undersigned promises to pay APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation (the "Company"), the sum of $399,999.60, with interest from the date hereof at a rate ----------- of 5.98% per annum, compounded semiannually, on the unpaid balance of said principal sum. Said principal and interest shall be due and payable on the earlier of February 12, 2000 or termination of the employment of the undersigned by the Company. Principal and interest are payable in lawful money of the United States of America. AT ANY TIME, THE PRIVILEGE IS RESERVED TO PAY MORE THAN THE SUM DUE. Should the interest not be so paid, it shall be added to the principal and thereafter bear interest at the rate payable on the principal hereof, but such unpaid interest so compounded shall not exceed an amount equal to simple interest on the unpaid principal at the maximum rate permitted by law. Should default be made in the payment of any installment of principal or interest when due, then the whole sum of principal and interest shall become immediately due and payable at the option of the holder of this Note. Should suit be commenced to collect this Note or any portion thereof, such sum as the Court may deem reasonable shall be added hereto as attorneys' fees. The makers and endorsers have severally waived presentment for payment, protest, notice of protest, and notice of non-payment of this Note. This Note, which is full recourse, is secured by a pledge of certain shares of Common Stock of the Company and is subject to the terms of a Purchaser's Common Stock Purchase Agreement between the maker and the Company. /s/ David M. Rickey ----------------------------- David M. Rickey EX-10.15 21 PATENT LICENSE AGREEMENT DATED 1/1/88 EXHIBIT 10.15 Amendment to the PATENT LICENSE AGREEMENT between Motorola, Inc. and Applied Micro Circuits Corporation Effective January 1, 1988 Motorola, Inc., having an office at 1303 East Algonquin Road, Schaumburg, Illinois 60196 and Applied Micro Circuits Corporation, having an office at 6195 Lusk Boulevard, San Diego, California 92121 hereby agree to amend the above- identified agreement as follows. 1. Section 4.1, line 3; delete "1992" and insert "[ * ]." 2. Directly after Section 4.1.3, insert new Section 4.1.4 as follows. "For 1993, [ * ] U.S. Dollars [ * ]." 3. Section 4.2.2, line 1; after "1988," insert "with the exception of 1993." 4. Section 4.3, line 3; after "made" insert "with the exception of 1993 for which the payment is due May 15, 1994". 5. Section 4.5, line 2; delete the account number and insert "38491386." 6. Section 5.1, line 2; delete "1992" and insert "[ * ]." 7. All other terms and conditions of the Agreement remain the same. Indicating their agreement to the forgoing, the parties hereto have executed this Amendment in duplicate. Motorola, Inc. Applied Micro Circuits Corporation By: /s/ [signature] By: /s/ [signature] --------------------------- --------------------------------- Title: Vice President and Title: V.P., Finance & Admin. ----------------------- ------------------------------ Intellectual Property ----------------------- ------------------------------ Licensing Counsel ----------------------- ------------------------------ Date: April 7, 1994 Date: April 20, 1994 ----------------------- ------------------------------ [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. PATENT LICENSE AGREEMENT ------------------------ THIS AGREEMENT is effective as of the 1st day of January, 1988 by and between MOTOROLA, INC., a Delaware corporation having an office at 5005 East McDowell Road, Phoenix, Arizona 85008 (hereinafter called "MOTOROLA"), and APPLIED MICRO CIRCUITS CORPORATION, a corporation of California having an office at 6195 Lusk Boulevard, San Diego, California 92121 (hereinafter called "AMCC"). WHEREAS, MOTOROLA owns and has, or may have, rights in various patents issued, and applications for patents pending, in various countries of the world as to which AMCC desires to acquire licenses as hereinafter provided, and WHEREAS, AMCC owns and has, or may have, rights in various patents issued, and applications for patents pending, in various countries of the world as to which MOTOROLA desires to acquire licenses as hereinafter provided, and WHEREAS, AMCC and MOTOROLA are engaged in continuing research, development and engineering in regard to LICENSED PRODUCTS (as hereinafter defined) and have programs for the patenting of inventions resulting therefrom, NOW THEREFORE, in consideration of the mutual covenants and conditions hereinafter set forth, it is agreed as follows: Section 1 - DEFINITIONS ----------------------- 1.1 SUBSIDIARY(IES) means a corporation, company, or other entity more than fifty percent (50%) of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, now or hereafter, owned or controlled, directly or indirectly by a party hereto, but such corporation, company, or other entity shall be deemed to be a SUBSIDIARY only so long as such ownership or control exists. 1.2 SEMICONDUCTIVE MATERIAL means any material whose conductivity is intermediate to that of metals and insulators at room temperature and whose conductivity, over some temperature range, increases with increases in temperature. Such material shall include but not be limited to refined products, reaction products, reduced products, mixtures and compounds. 1.3 INTEGRATED CIRCUIT STRUCTURE means an integral unit consisting primarily of a plurality of active and/or passive circuit elements associated on, or in, a unitary body of SEMICONDUCTIVE MATERIAL for performing electrical or electronic functions and, if provided therewith, such unit includes housing and/or supporting means therefor. 1.4 SEMICONDUCTOR ELEMENT means a device other than an INTEGRATED CIRCUIT STRUCTURE consisting primarily of a body of SEMICONDUCTIVE MATERIAL having a plurality of electrodes associated therewith, whether or not said body consists of a single SEMICONDUCTIVE MATERIAL or of a multiplicity of such materials, and whether or not said body includes one or more layers or other regions (constituting substantially less than the whole of said body) of a material or materials which are of a type other than SEMICONDUCTIVE MATERIAL and, if provided therewith, such device includes housing and/or supporting means therefor. 1.5 MANUFACTURING APPARATUS means as to each party hereto, any instrumentality or aggregate of instrumentalities primarily designed for use in the fabrication of that party's LICENSED PRODUCTS (as hereinafter defined). 1.6 FUNCTIONAL ASSEMBLY(IES) means a plurality of active and/or passive elements for generating, receiving, transmitting, storing, transforming or acting in response to an electrical signal. 1.7 MICROPROCESSOR(S) means one or more INTEGRATED CIRCUIT STRUCTURES containing functional elements including registers, control logic, decision logic, and input-output circuitry appropriately coupled to interconnections which may include internal buses such as data buses, address buses, or control buses and having a capability of executing temporarily or permanently stored program instructions or microinstructions; and which may also have included on said INTEGRATED CIRCUIT STRUCTURES, memory, clocks, input-output interface circuitry, or other electronic functions ordinarily associated with or connected to central processing units. 1.8 INPUT-OUTPUT ADAPTOR(S) means one or more INTEGRATED CIRCUIT STRUCTURES which are adapted to provide an interface between a MICROPROCESSOR and any instrumentality or aggregate of instrumentalities adapted to compute, classify, process, transmit, receive, retrieve, originate, switch, store, display, manifest, measure, detect, record, reproduce, handle, or utilize any form of information, intelligence or data for business, scientific, control or other purposes, but shall not include such instrumentality or aggregate of instrumentalities, per se. 1.9 VARISTOR MATERIALS AND DEVICES means a non-linear electrical device comprising dispersed mixtures of insulating and conducting phases and materials therefor and, if provided therewith, such device includes housing and/or supporting means therefor. VARISTOR MATERIALS AND DEVICES does not include materials or devices primarily for use with voltage magnitudes substantially higher than voltage magnitudes customarily employed with the other items listed within the definition of LICENSED PRODUCTS. 1.10 CIRCUIT OR SYSTEM means one or more FUNCTIONAL ASSEMBLY(IES) whether or not combined with one or more active and/or passive elements for performing electrical or electronic functions, whether or not a housing and/or supporting means for said circuitry is included. -2- 1.11 ELECTRICAL METHOD means a method or steps for using FUNCTIONAL ASSEMBLY(IES) whether or not combined with one or more active and/or passive element(s), for performing electrical or electronic function(s). 1.12 MOTOROLA SEMICONDUCTOR PRODUCTS SECTOR means a MOTOROLA existing business unit now consisting of an International Semiconductor Group, a Microprocessor Products Group, a MOS Memory Products Group, a Standard Logic and Analog Integrated Circuits Group, an Application Specific Integrated Circuits Division and a Discrete and Special Technologies Group having major manufacturing facilities located in Phoenix, Arizona; Mesa, Arizona; and Austin, Texas; Toulouse, France; Aizu and Sendai, Japan; and East Kilbride, Scotland; making and/or developing products falling within the definition of LICENSED PRODUCTS (as hereinafter defined). This definition of the MOTOROLA SEMICONDUCTOR PRODUCTS SECTOR also includes the predecessor MOTOROLA business unit of said Groups taken singularly or in combination and/or said Division and any MOTOROLA future business unit acquired or derived from, by separation or merger, irrespective of appellation, said Groups taken singularly or in combination and/or said Division. 1.13 MOTOROLA PATENTS means all classes or types of patents, utility models, design patents and applications for the aforementioned of all countries of the world, which are issued, published or filed prior to the date of expiration or termination of this Agreement, and which arise out of inventions made solely by one or more employees of the MOTOROLA SEMICONDUCTOR PRODUCTS SECTOR and under which and to the extent to which and subject to the conditions under which the MOTOROLA SEMICONDUCTOR PRODUCTS SECTOR may have, as of the EFFECTIVE DATE of this Agreement, or may thereafter during the term of this Agreement acquire the right to grant licenses or rights of the scope granted herein without the payment of royalties or other consideration to third persons, except for payments to third persons for inventions made by said third persons while engaged by MOTOROLA. In no event shall the term MOTOROLA PATENTS include or encompass patents on inventions made by employees of MOTOROLA while in the employ of groups or operations of MOTOROLA other than the MOTOROLA SEMICONDUCTOR PRODUCTS SECTOR, except in accordance with Section 3.6; and in no event shall MOTOROLA PATENTS include (i) any one or more of the following three patents of MOTOROLA which relate to circuitry for electronic organs: 3,535,430; 3,546,355; and 3,610,803. 1.14 AMCC SEMICONDUCTOR PRODUCTS SECTOR means AMCC's existing semiconductor business now consisting of a Gate Array Group having a manufacturing facility in San Diego, California; making and/or developing products falling within the definition of LICENSED PRODUCTS (as hereinafter defined). This definition of the AMCC SEMICONDUCTOR PRODUCTS SECTOR also includes any AMCC future semiconductor business whether or not derived from, by separation or merger, irrespective of appellation, said Gate Array Group. 1.15 AMCC PATENTS means all classes or types of patents, utility models, design patents and applications for the aforementioned of all countries of the world, which are issued, published or filed prior to the date of expiration or termination of this Agreement, and -3- which arise out of inventions made by one or more employees of AMCC SEMICONDUCTOR PRODUCTS SECTOR and under which and to the extent to which and subject to the conditions under which the AMCC SEMICONDUCTOR PRODUCTS SECTOR may have, as of the EFFECTIVE DATE of this Agreement, or may thereafter during the term of this Agreement acquire the right to grant licenses or rights of the scope granted herein without the payment of royalties or other consideration to third persons, except for payments to third persons for inventions made by said third persons while engaged by AMCC. In no event shall the term AMCC PATENTS include or encompass patents on inventions made by employees of AMCC while in the employ of groups of operations of AMCC other than the AMCC SEMICONDUCTOR PRODUCTS SECTOR, except in accordance with Section 3.7. 1.16 The term MOTOROLA PATENTS and AMCC PATENTS does not include any patent, utility model, or design patent on an invention which is an instrumentality or aggregate of instrumentalities for the purpose of converting solar energy to electricity, to heat, or to reactable chemical products, nor shall such term include any patent, utility model, or design patent for an invention on a method or material used for or in such an instrumentality or aggregate of instrumentalities. 1.17 LICENSED MOTOROLA PRODUCT(S) or LICENSED AMCC PRODUCT(S), as the case may be, means any one or more of the following items, whether or not an item is incorporated in more comprehensive equipment: 1.17.1 SEMICONDUCTIVE MATERIAL(S); 1.17.2 INTEGRATED CIRCUIT STRUCTURE(S); 1.17.3 SEMICONDUCTOR ELEMENT(S); 1.17.4 FUNCTIONAL ASSEMBLY(IES); 1.17.5 VARISTOR MATERIAL(S) AND DEVICE(S); 1.17.6 CIRCUIT(S) and SYSTEM(S); 1.17.7 CIRCUIT(S) and SYSTEM(S) employing an ELECTRICAL METHOD(S); 1.17.8 MICROPROCESSOR(S); and 1.17.9 INPUT-OUTPUT ADAPTORS. 1.18 EFFECTIVE DATE means the date entered on Page 1 hereof. 1.19 NET SEMICONDUCTOR SALES of AMCC means internal transfers or sales of finished semiconductor products and the total of all prices at which all the customers of AMCC were billed in the usual course of business including all packing material, boxes, cartons, -4- crates, and all contents thereof, and less sales taxes, excise taxes and similar taxes levied in respect to such sales. Section 2 - MUTUAL RELEASES --------------------------- 2.1 MOTOROLA hereby releases, acquits and forever discharges AMCC for any time prior to the EFFECTIVE DATE, from any and all claims or liability for infringement or alleged infringement of any MOTOROLA PATENTS, under which a license or a right is herein granted by MOTOROLA to or for AMCC. 2.2 AMCC hereby releases, acquits and forever discharges MOTOROLA for any time prior to the EFFECTIVE DATE, from any and all claims or liability for infringement or alleged infringement of any AMCC PATENTS under which a license or a right is herein granted by AMCC to or for MOTOROLA. Section 3 - GRANTS ------------------ 3.1 AMCC hereby grants for the term of this Agreement to MOTOROLA a [ * ] license throughout the world under AMCC PATENTS without the right to sub- license: 3.1.1 to import, make, use, lease, sell, or otherwise dispose of LICENSED MOTOROLA PRODUCTS and to practice any process or method involved in the manufacture or use thereof, and 3.1.2 to make, use and have made MANUFACTURING APPARATUS and to practice any process or method involved in the use thereof. 3.2 MOTOROLA hereby grants for the term of this Agreement to AMCC a [*] license throughout the world under MOTOROLA PATENTS without the right to sub-license: 3.2.1 to import, make, use, lease, sell or otherwise dispose of LICENSED AMCC PRODUCTS and to practice any process or method involved in the manufacture or use thereof, and 3.2.2 to make, use and have made MANUFACTURING APPARATUS and to practice any process or method involved in the use thereof. 3.3 Notwithstanding the provisions of Section 3.2, in no event shall the license granted to AMCC include the right to make, use, or sell any product which substantially utilizes the instruction set of, or is substantially compatible with the programmer's model of, any MICROPROCESSOR product designed and sold by MOTOROLA; or which is substantially compatible with the register set of any INPUT-OUTPUT ADAPTOR sold by MOTOROLA, including but not limited to the products of the M68XX, M68XXX, M1468XX or M68HCXX families of MICROPROCESSORS and INPUT-OUTPUT ADAPTOR, or which incorporate [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -5- such MICROPROCESSOR or INPUT-OUTPUT ADAPTOR products as elements of their structure. However, AMCC shall have the right, subject to all copyright and mask work rights owned or controlled by MOTOROLA and subject to the above limitations of this Section, to develop and manufacture original designs of products performing substantially the same functions as any MOTOROLA MICROPROCESSOR or INPUT-OUTPUT ADAPTOR products. 3.4 AMCC grants to the users of LICENSED MOTOROLA PRODUCTS which are imported, sold, leased or otherwise disposed of by MOTOROLA not in contravention of the license herein granted to MOTOROLA, a worldwide, non-exclusive and royalty-free immunity from suit under AMCC PATENTS, covering the use, whether direct or contributory, during the term of this Agreement of such LICENSED MOTOROLA PRODUCTS, provided that such royalty-free immunity for the user shall extend only under those AMCC PATENTS licensed hereunder and only to the use or sale of those particular LICENSED MOTOROLA PRODUCTS which the user obtained from MOTOROLA. 3.5 MOTOROLA grants to the users of LICENSED AMCC PRODUCTS which are imported, sold, leased or otherwise disposed of by AMCC not in contravention of the license herein granted to AMCC, a worldwide, non-exclusive and royalty-free immunity from suit under MOTOROLA PATENTS, covering the use, whether direct or contributory, during the term of this Agreement of such LICENSED AMCC PRODUCTS, provided that such royalty-free immunity for the user shall extend only under those MOTOROLA PATENTS licensed hereunder and only to the use or sale of those particular LICENSED AMCC PRODUCTS which the user obtained from AMCC. 3.6 MOTOROLA shall have the right to extend the release and grants of Sections 2.2, 3.1 and 3.4, respectively, to any MOTOROLA SUBSIDIARY(IES) if such SUBSIDIARY(IES) consents to extend the definition of MOTOROLA PATENTS in Section 1.13 to include inventions made solely by employees of that SUBSIDIARY(IES). 3.7 AMCC shall have the right to extend the release and grants of Sections 2.1, 3.2 and 3.5, respectively, to any AMCC SUBSIDIARY(IES) if such SUBSIDIARY(IES) consents to extend the definition of AMCC PATENTS in Section 1.15 to include inventions made by employees of that SUBSIDIARY(IES). 3.8 No licenses under any copyrights or mask work rights of either MOTOROLA or AMCC are granted under this Agreement. Section 4 - PAYMENTS -------------------- 4.1 In partial consideration of the rights granted by MOTOROLA under Section 3, for the period beginning on the EFFECTIVE DATE and extending to December 31, 1992, AMCC agrees to pay MOTOROLA the following payments: -6- 4.1.1 For 1988, [ * ] U.S. Dollars [ * ] plus whichever of the following is the least, but in no event shall the following be less than zero: 4.1.2 [ * ] percent of [ * ] U.S. Dollars [ * ]; or 4.1.3 the percentage (%) increase in the NET SEMICONDUCTOR SALES OF AMCC for 1988 with respect to 1987 multiplied by [ * ] U.S. Dollars [ * ]. 4.2.2 For each year subsequent to 1988, the amount of payment is equal to the payment for the year immediately preceding the year for which payment is being made plus whichever of the following is the least, but in no event shall the following be less than zero: 4.2.2.1 [ * ] percent of the payment for the year immediately preceding the year for which payment is being made; or 4.2.2.2 the [ * ] in the NET SEMICONDUCTOR SALES of AMCC for the year for which payment is being made with respect to the immediately preceding year, multiplied by the payment for such immediately preceding year. 4.2.3 For example, the amount of payment for 1989 equals the amount of payment for 1988 plus the lesser of either [ * ] of the amount of payment for 1988, or the percentage increase in the NET SEMICONDUCTOR SALES (NSS) of AMCC for 1989 with respect to 1988, i.e. (1989 NSS) - (1988 NSS), ---------------------- (1988 NSS) multiplied by the amount of payment for 1988. 4.3 The payment for 1988 is due on January 31, 1989. Each yearly payment for each year subsequent to 1988 is due by January 31 of the year following the year for which payment is being made with the exception of 1993 for which the payment is due May 15, 1994. 4.3.1 For example, the payment for 1989 is due on January 31, 1990. 4.4 Any payment hereunder which shall be delayed for more than thirty (30) days beyond the due date shall be subject to an interest charge of [ * ] on the unpaid balance payable in United States currency until paid. The foregoing payment of interest shall not affect MOTOROLA's right to terminate in accordance with Section 5. 4.5 Payments hereunder made to MOTOROLA's New York City account at CITIBANK #38491386 Citicorp Center, 153 E. 53rd Street, New York, New York 10043. Notice of payments shall be sent by AMCC to MOTOROLA's address in Section 6.10. 4.6 In the event and at such time that AMCC or a SUBSIDIARY of AMCC sublicensed hereunder acquires or is acquired by, directly or indirectly, at any time during the [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -7- term of this Agreement, another existing operation or operations or a part or parts thereof which manufactures products within the definition of LICENSED PRODUCTS but not previously licensed under the MOTOROLA PATENTS, where such operation or operations together with all previous acquisitions of nonlicensed production after the date of this Agreement have, as measured in fair market value at the times of acquisition, an aggregate annual gross production of LICENSED PRODUCTS used, sold, or otherwise put into use totaling not more than [ * ] of covered sales under this Agreement, then AMCC agrees to notify MOTOROLA promptly of any such acquisitions and it is agreed and understood that the production resulting from such acquisitions up to such [ * ] will be deemed to be licensed under this Agreement and subject to all of its terms and conditions without payment of further consideration than provided for herein. To the extent that the annual aggregate gross production of LICENSED PRODUCTS used, sold or otherwise put into use exceeds such [ * ] for such existing operation or operations not previously licensed under MOTOROLA PATENTS, the parties hereto will consider extending this license to cover said annual aggregate gross production of LICENSED PRODUCTS in excess of [ * ] produced by such unlicensed operation, operations, or parts thereof and will negotiate the terms of such an extension of this license; provided, however, that if an acquiror of AMCC is unable, despite good faith negotiations, to reach agreement with MOTOROLA with respect to said extension of this license, the rights of AMCC and its successors under this agreement shall not be adversely affected. By virtue of the acquisition of AMCC and AMCC's rights under this license agreement an acquiror is not being granted a license from MOTOROLA for any of its other products, and the acquiror is not granting any license rights to MOTOROLA. Section 5 - TERM AND TERMINATION AND ASSIGNABILITY -------------------------------------------------- 5.1 The term of this Agreement shall be from the EFFECTIVE DATE until [ * ] unless earlier terminated as elsewhere provided in this Agreement. 5.2 In the event of any breach of this Agreement by either party hereto (including AMCC's obligation to make payments under Section 4), if such breach is not corrected within forty-five (45) days after written notice describing such breach, this Agreement may be terminated forthwith by further written notice to that effect from the party noticing the breach. 5.3 Either party hereto shall also have the right to terminate this Agreement forthwith by giving written notice of termination to the other party at any time, upon or after: 5.3.1 the filing by such other party of a petition in bankruptcy or insolvency; or 5.3.2 any adjudication that such other party is bankrupt or insolvent; or 5.3.3 the filing by such other party of any legal action or document seeking reorganization, readjustment or arrangement of its business under any law relating to bankruptcy or insolvency; or [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -8- 5.3.4 the appointment of a receiver for all or substantially all of the property of such other party; or 5.3.5 the making by such other party of any assignment for the benefit of creditors; or 5.3.6 the institution of any proceedings for the liquidation or winding up of such other party's business or for the termination of its corporate charter. 5.4 In the event of termination of this Agreement by one party pursuant to Section 5.2, the licenses and rights granted to or for the benefit of that one party hereto and its SUBSIDIARIES under MOTOROLA PATENTS or AMCC PATENTS, as the case may be, depending upon who is the party doing the terminating, shall survive such termination and shall extend for the full term of this Agreement, but the licenses and rights granted to or for the benefit of the other party shall terminate as of the date termination takes effect. 5.5 At such time as is mutually agreeable, at the written request of either party hereto to the other party hereto, but in no event less than six (6) months prior to the expiration of this Agreement, the parties hereto shall discuss the possible extension of or the renewal of the term of this Agreement, including the possible amendment of the provisions thereof. 5.6 The rights or privileges provided for in this Agreement may be assigned or transferred by either party only with the prior written consent of the other party and with the authorization or approval of any governmental authority as then may be required, except to a successor in ownership of all or substantially all of the assets of the assigning party but such successor, before such assignment or transfer is effective, shall expressly assume in writing to the other party the performance of all of the terms and conditions of this Agreement to be performed by the assigning party. Section 6 - MISCELLANEOUS PROVISIONS ------------------------------------ 6.1 Each of the parties hereto represents and warrants that it has the right to grant to or for the benefit of the other the rights and licenses granted hereunder in Sections 2 and 3. 6.2 Nothing contained in this Agreement shall be construed as: 6.2.1 restricting the right of MOTOROLA or any of its SUBSIDIARIES to make, use, sell, lease or otherwise dispose of any particular product or products not herein licensed; 6.2.2 restricting the right of AMCC or any of its SUBSIDIARIES to make, use, sell, lease or otherwise dispose of any particular product or products not herein licensed; -9- 6.2.3 an admission by AMCC of, or a warranty or representation by MOTOROLA as to, the validity and/or scope of the MOTOROLA PATENTS, or a limitation on AMCC to contest, in any proceeding, the validity and/or scope thereof; 6.2.4 an admission by MOTOROLA of, or a warranty or representation by AMCC as to, the validity and/or scope of the AMCC PATENTS, or a limitation on MOTOROLA to contest, in any proceeding, the validity and/or scope thereof; 6.2.5 conferring any license or other right, by implication, estoppel or otherwise, under any patent application, patent or patent right, except as herein expressly granted under the MOTOROLA PATENTS, and the AMCC PATENTS; 6.2.6 conferring any license or right with respect to any trademark, trade or brand name, a corporate name of either party or any of their respective SUBSIDIARIES, or any other name or mark, or contraction, abbreviation or simulation thereof; 6.2.7 imposing on MOTOROLA any obligation to institute any suit or action for infringement of any MOTOROLA PATENTS, or to defend any suit or action brought by a third party which challenges or concerns the validity of any MOTOROLA PATENTS licensed under this Agreement; 6.2.8 imposing upon AMCC any obligation to institute any suit or action for infringement of any AMCC PATENTS, or to defend any suit or action brought by a third party which challenges or concerns the validity of any AMCC PATENTS licensed under this Agreement; 6.2.9 a warranty or representation by MOTOROLA that any manufacture, use, sale, lease or other disposition of LICENSED AMCC PRODUCTS will be free from infringement of any patent other than the MOTOROLA PATENTS licensed herein; 6.2.10 a warranty or representation by AMCC that any manufacture, use, sale, lease or other disposition of LICENSED MOTOROLA PRODUCTS will be free from infringement of any patent other than the AMCC PATENTS licensed herein; 6.2.11 imposing on either party any obligation to file any patent application or to secure any patent or maintain any patent in force; or 6.2.12 an obligation on either party to furnish any manufacturing or technical information under this Agreement except as the same is specifically provided for herein. 6.3 No express or implied waiver by either of the party to this Agreement of any breach of any term, condition or obligation of this Agreement by the other party shall be construed as a waiver of any subsequent breach of that term, condition or obligation or of any other term, condition or obligation of this Agreement of the same or of a different nature. -10- 6.4 Anything contained in this Agreement to the contrary notwithstanding, the obligations of the parties hereto shall be subject to all laws, both present and future, of any Government having jurisdiction over either party hereto, and to orders or regulations of any such Government, or any department, agency, or court thereof, and acts of war, acts of public enemies, strikes, or other labor disturbances, fires, floods, acts of God, or any causes of like or different kind beyond the control of the parties, and the parties hereto shall be excused from any failure to perform any obligation hereunder to the extent such failure is caused by any such law, order, regulation, or contingency but only so long as said law, order, regulation or contingency continues. 6.5 The captions used in this Agreement are for convenience only, and are not to be used in interpreting the obligations of the parties under this Agreement. 6.6 This Agreement and the performance of the parties hereunder shall be construed in accordance with and governed by the laws of the State of Illinois. 6.7 If any term, clause, or provision of this Agreement shall be judged to be invalid, the validity of any other term, clause, or provision shall not be affected; and such invalid term, clause, or provision shall be deemed deleted from this Agreement. 6.8 This Agreement sets forth the entire Agreement and understanding between the parties as to the subject matter hereof and merges all prior discussions between them, and neither of the parties shall be bound by any conditions, definitions, warranties, understandings or representations with respect to such subject matter other than as expressly provided herein or as duly set forth on or subsequent to the date hereof in writing and signed by a proper and duly authorized officer or representative of the party to be bound thereby. 6.9 The parties hereto shall keep this Agreement confidential and shall not now or hereafter divulge this Agreement or any part thereof to any third party except: 6.9.1 with the prior written consent of the other party; or 6.9.2 to any governmental body having jurisdiction to request and to read the same; or 6.9.3 as otherwise may be required by law or legal processes; or 6.9.4 to legal counsel representing either party. 6.10 All notices required or permitted to be given hereunder shall be in writing and shall be valid and sufficient if dispatched by registered airmail, postage prepaid, in any post office in the United States, addressed as follows: -11- 6.10.1 If to MOTOROLA: Motorola Inc. 1303 East Algonquin Road Schaumburg, Illinois 60196 Attention: Vice President for Patents, Trademarks & Licensing 6.10.2 If to AMCC: Applied Micro Circuits Corporation 6195 Lusk Boulevard San Diego, California 92121 Attention: Director of Corporate Planning 6.10.3 The date of receipt of such a notice shall be the date for the commencement of the running of the period provided for in such notice, or the date at which such notice takes effect, as the case may be. -12- IN WITNESS WHEREOF, the parties hereto have executed this Agreement in duplicate. MOTOROLA, INC. APPLIED MICRO CIRCUITS CORPORATION By /s/ [signature] By /s/ [signature] ------------------------------------- -------------------------------- Title Vice President Title V.P. ---------------------------------- ----------------------------- -13- EX-10.16 22 PATENT LICENSE AGREEMENT DATED 3/1/91 EXHIBIT 10.16 December 1, 1993 Mr. Joel O. Holliday Vice President Finance & Administration Applied Micro Circuits Corp. 6195 Lusk Boulevard San Diego, CA 92121-2793 Re: Patent License for Fiber Channel Standard dated as of March 1, 1991 Dear Mr. Holliday: In response to the request in your letter of November 17, IBM proposes to amend the referenced agreement between AMCC and IBM to add to the definition of Licensed Patents therein, US Patents Nos. [ * ] and [ * ] . Further, Section 6 Payments will be amended to recite the one-time payable fee for the -------- grant of rights under these two (2) additional patents. I will also take this opportunity to update the address to which any notices or requests for patent license matter should be sent to IBM. For these purposes, the following amendment is proposed: In Section 1.1, insert after "U.S. Patent No. [ * ]," the following phrase, "U.S. Patent No. [ * ] and U.S. Patent No. [ * ],"; In Section 6.1, substitute for the phrase "[ * ]," the phrase "[ * ] has been paid by LICENSEE and received by IBM at execution of this Agreement." "Such sum" shall be replaced by "The balance of [ * ]" and "Agreement" shall be replaced by "amendment."; and In Section 9.1.1, replace "2000 Purchase Street" and "Purchase, New York 10577" with "P.O. Box 10501" and "Stamford, Connecticut 06904-2501." [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Applied Micro Circuits Corporation Patent License Agreement of March 1, 1991 Amendment 1 Page 2 If you concur with this proposed amendment, please indicate such concurrence by signing both copies of this letter. Please return one such signed copy to me along with the check for [ * ] made payable to "IBM Corporation." Sincerely, John W. Lowe Program Manager, Licensing For Applied Micro Circuits Corporation: Signature /s/ Joel O. Holiday ------------------------------------ Name (Print) Joel O. Holiday --------------------------------- Title V.P. ---------------------------------------- Date 12/20/93 ----------------------------------------- [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. AGREEMENT dated as of March 1, 1991 between INTERNATIONAL BUSINESS MACHINES CORPORATION, a New York corporation (hereinafter called IBM), and APPLIED MICRO CIRCUITS CORPORATION, a California corporation (hereinafter called LICENSEE). IBM has the right to license others under certain U.S. and non-U.S. patent rights, and LICENSEE desires to acquire a [ * ] license under such patent rights, for use in respect of Products (as hereafter defined) which conform to any interim or to the final specification for the FC-1 protocol of the Fiber Channel Standard promulgated by the American National Standards Institute (hereinafter "ANSI"); NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, IBM and LICENSEE agree as follows: Section 1. Definitions ----------- 1.1 "Licensed Patents" shall mean U.S. Patent No. [ * ], any and all non-U.S. counterparts thereof and any and all patents related to any of the foregoing as a division, continuation, reissue or extension. 1.2 "Product" shall mean any instrumentality or aggregate of instrumentalities primarily designed to implement or otherwise conform to any interim or to the final specification of the FC-l protocol for the Fiber Channel Standard promulgated by ANSI, or any revision of such final specification as may be promulgated, from time to time, by ANSI. Section 2. License ------- 2.1 IBM hereby grants to LICENSEE and its majority-owned subsidiaries a [ * ] license under the Licensed Patents to make, have made, use, lease, sell and/or otherwise transfer Products. 2.2 No license is granted to LICENSEE by IBM, either directly or by implication, estoppel or otherwise; 2.2.1 under any patents other than the Licensed Patents. 2.2.2 with respect to any item other than Products, notwithstanding that such other item may incorporate Products; 2.2.3 for the combination of Products with any other items, including other items provided by LICENSEE; or 2.2.4 for the use of any combination set forth in Section 2.2.3. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. Section 3. Immunity -------- 3.1 IBM, on behalf of itself and its majority-owned subsidiaries, hereby grants to end users of Products manufactured, leased, sold or otherwise transferred by LICENSEE or any of its sublicensed majority-owned subsidiaries, a royalty-free immunity from suit with respect to any claim of a Licensed Patent only to use such Products. Section 4. Release ------- 4.1 IBM hereby irrevocably releases LICENSEE and its subsidiaries which are majority-owned subsidiaries as of the date of this Agreement, and its and their respective customers, mediate and immediate, of and from any and all claims of infringement of the Licensed Patents, which claims have been or might have been made by IBM before the date of this Agreement with respect to any Products made, used, leased, sold or otherwise transferred by or for LICENSEE or any of its majority-owned subsidiaries and which would have been licensed had the same been made, used, leased, sold and/or otherwise transferred or practiced after the date of this Agreement. Section 5. Term ---- 5.1 The term of this Agreement shall be from the date first written above until the expiration of the last to expire of the Licensed Patents. Section 6. Payments -------- 6.1 As full consideration for the license, immunity and release granted hereunder, LICENSEE shall pay to IBM the total sum of [ * ] dollars [ * ]. Such sum shall become due upon the signing of this Agreement by both parties, and shall be rendered by cashier's check, made payable to "IBM Corporation". Section 7. Option ------ 7.1 LICENSEE, on behalf of itself and its majority-owned subsidiaries, hereby grants to IBM an option to acquire a [ * ] license under any patent(s) which LICENSEE or any of such subsidiaries has a right to license during the term of this Agreement and which claims an invention required by IBM to make, use and sell Products. Such license shall be of the [ * ] and on [ * ]. However, if LICENSEE has [ * ]. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -2- Section 8. Warrant ------- 8.1 IBM represents and warrants that it has the full right and power to grant the license set forth in Section 2, the immunity set forth in Section 3, and the release set forth in Section 5, with respect to Licensed Patents. 8.2 IBM represents and warrants that there are no outstanding agreements, assignments or encumbrances inconsistent with the provisions of any license, immunity or release granted hereunder or with any other provision of this Agreement. 8.3 IBM makes no other representations or warranties, express or implied, nor does IBM assume any liability in respect of any infringement of any patents or other rights of third parties arising from the operation of LICENSEE and/or any of its customers under the license and/or immunity herein granted. Section 9. Payments and Other Communications --------------------------------- 9.1 Any payment or other communication required or permitted to be made or given to either party hereto pursuant to this Agreement shall be sufficiently made or given on the date of mailing if sent to such party by registered or certified mail, postage prepaid, addressed to it at its address set forth below, or to such other address as it shall designate by written notice given to the other party: 9.1.1 In the case of IBM, IBM Director of Commercial Relations International Business Machines Corporation 2000 Purchase Street Purchase, New York 10577 9.1.2 In the case of LICENSEE, Vice President, Corporate Planning Applied Micro Circuits Corporation 6195 Lusk Boulevard San Diego, California 92121-1792 Section 10. Assignments ----------- 10.1 LICENSEE shall not have the right, without prior written approval of IBM, to assign any license or right granted hereunder. Any such attempted assignment shall be null and void. 10.2 IBM shall not assign any of the Licensed Patents unless such assignment is made subject to the terms and conditions of this Agreement. Any attempted assignment in derogation of any of such terms and conditions shall be null and void. -3- Section 11. Applicable Law -------------- 11.1 This Agreement shall be construed, and the legal relations between the parties hereto shall be determined, in accordance with the law of the State of New York. Section 12. Know-How and Trade Secrets -------------------------- 12.1 No license or other right is granted herein to either party, directly or by implication, estoppel or otherwise, with respect to any trade secrets or know-how, and no such license or other right shall arise from the consummation of this Agreement or from any acts, statements or dealings leading to such consummation. In addition, neither party is required hereunder to furnish or disclose to the other any technical or other information whatsoever. Section 13. Miscellaneous ------------- 13.1 Nothing contained in this Agreement shall be construed as: 13.1.1 a warranty or representation by IBM as to the validity or scope of any of the Licensed Patents; 13.1.2 a warranty or representation by IBM that any manufacture, use, lease, sale and/or transfer and/or practice of any invention disclosed and/or claimed in any of the Licensed Patents will be free from infringement of any patent(s) other than the Licensed Patents; 13.1.3 a warranty or representation by IBM as to the technical or commercial viability of any invention(s), or any embodiment(s) thereof, described and/or claimed in any of the Licensed Patents; 13.1.4 imposing on LICENSEE any obligation, or conferring on LICENSEE any right, to institute any action or suit against a third party for infringement or to defend any action or suit brought by a third party which challenges or concerns the validity of any of the Licensed Patents; 13.1.5 restricting the right of LICENSEE or any of its subsidiaries to make, have made, use, have used, lease, sell and/or to transfer any machine, manufacture or composition of matter and/or to practice any process not herein licensed; 13.1.6 conferring any license or right with respect to any trademark, trade or brand name, the corporate name or other designation (including the contraction or simulation of any of the foregoing) of either party or any of its subsidiaries; and each party hereto agrees not to use the existence of this Agreement or the rights granted hereunder in any promotional activity without the express written approval of the other party; 13.1.7 prohibiting IBM from licensing any third party under one or more of the Licensed Patents. -4- 13.2 IBM shall have no obligation hereunder to institute any action or suit against a third party for infringement of any of the Licensed Patents or to defend any action or suit brought by a third party which challenges or concerns the validity of any of the Licensed Patents. 13.3 This Agreement will not be binding upon the parties until it has been signed hereinbelow by or on behalf of each party, in which event it shall be effective as of the date first written above. No amendment or modification hereof shall be valid or binding upon the parties unless made in writing and signed as aforesaid. This Agreement sets forth the entire agreement and understanding between the parties with respect to the Licensed Patents and merges all prior discussions between them, and neither of the parties shall be bound by any conditions, definitions, warranties, understandings, or representations with respect to the Licensed Patents other than as expressly provided herein or as duly set forth on, or subsequent to, the date hereof in writing and signed by the party bound thereby or its duly authorized representative. 13.4 If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions shall in no way be affected or impaired thereby. 13.5 The headings of the several Sections are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed on their behalf as of the date first above written. APPLIED MICRO CIRCUITS INTERNATIONAL BUSINESS CORPORATION MACHINES CORPORATION By /s/ Laurence H. Marty By /s/ H. G. Figueroa ------------------------------ -------------------------------- H. G. Figueroa Vice President Name Laurence H. Marty ---------------------------- Title VP Corporate Planning --------------------------- -5- EX-10.17 23 PATENT LICENSE AGREEMENT DATED 6/1/97 EXHIBIT 10.17 LICENSE AGREEMENT ("Agreement") with an Effective Date of June 1, 1997 between INTERNATIONAL BUSINESS MACHINES CORPORATION, a New York corporation ("IBM"), and APPLIED MICRO CIRCUITS CORPORATION, a Delaware corporation ("AMCC"). IBM has the right to license others under the patents listed in Exhibit 1 (the "Licensed Patents"). AMCC desires to acquire a [*] license under the Licensed Patents for Products as defined below. In consideration of the premises and mutual covenants herein contained, IBM and AMCC agree as follows: SECTION 1. DEFINITIONS ----------- 1.1 "Patented Portion" shall mean that portion of a Product which: (a) embodies or uses all the elements or steps recited in any one claim of one Licensed Patent; or (b) is manufactured by use of all the steps recited in any one claim of one Licensed Patent. 1.2 "Products" shall mean integrated circuits for producing a [ * ]. Any instrumentality or aggregate of instrumentalities primarily designed for use in the fabrication (including testing) of a product licensed herein shall not be considered to be a Product. 1.3 "Selling Price" shall mean the [ * ] selling price to [ * ] , and the [ * ] selling price [ * ]. 1.4 "Subsidiary" shall mean a corporation, company or other entity: (a) more than fifty percent (50%) of whose outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are, now or hereafter, owned or controlled, directly or indirectly, by a party hereto, or (b) which does not have outstanding shares or securities, as may be the case in a partnership, joint venture or unincorporated association, but more than fifty percent (50%) of whose ownership interest representing the right to make the decisions for such corporation, company or other entity is now or hereafter, owned or controlled, directly or indirectly, by a party hereto, but such corporation, company or other entity shall be deemed to be a Subsidiary only so long as such ownership or control exists. SECTION 2. LICENSE ------- 2.1 IBM grants to AMCC and its Subsidiaries a [*] license under the Licensed Patents to make, use, import, offer to sell, sell and otherwise transfer Products. The license as to any Subsidiary shall terminate on the date such Subsidiary ceases to be a Subsidiary. Additionally, subject to Section 2.4, IBM grants to AMCC and its Subsidiaries a [*] [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. license under the Licensed Patents the right to have AMCC's Products made by another manufacturer for the use and/or lease, sale or other transfer only by AMCC. 2.2 No license is granted pursuant to Section 2.1 with respect to any particular Product, unless: (a) a Licensed Patent defines a Patented Portion of said Product; (b) said Licensed Patent is identified in a report as covering said Product; and (c) either the royalty attributable to said Product is paid as required by Section 4.2, or a late payment of said royalty is made and accepted by IBM pursuant to Section 4.4. 2.3 No license, immunity or other right is granted under this Agreement, either directly or by implication, estoppel, or otherwise: (a) other than under the Licensed Patents; (b) to have licensed products made by a third party (other than as provided in Section 2.4); (c) with respect to any item other than a licensed Product notwithstanding that such other item may incorporate one or more licensed Products; or (d) to parties acquiring any item from AMCC or its Subsidiaries for the combination of such acquired item with any other item, including other items provided by AMCC or its Subsidiaries, or for the use of any such combination even if such acquired item has no substantial use other than as part of such combination. 2.4 The license to have Products made granted in Section 2.1 to AMCC: (a) shall only apply when the specifications for AMCC's Products were created by AMCC (either solely or jointly with one or more third parties); (b) shall only be under claims of Licensed Patents, the infringement of which would be necessitated by compliance with such specifications; (c) shall not be under claims for a method or process unless such method or process is based upon technology created by AMCC (either solely or jointly with one or more third parties); and (d) shall not apply to any Products in the form manufactured or marketed by said other manufacturer prior to AMCC furnishing said specifications. Unless AMCC informs IBM to the contrary, AMCC shall be deemed to have authorized said other manufacturer to make AMCC's Products under the license granted to -2- AMCC in Section 2.1 when the condition specified in Section 2.4(a) is fulfilled. In response to a written request identifying a Product and a manufacturer, AMCC shall in a timely manner inform IBM of the quantity of such Product, if any, manufactured by such manufacturer pursuant to the license granted in Section 2.1. SECTION 3 . PAYMENT ------- 3.1 AMCC shall pay a royalty for each Product which contains a patented Portion at a rate computed at [*] of the Selling Price of such Product. For the purposes of this Section 3.1, a Licensed Patent and its corresponding patents in other countries, listed in Exhibit 1, shall be deemed to be one Licensed Patent. 3.2 [ * ] royalties shall be paid by AMCC with respect to Products which AMCC purchases from a third party licensed under all of the Licensed Patents to sell such Products, and for which Products a royalty or other consideration was paid to IBM. 3.3 AMCC shall pay to IBM the sum of [*] dollars [*] upon execution of this Agreement. No portion of said sum shall be returnable, but the whole of said sum shall be creditable against royalties payable by AMCC under the provisions of this Section 3. 3.4 If AMCC purchases from a third party portions of a Product and combines such portions with each other and/or with other portions such that the combination is itself a Product which includes a Patented Portion not fully included in any individual purchased portion, then royalty shall be due for the combination in accordance with this Section 3, whether or not said third party is authorized by IBM to sell said purchased portions. SECTION 4. ACCRUALS, RECORDS, REPORTS AND OTHER INFORMATION ------------------------------------------------ 4.1 Royalties shall accrue when a Product, with respect to which royalty payments are required by this Agreement, is first sold or otherwise transferred (including, sold or otherwise transferred to IBM or any of its Subsidiaries), or first used in each country of use, by or for AMCC or any of its Subsidiaries. 4.2 AMCC shall pay all royalties and other payments due hereunder in US dollars. All royalties for an accounting period computed in other currencies shall be converted into United States dollars at the exchange rate for bank transfers from such currency to US dollars as quoted by the head office of Citibank N.A., New York, USA, at the close of banking on the last day of such accounting period (or the first business day thereafter if such last day is a non-business day). 4.3 AMCC's accounting period shall be semiannual and shall end on the last day of each June and December during the term of this Agreement. Within thirty (30) days after the end of each such period, AMCC shall furnish to IBM a written report containing the information [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. -3- specified in Section 4.5 and shall pay to IBM all unpaid royalties accrued hereunder through the end of each such period. 4.4 IBM may accept a late payment provided such payment includes all overdue royalties plus interest. The interest on any overdue royalty or other payment shall be calculated commencing on the date such royalty or other payment became due, using an annual rate which is the greater of ten percent (10%) or one percentage point higher than the prime interest rate as quoted by the head office of Citibank N.A., New York, USA at the close of banking on such date, or on the first business day thereafter if such date falls on a non-business day. If such interest rate exceeds the maximum legal rate in the jurisdiction where a claim therefor is being asserted, the interest rate shall be reduced to such maximum legal rate. 4.5 AMCC's written report shall be certified by an officer of AMCC and shall contain the following information: (a) a description of each type of Product, the quantity sold or otherwise transferred during the accounting period, and the sum of the Selling Prices for such quantity; (b) identification of each Licensed Patent covering each such Product; (c) the amount of royalties due for each type of Product; and (d) the aggregate amount of all royalties due. In the event that any of Sections 4.5(a) through 4.5(d) do not apply to an accounting period, AMCC shall so indicate. In the event no royalties are due, AMCC's report shall so state. 4.6 For the purpose of determining obligations under IBM patents, AMCC shall, within thirty (30) days of a written request by IBM: (a) provide to or make available for inspection by IBM or its designee any Product or a copy of any materials relevant to any Product identified by IBM; (b) sell, license or otherwise transfer and deliver to IBM any Product at any time offered for sale or transferred by AMCC; and (c) provide to IBM or its designee access to those manufacturing processes used by AMCC in the manufacture of Products, subject to the terms and conditions of a mutually agreeable signed confidentiality agreement. 4.7 AMCC shall keep records in accordance with generally accepted accounting principles and in sufficient detail to permit the determination of royalties due IBM. Such records shall include, but not be limited to, detailed records supporting the information provided under Section 4.5. Such records shall be kept for four (4) years following the submission of the related report. -4- Upon written notice for an audit, AMCC shall permit auditors designated by IBM, together with such legal and technical support as IBM deems necessary, to examine, during ordinary business hours, records, materials, and manufacturing processes of AMCC for the purpose of verifying compliance with this Agreement. Each party shall pay the costs that it incurs in the course of the audit. However, in the event that the audit establishes underpayment greater than five percent (5%) of the royalties due, AMCC shall reimburse IBM for the cost of the audit; provided, however, such reimbursement shall not exceed the amount of the -------- ------- underpayment. SECTION 5. TERM OF AGREEMENT; TERMINATION ------------------------------ 5.1 The term of this Agreement shall be from the Effective Date until the expiration of the last to expire of the Licensed Patents, unless earlier terminated under the provisions of this Agreement. 5.2 AMCC may terminate the license granted herein, in whole or as to any specified Licensed Patent by giving notice in writing to IBM; provided, -------- however, that termination of the license as to any specified Licensed Patent - ------- shall include termination of the license as to all corresponding Licensed Patents in other countries. Any such termination shall be irrevocable. 5.3 IBM shall have the right to terminate this Agreement, or the license granted hereunder, if AMCC fails, at any time to: (a) maintain records which meets the requirements of Section 4.7; (b) make a report which meets the requirements of Section 4.5; (c) pay any accrued royalties; (d) make any other payment required herein; or (e) permit an audit pursuant to Section 4.7; and if AMCC does not cure such failure within sixty (60) days after mailing of written notice from IBM to AMCC specifying the nature of such failure. IBM's termination of this Agreement or of the license shall be effective upon written notice of termination. 5.4 No termination of this Agreement or the license granted hereunder shall relieve AMCC of any obligation or liability accrued hereunder prior to such termination. 5.5 In the event that more than fifty percent (50%) of AMCC's outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) are now, or hereafter become, owned or controlled, directly or indirectly, by a third party, AMCC's license shall terminate unless IBM agrees otherwise in a signed writing, which shall not be unreasonably withheld. -5- SECTION 6. OPTION GRANTED -------------- 6.1 AMCC grants to IBM, the right to obtain a license to make, use, import, offer to sell, sell and otherwise transfer any information handling system product. Said license shall be [*]. Said right shall be with respect to any patent under which AMCC or any of its Subsidiaries has the right to grant licenses to unaffiliated third parties at any time on or before the Effective Date and shall be limited to a number equivalent to the number of Licensed Patents licensed hereunder. SECTION 7. MEANS OF PAYMENT AND COMMUNICATION ---------------------------------- 7.1 Payment shall be made by check mailed to the IBM address specified in Section 7.2, or by electronic funds transfer to the following account: IBM, Director of Licensing The Bank of New York 48 Wall Street New York, New York 10286 Credit Account No. 890-0209-674 ABA No. 0210-0001-8 7.2 Notices and other communications shall be sent by facsimile or by registered or certified mail to the following address and shall be effective upon mailing: For IBM: For AMCC: Director of Licensing Mr. Joel O. Holliday IBM Corporation VP, Finance & Administration 500 Columbus Avenue APPLIED MICRO CIRCUITS CORPORATION Thornwood, New York 10594 6195 Lusk Boulevard Facsimile: (914) 742-6737 San Diego, CA 92121-2793 Facsimile: (619) 535-6800 SECTION 8. MISCELLANEOUS ------------- 8.1 AMCC shall not assign this Agreement, assign or sublicense any rights under it, or delegate any of its obligations. Any attempt to do so shall be void. 8.2 Both parties agree not to use or refer to this Agreement or any of its provisions in any promotional activity. 8.3 IBM shall not have any obligation hereunder to institute any action or suit against third parties for infringement of any Licensed Patents or to defend any action or suit brought by a third party which challenges or concerns the validity of Licensed Patents. AMCC shall not have any right to institute any action or suit against third parties for infringement of any Licensed Patents. -6- 8.4 IBM represents and warrants that it has the full right and power to grant the license set forth in Section 2. IBM MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, NOR SHALL IBM HAVE ANY LIABILITY, IN RESPECT OF ANY INFRINGEMENT OF PATENTS OR OTHER RIGHTS OF THIRD PARTIES DUE TO LICENSEE'S OPERATION UNDER THE LICENSE HEREIN GRANTED. 8.5 This Agreement shall not be binding upon the parties until it has been signed hereinbelow by or on behalf of each party. No amendment or modification hereof shall be valid or binding upon the parties unless made in writing and signed as aforesaid. 8.6 If any section of this Agreement is found by competent authority to be invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such section in every other respect and the remainder of this Agreement shall continue in effect so long as the Agreement still expresses the intent of the parties. However, if the intent of the parties cannot be preserved, this Agreement shall be either renegotiated or terminated. 8.7 This Agreement shall be construed, and the legal relations between the parties hereto shall be determined, in accordance with the law of the State of New York, USA, as such law applies to contracts signed and fully performed in such State. 8.8 The headings of sections are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. This Agreement, including its Exhibit, embodies the entire understanding of the parties with respect to the Licensed Patents, and replaces any prior oral or written communications between them. Agreed to: Agreed to APPLIED MICRO INTERNATIONAL BUSINESS CIRCUITS CORPORATION MACHINES CORPORATION By: /s/ JOEL O. HOLLIDAY By: /s/ M.C. PHELPS, JR. --------------------------- --------------------------- Joel O. Holliday M.C. Phelps, Jr. Vice President, Vice President Finance & Administration -7- EXHIBIT 1 "Licensed Patents" shall mean the following patents, applications or patents issuing from such applications, and all patents which are reissues, divisions, continuations, or extensions of any of the following patents:
Country Patent Number Issue Date - ------- ------------- ---------- United States US [*] [*] Canada CA [*] [*] European EP [*] [*] Germany DE [*] [*]
[*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EX-10.18 24 LETTER AGREEMENT DATED 1/30/96 [LOGO OF AMCC APPEARS HERE] EXHIBIT 10.18 January 30, 1996 Mr. David Rickey Re: OFFER OF EMPLOYMENT ------------------- Dear David: APPLIED MICRO CIRCUITS CORPORATION ("AMCC") is pleased to offer you a position in our Company as President and CEO. The following are the basic terms: 1. Compensation: ------------ Your bi-weekly salary will be $10,576.90, which equated to $275,000.00 annually. A $75,000.00 hiring bonus (net of all taxes) will be paid on the first day of employment. You will be given an annual bonus determined by the Board of Directors in its discretion based on AMCC performance and targeted at $60,000.00. 2. Stock Options: ------------- You will be granted options to purchase 1,200,00 shares pursuant to AMCC's current 1992 Stock Option Plan, and AMCC's Stock Option Agreement. The options will vest at the rate of 300,000 shares one year after you commence employment and 75,000 shares each three months thereafter, subject to continued employment. All stock options offered, and all terms of the option and repurchase agreements (including option price), are contingent upon final approval by AMCC's Board of Directors. The option price established by the Board has recently been $.35 per share, and AMCC intends to take action to cause the options to be granted with an exercise price of $.35 per share. The issuance of the options is also contingent upon the approval of an increase in the available stock option shares by the California Commissioner of Corporations. All options will vest in the event of an acquisition of AMCC by merger or sale of assets. If AMCC is acquired, and the per share value is less than $2.00 per share, then additional compensation will be provided to make up the difference between $2.00 per share and the per share merger/sale price as determined by AMCC's Board of Directors. 3. Benefits: -------- You will be entitled to AMCC standard Medical, Dental and Life Insurance benefits, as well as supplemental Medical and Dental Insurance to cover deductibles, copayments and non-covered medical expenses at 100%. AMCC will also pay the premiums on a Life insurance policy for $2,000,000.00. 4. Prior Relocation Expenses: ------------------------- AMCC will reimburse you against any claims made by your prior employer for repayment of up to $120,000.00 of "grossed up" relocation payments, for which you may be deemed liable. 5. Relocation: ---------- AMCC will reimburse your reasonable relocation expenses (including closing costs on sale of your existing residence and purchase of a new residence, temporary living expenses, mortgage expense on your exiting residence while unoccupied prior to sale, losses on sale of your existing residence and moving expenses) up to a maximum of $130,000, the reimburse amount to be grossed up for tax purposes. 6. Loans: ----- AMCC will reinstate the loan previously made to you in the principal amount of $53,000.00 at the applicable federal interest rate, with principal and interest to repaid on or before February 28, 1999. Recently, the minimum applicable federal interest rate for loans of 3 years or less, with interest compounded annually, has been 5.50%. AMCC will provide a loan for $750,000.00 at the minimum applicable federal interest rate. The principal and interest will be due in 3 years. This note will be secured by NexGen stock (or post-merger AMD Stock) received by you pursuant to the exercise of your NexGen options, with a value of the collateral of at least 120% of the principal amount of the loan as of the date of the loan. This note shall be non-recourse to you personally.If you elect to sell any portion of the collateral, you will repay an equivalent portion of the principal amount of the loan, together with all accrued interest on such portion. AMCC will provide a real estate bridge loan for a down payment on a San Diego home for up to $150,000.00. Said note shall be unsecured, but with full recourse to you, and will bear interest at the minimum applicable federal interest rate. 7. Start Date: ---------- On or before February 28, 1996. Your employment with AMCC shall be "at will" and terminable by either you or the Company at any time for any reason, with or without cause, and with or without notice. -2- Dave, we look forward to a very rewarding and mutually beneficially association. This agreement is our entire agreement and supersedes any prior agreements or understandings. Sincerely, APPLIED MICRO CIRCUITS CORPORATION /s/ Roger Smullen Roger Smullen Chairman of the Board Agreed and understood. /s/ David M. Rickey - ----------------------- David Rickey -3- EX-10.19 25 PATENT LICENSE AGREEMENT DATED 10/19/92 EXHIBIT 10.19 INTRODUCTION ------------ This Agreement is made and entered into by and between Alcatel Network Systems, Inc., a corporation organized and existing under the laws of the State of Delaware, having a place of business at 1225 N. Alma Rd., Richardson, Texas 75081, (hereinafter called "Alcatel") and Applied Micro Circuits Corporation a corporation organized and existing under the laws of the State of Delaware, having its principal office and place of business at 6195 Lusk Blvd., San Diego, California 92121 (hereinafter called "AMCC"), AMCC and Alcatel sometimes being hereinafter referred to collectively as "Parties" and individually as "Party". RECITALS -------- WHEREAS, Alcatel has a patent relating to [*]; and WHEREAS, AMCC wishes to be licensed under Alcatel's patent, so that AMCC may make, use and sell products, as described herein; and WHEREAS, Alcatel is willing to provide AMCC with a license under Alcatel's patent, to the extent and upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, the parties agree as follows: [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. ARTICLE I --------- DEFINITIONS ----------- A. "Licensed Products" shall mean any of the items specified in Schedule A covered by a subsisting and unexpired claim of the Licensed Patent and any version thereof which is so covered. Schedule A may be amended from time to time by mutual agreement of the Parties. B. "The Licensed Patent" shall mean U.S. Patent [*], issued August 13, 1995 to [*] C. "Net Sales Price" shall mean AMCC's selling price to its customers, F.O.B. AMCC's factory. D. "Sale(s) or Sold" shall mean any disposition of Licensed Products for value. ARTICLE II ---------- LICENSE ------- A. License Grant. ------------- 1. Alcatel grants to AMCC a [*] license under the Licensed Patent to make, use and sell the Licensed Products throughout the United States of America. 2. The right to make Licensed Products shall include the right to have all or any portion of the Licensed Products made for AMCC by third parties. 3. Any Licensed Product that is sold by AMCC during the term of this Agreement and for which a royalty has been paid according to the provisions of this Agreement may be used or sold again without permission of, or payment of any additional royalty to Alcatel. B. Grantback. AMCC hereby grants Alcatel a [*] license to make, use, and sell --------- any invention which is an improvement or modification of the subject matter of the Licensed Patent. C. Sublicensing. AMCC shall not have the right to sublicense the rights granted ------------ by Alcatel hereinabove to any third party, except as expressly authorized herein. D. Retention of Rights. The rights granted to AMCC hereunder are ------------------- [*], and Alcatel specifically retains the right to itself to carry out the activities licensed to AMCC [*]. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. ARTICLE III ----------- COMPENSATION ------------ A. Price and Payment. ----------------- 1. License Fee. For the license and rights granted under Article II., AMCC ----------- agrees to pay Alcatel, upon the signing of this Agreement, the lump sum amount of [*] as a non-refundable license fee. 2. Royalty. AMCC shall pay to Alcatel a running royalty amounting to [*] ------- percent [*] of the Net Sales Price of each unit of Licensed Products Sold by AMCC during the term of this Agreement. 4. Royalty Payments. The first royalty period shall extend from the ---------------- effective date of this Agreement to August 13, 2002, and each six month period after the effective date until the termination of this Agreement shall be a royalty period. Within one (1) month following the close of each royalty period, royalties shall be paid on all Sales made during that royalty period. Payments shall be made at such office of Alcatel as Alcatel shall specify. Each payment shall be accompanied by a statement signed by an authorized representative of AMCC as being accurate to the best of such representative's knowledge, showing the number of units of Licensed Products sold during the royalty period, the total of the Net Sales Prices of the Licensed Products sold, and the amount of the payment to Alcatel on account thereof. B. Records and Reports. AMCC shall keep reasonable records, files and accounts ------------------- containing all data reasonably required for the full computation and verification of sums payable under this Agreement, which records shall be subject to audit by Alcatel or its representative during normal business hours for a period of four (4) years following the end of the calendar year in which the record was created. C. Alcatel's Obligation Dependent on Payment. All of Alcatel's obligations ----------------------------------------- under this Agreement are specifically dependent upon AMCC making all payments hereunder as scheduled. D. Taxes. Any turnover, registration, withholding or other tax or fee which ----- might be imposed on payments to be made hereunder, by any United States governmental entity whether national, state or local, shall be borne and paid by AMCC. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. ARTICLE IV ---------- LIABILITY --------- A. Warranties and Representations. ------------------------------ 1. Alcatel warrants that it has the right to grant the rights licensed hereunder. 2. AMCC has not requested and Alcatel has not agreed to provide any technical, manufacturing or other information in support of AMCC's plan to make the Licensed Products. Accordingly Alcatel makes no warranty of AMCC's ability to successfully make, use or sell Licensed Products in exercising the rights granted in this Agreement. 3. Alcatel does not warrant that the exercise of the rights granted herein will be free from infringement of any patents, copyrights or any other rights of third parties. 4. THE FOREGOING PROVISIONS OF THIS ARTICLE ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESSED OR IMPLIED, INCLUDING IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WHETHER ARISING BY LAW, CUSTOMER OR CONDUCT. B. Indemnity. AMCC shall indemnify and hold Alcatel harmless against all loss, --------- damage or liability, including costs, expenses and attorney fees which may be incurred on account of any third party suit, claim, judgment or demand made against Alcatel in any way connected with the exercise of the rights granted under this Agreement by AMCC or any of its successors, assigns, agents or customers. In the event any suit, claim, judgment or demand is asserted or threatened, as to which Alcatel will seek indemnification hereunder, AMCC shall have the absolute right to defend against, settle, compromise, or otherwise dispose of said suit, claim, judgment or demand including but without 1imitation thereto, the right to contest or litigate the same through counsel of its own choosing, and Alcatel shall cooperate with AMCC fully with respect thereto at no cost or expense to Alcatel. C. Consequential Damages. In no event shall either Party be liable for --------------------- indirect, incidental, consequential, or special damages hereunder, however caused. ARTICLE V --------- TERM AND TERMINATION FOR DEFAULT -------------------------------- A. Effective Date. This Agreement shall become effective immediately upon the -------------- date when the last of the follow actions have occurred: 1. Execution of this Agreement by both Parties, 2. AMCC has remitted to Alcatel the initial payment stated in Article III.A.1 hereof. B. Term. Unless otherwise terminated as provided herein, this Agreement shall ---- continue in full force and effect for the life of the Licensed Patent. Any termination of this Agreement prior to the expiration of the Licensed Patent terminates the licenses granted herein. C. Termination. ----------- 1. AMCC may terminate this Agreement upon one (1) month's notice to Alcatel, subject to the fulfillment of all of AMCC's obligations hereunder. 2. In the case of a material breach of this Agreement by either Party, the other Party shall have the right, without limitation of any other right it may have on account of such failure, to terminate this Agreement by giving two (2) months written notice of its intention and specifying the cause for default, provided, however, that the defaulting Party shall have the right to avoid such termination by remedying such breach within such notice period. 3. Upon termination of this Agreement by Alcatel for AMCC's default as provided herein, AMCC shall have the right to complete any existing and outstanding contracts pursuant to the licenses granted hereunder. AMCC may also dispose of any previously manufactured Licensed Products held in its inventory as of the date of such termination. Any such completion or disposal will be subject to payment of royalties as provided elsewhere in this Agreement. 4. Termination of this Agreement shall not excuse AMCC's obligations to make payment of sums due and payable at the time of termination under the provisions of this Agreement. For so long as such payments are due or alleged to be due, relevant provisions of the Agreement shall remain in force. ARTICLE V --------- MISCELLANEOUS ------------- A. Notices. Any notice or correspondence required to be given by either Party ------- to the other Party hereto may be delivered personally or sent by prepaid registered mail, addressed to the other Party as set forth below, or at such other address as may be agreed to in writing by the Parties, and such notice shall be deemed to have been given upon such delivery or sending. If to Alcatel: Alcatel Network Systems, Inc. 1225 N. Alma Rd. Richardson, Texas 75081 Attn: R. D. Cunningham, M/S 401-107 If to AMCC: Applied Micro Circuits Corporation 6195 Lusk Blvd. San Diego, CA 92121 Attn: Buck Marty, Vice-Pres., Corp. Planning B. Choice of Law. This Agreement shall be construed and the rights of ------------- the Parties shall be governed by the laws of the State of Texas as the same would be applied to transactions between residents of the State and without regard to the State's conflict of laws principles. C. Disputes. -------- 1. If any claim or controversy arises out of, or relates to, this Agreement, the Parties shall make a good faith attempt to resolve the matter through representatives of their management. 2. In the event that the claim or controversy cannot otherwise be settled by such an attempt, the Parties agree to attempt in good faith to resolve such claim or controversy, prior to litigation, by mediation or other mutually acceptable alternative dispute resolution method. 3. Nothing herein shall prohibit either Party from seeking judicial relief, if such party would be substantially prejudiced by a failure to act during the time that such good faith efforts are being made to resolve the claim or controversy. E. Trademarks. AMCC shall have no right to use the name "Alcatel" or any ---------- trademark of Alcatel. F. Assignment. This Agreement may not be assigned by either Party without the ---------- prior written consent of the other Party, although Alcatel may assign the Agreement to any person or organization acquiring a business to which the Licensed Products is related. G. Release of Information. Neither Party shall make any press release, ---------------------- advertisement or official public statement concerning the existence of this Agreement or its contents without the express written consent of the other Party. H. Entire Agreement. This agreement is the entire and only Agreement ----------------- between the Parties hereto with respect to the subject matter hereof, and all prior or contemporaneous Agreements, representations, understandings, negotiations, and the like are superseded hereby. I. Amendments. Neither this Agreement nor any provision thereof may be ---------- released, discharged, waived, abandoned, or modified in any manner, except by an instrument in writing signed on behalf of both of the Parties hereto by their duly authorized officers or representatives. J. Relationship of Parties. This Agreement shall not constitute a ----------------------- partnership, joint venture, pooling arrangement or agency, or formal business entity between the Parties hereto, nor shall either of the Parties hold itself out as such, nor shall either of the Parties be bound or become liable because of any representation, action or omission of the other, and the rights and obligations of the Parties sall be limited to those expressly set forth herein. K. Waiver. No waiver of any breach of any provision of this Agreement shall ------ constitute a waiver of any other breach of the same or any other provision hereof, and no waiver shall be effective unless made in writing. L. Captions; Headings. The headings of articles, sections and other ------------------ subdivisions hereof are inserted only for the purpose of convenient reference, and they may not adequately or accurately describe the contents of the paragraphs which they head. Such headings shall not be deemed to govern, limit, modify, or in any other manner affect, the scope, meaning or intent of the provisions of this Agreement or any part or portion thereof, nor shall they otherwise be given any legal effect. IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed by their duly authorized representatives on the dates indicated. ALCATEL NETWORK SYSTEMS, INC. By: /s/ P.G. Kampas --------------------------------------- Printed Name: P. G. Kampas ----------------------------- Title: Manager, Contracts ------------------------------------ Date: September 21, 1992 ------------------------------------- APPLIED MICRO CIRCUITS CORPORATION By: /s/ Laurence H. Marty --------------------------------------- Printed Name: Laurence H. Marty ----------------------------- Title: Vice President, Corporate Planning ------------------------------------ Date: October 19, 1992 ------------------------------------ SCHEDULE A Licensed Products 1. [*] 2. [*] 3. All standard products developed using above [*]. [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. AMENDMENT NO. 1 --------------- PATENT LICENSE BETWEEN ALCATEL NETWORK SYSTEMS, INC. AND APPLIED MICRO CIRCUITS CORPORATION FOR U. S. PATENT [*] The purpose of this amendment is to revise ARTICLE III, COMPENSATION, sub paragraph A.4. entitled "Royalty Payments" to provide for the first royalty period to be from the effective date of contract until 31 March 1993. Each successive royalty period shall be every six (6) months thereafter to August 13, 2002. All other terms and conditions except as heretofore revised shall remain in full force and effect. IN WITNESS WHEREOF, the Parties hereto have caused this Amendment to be effective as of the day and year last below written. ALCATEL NETWORK SYSTEMS, INC. APPLIED MICRO CIRCUITS CORPORATION By: /s/ P.G. Kampas By: /s/ Laurence H. Marty --------------------------- ------------------------------ Printed Name: P. G. Kampas Printed Name: Laurence H. Marty ----------------- -------------------- Title. Manager, Contracts Title: Vice President ----------------------- -------------------------- Date: 9 February 1993 Date: February 13, 1993 ------------------------- ---------------------------- [*] = CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS. EX-11.1 26 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1 COMPUTATION OF PRO FORMA EARNINGS PER SHARE (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEAR ENDED SEPTEMBER MARCH 31, 30, 1997 1997 ---------- ---------- Net income............................................... $6,316 $5,934 Average common shares outstanding........................ 5,004 5,539 Net effect of dilutive common share equivalents based on the treasury stock method............................... 12,829 12,897 Adjustments to reflect requirements of the Securities and Exchange Commission (Effect of SAB 83).................. 1,187 1,187 ------ ------ Pro forma shares outstanding............................. 19,020 19,623 ------ ------ Pro forma net income per share reflecting requirements of the SEC................................................. $ 0.33 $ 0.30 ====== ======
EX-27.1 27 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS CONTAINED IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 EXPECTED TO BE FILED ON ON ABOUT OCTOBER 9, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000 YEAR 6-MOS MAR-31-1997 MAR-31-1998 APR-01-1996 APR-01-1997 MAR-31-1997 SEP-30-1997 5,488 2,041 8,109 9,361 8,618 10,159 (200) (350) 7,530 7,961 30,243 31,121 38,701 41,740 (27,933) (29,413) 41,814 44,382 10,879 12,168 0 0 0 0 12 11 50 64 27,681 30,043 41,814 44,382 57,468 35,208 57,468 35,208 30,057 16,534 30,057 16,534 20,209 12,578 198 154 29 (151) 6,975 6,093 659 159 0 0 0 0 0 0 0 0 6,316 5,934 0.33 0.30 0 0
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