-----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, UHMdvR9eEET477IZgn9lJ1ssRn3vELU0VlkUJK3yEefxR+AF/K23pkSrsyD7yEeO X2sHGGS1U4GsiqcJMpOi6Q== /in/edgar/work/20000817/0000891618-00-004456/0000891618-00-004456.txt : 20000922 0000891618-00-004456.hdr.sgml : 20000922 ACCESSION NUMBER: 0000891618-00-004456 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 23 FILED AS OF DATE: 20000817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSMETA CORP CENTRAL INDEX KEY: 0001001193 STANDARD INDUSTRIAL CLASSIFICATION: [ ] IRS NUMBER: 770402448 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-44030 FILM NUMBER: 705108 BUSINESS ADDRESS: STREET 1: 3940 FREEDOM CIRCLE CITY: SANTA CLARA STATE: CA ZIP: 95054 BUSINESS PHONE: 4089193000 MAIL ADDRESS: STREET 1: 3940 FREEDOM CIRCLE CITY: SANTA CLARA STATE: CA ZIP: 95054 S-1 1 s-1.txt FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 17, 2000 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ TRANSMETA CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3674 77-0402448 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
------------------------ 3940 FREEDOM CIRCLE SANTA CLARA, CALIFORNIA 95054 (408) 919-3000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ DAVID R. DITZEL, CHIEF EXECUTIVE OFFICER TRANSMETA CORPORATION 3940 FREEDOM CIRCLE SANTA CLARA, CALIFORNIA 95054 (408) 919-3000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: LAIRD H. SIMONS III, ESQ. JEFFREY D. SAPER, ESQ. MERLE A. MCCLENDON MARK A. LEAHY, ESQ. KAREN A. DEMPSEY, ESQ. CHIEF FINANCIAL OFFICER FENWICK & WEST LLP WILSON SONSINI GOODRICH & ROSATI TRANSMETA CORPORATION TWO PALO ALTO SQUARE PROFESSIONAL CORPORATION 3940 FREEDOM CIRCLE PALO ALTO, CALIFORNIA 94306 650 PAGE MILL ROAD SANTA CLARA, CALIFORNIA 95054 (650) 494-0600 PALO ALTO, CALIFORNIA 94304 (408) 919-3000 (650) 493-9300
------------------------ 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 of 1933, 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 of 1933, 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 of 1933, 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 MAXIMUM TITLE OF EACH CLASS AGGREGATE OFFERING AMOUNT OF REGISTRATION OF SECURITIES TO BE REGISTERED PRICE(1) FEE - ------------------------------------------------------------------------------------------------------------ Common Stock, $0.00001 par value per share.................. $200,000,000 $52,800 - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. ------------------------ 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 THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any state where the offer or sale is not permitted. PROSPECTUS (Subject to Completion) Issued August 17, 2000 Shares [LOGO] COMMON STOCK ------------------------ TRANSMETA CORPORATION IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $ AND $ PER SHARE. ------------------------ WE HAVE APPLIED TO LIST OUR COMMON STOCK FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "TMTA." ------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 7. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS TRANSMETA -------- ------------- ----------- Per Share................................. $ $ $ Total..................................... $ $ $
Transmeta has granted the underwriters the right to purchase up to an additional shares to cover over-allotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 2000. ------------------------ MORGAN STANLEY DEAN WITTER DEUTSCHE BANC ALEX. BROWN SALOMON SMITH BARNEY BANC OF AMERICA SECURITIES LLC SG COWEN , 2000 3 [ARTWORK] 4 DESCRIPTION OF FRONT COVER ARTWORK Inside Front Cover Page: - - The Crusoe Logo is superimposed over a sky blue background covering the top two-thirds of the page. - - The words "We rethought the microprocessor... for a new world of mobility" are superimposed over a sandy beach background covering the bottom one third of the page. Description of Gatefold Graphics: - - A sandy beach background. - - Centered across the top of the gatefold is the phrase "Transmeta Enables Mobile Internet Computing." - - On the left-hand side of the gatefold below the caption superimposed over the sky are a set of words and graphics arranged like an addition equation. - The first part of the equation is the phrase "Code Morphing Software" followed by an addition sign. - Centered below this phrase are the words: - "Translates x86 Software into VLIW Software" - "Optimizes for Longer Battery Life" - "Optimizes for Higher Performance" - The second part of the equation is the phrase "VLIW Processor" above a graphic of the Crusoe Microprocessor. - Centered below the Crusoe Microprocessor are the words: - "128-bit VLIW Instructions" - "Simple and Fast" - "Fewer Transistors" - The text "Crusoe is the sum of" is centered above the two parts of the equation. - The equation is followed by an equal sign and a set of overlapping vertical rings. - The words "Low Power," "x86 Compatibility" and "PC Performance" are centered in each of the three rings. - - On the top right of the gatefold are a pair of icons, one of a notebook computer and one of an Internet appliance. On the bottom right of the gatefold are two columns of text. - - Under the first column are the words: - "Technologies for Mobile Computing" in bold header text - "Crusoe Software-based Microprocessor" - "LongRun Power Management" - "Mobile Linux" - "PC System Design Expertise" - - Under the second column are the words: - "Benefits for Mobile Computers" in bold header text - "Longer Battery Life" - "x86 Software Compatible" (Windows, Linux, Internet Applications) - "High Performance" - "Lighter Weight" - "Cool and Quiet" 5 - "Cost-Effective" - "Software Upgradeable" 6 TABLE OF CONTENTS
PAGE ---- Prospectus Summary..................... 4 Risk Factors........................... 7 Special Note Regarding Forward-Looking Statements........................... 19 Use of Proceeds........................ 20 Dividend Policy........................ 20 Capitalization......................... 21 Dilution............................... 22 Selected Consolidated Financial Data... 23 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 24
PAGE ---- Business............................... 31 Management............................. 44 Related Party Transactions............. 54 Principal Stockholders................. 56 Description of Capital Stock........... 58 Shares Eligible for Future Sale........ 62 Underwriters........................... 64 Legal Matters.......................... 66 Experts................................ 66 Where You Can Find More Information.... 66 Index to Consolidated Financial Statements........................... F-1
------------------------ You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. Unless otherwise indicated, all information in this prospectus: - assumes that the underwriters do not exercise their over-allotment option; and - gives effect to our reincorporation in Delaware before the completion of this offering. UNTIL , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL DEALERS THAT BUY, SELL OR TRADE OUR COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, 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. For investors outside the United States: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus. 3 7 PROSPECTUS SUMMARY You should read the following summary together with the entire prospectus, including the more detailed information in our consolidated financial statements and related notes appearing elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in "Risk Factors." Transmeta develops and sells hardware and software technologies for Mobile Internet Computers, which are portable computing and communication devices designed to provide an Internet experience comparable to that traditionally provided by a desktop personal computer, or PC. Our Crusoe family of microprocessors is targeted at the notebook and Internet appliance segments of the Mobile Internet Computer market, and we provide Crusoe microprocessors to suit both existing and emerging products within these market segments. We believe that our microprocessors are also well suited for other developing markets requiring low power consumption, including set-top boxes and residential gateways. As people are becoming increasingly mobile, they are dependent on use of the Internet from remote locations to conduct their business and personal lives. In addition, the emergence of high-speed wired and wireless Internet access is enabling a new generation of notebook and Internet appliance products that offer significant improvements in portability and provide users with a full-featured Internet experience. International Data Corporation, or IDC, estimates that the market for notebook computers will grow to 35 million units in 2003, while the market for Internet appliances and similar devices that access the Internet is expected to grow to more than 75 million units in the same time frame. Rather than using the traditional method of designing microprocessors primarily with hardware, we have developed a unique approach that incorporates a substantial portion of microprocessor functionality into our software. We believe that our approach to designing microprocessors allows us to provide the first microprocessor solution that simultaneously satisfies a wide range of user requirements for Mobile Internet Computers, including x86 software compatibility, long battery life and performance comparable to the desktop PC. The primary components of our Crusoe microprocessors are as follows: CODE MORPHING SOFTWARE. Our Code Morphing software provides a compatibility bridge between x86 software and our own proprietary instruction set, using a translation process that is indiscernible to the end user. In addition, Code Morphing Software continuously learns about and re-optimizes software applications a user is running to improve power usage and performance. VERY LONG INSTRUCTION WORD (VLIW) PROCESSOR HARDWARE. Our VLIW processor hardware provides for parallel processing of instructions to achieve high performance. Because we use Code Morphing software to perform much of the functionality typically found in hardware, our microprocessors use a relatively simple hardware design that is optimized for low power consumption in addition to speed. We are focused on extending our leadership in software-based microprocessor technologies and expanding the number of products and end markets that use Crusoe microprocessors. We have assembled a team of engineers with comprehensive systems expertise to help these manufacturers quickly resolve any system design issues and achieve rapid time-to-market for next generation products built with our Crusoe microprocessors. In addition, we have established, and intend to continue to establish, relationships with computer manufacturers to design and develop next generation Mobile Internet Computers. We have a history of substantial losses, and at June 30, 2000, we had an accumulated deficit of approximately $119.4 million. ------------------------ We were incorporated in California in March 1995. We intend to reincorporate in Delaware prior to this offering. Our principal executive offices are located at 3940 Freedom Circle, Santa Clara, California 95054, and our telephone number at that address is (408) 919-3000. Transmeta(TM), the Transmeta logo, Crusoe(TM), the Crusoe logo, Code Morphing(TM) and LongRun(TM) are trademarks of Transmeta Corporation in the United States and other countries. All other trademarks or trade names appearing in this prospectus are the property of their respective owners. 4 8 THE OFFERING Common stock offered by Transmeta........................ shares Common stock to be outstanding after this offering.............. shares Use of proceeds.................. We intend to use the net proceeds from this offering for working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market symbol........................... TMTA The number of shares of our common stock to be outstanding immediately after this offering is based on the number of shares outstanding on June 30, 2000 and assumes the conversion of our outstanding shares of preferred stock into 36,587,171 shares of common stock and the conversion of a convertible promissory note into 600,000 shares of common stock upon the closing of this offering. The number of shares of our common stock that will be outstanding immediately after this offering excludes: - 6,203,824 shares of common stock issuable upon exercise of options outstanding at June 30, 2000 with a weighted average exercise price of $5.05 per share; - 1,073,216 shares of common stock issuable upon exercise of warrants outstanding at June 30, 2000 with a weighted average exercise price of $2.27 per share and; - 5,597,644 additional shares available for issuance under our stock purchase and option plans. 5 9 SUMMARY CONSOLIDATED FINANCIAL DATA The following tables provides summary consolidated financial data and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus. The pro forma information in the tables below reflects the conversion of our outstanding preferred stock into 36,587,171 shares of common stock and the conversion of a convertible promissory note into 600,000 shares of common stock upon the closing of this offering. The pro forma as adjusted column of consolidated balance sheet data also reflects the sale of shares of common stock offered by us at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. The financial results as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 are unaudited.
PERIOD FROM INCORPORATION (MARCH 3, 1995) SIX MONTHS ENDED THROUGH YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, ---------------------------------------- ------------------- 1995 1996 1997 1998 1999 1999 2000 --------------- ------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Product revenue........................... $ 250 $ -- $ -- $ 326 $ 76 $ 74 $ 358 License revenue........................... -- -- 1,400 28,000 5,000 5,000 -- Total revenue........................... 250 -- 1,400 28,326 5,076 5,074 358 Gross profit.............................. 250 -- 1,400 28,255 5,058 5,058 135 Total operating expenses.................. 1,295 7,640 17,412 36,083 46,151 21,948 45,597 Operating loss............................ (1,045) (7,640) (16,012) (7,828) (41,093) (16,890) (45,462) Net loss.................................. (1,009) (7,471) (16,187) (10,090) (41,089) (17,884) (43,393) Net loss per share Basic and diluted....................... $ (.10) $ (.75) $ (1.57) $ (.87) $ (3.02) $ (1.37) $ (2.81) Weighted average shares outstanding Basic and diluted....................... 10,000 10,000 10,288 11,537 13,618 13,048 15,419 Pro forma net loss per share Basic and diluted (unaudited)........... $ (1.03) $ (.88) Pro forma weighted average shares outstanding Basic and diluted (unaudited)............................. 39,782 49,227
JUNE 30, 2000 ----------------------- PRO FORMA ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $112,353 Working capital............................................. 106,065 Total assets................................................ 157,970 Long-term obligations, net of current portion............... 26,307 Total stockholders' equity.................................. 115,420
6 10 RISK FACTORS Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as other information contained in this prospectus, before deciding to invest in shares of our common stock. If any of the following risks actually occurs, our business, financial condition and results of operations would suffer. In this case, the trading price of our common stock could decline and you might lose all or part of your investment in our common stock. RISKS RELATED TO OUR BUSINESS AND INDUSTRY WE HAVE A HISTORY OF LOSSES, EXPECT TO INCUR FURTHER SIGNIFICANT LOSSES AND MAY NEVER ACHIEVE OR MAINTAIN PROFITABILITY. We have a history of substantial losses, expect to incur further significant losses, and do not expect to achieve profitability in the near future. We incurred net losses of $10.1 million in 1998, $41.1 million in 1999 and $43.4 million in the first half of 2000. As of June 30, 2000, we had an accumulated deficit of approximately $119.4 million. We intend to significantly increase our product development, sales and marketing, and administrative expenses. We also expect to incur substantial non-cash charges relating to the amortization of deferred compensation, which will serve to increase our net losses further. We cannot assure you that our revenue will grow and we may never achieve or maintain profitability. Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or an annual basis. OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE WE RECOGNIZED OUR FIRST PRODUCT REVENUE IN THE FIRST HALF OF 2000. We introduced our first Crusoe microprocessors in January 2000 and recognized our first product revenue from these products in the first half of 2000. We have manufactured limited quantities of our products to date, but have not shipped any products in volume. Thus, we have only a very limited operating history with all of our products. This limited history makes it difficult to evaluate our business. We derived substantially all of our revenue for 1997, 1998 and 1999 from license fees, but do not expect any license fee revenue in the foreseeable future. As a result, we need to generate substantial future revenue from product sales, but our ability to manufacture our products in production quantities and the revenue and income potential of our products and business are unproven. You should consider our chances of financial and operational success in light of the risks, uncertainties, expenses, delays and difficulties associated with new businesses in highly competitive technology fields, many of which may be beyond our control. If we fail to address these risks, uncertainties, expenses, delays and difficulties, the value of your investment would decline. WE DEPEND ON INCREASING DEMAND FOR OUR CRUSOE MICROPROCESSORS. We expect to derive virtually all of our revenue from the sale of our Crusoe microprocessors for the foreseeable future. We have not shipped any of these products in volume. Therefore, our future operating results will depend on the demand for Crusoe by future customers. If Crusoe is not widely accepted by the market due to performance, price, compatibility or for any other reason, or if, following acceptance, we fail to enhance Crusoe in a timely manner, demand for our products may fail to increase. If demand for our Crusoe products does not increase, our revenue will not increase. IF WE FAIL TO PENETRATE THE NOTEBOOK COMPUTER MARKET, OUR OPERATING RESULTS WOULD BE IMPAIRED. Our success depends upon our ability to sell our Crusoe microprocessors in volume to makers of notebook computers. Due to our software-based approach to microprocessor design, we have been required, and expect to continue to be required, to devote substantial resources to educate prospective customers in the notebook computer market about the benefits of our Crusoe products and to assist potential customers with their designs. In addition, most notebook computer companies have made significant investments in designing their systems for other microprocessor technology and might incur significant costs if they were to switch to our products. Our target customers may not choose our products for technical, cost or other reasons. If our Crusoe 7 11 products fail to achieve widespread acceptance in the notebook computer market, our substantial marketing and development expenditures may not be offset by increased revenue. IF THE INTERNET APPLIANCE MARKET FAILS TO GROW AS WE ANTICIPATE OR IF WE FAIL TO MEET THE NEEDS OF THIS MARKET, OUR GROWTH WOULD BE IMPAIRED. The growth of our business depends in part on the increased acceptance and use of Internet appliances. We depend on the ability of our target customers to develop new products and enhance existing products for the Internet appliance market that incorporate our products and to introduce and promote these products successfully. The market for Internet appliances depends in part upon the deployment of wireless technologies that enable the delivery of Internet content at a speed comparable to that of a desktop computer. The wireless technologies currently under development might not fully address the needs of mobile Internet users. If the use of Internet appliances does not grow as we anticipate, or our targeted customers do not incorporate our products into theirs, our operating results would be materially adversely affected. In addition, the market for Internet appliances is new and evolving. Internet appliance manufacturers are likely to have varying requirements. To meet the requirements of different Internet appliance manufacturers, we may be required to change our product design or features, sales methods or pricing policies. The costs of addressing these requirements could be substantial and could harm our operating results. OUR OPERATING RESULTS ARE DIFFICULT TO PREDICT IN ADVANCE AND MAY FLUCTUATE SIGNIFICANTLY, AND A FAILURE TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS WOULD LIKELY RESULT IN A SUBSTANTIAL DECLINE IN OUR STOCK PRICE. There is little historical financial information that is useful in evaluating our business, prospects and future operating results. You should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance. We expect our future operating results to fluctuate significantly from quarter to quarter. If our operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price would likely decline substantially. Factors that are likely to cause our results to fluctuate include the following: - the gain or loss of significant customers or significant changes in purchasing volume; - the amount and timing of our operating expenses and capital expenditures; - changes in the volume of our product sales and pricing concessions on volume sales; - fluctuations in manufacturing yields; - cancellations, changes or delays of deliveries to us by our manufacturer; - the timing, rescheduling or cancellation of customer orders; - the varying length of our sales cycles; - the availability and pricing of competing products and technologies and the resulting effect on sales and pricing of our products; - our ability to specify, develop, complete, introduce and market new products and technologies and bring them to volume production in a timely manner; - fluctuations in the cost and availability of raw materials, such as wafers, chip packages and chip capacitors; - the cost and availability of manufacturing, assembly and test capacity; - fluctuations in the cost and availability of components, such as dynamic random access memory, or DRAM, that our customers require to build systems that incorporate our products; - the rate of adoption and acceptance of new industry standards in our target markets; - seasonality in some of our target markets; 8 12 - the effectiveness of our product cost reduction efforts and those of our suppliers; - problems or delays due to shifting our products to smaller geometry process technologies and designing our products to achieve higher levels of design integration; - changes in the mix of products we sell; - changes in demand by the end users of our customers' products; - variability of our customers' product life cycles; and - changes in the average selling prices of our microprocessors or the products that incorporate them. Because a large portion of our expenses, including rent, salaries and capital leases, is fixed and difficult to reduce, if our revenue does not meet our expectations, the adverse effect of the revenue shortfall will be magnified by the fixed nature of our expenses. COMPETITION IN THE SEMICONDUCTOR MARKET IS INTENSE; MANY OF OUR COMPETITORS AND POTENTIAL COMPETITORS ARE MUCH LARGER THAN WE ARE AND HAVE SIGNIFICANTLY GREATER RESOURCES; WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY. The market for microprocessors is intensely competitive, rapidly evolving and subject to rapid technological change. We believe that competition will become more intense in the future and may cause price reductions, reduced gross margins and loss of market share, any one of which could significantly reduce our future revenue or any income. Significant competitors that offer microprocessors for the notebook computer market include Advanced Micro Devices and Intel. Significant competitors that offer microprocessors for the Internet appliance market include manufacturers of RISC microprocessors such as licensees of ARM technology and licensees of MIPS technology. In addition, we face competition from providers of x86 compatible microprocessors for the Internet appliance market, including National Semiconductor. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, product development and marketing resources, greater name recognition and significantly larger customer bases than we do. Our competitors may be able to develop products comparable or superior to those we offer, adapt more quickly than we do to new technologies, evolving industry trends and customer requirements, and devote greater resources to the development, promotion and sale of their products than we can. Many of our competitors also have well-established relationships with our existing and prospective customers and suppliers. In addition, many of our competitors, either alone or with other companies, have significant influence in our target markets. Negotiating and maintaining favorable customer and strategic relationships are and will continue to be critical to our business. If our competitors negotiate strategic relationships on more favorable terms than we are able to negotiate, or if they structure relationships that impair our ability to form strategic relationships, our competitive position and our business would be substantially damaged. Furthermore, a number of these competitors may merge or form strategic relationships that would enable them to offer, or bring to market earlier, products that are superior to ours in terms of features, quality, pricing or other factors. We expect additional competition from other established and emerging companies. We may not be able to compete effectively against current and potential competitors, especially those with significantly greater resources and market leverage. OUR PRODUCTS MAY HAVE DEFECTS, WHICH COULD HARM OUR REPUTATION, DECREASE MARKET ACCEPTANCE OF OUR PRODUCTS, CAUSE US TO LOSE CUSTOMERS AND REVENUE, AND RESULT IN LIABILITY TO US. Highly complex products such as our microprocessors may contain either hardware or software defects or bugs. Often, these defects and bugs are not detected until after the products have been shipped. If any of our products contains defects, or has reliability, quality or compatibility problems, our reputation might be damaged significantly and customers might be reluctant to buy our products, which could harm our ability to retain or attract customers. In addition, these defects could interrupt or delay sales. We may have to invest significant capital and other resources to correct these problems. If any of these problems are not found until 9 13 after we have commenced commercial production of a new product, we might incur substantial additional development costs. If we fail to provide solutions to the problems, such as software upgrades or patches, we could also incur product recall, repair or replacement costs. These problems might also result in claims against us by our customers or others. In addition, these problems may divert our technical and other resources from other development efforts. Moreover, we would likely lose, or experience a delay in, market acceptance of the affected product or products, and we could lose credibility with our current and prospective customers. This is particularly significant as we are a new entrant to a market dominated by large well-established companies. WE EXPECT TO DERIVE A SUBSTANTIAL PORTION OF OUR REVENUE FROM A SMALL NUMBER OF CUSTOMERS, AND OUR REVENUE WOULD DECLINE SIGNIFICANTLY IF ANY MAJOR CUSTOMER CANCELS, REDUCES OR DELAYS A PURCHASE OF OUR PRODUCTS. We expect that a small number of OEM customers and distributors will account for a significant portion of our revenue. As a result, our future success will depend upon the timing and size of future purchase orders, if any, from these customers and, in particular: - the success of these customers in marketing products that incorporate our products; - the product requirements of these customers; and - the financial and operational success of these customers. We expect that our distributor agreements will be nonexclusive and will not contain minimum purchase commitments. Should any distributor fail to emphasize sales of our products, choose to emphasize alternative products or promote products of our competitors, our revenue and results of operations would be harmed. We expect that our sales to OEM customers will be made on the basis of purchase orders rather than long-term commitments. In addition, customers can delay, modify or cancel orders without penalty. Many of our customers are significantly larger than we are and have sufficient bargaining power to demand lower prices and better terms. The loss of any one of our future major customers, or the delay of significant orders from these customers, could reduce or delay our recognition of product revenue and harm our reputation in the industry. IF WE FAIL TO ESTABLISH AND MAINTAIN RELATIONSHIPS WITH KEY PARTICIPANTS IN OUR TARGET MARKETS, WE MAY HAVE DIFFICULTY SELLING OUR PRODUCTS. In addition to our customers, we will need to establish and maintain relationships with companies that develop technologies that work in conjunction with our microprocessors. These technologies include operating systems, BIOS software, graphics chips, DRAMs and other hardware components and software that are used in computers. If we fail to establish and maintain these relationships, it would be more difficult for us to develop and market products with features that address emerging market trends. IF OUR PRODUCTS ARE NOT COMPATIBLE WITH THE OTHER COMPONENTS THAT OUR CUSTOMERS DESIGN INTO THEIR SYSTEMS, SALES OF OUR PRODUCTS COULD BE DELAYED OR CANCELLED AND A SUBSTANTIAL PORTION OF OUR PRODUCTS COULD BE RETURNED. Our products are designed to function as components of a system. We anticipate that our customers will use our products in systems that have differing specifications and that require various other components, such as dynamic random access memory, or DRAM, and other semiconductor devices. If our customers' systems are to function properly, all of the components must be compatible with each other. If our customers experience system-level incompatibilities between our products and the other components in their systems, we could be required to modify our products to overcome the defects or delay shipment of our products until the manufacturers of other components modify their products or until our customers select other components. These events would delay purchases of our products, cause orders for our products to be cancelled or result in product returns. System level incompatibilities that are significant, or are perceived to be significant, could also result in negative publicity and could significantly damage our business. 10 14 IF OUR CUSTOMERS ARE NOT ABLE TO OBTAIN THE OTHER COMPONENTS NECESSARY TO BUILD THEIR SYSTEMS, SALES OF OUR PRODUCTS COULD BE DELAYED OR CANCELLED. Suppliers of other components incorporated into our customers' systems may experience shortages, which could affect the demand for our products. For example, from time to time, the semiconductor industry has experienced shortages of some materials and devices, including DRAM. Our customers could be forced to defer or cancel purchases of our products if they are not able to obtain the other components necessary to build their systems. THERE MAY BE SOFTWARE APPLICATIONS THAT ARE NOT COMPATIBLE WITH OUR PRODUCTS, WHICH MAY HARM OUR REPUTATION, PREVENT OUR PRODUCTS FROM ACHIEVING MARKET ACCEPTANCE AND IMPAIR OUR REVENUE GROWTH. Software applications with machine-specific routines programmed into them can result in specific incompatibilities. If a particular software application is programmed in a manner that makes it unable to respond correctly to our microprocessor, it will appear to users of that software that our microprocessor is not x86 compatible. We have encountered specific incompatibilities in the past and expect to do so in the future, which could harm our reputation. In addition, if customers perceive that our products are not sufficiently x86 compatible, our products may never achieve market acceptance and our revenue growth would be impaired. IF WE FAIL TO MANAGE OUR GROWTH EFFECTIVELY, OUR BUSINESS MAY NOT SUCCEED. Our ability to implement our business plan in a rapidly evolving market requires an effective planning and management process. We have recently increased our number of employees substantially and plan to increase the scope of our operations and the size of our direct sales force domestically and internationally. This growth will require us to continue to expand our facilities. In addition, this growth may place a significant strain on our management systems, infrastructure and other resources. We expect that we will need to continue to improve our financial and managerial controls and procedures. We will also need to expand, train and manage our workforce worldwide. Furthermore, we expect that we will be required to manage an increasing number of relationships with customers and other third parties. Our failure to manage our growth effectively would harm our business. OUR LENGTHY AND VARIABLE SALES CYCLES MAKE IT DIFFICULT FOR US TO PREDICT WHEN AND IF A DESIGN WIN WILL RESULT IN VOLUME SHIPMENTS. We depend upon companies designing our microprocessors into their products, which we refer to as design wins. Many of our targeted customers consider the choice of a microprocessor to be a strategic decision. Our targeted customers may take a long time to evaluate our products, and many individuals may be involved in the evaluation process. We anticipate that the length of time between our initial contact with a customer and the time when we recognize revenue from that customer will vary. We expect our sales cycles to range from six to twelve months from the time we achieve the design win to the time the customer begins volume production of products that incorporate our microprocessors. We do not have historical experience selling our products that is sufficient for us to determine how our sales cycles will affect our revenue. Variations in the length of our sales cycles could cause our revenue to fluctuate widely from period to period. While potential customers are evaluating our products and before they place an order with us, we may incur sales and marketing expenses and expend significant management and engineering resources without any assurance of success. The value of any design win depends upon the commercial success of our targeted customers' products. Therefore, we take risks related to project cancellations or changed product plans, which could result in the loss of anticipated sales. We can offer no assurance that we will achieve further design wins or that the products for which we achieve design wins will be commercially successful. 11 15 IF WE DO NOT KEEP PACE WITH TECHNOLOGICAL CHANGE, OUR PRODUCTS MAY NOT BE COMPETITIVE AND OUR REVENUE AND OPERATING RESULTS MAY SUFFER. The semiconductor industry is characterized by rapid technological change, frequent new product introductions and enhancements and ongoing customer demands for greater performance. In addition, the average selling price of any particular microprocessor product has historically decreased over its life, and we expect that trend to continue. As a result, our products may not be competitive if we fail to introduce new products or product enhancements that meet evolving customer demands. The development of new products is complex, and we may not be able to complete development in a timely manner, or at all. To introduce products on a timely basis, we must: - accurately define and design new products to meet market needs; - design features that continue to differentiate our products from those of our competitors; - transition our products to new manufacturing process technologies; - identify emerging technological trends in our target markets; - anticipate changes in end-user preferences with respect to our customers' products; - bring products to market on a timely basis at competitive prices; and - respond effectively to technological changes or product announcements by others. We believe that we will need to continue to enhance our products and develop new products to keep pace with competitive and technological developments and to achieve market acceptance for our products. OUR DEPENDENCE ON IBM TO FABRICATE WAFERS AND TO PROVIDE ASSEMBLY AND TEST SERVICES LIMITS OUR CONTROL OVER THE PRODUCTION, SUPPLY AND DELIVERY OF OUR PRODUCTS. The cost, quality and availability of third-party manufacturing operations are essential to the successful production of our products. We currently rely exclusively on IBM to fabricate our wafers. Our contract with IBM does not obligate IBM to provide us with any specified number of wafers at any specified price until IBM has accepted a purchase order. The absence of dedicated capacity under our agreement means that, with little or no notice, IBM could refuse to continue to fabricate all or some of the wafers that we require or change the terms under which it fabricates wafers. If IBM were to stop manufacturing for us, we would likely be unable to replace the lost capacity on a timely basis, which would significantly harm our business. Transferring to another manufacturer would require a significant amount of time, and a smooth and timely transition would be unlikely. In addition, if IBM were to change the terms under which it manufactures for us, our manufacturing costs could increase. Our reliance on a third-party manufacturer exposes us to the following risks outside our control: - unpredictability of manufacturing yields and production costs; - interruptions in shipments; - potential lack of adequate capacity to fill all or part of the services we require; - inability to control quality of finished products; - inability to control product delivery schedules; and - potential lack of access to key fabrication process technologies. Because IBM provides substantially all of our required assembly and test services, we do not directly control our product delivery schedules. This lack of control could result in product shortages as IBM manufactures our current products in volume and, in the future, as we introduce new products. Product shortages could increase our fabrication, assembly or testing costs or delay delivery of our products. We do not have a long-term contract with IBM for test and assembly services, and we typically procure these services from IBM on a per order basis. Therefore, we may not be able to obtain assembly and testing services for our 12 16 products on acceptable terms, or at all. If we are required to find and qualify alternative assembly or testing services, we could experience delays in product shipments or a decline in product quality. WE MAY NOT ACHIEVE ACCEPTABLE MANUFACTURING YIELDS, WHICH COULD INCREASE THE COST AND REDUCE THE SUPPLY OF OUR PRODUCTS. The fabrication of wafers for our microprocessors is a highly complex and precise process that requires production in a tightly controlled, clean room environment. Minute impurities, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer or other factors can cause numerous die on each wafer to be nonfunctional. The proportion of functional die expressed as a percentage of total die on a wafer is referred to as product "yield." Even with functional die, normal variations in wafer fabrication can cause some die to run faster than others. Semiconductor companies frequently encounter difficulties in achieving expected product yields. If we do not achieve expected yields, our product costs would increase. Variations in speed yield could lead to excess inventory of slower products and insufficient inventory of faster products, depending upon customer demand. Further, as our products mature, we may experience yield problems as we migrate our manufacturing processes to smaller geometries. Yield problems may not be identified and resolved until a product has been manufactured and can be analyzed and tested, if ever. As a result, yield problems are often difficult, time consuming and expensive to correct. Yield problems could hamper our ability to deliver our products to our customers in a timely manner. IF WE FAIL TO FORECAST DEMAND FOR OUR PRODUCTS ACCURATELY, WE COULD LOSE SALES AND INCUR INVENTORY LOSSES. Because we only introduced our products in January 2000, we have little historical information about demand for our products. We expect that the demand for our products will depend upon many factors and be difficult to forecast. We expect that it will become more difficult to forecast demand as we introduce a larger number of products and as competition in the markets for our products intensifies. Significant unanticipated fluctuations in demand could cause problems in our operations. The lead time required to fabricate wafers in volume production is often longer than the lead time our customers provide to us for delivery of their product requirements. Therefore, we often must place our orders in advance of expected purchase orders from our customers. As a result, we have only a limited ability to react to fluctuations in demand for our products, which could cause us to have either too much or too little inventory of a particular product. If demand does not develop as we expect, we could have excess production, which would result in excess inventories of finished products, which would use cash and could result in inventory write-offs. We have limited capability to reduce ongoing production once wafer fabrication has commenced. Excess materials would likely result in excess or obsolete inventory. If demand exceeds our expectations, IBM may not be able to fabricate enough wafers as fast as we need them. In that event, we will need to increase production rapidly at IBM or find, qualify and begin production at additional manufacturers, which may not be possible within a timeframe acceptable to our customers. The inability of IBM to increase production rapidly enough could cause us to fail to meet customer demand. In addition, rapid increases in production levels to meet unanticipated demand could result in higher costs for manufacturing and other expenses. These higher costs could lower our gross margins. OUR PRODUCTS MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WHICH MAY CAUSE US TO BECOME SUBJECT TO EXPENSIVE LITIGATION, CAUSE US TO INCUR SUBSTANTIAL DAMAGES, REQUIRE US TO PAY SIGNIFICANT LICENSE FEES OR PREVENT US FROM SELLING OUR PRODUCTS. Our industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and other intellectual property rights. We cannot be certain that our products do not and will not infringe issued patents or other intellectual property rights of others. Historically, patent applications in the United States have not been publicly disclosed until the patent is issued, and we may not be aware of filed patent applications that relate to our products or technology. If patents later issue on these applications, we may be liable for infringement. In addition, leading companies in the semiconductor industry have extensive portfolios with respect to semiconductor technology. From time to time, third parties, 13 17 including these leading companies, may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies and related methods that are important to us. We expect that we may become subject to infringement claims as the number of products and competitors in our target markets grows and the functionality of products overlaps. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. We may also be subject to claims from customers for indemnification. Any resulting litigation could result in substantial costs and diversion of resources. If it were determined that our products infringe the intellectual property rights of others, we would need to obtain licenses from these parties or substantially reengineer our products in order to avoid infringement. We might not be able to obtain the necessary licenses on acceptable terms or at all, or to reengineer our products successfully. Moreover, if we are sued for infringement and lose the suit, we could be required to pay substantial damages or enjoined from licensing or using the infringing products or technology. Any of the foregoing could cause us to incur significant costs and prevent us from selling our products. OUR FAILURE TO PROTECT OUR PROPRIETARY RIGHTS, OR THE COSTS OF PROTECTING THESE RIGHTS, MAY HARM OUR ABILITY TO COMPETE. We believe that our success will depend in part upon our proprietary technology. We rely on a combination of patents, copyrights, trademarks, trade secret laws and contractual obligations with employees and third parties to protect our proprietary rights. These legal protections provide only limited protection and may be time consuming and expensive to obtain and enforce. Our failure to adequately protect our proprietary rights could result in competitors offering similar products and impair our ability to compete. Moreover, despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary. Also, our competitors may independently develop similar, but not infringing, technology, duplicate our products, or design around our patents or our other intellectual property. In addition, other parties may breach confidentiality agreements or other protective contracts with us, and we may not be able to enforce our rights in the event of these breaches. Furthermore, we expect that we will increase our international operations in the future, and the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States. Our pending patent and trademark applications may not be approved. Even if our pending patent applications are approved, the resulting patents may not provide us with any competitive advantage or may be challenged by third parties. If challenged, our patents might not be upheld or their claims could be narrowed. Any litigation surrounding our rights could force us to divert important financial and other resources away from our business operations. THE LOSS OF KEY MANAGEMENT AND TECHNICAL PERSONNEL, ON WHOSE KNOWLEDGE, LEADERSHIP AND TECHNICAL EXPERTISE WE RELY, WOULD HARM OUR ABILITY TO EXECUTE OUR BUSINESS PLAN. Our success depends heavily upon the continued contributions of our key management and technical personnel, whose knowledge, leadership and technical expertise would be difficult to replace. Several of these personnel have been with us for a number of years. All of our executive officers and key personnel are employees at-will. We have no employment contracts and maintain no key person insurance on any of our personnel. If we were to lose the services of any of our key personnel, our ability to execute our business plan would be harmed. IF WE ARE UNABLE TO HIRE, TRAIN AND RETAIN ADDITIONAL SALES, MARKETING, OPERATIONS, ENGINEERING AND FINANCE PERSONNEL, OUR GROWTH WILL BE IMPAIRED. To grow our business successfully and maintain a high level of quality, we will need to recruit, retain and motivate additional highly-skilled sales, marketing, engineering and finance personnel. If we are not able to hire, train and retain a sufficient number of qualified employees, our growth will be impaired. In particular, we will need to expand our sales and marketing organizations in order to increase market awareness of our 14 18 products and to increase revenue. In addition, as a company focused on the development of complex products, we will need to hire additional engineering staff of various experience levels in order to meet our product roadmap. Competition for skilled employees, particularly in the San Francisco Bay Area, is intense. We may have even greater difficulty recruiting potential employees after this offering if prospective employees perceive the equity component of our compensation package to be less valuable after this offering than before this offering. SEVERAL OF OUR EXECUTIVES AND OTHER EMPLOYEES HAVE JOINED US ONLY RECENTLY, AND IF THEY ARE UNABLE TO WORK TOGETHER EFFECTIVELY, WE MAY NOT BE ABLE TO MANAGE OUR GROWTH AND OPERATIONS. Several of our executives and other employees joined us only recently and have had only a limited time to work together. Mark K. Allen, our President and Chief Operating Officer, joined us in January 2000; David P. Jensen, our Vice President of Operations, joined us in February 2000; Merle A. McClendon, our Chief Financial Officer, joined us in March 2000; John O. Horsley, our General Counsel, joined us in July 2000; and Barry L. Rubinson, our Vice President of Software, joined us in August 2000. If our management team is not able to work effectively together or with the rest of our employees to develop our technology and manage our growth and continuing operations, our business would be harmed. WE MAY MAKE ACQUISITIONS, WHICH COULD PUT A STRAIN ON OUR RESOURCES, CAUSE DILUTION TO OUR STOCKHOLDERS AND ADVERSELY AFFECT OUR FINANCIAL RESULTS. We may acquire companies to expand our business. Integrating newly acquired organizations and technologies into our company could put a strain our resources and be expensive and time consuming. We may not be successful in integrating acquired businesses or technologies and may not achieve anticipated revenue and cost benefits. In addition, future acquisitions could result in potentially dilutive issuances of equity securities or the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other intangible assets, any of which could adversely affect our balance sheet or operating results. Moreover, we may not be able to identify future suitable acquisition candidates or, if we are able to identify suitable candidates, we may not be able to make these acquisitions on commercially reasonable terms or at all. THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY COULD CREATE FLUCTUATIONS IN OUR OPERATING RESULTS. The semiconductor industry has historically been cyclical, and characterized by wide fluctuations in product supply and demand. From time to time, the industry has also experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. Industry downturns have been characterized by diminished product demand, production overcapacity and accelerated decline of average selling prices, and in some cases have lasted for more than a year. A downturn of this type occurred in 1997 and 1998. Our business could be harmed by industry-wide fluctuations in the future. WE PLAN TO EXPAND OUR INTERNATIONAL OPERATIONS, AND THE SUCCESS OF OUR INTERNATIONAL EXPANSION IS SUBJECT TO SIGNIFICANT UNCERTAINTIES. We believe that we must expand our international sales and distribution operations to be successful. We expect to sell a significant portion of our products to customers overseas. In attempting to conduct and expand business internationally, we are exposed to various risks that could adversely affect our international operations and, consequently, our operating results, including: - difficulties and costs of staffing and managing international operations; - fluctuations in currency exchange rates; - unexpected changes in regulatory requirements, including imposition of currency exchange controls; - longer accounts receivable collection cycles; - import or export licensing requirements; 15 19 - potentially adverse tax consequences; - political and economic instability; and - potentially reduced protection for intellectual property rights. In addition, because we have suppliers that are located outside of the United States, we are subject to risks generally associated with contracting with foreign suppliers and may experience problems in the timeliness and the adequacy or quality of product deliveries. RISKS RELATED TO THIS OFFERING THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR STOCK; THE STOCKS OF TECHNOLOGY COMPANIES HAVE EXPERIENCED EXTREME PRICE AND VOLUME FLUCTUATIONS; AND OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD ADVERSELY AFFECT YOUR INVESTMENT. Before this offering, there has been no public market for our common stock. An active public market for our common stock may not develop or be sustained after this offering. The price of the common stock in any such market may be higher or lower than the price you pay. If you purchase shares of common stock in this offering, you will pay a price that was not established in a competitive market. Rather, you will pay the price that we negotiated with the representatives of the underwriters. Many factors could cause the market price of our common stock to rise and fall, including: - variations in our quarterly results; - announcements of technological innovations by us or by our competitors; - introductions of new products or new pricing policies by us or by our competitors; - acquisitions or strategic alliances by us or by our competitors; - recruitment or departure of key personnel; - the gain or loss of significant orders; - the gain or loss of significant customers; - changes in the estimates of our operating performance or changes in recommendations by any securities analysts that elect to follow our stock; and - market conditions in our industry, the industries of our customers and the economy as a whole. In addition, stocks of technology companies have experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to these companies' operating performance. Public announcements by companies in our industry concerning, among other things, their performance, accounting practices or legal problems could cause fluctuations in the market for stocks of these and similar companies. These fluctuations could lower the market price of our common stock regardless of our actual operating performance. In the past, securities class action litigation has often been brought against a company following a period of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management's attention and resources, which could harm our operating results and our business. OUR OFFICERS, DIRECTORS AND AFFILIATED ENTITIES OWN A LARGE PERCENTAGE OF OUR COMPANY AND COULD SIGNIFICANTLY INFLUENCE THE OUTCOME OF ACTIONS IN WAYS THAT COULD ADVERSELY IMPACT OUR STOCK PRICE. We anticipate that our executive officers, directors, entities affiliated with them and other 5% or greater stockholders will, in total, beneficially own approximately % of our outstanding common stock after this offering. These stockholders, acting together, would be able to significantly influence all matters requiring approval by our stockholders, including the election of directors. Thus, actions might be taken even if other stockholders, including those who purchase shares in this offering, oppose them. This concentration of 16 20 ownership might also have the effect of delaying or preventing a change of control of our company, which could harm our stock price. MANAGEMENT WILL HAVE DISCRETION OVER THE USE OF PROCEEDS FROM THIS OFFERING AND COULD SPEND OR INVEST THOSE PROCEEDS IN WAYS WITH WHICH YOU MIGHT NOT AGREE. We do not have a definitive quantified plan with respect to the use of the net proceeds of this offering. Our management will have broad discretion with respect to the use of the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Some of the uses we currently anticipate include working capital and other general corporate purposes, including sales and marketing expenses, research and development expenses, general and administrative expenses and capital expenditures. In addition, we may use a portion of the net proceeds to acquire or invest in complementary businesses, technologies, product lines or products. These investments may not yield a favorable return. SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK. The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market after this offering or the perception that these sales could occur. Based on shares outstanding as of June 30, 2000, upon completion of this offering, we will have outstanding shares of common stock, or shares if the underwriters' over-allotment option is exercised in full. Of these shares, the common stock sold in this offering will be freely tradeable except for any shares purchased by our "affiliates" as defined in Rule 144 under the Securities Act of 1933. All of the 56,526,243 remaining shares of common stock held by our existing shareholders will be subject to 180-day lock-up agreements with the underwriters or with us. Morgan Stanley & Co. Incorporated, in its sole discretion, may release any portion of the securities subject to these lock-up agreements. After the 180-day lock-up period, these shares may be sold in the public market, subject to prior registration or qualification for an exemption from registration, including, in the case of shares held by affiliates, to compliance with volume restrictions. After the lock-up period, of these shares will be immediately available for sale in the public market without registration under Rule 144. The remaining shares held by our existing stockholders will become available for sale under Rule 144 at varying times following the end of the 180-day lock-up period. Stockholders owning shares are entitled, pursuant to contracts providing for registration rights, to require us to register our securities owned by them for public sale. In addition, based on options outstanding as of June 30, 2000, after this offering, 7,277,040 shares will be issuable under outstanding options and warrants, approximately of which will be exercisable 180 days after this offering. We intend to file a registration statement to register for resale shares issuable upon the exercise of outstanding stock options and shares reserved for future issuance under our stock option and stock purchase plans. YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK VALUE OF THE SHARES YOU PURCHASE IN THIS OFFERING. If you purchase shares of common stock in this offering, you will experience immediate and substantial dilution of $ per share, based on an assumed initial public offering price of $ per share. This dilution arises because our earlier investors paid substantially less than the public offering price when they purchased their shares of common stock. You will experience additional dilution upon the exercise of outstanding stock options or warrants to purchase our common stock. As of June 30, 2000, there were options and warrants outstanding to purchase 7,277,040 shares of common stock with a weighted average exercise price of $4.64 per share. 17 21 OUR CERTIFICATE OF INCORPORATION, BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD DISCOURAGE OR PREVENT A TAKEOVER, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR STOCKHOLDERS. Provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include: - establishing a classified board of directors so that not all members of the board may be elected at one time; - providing that directors may only be removed "for cause" and only with the approval of 66 2/3% of our stockholders; - requiring super-majority voting to amend some provisions in our certificate of incorporation and bylaws; - authorizing the issuance of "blank check" preferred stock that our board could issue to increase the number of outstanding shares and to discourage a takeover attempt; - limiting the ability of our stockholders to call special meetings of stockholders; - prohibiting stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders; - eliminating cumulative voting in the election of directors; and - establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. In addition, Section 203 of the Delaware General Corporation Law and the terms of our stock option plans may discourage, delay or prevent a change in control. IF WE NEED ADDITIONAL FINANCING, WE MAY NOT BE ABLE TO RAISE FURTHER FINANCING OR IT MAY ONLY BE AVAILABLE ON TERMS UNFAVORABLE TO US OR OUR STOCKHOLDERS. We believe that our available cash resources, combined with the net proceeds from this offering, will be sufficient to meet our anticipated working capital and capital expenditure requirements for at least twelve months after the date of this prospectus. We might need to raise additional funds, however, to respond to business contingencies, which could include the need to: - fund more rapid expansion; - fund additional marketing expenditures; - develop new products or enhance existing products; - enhance our operating infrastructure; - hire additional personnel; - respond to competitive pressures; or - acquire complementary businesses or technologies. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders would be reduced, and these newly issued securities might have rights, preferences or privileges senior to those of existing stockholders, including those acquiring shares in this offering. Additional financing might not be available on terms favorable to us, or at all. If adequate funds were not available or were not available on acceptable terms, our ability to fund our operations, take advantage of unanticipated opportunities, develop or enhance our products or otherwise respond to competitive pressures would be significantly limited. 18 22 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS We have made statements under the captions "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and in other sections of this prospectus that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as "may," "might," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "potential" or "continue," the negative or plural of these words and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include, among other things, projections of our future financial performance, our anticipated growth strategies and anticipated trends in our business and the markets in which we operate. These statements are only predictions, based on our current expectations and projections about future events. Because these forward-looking statements involve risks and uncertainties, there are important factors that could cause our actual results, levels of activity, performance or achievements to differ materially from the results, levels of activity, performance or achievements expressed or implied by the forward-looking statements, including those factors discussed under the caption entitled "Risk Factors." You should specifically consider the numerous risks outlined under "Risks Factors." Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. 19 23 USE OF PROCEEDS We estimate that the net proceeds from this offering will be approximately $ million, at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate that our net proceeds will be approximately $ million. While we do not have any specific plans or proposals for the allocation of the net proceeds of this offering, we currently expect to use the net proceeds from this offering for working capital and other general corporate purposes, including sales and marketing expenses, research and development expenses, general and administrative expenses and capital expenditures. The amount and timing of what we actually spend for these purposes may vary significantly and will depend on a number of factors, including our future revenue and cash generated by operations and the other factors described in "Risk Factors." Therefore, we will have broad discretion in the way we use the net proceeds. Additionally, if appropriate opportunities arise, a portion of the net proceeds of the offering may be used for acquiring, or investing in, businesses, products or technologies or establishing joint ventures. We have no current agreements or commitments with respect to any acquisition or investment, and we currently are not engaged in negotiations with respect to any acquisition or investment. Pending these uses, we intend to invest the net proceeds in short-term, investment-grade, interest-bearing securities. DIVIDEND POLICY We have never declared or paid cash dividends on our capital stock. We currently expect to retain all available funds and any future earnings to finance the growth and development of our business. Therefore, we do not anticipate declaring or paying cash dividends on our common stock in the foreseeable future. 20 24 CAPITALIZATION The following table sets forth our capitalization as of June 30, 2000. Our capitalization is presented (1) on an actual basis, (2) on a pro forma basis to reflect the conversion of our outstanding shares of preferred stock into 36,587,171 shares of common stock and the conversion of a convertible promissory note into 600,000 shares of common stock upon the closing of this offering, and (3) on a pro forma as adjusted basis to reflect the sale of shares of common stock offered by us at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
JUNE 30, 2000 ------------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ------------- ------------- --------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Long-term debt and capital lease obligations, net of current portion....................................... $ 5,303 $ 5,303 $ 5,303 Deposits received under subleasing agreements........... 138 138 138 Payable to development partner.......................... 20,866 20,455 20,455 --------- --------- --------- Total long-term obligations, net of current portion... 26,307 25,896 25,896 --------- --------- --------- Stockholders' equity: Convertible preferred stock, $.00001 par value at amounts paid in; 28,159,835 shares authorized, issued and outstanding, at June 30, 2000; 5,000,000 shares authorized and no shares issued and outstanding, pro forma or pro forma as adjusted.... 222,922 -- -- Common stock, $.00001 par value at amounts paid in; 80,000,000 shares authorized; 19,339,072 shares issued and outstanding, at June 30, 2000; 80,000,000 shares authorized, 56,526,243 shares issued and outstanding, pro forma; 1,000,000,000 shares authorized, shares issued and outstanding, pro forma as adjusted................. 37,724 261,057 Notes receivable from stockholders.................... (11,019) (11,019) (11,019) Deferred stock compensation........................... (14,808) (14,808) (14,808) Deficit accumulated during development stage.......... (119,399) (119,399) (119,399) --------- --------- --------- Total stockholders' equity......................... 115,420 115,831 --------- --------- --------- Total capitalization............................. $ 141,727 $ 141,727 $ ========= ========= =========
The number of shares shown as issued and outstanding in the table above excludes the following: - 6,203,824 shares of common stock issuable upon exercise of options outstanding at June 30, 2000 with a weighted average exercise price of $5.05 per share; - 1,073,216 shares of common stock issuable upon exercise of warrants outstanding at June 30, 2000 with a weighted average exercise price of $2.27 per share; and - 5,597,644 additional shares available for issuance under our stock purchase and option plans. Please read the capitalization table together with the sections of this prospectus entitled "Selected Consolidated Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes included elsewhere in this prospectus. 21 25 DILUTION Our pro forma net tangible book value as of June 30, 2000 was approximately $87.6 million, or $1.55 per share of common stock. Our pro forma net tangible book value per share represents our total tangible assets less total liabilities divided by the number of shares of our common stock outstanding on June 30, 2000 and assumes the conversion of our outstanding shares of preferred stock into 36,587,171 shares of common stock and the conversion of a convertible promissory note into 600,000 shares of common stock upon the closing of this offering. Without taking into account any changes in pro forma net tangible book value after June 30, 2000, other than to give effect to the sale of shares of common stock offered by us at an assumed initial public offering price of $ per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of June 30, 2000 would have been approximately $ million, or $ per share of common stock. This amount represents an immediate increase in pro forma net tangible book value of $ per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $ per share to new investors purchasing shares in this offering. The following table illustrates the dilution in pro forma net tangible book value per share to new investors. Assumed initial public offering price per share............. $ Pro forma net tangible book value per share as of June 30, 2000................................................... $ 1.55 Increase per share attributable to new investors.......... ------- Pro forma net tangible book value per share after this offering.................................................. ------- Dilution in pro forma net tangible book value per share to new investors............................................. $ =======
The following table summarizes, as of June 30, 2000 on the pro forma basis described above, the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid to us by existing stockholders and to be paid by new investors purchasing shares of common stock in this offering at an assumed initial public offering price of $ per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
SHARES PURCHASED TOTAL CONSIDERATION ------------------------- ------------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE -------------- ------- -------------- ------- ------------- Existing stockholders..... % $ % $ New investors............. -------------- ------- -------------- ------- Total................... % $ % ============== ======= ============== =======
The above information excludes: - 6,203,824 shares of common stock issuable upon exercise of options outstanding at June 30, 2000 with a weighted average exercise price of $5.05 per share; - 1,073,216 shares of common stock issuable upon exercise of warrants outstanding at June 30, 2000 with a weighted average exercise price of $2.27 per share; and - 5,597,644 additional shares currently available for issuance under our stock purchase and option plans. 22 26 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with, and are qualified by reference to, our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The consolidated statement of operations data for the years ended December 31, 1997, 1998 and 1999, and the consolidated balance sheet data as of December 31, 1998 and 1999, are derived from our consolidated financial statements included elsewhere in this prospectus, which have been audited by Ernst & Young LLP, independent auditors. The consolidated statement of operations data for the period from incorporation (March 3, 1995) to December 31, 1995 and for the year ended December 31, 1996, and the consolidated balance sheet data as of December 31, 1995, 1996 and 1997, are derived from financial statements not included in this prospectus, which have been audited by Ernst & Young LLP. The consolidated statement of operations data for the six months ended June 30, 1999 and June 30, 2000, and the consolidated balance sheet data as of June 30, 2000, are derived from unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited information on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results as of these dates and for these periods. The historical results are not necessarily indicative of results to be expected in any future period and results for the six months ended June 30, 2000 are not necessarily indicative of results to be expected for the full fiscal year.
PERIOD FROM INCORPORATION (MARCH 3, 1995) SIX MONTHS ENDED THROUGH YEAR ENDED DECEMBER 31, JUNE 30, DECEMBER 31, ------------------------------------------- -------------------- 1995 1996 1997 1998 1999 1999 2000 --------------- ------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue: Product................................. $ 250 $ -- $ -- $ 326 $ 76 $ 74 $ 358 License................................. -- -- 1,400 28,000 5,000 5,000 -- ------- ------- -------- -------- -------- -------- -------- Total revenue......................... 250 -- 1,400 28,326 5,076 5,074 358 Cost of revenue........................... -- -- -- 71 18 16 223 ------- ------- -------- -------- -------- -------- -------- Gross profit.............................. 250 -- 1,400 28,255 5,058 5,058 135 Operating expenses: Research and development................ 1,135 5,800 12,828 23,467 33,122 16,143 26,549 Selling, general and administrative..... 160 1,840 4,584 12,616 12,811 5,805 11,447 Amortization of deferred charge under license agreements.................... -- -- -- -- 218 -- 4,461 Amortization of deferred stock compensation.......................... -- -- -- -- -- -- 3,140 ------- ------- -------- -------- -------- -------- -------- Total operating expenses.............. 1,295 7,640 17,412 36,083 46,151 21,948 45,597 ------- ------- -------- -------- -------- -------- -------- Operating loss............................ (1,045) (7,640) (16,012) (7,828) (41,093) (16,890) (45,462) Interest and other income............... 36 200 96 892 2,456 507 2,945 Interest expense........................ -- (31) (271) (1,154) (1,952) (1,001) (876) ------- ------- -------- -------- -------- -------- -------- Loss before income taxes.................. (1,009) (7,471) (16,187) (8,090) (40,589) (17,384) (43,393) Provision for income taxes................ -- -- -- 2,000 500 500 -- ------- ------- -------- -------- -------- -------- -------- Net loss.................................. $(1,009) $(7,471) $(16,187) $(10,090) $(41,089) $(17,884) $(43,393) ======= ======= ======== ======== ======== ======== ======== Net loss per common share Basic and diluted....................... $ (.10) $ (.75) $ (1.57) $ (.87) $ (3.02) $ (1.37) $ (2.81) ======= ======= ======== ======== ======== ======== ======== Weighted average shares outstanding Basic and diluted....................... 10,000 10,000 10,288 11,537 13,618 13,048 15,419 ======= ======= ======== ======== ======== ======== ======== Pro forma net loss per share Basic and diluted (unaudited)........... $ (1.03) $ (.88) ======== ======== Pro forma weighted average shares outstanding Basic and diluted (unaudited)........... 39,782 49,227 ======== ========
DECEMBER 31, JUNE 30, ------------------------------------------------ -------- 1995 1996 1997 1998 1999 2000 ------ ------ ------ ------- ------- -------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash and cash equivalents................................... $6,951 $3,639 $5,342 $27,809 $46,645 $112,353 Working capital............................................. 6,933 3,063 2,732 21,909 58,912 106,065 Total assets................................................ 7,153 4,509 8,740 43,497 96,227 157,970 Long-term obligations, net of current portion............... -- 6,911 1,823 10,798 27,020 26,307 Total stockholders' equity.................................. 7,045 3,346 3,764 24,032 59,867 115,420
23 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion of our financial condition and results of operations with the consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under "Risk Factors" and elsewhere in this prospectus. OVERVIEW We develop and sell software-based microprocessors and develop additional hardware and software technologies that enable computer manufacturers to build computers that simultaneously offer long battery life, high performance and x86 compatibility. We rely on independent, third-party contractors to perform manufacturing, assembly and test functions. Our fabless approach allows us to focus on designing, developing and marketing our products and significantly reduces the amount of capital we need to invest in manufacturing products. From our inception in March 1995 through June 30, 2000, we were in the development stage and engaged primarily in research and development. In 1999, we began focusing on achieving design wins with original equipment manufacturers, or OEMs, in addition to our ongoing development activities. In January 2000, we introduced our Crusoe family of microprocessors, and we began recognizing product revenue from sales of these microprocessors in the first half of 2000. We expect to be dependent on sales of these products and successive generations of these products for the foreseeable future. Since we introduced our products, we have been engaged in marketing and selling efforts, pre-production activities and continued research and development. Product shipments to date have consisted of prototypes and development systems. License fees from IBM and Toshiba constituted substantially all of our revenue in 1997, 1998 and 1999. In connection with our research and development efforts, we negotiated a technology license agreement with IBM Corporation in December 1997 and a technology license agreement with Toshiba Corporation in February 1998. Under these agreements, we received license fees, access to technology, engineering and test services, mask sets and wafer and other production services and granted IBM and Toshiba rights to manufacture and market x86 compatible products incorporating the licensed technology. The IBM and Toshiba license agreements were amended such that we reacquired rights we previously granted to IBM and Toshiba to manufacture and market x86 compatible products. In connection with these amendments, we agreed to pay IBM a total of $33.0 million over the next four years and fixed the conversion rate of a convertible promissory note issued to IBM at 600,000 shares of our common stock. We also issued 600,000 shares of our common stock to Toshiba. IBM and Toshiba retain a license to manufacture, market and sell non-x86 compatible products incorporating the licensed technology. We are not entitled to any future license fees under these license agreements, and we do not expect to receive license revenue from any other party. We expect to sell our products primarily to OEMs and, to a lesser extent, through distributors. We anticipate that a relatively small number of OEMs will account for a substantial percentage of our revenue. In August 2000, we entered into our first distribution agreement to support our sales and marketing activities in the Far East market, and we plan to enter into other distribution agreements during 2000. Although we expect to derive a significant portion of our product revenue from customers in Asia, these customers ultimately sell their products to major PC manufacturers in the United States and Japan. All of our product revenue to date has been denominated in U.S. dollars, and we expect that most of our sales in the future will be denominated in U.S. dollars. We recognize revenue from product sales upon transfer of title, providing for expected returns and warranty costs at that time. With respect to products shipped to distributors, we will defer recognition of product revenue until the distributors sell our products to their customers. 24 28 Cost of revenue consists primarily of the costs of manufacturing, assembly and test of our silicon chips, and compensation and associated costs related to manufacturing support, logistics and quality assurance personnel. Research and development expenses consist primarily of salaries and related overhead costs associated with employees engaged in research, design and development activities, as well as the cost of masks, wafers and other materials and related test services and equipment used in the development process. Selling, general and administrative expenses consist of salaries and related overhead costs for sales, marketing and administrative personnel and legal and accounting services. They will also include commissions paid to internal and external sales representatives, once we begin volume shipments. We have incurred no sales commission costs to date. In connection with the grant of stock options to our employees in 2000, we recorded deferred stock compensation of approximately $16.6 million through June 30, 2000, representing the difference between the estimated fair value of the common stock for accounting purposes and the exercise price of these options at the date of grant. Deferred stock compensation is presented as a reduction of stockholders' equity and is amortized on the graded vesting method. In addition, we recorded $1.3 million of deferred compensation charges in the first quarter of 2000 related to a severance agreement with a former employee. We will incur substantial stock compensation expense in future periods. Historically, we have incurred significant losses. As of June 30, 2000, we had an accumulated deficit of $119.4 million. We expect to incur substantial losses for the foreseeable future. We also expect to incur significant research and development and selling, general and administrative expenses. As a result, if our revenue does not increase substantially, our operating results will be adversely affected, and we will not achieve profitability. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1999 AND 2000 Revenue. Revenue in the six months ended June 30, 1999 included both license revenue from the Toshiba license agreement and product revenue. No future license revenue will be recognized in connection with this agreement. Revenue in the six months ended June 30, 2000 was comprised of product revenue derived from sales of our microprocessors, which were introduced in January 2000. Total revenue decreased from $5.1 million for the six months ended June 30, 1999 to $358,000 for the six months ended June 30, 2000 due to completion of the payments under the Toshiba license agreement. Product revenue increased from $74,000 in the first six months of 1999 to $358,000 in the first six months of 2000, reflecting increased shipments of prototypes and development systems. Revenue to date does not include any volume product shipments. Gross Profit. Product gross profit, which equals product revenue less cost of product revenue, increased from $58,000 in the six months ended June 30, 1999 to $135,000 in the six months ended June 30, 2000. These product gross profit amounts reflect sales of small volume prototypes and development systems, and do not indicate the product gross profit amounts that can be expected from volume production of microprocessors. We expect our gross margin, which is product gross profit as a percentage of product revenue, to change in future quarters as we commence volume shipments. In addition, we expect our gross margin to vary from period to period due to the mix of products sold, the stage in the life cycle of each of our products and expenses in connection with the manufacturing process. For example, newly-introduced products generally have higher average selling prices, which typically decline over product life cycles due to competitive pressures and technological advances. Research and Development. Research and development expenses increased from $16.1 million in the six months ended June 30, 1999 to $26.5 million in the six months ended June 30, 2000. This increase was primarily due to increased prototype wafer costs, costs of other foundry services, mask set costs and costs of development systems used internally. In addition, we incurred higher costs for additional development personnel, and related facility and other allocable expenses. We expect that research and development expenses will increase in absolute dollars in future quarters as we develop new products, engage in other product development initiatives and increase our number of research and development personnel. 25 29 Selling, General and Administrative. Selling, general and administrative expenses increased from $5.8 million in the six months ended June 30, 1999 to $11.4 million in the six months ended June 30, 2000. This increase was primarily due to the hiring of additional personnel and a resulting increase in salaries and related costs, increased costs related to expanding our marketing and branding activities and increased facility and other allocable expenses. We expect that selling, general and administrative expenses will increase in absolute dollars in future quarters as we hire additional personnel, expand our sales and marketing efforts, begin to pay sales commissions and incur the costs associated with being a public company. Amortization of Deferred Charge Under License Agreements. In connection with the renegotiation of our technology license agreement with IBM in November 1999, we agreed to pay a total of $33.0 million over the next four years in order to reacquire license rights previously granted to IBM. The present value of these payments was $18.9 million, was recorded as a liability in 1999 and is being amortized on a straight line basis over the license buyback period. Future amortization including accretion of the liability to IBM will be $3.6 million in the second half of 2000, $8.0 million in 2001, $7.9 million in 2002, $7.6 million in 2003, and $2.0 million in 2004. In connection with the renegotiation of our technology license agreement with Toshiba in February 2000, we issued 600,000 shares of common stock to Toshiba. The deemed fair value of shares issued of $6.8 million is also being amortized on a straight line basis over the license buyback period. Future amortization in connection with this stock issuance will be $1.1 million in the second half of 2000, $2.3 million in 2001, $2.3 million in 2002 and $375,000 in 2003. We recorded amortization of deferred charges of $4.5 million in connection with these agreements in the six months ended June 30, 2000. Amortization of Deferred Stock Compensation. Amortization of deferred stock compensation was $3.1 million in the six months ended June 30, 2000. In connection with stock option grants through June 30, 2000, we expect to record $4.9 million as an expense on our statement of operations in the remaining six months of 2000, $6.2 million in 2001, $3.7 million in 2002 and the balance in future years. We expect to incur additional deferred stock compensation amortization in connection with stock option grants made after June 30, 2000 and prior to the date of this offering. Interest Income. Interest income reflects interest earned on cash and cash equivalents and short-term investment balances. Interest income increased from $507,000 in the six months ended June 30, 1999 to $2.9 million in the six months ended June 30, 2000. The increase was due to larger average invested cash balances resulting from the closing of an equity offering in April 2000. Interest Expense. Interest expense consists of interest on our long-term debt and capital lease obligations used to finance capital expenditures. Interest expense decreased from $1.0 million in the six months ended June 30, 1999 to $876,000 in the six months ended June 30, 2000. This decrease was due to lower average debt balances. Provision for Income Taxes. We recorded a tax provision of $500,000 for the six months ended June 30, 1999, relating to foreign taxes withheld on license revenue. No tax provision was recorded for the six months ended June 30, 2000. YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 Revenue. Revenue, substantially all of which was license revenue, increased from $1.4 million in 1997 to $28.3 million in 1998, and declined to $5.1 million in 1999. This revenue was earned in connection with the technology license agreements with IBM and Toshiba executed in 1997 and 1998. The significant increase in 1998 was due to payments from Toshiba. We did not have any product revenue during the year ended December 31, 1997. Product revenue was $326,000 in 1998 and $76,000 in 1999 and related to the sale of prototypes and development systems. Product revenue decreased from 1998 to 1999 primarily due to one-time requirements for development systems used by licensees. 26 30 Gross Profit. Product gross profit on product sales decreased from $255,000 in 1998 to $58,000 in 1999. The product gross profit in 1998 and 1999 reflects sales of small volume prototypes and development systems. Research and Development. Research and development expenses increased from $12.8 million in 1997 to $23.5 million in 1998 and $33.1 million in 1999. These increases were primarily due to hiring additional development personnel, prototype wafer costs and services, mask set costs and depreciation and amortization expense arising from significant purchases of computer aided design and other software tools. Selling, General and Administrative. Selling, general and administrative expense increased from $4.6 million in 1997 to $12.6 million in 1998 and $12.8 million in 1999. These increases were due primarily to costs of additional personnel, increased costs related to expanding our marketing activities, costs of implementing an enterprise resource planning system in 1998 and increased legal, accounting and consulting fees. Amortization of Deferred Charge Under License Agreement. We recorded amortization of $218,000 in 1999 in connection with the renegotiation of the IBM technology license agreement. Interest Income. Interest income increased from $96,000 in 1997 to $892,000 in 1998 and $2.5 million in 1999. Interest income fluctuates primarily due to the timing of equity financings and resulting changes in average invested cash balances. Interest Expense. Interest expense increased from $271,000 in 1997 to $1.2 million in 1998 and $2.0 million in 1999. These increases were primarily due to increasing average debt balances and capital expenditure financing activity as we expanded our operating activities. Provision for Income Taxes. In 1998 and 1999, we recorded tax provisions of $2.0 million and $500,000, respectively, relating to foreign taxes withheld on license revenue. No tax provision was recorded in 1997. 27 31 QUARTERLY RESULTS OF OPERATIONS The following table presents our unaudited quarterly results of operations data for the four quarters of 1999 and the first two quarters of 2000. We believe that this information has been prepared on the same basis as our audited consolidated financial statements and that all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the selected quarterly information. This information should be read in conjunction with our audited consolidated financial statements and the notes to those statements included elsewhere in this prospectus. Our quarterly results of operations for these periods are not necessarily indicative of future results of operations.
THREE MONTHS ENDED --------------------------------------------------------------------- MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, 1999 1999 1999 1999 2000 2000 -------- -------- --------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenue: Product.................................... $ 61 $ 13 $ 2 $ -- $ 4 $ 354 License.................................... 5,000 -- -- -- -- -- -------- -------- -------- -------- -------- -------- Total revenue............................ 5,061 13 2 -- 4 354 Cost of revenue.............................. 13 3 2 -- 4 219 -------- -------- -------- -------- -------- -------- Gross profit................................. 5,048 10 -- -- -- 135 Operating expenses: Research and development................... 7,976 8,167 7,436 9,543 11,477 15,072 Selling, general and administrative........ 2,761 3,044 3,133 3,873 5,666 5,781 Amortization of deferred charge under license agreements....................... -- -- -- 218 2,048 2,413 Amortization of deferred stock compensation............................. -- -- -- -- 1,126 2,014 -------- -------- -------- -------- -------- -------- Total operating expenses................. 10,737 11,211 10,569 13,634 20,317 25,280 -------- -------- -------- -------- -------- -------- Operating loss............................... (5,689) (11,201) (10,569) (13,634) (20,317) (25,145) Interest and other income.................. 283 224 957 992 938 2,007 Interest expense........................... (499) (502) (494) (457) (450) (426) -------- -------- -------- -------- -------- -------- Loss before income taxes..................... (5,905) (11,479) (10,106) (13,099) (19,829) (23,564) Provision for income taxes................... 500 -- -- -- -- -- -------- -------- -------- -------- -------- -------- Net loss..................................... $ (6,405) $(11,479) $(10,106) $(13,099) $(19,829) $(23,564) ======== ======== ======== ======== ======== ========
Operating expenses have generally increased over the six quarters ended June 30, 2000. After September 30, 1999, research and development expenses increased primarily due to increased costs for wafers, services, mask sets and development systems. In addition, costs of additional development personnel and related facility and other allocable expenses increased. The increases in selling, general and administrative expenses were primarily due to increased salaries and related costs and increased costs related to expanding our marketing and branding activities in the six months ended June 30, 2000, as well as increased facility and other allocable expenses. LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have financed our operations primarily through private sales of convertible preferred stock and, to a lesser extent, from license revenue and capital lease financing. At June 30, 2000, we had $112.4 million in cash and cash equivalents. Net cash used in operating activities was $14.0 million in 1997, $5.2 million in 1998, $36.4 million in 1999 and $30.7 million in the six months ended June 30, 2000. In 1997, net cash used in operating activities was attributable to our net loss of $16.2 million, partially offset by increases in accounts payable and accrued liabilities. In 1998, 1999 and the six months ended June 30, 2000, net cash used in operating activities was attributable to our net losses, partially offset by non-cash depreciation and amortization charges and increases in accounts payable and accrued liabilities. 28 32 Net cash used in investing activities was $2.6 million in 1997, $15.9 million in 1998, and $19.2 million in 1999. Net cash used in investing activities consisted of capital expenditures and short-term investments. Capital expenditures were $2.6 million in 1997, $13.9 million in 1998 and $1.4 million in 1999 and consisted primarily of property, equipment and software. Net cash provided by investing activities was $9.9 million in the six months ended June 30, 2000. Net sales of short-term investments totaled $16.8 million and we used cash of $1.7 million to purchase property, equipment and other assets in the six months ended June 30, 2000. Net cash provided by financing activities was $18.3 million in 1997, $43.5 million in 1998, $74.4 million in 1999 and $86.6 million in the six months ended June 30, 2000. In 1997, net cash provided by financing activities was primarily attributable to net proceeds from the sale of convertible preferred stock. In 1998, net cash provided by financing activities was primarily attributable to net proceeds from the sale of convertible preferred stock, and the issuance of debt and capital lease obligations to finance property and equipment. In 1999 and the six months ended June 30, 2000, net cash provided by financing activities was primarily attributable to net proceeds from the sale of convertible preferred stock. We lease equipment and software under non-cancelable leases with terms ranging from 36 to 48 months. We lease our facilities under non-cancelable operating leases, expiring in 2008. At June 30, 2000, we had total minimum lease payments of $35.7 million under our operating leases and $7.5 million under our capital leases. We also had minimum aggregate principal payments of $4.8 million under our long-term debt. Our relationship with our foundry, IBM, allows us to cancel all outstanding purchase orders, but requires us to pay the foundry for expenses it has incurred in connection with the purchase orders through the date of cancellation. As of June 30, 2000, IBM had incurred approximately $18.4 million of manufacturing expenses on our outstanding purchase orders. As of June 30, 2000, we had no commitments for capital expenditures. We anticipate that capital expenditures will be required as we grow our business. We believe that existing cash, cash equivalent and short-term investment balances will be sufficient to fund our operations for at least the next twelve months as we expand our business and increase commercial production and sales of our products. After this period, capital requirements will depend on many factors, including the rate of sales growth, market acceptance of our products, costs of securing access to adequate manufacturing capacity, the timing and extent of research and development projects and increases in our operating expenses. To the extent that funds generated by this offering, together with existing cash, cash equivalent and short-term investment balances and any cash from operations, are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing. Although we are currently not a party to any agreement or letter of intent with respect to a potential acquisition or strategic arrangement, we may enter into acquisitions or strategic arrangements in the future, which also could require us to seek additional equity or debt financing. Additional funds may not be available on terms favorable to us or at all. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISKS Interest Rate Risk. Our cash equivalents and short-term investments are exposed to financial market risk due to fluctuations in interest rates, which may affect our interest income. As of June 30, 2000, our cash equivalents included money market funds, Federal agency discount notes and commercial paper and earn interest at an average rate of 6.6%. Due to the short-term nature of our investment portfolio, we would not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates. We do not use our investment portfolio for trading or other speculative purposes. Foreign Currency Exchange Risk. All of our sales and substantially all of our expenses are denominated in U.S. dollars. As a result, we have relatively little exposure to foreign currency exchange risk. We do not currently enter into forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. However, in the event our exposure to foreign currency risk increases, we may choose to hedge those exposures. 29 33 RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 133, as amended, establishes methods for recording derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities. We are required to adopt SFAS 133 effective January 1, 2001. Because we currently do not hold any derivative instruments and do not engage in hedging activities, we do not currently believe that the adoption of SFAS 133, as amended, will have a significant impact on our financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101. SAB 101 summarizes certain areas of the Staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. We believe that our current revenue recognition principles comply with SAB 101. In March 2000, the Emerging Issues Task Force of the FASB issued EITF Issue 00-2, "Accounting for Website Development Costs." The issue addresses how an entity should account for costs incurred to develop a website. The total capitalizable costs associated with the development of our website have been immaterial to date and have not been capitalized. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, Interpretation of APB Opinion No. 25." Interpretation No. 44 clarifies the application of Accounting Principle Board Opinion No. 25 to certain issues including: (1) the definition of employee for purposes of applying APB Opinion No. 25, (2) the criteria for determining whether a plan qualifies as a noncompensatory plan, (3) the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and (4) the accounting for an exchange of stock compensation awards in business combinations. In general, Interpretation No. 44 is effective July 1, 2000. We do not expect the adoption of Interpretation No. 44 to have a material effect on our consolidated financial position or results of operations. 30 34 BUSINESS OVERVIEW Transmeta Corporation develops and sells hardware and software technologies used to build Mobile Internet Computers, which are portable computing and communication devices that are compatible with x86 software and provide sufficient performance to run demanding Internet media applications while also offering long battery life. Mobile Internet Computers include traditional notebook computers and newly emerging Internet appliances. We believe that Mobile Internet Computers using our products will allow users to access the Internet virtually anywhere and anytime, and to benefit from the same full-featured computing experience that they currently enjoy with their desktop PCs. Crusoe is the name for our software-based family of microprocessors that operate with low power consumption, offer high performance and are compatible with software designed for IBM x86 PC compatible computers. Transmeta offers Crusoe microprocessors suitable for a broad set of existing and emerging end markets. INDUSTRY BACKGROUND THE EVOLUTION OF THE DESKTOP PERSONAL COMPUTER TOWARD MOBILE INTERNET COMPUTING The desktop personal computer, or PC, is widely used for business and personal activities and is commonly found in both the workplace and the home. Although the PC was originally developed to run software applications on a standalone basis, the emergence of the Internet has dramatically changed how people use the PC. The PC is now commonly used for communication and collaboration over the Internet in addition to computation and word processing functions. Electronic mail, or email, is a widely used means of communication and information delivery. Many PC users spend a significant portion of their PC usage time browsing the World Wide Web. The Internet has also become an efficient means of conducting personal and business transactions, primarily through business-oriented websites and online business exchanges. Internet usage has proliferated to the point where, out of a United States population of 273 million people, International Data Corporation, or IDC, estimates that more than 100 million access the Internet. People are becoming increasingly mobile in their business and personal activities, and are using the Internet to connect remotely to their businesses, family and friends. As people become more dependent upon email and visiting their favorite sites on the World Wide Web, they want to have Internet access wherever they go. Notebook computers enable people to bring the PC experience with them when they are away from their homes and offices. The notebook computer market is expected to grow as people use the Internet for web access, email and other forms of communication, in addition to running business and personal software applications. According to IDC, approximately 20 million notebook computers were shipped during 1999 and this number is expected to grow to approximately 35 million in 2003. As users seek access to the Internet anytime and anywhere, we believe they will want the same portable convenience that they currently enjoy from cellular phones. Until recently, most users have accessed the Internet through a wired Internet connection in office environments or through dial-up modems in home environments. However, consumer demand has caused the proliferation of Internet connections to many locations, such as airports and hotels, where a mobile Internet user may need them. Wireless modem technologies currently exist to help mobile users reach the Internet when these land-based connections are unavailable. We believe that the emergence of new wireless technologies will further increase demand for Internet access from battery-powered mobile devices. As mobile computer users increasingly use wireless technologies to access the Internet, they are likely to expect the same full Internet experience that they currently have with a desktop PC. We believe this ability to access the entire Internet, anywhere and anytime, with mobile computing devices will change people's view of communication like cellular telephones changed how we use the telephone. We refer to these devices, which include notebook computers and newly emerging devices such as full-featured Internet appliances, as "Mobile Internet Computers." 31 35 The demand for Internet access has spawned an emerging market for simpler computing devices dedicated to Internet applications. Often referred to as "Internet appliances," these devices are designed to provide the user with an Internet experience comparable to that delivered by a desktop PC. These appliances take many forms, such as a handheld web tablet or a desktop flat panel display with the electronics behind the display. As these devices proliferate throughout the home and office, other types of Internet appliances are emerging, such as set-top boxes and residential gateways. Some of these devices will transform the wired Internet connection into radio-based communication for other Internet appliances in the home. For example, the 11 Mbps IEEE 802.11(b) radio standard is being used to provide high-speed wireless Internet connections in the home. Today the market for Internet appliances is in its infancy, but is predicted to grow rapidly. IDC predicts that the market for Internet appliances and other similar devices that access the Internet will grow to more than 75 million units in 2003. The personal computer has improved tremendously since the introduction of the first 64KB 5-MHz IBM x86 PC in 1981. While hardware performance and memory capacity have each increased by a factor of about one thousand since the original IBM x86 PC, software compatibility has remained largely unchanged. Personal computers that retained software compatibility with the x86 computer instruction language have thrived, while those that tried to use other microprocessors incompatible with the x86 PC have not sustained significant market share. Adherence to IBM x86 PC compatibility has been critical for the success of both new PCs and thousands of PC-oriented software applications. Microsoft's Windows95, Windows98 and Windows Millennium Edition operating systems, for example, are only available for x86 compatible PCs. Beyond compatibility with standalone x86 PC software, the ability to access the entire Internet and obtain the full Internet experience usually requires x86 compatibility. Software developers and developers of websites often presume that users will be accessing the Internet through an x86 compatible PC. Software developers will often use new multimedia and animation techniques in order to attract people to their websites. Often these new techniques are delivered through small software programs, called plug-ins, that extend the functionality of a web browser. Most plug-ins are composed of small x86 compatible software programs downloaded over the Internet. This means that an x86 plug-in will not run unless the web browser is running on an x86 compatible microprocessor. Without plug-in functionality, sections of a website dependent on a plug-in are inaccessible, denying the user the full Internet experience. Full compatibility with the Internet demands x86 software compatibility. DESIRABLE FEATURES FOR MOBILE INTERNET COMPUTERS Today's mobile computers can still be improved in many ways. For users to obtain a truly satisfying Internet computing experience and for the markets for notebook computers and Internet appliances to reach their full potential, a wide range of user requirements must be simultaneously satisfied. To date, no technology has enabled the full mobile Internet experience that incorporates the wide range of features that users desire. We believe that the successful evolution of Mobile Internet Computers will require a single solution that addresses all of the following user desires: LONGER BATTERY LIFE. As users become increasingly mobile in their business and personal lives, their ability to plug their Internet computing devices into an electrical socket becomes increasingly constrained. To mitigate this problem, Mobile Internet Computing devices need to run several hours on battery power alone, significantly longer than the one to two hours often experienced with existing notebook computers. In addition, because mobile users tend to run the same high performance applications whether their computers are plugged into an electric socket or running on battery power, they will want several hours of battery life without noticeably sacrificing performance or portability. For example, the ability of a battery to last for the entire duration of a transatlantic airline flight would greatly increase the utility of notebook computers. LIGHTER WEIGHT. Lighter and thinner notebook computers have grown in popularity as people who need to stay connected to the Internet have become less willing to travel regularly with heavy notebook computers. Notebook computers can weigh as much as 8 or 9 pounds, making them cumbersome to carry. One of the heaviest components of the notebook is the battery, but reducing the battery size to reduce weight also reduces the notebook's running time before it must be recharged. 32 36 COMPARABLE PERFORMANCE. Most people are accustomed to accessing the Internet through an x86 desktop PC. Playing a DVD movie, downloading an MPEG-4 streaming video movie or running a Macromedia Flash plug-in, for example, require levels of performance comparable to that of a typical 400 MHz desktop x86 PC. As mobile computing becomes a more integral part of daily business and personal life, users will expect comparable levels of performance from their Mobile Internet Computers. FULL X86 SOFTWARE AND INTERNET COMPATIBILITY. The majority of Internet sites presume the user has an x86 notebook or desktop PC. Users will expect the same full-featured Internet experience from any new Mobile Internet Computer as they enjoy with their desktop PC. Internet users require x86-based plug-in applications and general application software in order to enjoy an experience comparable to that of the desktop PC. Thus, we believe that compatibility with the x86 instruction set and basic PC system infrastructure will be important for any Mobile Internet Computer. COST EFFECTIVE. For Mobile Internet Computers to proliferate, they must be priced at levels that are suitable for consumer electronic devices. Particularly in the Internet appliance market, consumers are expected to look for moderately priced alternatives to the desktop PC and notebook computer to be used throughout the home and office. COOL AND QUIET. As Mobile Internet Computers become more consumer-oriented, issues such as cooling fan noise and surface heat will become increasingly important to minimize the annoyance and discomfort associated with loud fans and hot notebook computers. Ideally, Mobile Internet Computers will remain cool without requiring a noisy fan. THE INDUSTRY MICROPROCESSOR DILEMMA Within a notebook computer or Internet appliance, the microprocessor usually dictates the characteristics of the entire computer system. Unfortunately, no single microprocessor has simultaneously enabled all of the characteristics users desire for full-featured Mobile Internet Computers. These limitations force system designers to make choices among various features such that only a subset of user requirements is satisfied when using any traditional microprocessor. For example, a common tradeoff in existing products is that x86 compatibility is sacrificed in order to achieve longer battery life. Two types of microprocessor architectures dominate today's marketplace. They are generically known as Reduced Instruction Set Computers, or RISC, and Complex Instruction Set Computers, or CISC. RISC is represented by a variety of different microprocessor architectures such as ARM, MIPS, PowerPC and SPARC, and CISC is typically represented by microprocessors found in x86 PCs. RISC microprocessors were developed in the 1980s as a way to use a simpler microprocessor design to provide higher performance. However, RISC instruction sets are not compatible with x86 PC software, and systems that use this architecture have much more limited software availability. Over recent years, CISC microprocessor design teams have found that they were able to achieve levels of performance similar to RISC chips by adding further complexity to their designs. However, more complex designs have a number of other drawbacks, including additional power usage and larger, more costly chips. When considering alternatives among commonly available microprocessors, system designers typically have the following choices and tradeoffs: - HIGH PERFORMANCE, HIGH POWER X86 COMPATIBLE MICROPROCESSORS. These are microprocessors typically used in a mobile or desktop PC. For a Mobile Internet Computer, the most important user disadvantages of these microprocessors are high power consumption and limited battery life. - LOW-PERFORMANCE X86 COMPATIBLE MICROPROCESSORS. These devices are usually based on an older generation microprocessor, such as a 486 generation design. The cost of these older designs is usually very low, but performance is often not sufficient to run modern multimedia applications such as MPEG-4 video movies. - HIGH PERFORMANCE, HIGH POWER RISC MICROPROCESSORS. These microprocessors are often found in RISC workstations and do not provide compatibility with x86 PC application software or x86 plug-ins. 33 37 - LOW POWER RISC MICROPROCESSORS. There are several low power RISC microprocessors that can provide excellent battery life, but the lack of x86 compatibility limits their ability to provide the full-featured Internet experience, which requires the ability to run PC software and x86 plug-ins. We believe that no single microprocessor to date has provided enough of the desired characteristics for Mobile Internet Computers to satisfy user requirements and to achieve their full market potential. As a result, systems developers must compromise their designs and speculate regarding the features consumers might be willing to sacrifice as part of their Mobile Internet Computing experience. TRANSMETA'S SOLUTION Transmeta develops and sells software-based microprocessors and develops additional hardware and software technologies that enable computer manufacturers to build computers that simultaneously offer long battery life, high performance and x86 compatibility. We have developed and patented the first software-based microprocessor that is built using dynamic translation software as part of the microprocessor. Our Crusoe microprocessors are unique because unlike traditional microprocessors that are built entirely with silicon hardware, they are composed of both a software and a hardware component. The software component of our Crusoe microprocessors is called Code Morphing software. The primary function of Code Morphing software is to provide a compatibility bridge between standard x86 PC software and our hardware chip with its own proprietary instruction set. Code Morphing software dynamically translates the ones and zeros of the x86 software instructions into a functionally equivalent but simpler set of ones and zeros that our hardware chip decodes and executes. This translation process is undetectable to the end user. In addition, Code Morphing software continuously learns about the programs run by a user in order to re-optimize the operation of those programs so that they run on Crusoe with the lowest power usage and highest performance. The hardware component of our Crusoe microprocessors is a silicon chip using a Very Long Instruction Word, or VLIW, architecture. It has a proprietary instruction set with instructions up to 128-bits long. This chip provides the basic processing units, registers and cache memory. Our VLIW architecture provides for large amounts of instruction-level parallelism as a way to achieve high performance with a relatively simple internal design primarily optimized for speed and low power. Responsibility for complex control and instruction scheduling functions, which is normally found in hardware, is transferred to the Code Morphing software. Moving these functions from hardware into software results in a design with fewer logic transistors, and hence a smaller die size, to achieve a given level of performance. Our unique software-based microprocessor approach can help computers built with Crusoe microprocessors to achieve the following benefits: - LONGER BATTERY LIFE. Crusoe microprocessors consume less power than other x86 microprocessors -- around 1 watt or less in typical applications. Existing x86 microprocessors with features comparable to those of Crusoe may range in power usage from 6 to 10 watts or more in similar applications. Since the microprocessor is often the largest user of overall system power, Crusoe's lower power consumption translates into longer battery life for a given battery size. - LIGHTER WEIGHT. The battery is often the heaviest single component in a mobile computer. Because Crusoe microprocessors use less power than typical hardware-based microprocessors, system designers have the option to build lighter weight computers with smaller batteries. Crusoe's lower power consumption also means that systems can be designed without heavy components used to eliminate heat, such as a fan or heat pipe, which add additional weight and thickness. - COMPARABLE PERFORMANCE. Crusoe microprocessors provide performance comparable to that of typical x86 desktop computers. For example, Crusoe microprocessors offer sufficient performance for highly computational multimedia tasks such as software decoding a DVD movie. - FULL X86 AND INTERNET SOFTWARE COMPATIBILITY. Crusoe microprocessors are compatible with software written for the x86 PC and the Internet. This allows Crusoe microprocessors to run x86-based Internet 34 38 software such as browser plug-ins, as well as the wide range of software applications familiar to users of desktop PCs. Crusoe microprocessors are compatible with operating systems, BIOS and applications software that normally run on x86 PCs. - COST-EFFECTIVE APPROACH. By moving functionality from hardware into software, Crusoe's VLIW hardware uses fewer logic transistors than other x86 PC microprocessors, resulting in a chip with a less complex and smaller die. Smaller chips cost less to manufacture than larger chips. Our small die size has also allowed us to integrate additional functionality, which can save space on the motherboard and provide OEMs with the cost advantages of a one-chip solution compared to a two-chip solution. - COOL AND QUIET. Because Crusoe microprocessors consume low power, computers using Crusoe generally do not require a cooling fan. This eliminates fan noise, fan weight, fan cost, and power consumption by the fan itself. We believe that cool and quiet computers will be increasingly valued as Internet appliances become more common in the home. - DOWNLOADABLE OVER THE INTERNET. Because Crusoe is implemented with software, we can send new versions of Code Morphing software over the Internet. We can use this feature to send product updates to customers, as well as to provide specialized versions with additional diagnostic capabilities, or even to fix bugs that may be found at a future time. We believe that we have one of the foremost combined hardware and software engineering teams involved with microprocessor design. David Ditzel, our Chief Executive Officer and a co-founder of Transmeta, is a pioneer designer in the microprocessor arena. Over the last 25 years, he co-developed RISC microprocessor technology while employed at AT&T's Bell Laboratories, and was director of SPARC Laboratories and Chief Technical Officer of Sun Microsystems' Microelectronics division. We have recruited a talented engineering staff in both hardware and software areas consisting of many well respected senior engineers. For example, we employ Linus Torvalds, the originator of the Linux operating system, to work on a variety of software projects within the Crusoe solution. At August 15, 2000, at least 138 of our employees had post-graduate degrees, of which 44 have Ph.Ds. STRATEGY Our objective is to provide industry-leading low power processing solutions combined with x86 software compatibility at a variety of compelling cost and performance points. Key elements of our strategy include: Extending Our Leadership in Software-Based Microprocessor Technologies. We plan to extend our leadership position in software-based microprocessor technology to provide differentiated products to the market. We intend to develop successive generations of VLIW architectures and Code Morphing software optimizations to further enhance power management and performance, while maintaining x86 software compatibility. We also intend to exploit the unique characteristics of software to continue to move additional hardware features into software. We plan to extend the ability of our Code Morphing software to "learn" about the characteristics of an application program while it is running, and to use this knowledge to further improve performance and lower power consumption. Focusing On the Notebook Computer and Mobile Internet Appliance Markets. Our initial goal is to target our Crusoe microprocessors at growing markets where low power, mobility and x86 PC software compatibility are paramount, such as in the Mobile Internet Computing market. We believe that we are well positioned to be the leading microprocessor solution for Mobile Internet Computing devices, which are at the convergence point between communications and computing. Our initial products are focused on the growing light weight notebook computer market, which seeks long battery life combined with high performance. We are also focused on the evolving Internet appliance market, where low power consumption and low cost are important. Developing Additional Low Power Markets Beyond Mobile Computing. We believe that there are a number of new market opportunities for our Crusoe microprocessors where low power and x86 software compatibility are particularly important, but where mobility and battery life may not be a factor. Next generation set-top boxes, for example, will need x86 compatibility to provide Internet connectivity and web 35 39 browsing, and sufficient performance to deliver streaming media in a home environment where a cool and quiet system without a noisy fan will be desired. As people acquire multiple computers or Internet appliances in the home, they will need a facility, such as a home network server or a residential gateway, for connecting them to each other and to the Internet. We also see a developing interest in a new type of web server, where the critical factor is the number of processors per unit volume. This is an application for which Crusoe's low power features are particularly attractive. Developing Relationships With Companies and Communities That Enhance Our Business. We are working aggressively to develop relationships with others that enhance our respective businesses and allow us to focus on our core competencies. We work closely with our OEM customers to collaborate on the specifications for our next generation products. We have developed a working relationship with Microsoft to ensure compatibility with their software products and to collaborate on future products. We also work closely with the Linux community to develop new features for our customized version of Linux, called Mobile Linux, and we intend to share those improvements with the open source community. We use IBM to fabricate silicon wafers using advanced process technologies rather than developing our own manufacturing facilities. We believe that these relationships will enable computer manufacturers to bring Crusoe-based computers to market quickly. Developing Expertise Across the Entire Computer System. To speed the adoption of our technology and improve our customers' time-to-market, we often provide our targeted customers with complete reference computer system solutions. By building an entire computer system, we can innovate across all the components of a computer system and help our customers resolve system design issues. We are committed to bringing expertise to our customers not only in microprocessors, but also in the engineering know-how of motherboard design, BIOS porting, operating system bring up, compatibility testing, power management tuning and thermal design issues. We believe that our ability to provide comprehensive systems expertise will continue to improve our customers' time-to-market and accelerate the adoption of the Crusoe solution. CORE COMPETENCIES AND TECHNOLOGIES We are involved in the research, design, product development and system integration of many of the software and hardware technologies that make up a complete x86 PC compatible computer system. In addition to the microprocessor, the quality of the final computer system depends on the successful integration and optimization of all of the various hardware and software components in the computer. Our understanding of the complete computer system and our ability to provide and improve an optimized total platform solution for our customers are the result of our core competencies and technologies. CRUSOE MICROPROCESSOR DEVELOPMENT. Our approach to microprocessor design implements substantial portions of the microprocessor with software. Each of our Crusoe microprocessors consists of both a software component and a hardware component. When combined, these two components form a single microprocessor solution that is compatible with software programs designed for x86 PC compatible computers, operates using less power than other x86 microprocessors and runs applications with performance levels comparable to those of desktop computers. We believe that there are several technical and business benefits to this approach. By partitioning the complex problem of designing a microprocessor into two pieces, each piece is individually simpler to implement. A substantial portion of the functionality of our microprocessor is implemented with software, which allows the remaining functionality to be implemented in a relatively simple semiconductor chip. We have developed substantial technical expertise and technology in developing the following components in our microprocessor. - CODE MORPHING SOFTWARE. The software component of our Crusoe microprocessors is called Code Morphing software, because it dynamically translates, or morphs, x86 instructions into VLIW instructions. Code Morphing software dynamically translates from the ones and zeros of the x86 software instructions into a functionally equivalent but simpler set of ones and zeros for our hardware chip to decode and execute. The technology involved in Code Morphing software is similar to that used 36 40 in advanced compilers, but with the input being binary programs rather than high-level language source code. Code Morphing software translates small groups of instructions incrementally, on an as-needed basis. Because of the incremental approach, the Code Morphing process happens so quickly that it is not detectable to the end user. Once a group of instructions is translated, those translated instructions are cached for successive executions without the need for further translation. Since instructions in an application often execute millions of times or more, performance costs associated with translation are quickly amortized. Code Morphing software constantly monitors the programs a user is running in order to re-optimize the operation of the program sections so that they run on the Crusoe microprocessor with the lowest possible power consumption and highest possible performance. - VERY LONG INSTRUCTION WORD (VLIW) PROCESSOR HARDWARE. The hardware component of our Crusoe microprocessors is a VLIW processor. The VLIW hardware chip is responsible for basic arithmetic computation, and the control and caching functions. Our VLIW chip currently supports both 128-bit and 64-bit wide instructions. Each of these wide instructions can control multiple functional units in parallel for high performance under software control. For example, a single 128-bit VLIW instruction might simultaneously control an integer addition, an integer subtraction, a memory load and a branch. Our microprocessors currently employ a number of advanced features, such as 64 integer registers and 32 floating point registers. Crusoe microprocessors have relatively large Level 1 instruction caches and large Level 1 data caches. Our high-end Crusoe microprocessors also contain on-chip Level 2 caches that improve performance by reducing average memory latencies, and also help reduce power by decreasing the number of power-burning memory accesses to DRAM. - INTEGRATED NORTHBRIDGE CHIPSET. Because we have moved many traditional chip functions from hardware into software, the basic VLIW processor requires a relatively small chip area. This provides the opportunity to integrate a full PCI bus controller, an SDRAM memory interface, and, on some Crusoe microprocessors, a DDR SDRAM memory interface. These functions have been traditionally provided in a second chip, called a northbridge. Crusoe microprocessors integrate this northbridge functionality onto the same silicon die as the processor. This increased level of integration reduces both power requirements and motherboard area, critical resources in small mobile devices. - LONGRUN POWER MANAGEMENT. Our proprietary LongRun technology is enabled by the monitoring and optimization capabilities of Code Morphing software. LongRun monitors levels of user activity to determine how much performance is actually needed. Our VLIW chip has special purpose hardware that allows LongRun to rapidly adjust the frequency and voltage of the VLIW silicon chip to a variety of levels to closely match the needed level of performance. Reducing frequency and voltage can have substantial effects on the power consumed by the Crusoe microprocessor, which in turn leads to longer battery life. 37 41 The following diagram illustrates how applications and operating systems run on top of our Crusoe microprocessor: graph PC DESIGN EXPERTISE. We design and build fully functional PC-compatible computer systems based on our Crusoe microprocessors, in order to test our Crusoe microprocessors in a real system environment and to provide working reference designs. By providing schematics, motherboard layout and extensive design notes, we can help our customers save time to market. We have a systems engineering department that has already completed reference designs suitable for use in notebook computers, mobile Internet appliances and residential gateway systems. We also use these systems for many in-house purposes, such as testing new Code Morphing software, testing BIOS software, benchmarking and compatibility testing. We also take an active role in helping our customers debug and optimize the design of their platforms for longest battery life and best performance. BIOS DEVELOPMENT. The BIOS, or Basic Input/Output Software, is usually the lowest level of software and the first software to execute x86 instructions in a PC. The BIOS controls low-level hardware functions, set-up of peripheral devices, some power management functions and a host of miscellaneous system housekeeping operations. Different BIOS code is needed for each unique motherboard and microprocessor combination, for Crusoe and other microprocessors as well, in order to make each of the components in the computer system work properly together. Knowing how to make changes to the BIOS requires detailed expertise about the individual motherboard and microprocessor characteristics. Our team of BIOS experts works with BIOS providers and customers to customize their BIOS code to the Crusoe microprocessor, Crusoe power management features and particular motherboard features. We then provide these changes back to the BIOS providers, so that they can provide Crusoe-supported BIOS ports to the computer manufacturers. This enables the computer manufacturer to save many months of time and substantial expense compared to doing a BIOS port on its own. In addition, our BIOS staff also assists our customers in the power-on and bring-up of new products. POWER MANAGEMENT EXPERTISE. Power management in a computer system requires substantial technical expertise. We have developed tools, methodologies and techniques that allow us to provide power management expertise to our customers. This expertise in power management is used to tune the computer system for the longest possible battery life. 38 42 THERMAL MANAGEMENT EXPERTISE. Electronic devices operating in a closed box can generate excessive heat if not managed carefully. We use our expertise in thermal management to advise our customers about thermal solutions for their notebook and other Crusoe-based computers. Our chips incorporate thermal sensors, which can be used in conjunction with a Crusoe BIOS port and Code Morphing software to allow the Crusoe microprocessor to operate at the peak performance allowed by the thermal solution of the computer system. We use advanced software computer aided design tools to do thermal modeling of individual computer systems to assure our customers that Crusoe will work reliably in their systems. Our goal is to help our customers avoid the use of fans. Eliminating fans can reduce noise and, by decreasing power usage, increase battery life. MICROSOFT WINDOWS SUPPORT. We expect most notebook computers using Crusoe to run a version of the Microsoft Windows operating system. We have established a working relationship with Microsoft. Microsoft meets most of the operating system needs of computer manufacturers directly. Transmeta occasionally provides expertise for special software, such as "device drivers," that allow Windows or the BIOS to communicate with Crusoe. For example, we have provided our customers with a special device driver that allows them to use a graphical user interface to control our LongRun power management. We also work with Microsoft and computer manufacturers in testing Crusoe and customer platforms using Microsoft's Windows Hardware Quality Lab tests. MOBILE LINUX. Particularly for Internet appliances, we find that our potential customers desire customized versions of the Linux operating system. We have substantial expertise in the Linux operating system. Linus Torvalds, the creator of Linux, and several other well-known contributors to Linux and Linux standards are employees of Transmeta. We use this expertise to work with our customers to port, customize and otherwise provide enhancements to Linux that work with the different Crusoe-powered Internet appliance devices that our customers are designing. We have developed a customized version of Linux, called Mobile Linux, that enhances the Linux operating system to add power management functions, to operate without a hard disk drive and to use a compressed file system, so that programs can be stored more efficiently in FLASH ROM memory. Following the open source model, we intend to release our changes for the Mobile Linux source code to the Linux community. COMPATIBILITY TESTING. We have invested substantial resources in developing tools, expertise and test environments for compatibility testing. We test compatibility across three major areas: x86 compatibility, hardware compatibility, and full operating system and application compatibility. To test Crusoe microprocessors for compatibility with the x86 instruction set, we have purchased substantial microprocessor test suites, and had teams of programmers write individual compatibility test programs. We have also purchased and built computer programs that automatically generate further compatibility tests. For hardware interface compatibility, we test Crusoe's PCI interface for compatibility with the industry-standard definitions for PCI. We test Crusoe's ability to communicate with standard components, such as graphics chips, southbridge chips and PCMCIA controller chips, that communicate with the PCI bus. We test a variety of SDRAMs and DDR SDRAMs to ensure functionality with Crusoe hardware. We also test other components on the motherboard, such as power supply chips and clock generator chips are also tested to make sure that they work with Crusoe. We have established a systems compatibility test laboratory that tests approximately 30 different PC operating systems and hundreds of different PC applications with Crusoe. INTERNAL MICROPROCESSOR DEVELOPMENT SOFTWARE TOOLS. We have developed a set of software tools including a C Compiler, a C++ Compiler, an assembler, a linker, a loader and various advanced debugging tools that give us a unique view into the execution of both Code Morphing software and translated user programs. This capability allows us to isolate bugs quickly in x86 code and watch the real-time operation of programs so that we can tune them for better performance and lower power characteristics. These tools also have proven valuable in bringing up new hardware systems with our customers because, even before the first x86 instruction is executed, Code Morphing software has already executed millions of instructions that can assist in probing different sections of the system. 39 43 PRODUCTS AND PRODUCTS UNDER DEVELOPMENT In January 2000, we introduced our Crusoe family of microprocessors. We expect to use the name Crusoe to represent current and future products, and to use this single brand name to represent characteristics of long battery life, x86 PC software compatibility and high performance. The different microprocessor models in the Crusoe family offer different levels of performance and different cost structures. We have found that the marketplace divides Mobile Internet Computing into two distinct markets: notebook computers and Internet appliances. Notebook computers usually run a version of the Microsoft Windows operating system. This market demands higher performance, longer battery life and x86 compatibility and is less price sensitive than the Internet appliance market. To address the notebook computer market, we have developed the TM5000 series of Crusoe microprocessors. In the market for Internet appliances, compatibility with the x86 instruction set is important, but cost can take a higher level of importance. We have seen a growing interest in the Linux operating system for this market. To address the Internet appliance market we have developed the TM3000 series of Crusoe microprocessors. The table below shows a comparison of many of the key features and differences of six different Crusoe microprocessors in our product roadmap, three of which are currently in production, and three of which we expect to introduce by the first half of 2001. The features of products not yet in production are subject to change.
TM3X00 SERIES FOR TM5X00 SERIES FOR INTERNET APPLIANCES NOTEBOOK COMPUTERS ------------------------------------- --------------------------------------- TM3200 TM3300 TM3400 TM5400 TM5600 TM5800 ----------- ----------- ----------- ----------- ----------- ------------- Typical maximum MHz range..... 400 400 400 - 500 500 - 700 600 - 800 600 - 1000 Instruction compatibility..... x86 x86 x86 x86 x86 x86 Level 1 data cache............ 32 KB 64 KB 64 KB 64 KB 64 KB 64 KB Level 1 instruction cache..... 64 KB 64 KB 64 KB 64 KB 64 KB 64 KB Private data memory........... 4 KB 8 KB 8 KB 8 KB 8 KB 8 KB Private instruction memory.... 8 KB 8 KB 8 KB 8 KB 8 KB 8 KB Level 2 combined I/D cache.... none none 256 KB 256 KB 512 KB 512 KB - 1 MB PCI bus interface............. Yes Yes Yes Yes Yes Yes SDR SDRAM controller.......... Yes Yes Yes Yes Yes Yes DDR SDRAM controller.......... No No No Yes Yes Yes Standard PC power management.. Yes Yes Yes Yes Yes Yes LongRun power management...... No No Yes Yes Yes Yes VLIW full instruction length...................... 128-bits 128-bits 128-bits 128-bits 128-bits 128-bits Number of integer registers... 64 64 64 64 64 64 Number of floating point registers................... 32 32 32 32 32 32 Package type and pins......... 474 CBGA 360 CBGA 360 CBGA 474 CBGA 474 CBGA 474 CBGA CMOS technology rules......... .22 micron .18 micron .18 micron .18 micron .18 micron .13 micron Production status............. First half First half First half of Now of 2001 of 2001 Now Now 2001
TM3X00 SERIES FOR INTERNET APPLIANCES. The TM3200 is a Crusoe microprocessor intended for Internet appliance computers running the Linux operating system. This microprocessor is composed of Transmeta's Code Morphing software and a 128-bit VLIW chip. The VLIW chip runs at up to 400 MHz, contains a processing engine capable of executing up to four basic operations every clock cycle, and has a 64 KB Level 1 instruction cache and a 32 KB Level 1 data cache. In addition to the basic processor, the TM3200 also contains a PCI bus interface and a SDR SDRAM controller. These latter two functions, often referred to as a northbridge, are integrated directly onto the Crusoe microprocessor. The TM3200 is produced using .22 micron CMOS technology. For the TM3300 and TM3400 microprocessor, we have redesigned the parts to move from a .22 micron technology into a .18 micron CMOS technology. We expect these products to be available in the first half of 2001. We expect this technology shrink to improve operating frequency, reduce power consumption and reduce costs. 40 44 TM5X00 SERIES FOR NOTEBOOK COMPUTERS. The TM5400 is a high performance Crusoe microprocessor intended for notebook computers running the Windows operating system. This microprocessor is composed of Transmeta's Code Morphing software and a 128-bit VLIW microprocessor. The TM5400 is a superset of the TM3200, and has an increased Level 1 data cache of 64 KB. The TM5400 added a number of new features such as a 256 KB Level 2 cache, LongRun power management and a DDR DRAM controller. The TM5400 is produced using .18 micron CMOS technology. In May 2000, we began sampling the TM5600 Crusoe microprocessor to our customers. The TM5600 is similar to the TM5400, but has an increased Level 2 cache of 512 KB. The increased Level 2 cache improves the performance and reduces the power consumption of the TM5600 relative to the TM5400. The TM5600 is produced using .18 micron CMOS technology. As yields improve and customer performance demands increase, we expect to introduce the TM5800 Crusoe microprocessor. We expect that this microprocessor may have increased Level 2 cache of up to 1 MB, and use more advanced semiconductor technology, moving to a .13 micron CMOS technology as soon as it is available during 2001. CUSTOMERS We have manufactured limited quantities of our products for evaluation purposes but, to date, have not shipped our products in volume. We expect to sell our microprocessor products primarily to end manufacturers of computer equipment. We anticipate that a relatively small number of customers will account for a substantial percentage of our revenue. In addition, we expect to sell a significant portion of our products to customers overseas. Because many notebook computer companies manufacture their products through subcontractors located in Asia, we expect that a majority of our revenue will be derived from customers in that region. All of our sales to date have been denominated in U.S. dollars. SALES AND MARKETING We market and sell our products through a variety of channels, including a direct sales force, sales representatives and distributors. A marketing staff supports our sales effort. We have opened an office in Taiwan to provide sales and customer support. We also expect to sell our products in Asia through distributors. In addition, we have field applications engineers who will work directly with our customers. We expect to dedicate sales managers to principal customers to promote close cooperation and communication. We work with our potential customers to select, integrate and tune hardware and software system components that make up the final computer system. We also provide our potential customers with reference platform designs, which we believe will enable our customers to achieve easier and faster transitions from the initial prototype designs through final production releases. We believe these reference platform designs also will enhance our targeted customers' confidence that our products will meet their market requirements and product introduction schedules. MANUFACTURING We use IBM for wafer fabrification. By subcontracting our manufacturing, we focus our resources on product design and eliminate the high cost of owning and operating a semiconductor fabrication facility. This fabless business model also allows us to take advantage of the research and development efforts of manufacturers, and permits us to work with those manufacturers that offer the most advanced manufacturing processes and competitive prices. IBM, at its manufacturing plant in Vermont, has manufactured all of our products to date. We have entered into a manufacturing agreement with IBM, which expires no sooner than December 30, 2003. However, the contract does not guarantee any level of production capacity or any particular price. Any inability of IBM to provide the necessary capacity or output could result in significant production delays. Under some circumstances, IBM may allocate its available capacity to its other customers. If IBM suffers any 41 45 damage to its facility, or there is any other disruption of its manufacturing capacity, we may not be able to qualify alternative manufacturing sources for our products in a timely manner. We are considering qualifying one or more other companies to also fabricate wafers for us. Our designs are compatible with industry-standard CMOS manufacturing processes. We believe this compatibility will permit us to qualify additional manufacturers to mitigate the risk of using a single source for a product. Our products are now primarily fabricated using .18 micron process technologies. We continuously evaluate the benefits, on a product by product basis, of migrating to a smaller geometry process technology to reduce costs and increase the performance of our microprocessors. IBM also performs the initial testing of the silicon wafers that contain our microprocessors. After initial testing, the silicon wafers are cut into individual semiconductors and assembled into packages. All testing is performed on standard test equipment using proprietary test programs developed by our test engineering group. We periodically audit our test facilities to ensure that their procedures remain consistent with those required for the production of our products. We rely upon IBM, at a site located in Canada, to assemble and test substantially all of our products. This reliance on IBM could result in product shortages or delays in the future. If these shortages or delays were significant, our customers might seek alternative sources of supply, which could harm our operating results and reputation. We participate in quality and reliability monitoring through each stage of the production cycle by reviewing data from our wafer fabrication plant and assembly subcontractor. We closely monitor wafer fabrication plant production to enhance product quality and reliability and yield levels. COMPETITION The market for microprocessors is intensely competitive, rapidly evolving and subject to rapid technological change. We believe that competition will become more intense in the future and may cause price reductions, reduced gross margins and loss of market share, any one of which could significantly reduce our future revenue or any income. Significant competitors that offer microprocessors for the notebook computer market include Advanced Micro Devices and Intel. Significant competitors that offer microprocessors for the Internet appliance market include manufacturers of RISC microprocessors such as licensees of ARM technology and licensees of MIPS technology. In addition, we face competition from providers of x86 compatible microprocessors for the Internet appliance market, including National Semiconductor. We compete on the basis of a variety of factors, including: - technical innovation; - performance of our products, including their power usage, product system compatibility, speed, reliability and density; - product price; - product availability; - reputation and branding; and - technical support. Many of our current and potential competitors have longer operating histories, significantly greater financial, technical, product development and marketing resources, greater name recognition and larger customer bases than we do. Many of our competitors also have significant influence in the industry. We may not be able to compete effectively against current and potential competitors, especially those with significantly greater resources and market leverage. INTELLECTUAL PROPERTY Our success depends in part upon our ability to maintain the proprietary aspects of our technology and to operate without infringing the proprietary rights of others. We rely on a combination of patents, copyrights, 42 46 trademarks, trade secret laws and contractual restrictions on disclosure to protect our intellectual property rights. We have six U.S. patents with expiration dates ranging from 2016 to 2017. Our patents principally cover microprocessors, software, components for microprocessors and systems including microprocessors. We have applied for 29 additional U.S. patents and have filed foreign patent applications based on our U.S. patents and patent applications. It is possible that no patents will issue from our pending patent applications. Even if additional patents are issued, taken together with our existing patents, they may not provide sufficiently broad protection to protect our proprietary rights. We hold a number of trademarks, including Transmeta, Crusoe, LongRun and Code Morphing. Legal protections afford only limited protection for our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, leading companies in the semiconductor industry have extensive portfolios with respect to semiconductor technology. From time to time, third parties, including these leading companies, may assert exclusive patent, copyright, trademark and other intellectual property rights to technologies and related methods that are important to us. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of our proprietary rights or the rights, of others or to defend against claims of infringement or invalidity. EMPLOYEES At August 15, 2000, we and our subsidiaries employed 313 people in the United States and Taiwan. Of these employees, 218 were engaged in research and development, 38 were engaged in sales and marketing, 27 were engaged in professional services and technical support and 30 were engaged in finance and other administrative departments. Seven of our employees are located in Asia. In addition, at June 30, 2000, 24 people in the United States, Japan and Europe worked for us on a contract basis. None of our employees is subject to any collective bargaining agreements. We believe our employee relations are good. FACILITIES We lease a total of approximately 137,475 square feet of office space in five buildings in a business park complex located in Santa Clara, California. We lease space in these buildings under four separate leases and one sublease, four of which expire in June 2008 and one of which expires in July 2001. We sublease a total of approximately 49,680 square feet of office space in two of the buildings to three different subtenants. These subleases expire between September 2001 and July 2002. We also lease office space in Taiwan to support our sales and marketing personnel worldwide. We intend to expand our operations significantly and therefore may discontinue subleasing space and may require additional facilities in the future. LEGAL PROCEEDINGS From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. We are not currently involved in any material legal proceedings. 43 47 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table shows information concerning our executive officers and directors. Ages are as of June 30, 2000.
NAME AGE POSITION ---- --- -------- David R. Ditzel............................ 43 Director and Chief Executive Officer Mark K. Allen.............................. 45 Director, President and Chief Operating Officer James N. Chapman........................... 51 Senior Vice President of Sales and Marketing Douglas A. Laird........................... 44 Senior Vice President of Product Development Merle A. McClendon......................... 44 Chief Financial Officer and Secretary David P. Jensen............................ 52 Vice President of Operations Barry L. Rubinson.......................... 55 Vice President of Software John O. Horsley............................ 39 General Counsel Murray A. Goldman.......................... 62 Chairman of the Board of Directors R. Hugh Barnes............................. 54 Director Paul M. McNulty............................ 38 Director William P. Tai............................. 38 Director T. Peter Thomas............................ 53 Director
David R. Ditzel is a co-founder of Transmeta. Mr. Ditzel has served as Chief Executive Officer and a director of Transmeta since March 1995. From March 1995 to January 2000, Mr. Ditzel served as President and, from March 1995 to November 1998, Mr. Ditzel served as Vice President of Engineering of Transmeta. From 1987 to 1995, Mr. Ditzel was employed at Sun Microsystems, where he held a variety of positions, most recently as Director of SPARC Labs and Chief Technical Officer of the Microelectronics division. From 1978 to 1987, Mr. Ditzel was employed at AT&T Bell Laboratories, where he was a Member of Technical Staff. Mr. Ditzel holds a B.S. in electrical engineering and a B.S. in computer science from Iowa State University. Mr. Ditzel also holds an M.S. in electrical engineering and computer science from the University of California at Berkeley. Mark K. Allen has served as President, Chief Operating Officer and a director of Transmeta since January 2000. From October 1998 to November 1999, Mr. Allen served as Vice President of Operations of NVIDIA, Inc., a designer and developer of 3D graphics processors, graphics processing units and related software for semiconductor companies focusing on graphics chips. From February 1995 to October 1998, Mr. Allen served as Senior Vice President of Operations for C-Cube Microsystems, a digital video technology company. From March 1987 to February 1993, Mr. Allen served as Vice President of Worldwide Manufacturing Operations for Cypress Semiconductor, a manufacturer and supplier of integrated circuits. Mr. Allen holds a B.S. in electrical engineering from Purdue University. James N. Chapman has served as Senior Vice President of Sales and Marketing of Transmeta since February 2000. Prior to that, he served as Vice President of Sales and Marketing from November 1998 to January 2000 and Vice President of Sales from August 1997 to November 1998. Mr. Chapman joined Cyrix Corporation, a semiconductor company, in November 1991 and served as Vice President of Sales and Marketing for Cyrix from October 1993 to August 1996. From April 1981 to October 1991, Mr. Chapman was employed at Intel, where he held a variety of positions, most recently as Director of Marketing for the Entry-Level Products Group. Mr. Chapman attended the University of Illinois. Douglas A. Laird is a co-founder of Transmeta. Mr. Laird has served as the Senior Vice President of Product Development of Transmeta since February 2000. Prior to that, he served as Vice President of Product Development from November 1998 to January 2000, and as Vice President of VLSI Engineering from October 1995 to November 1998. From 1992 to March 1995, Mr. Laird was employed at Sun Microsystems, where he held a variety of positions, most recently as Manager of Advanced Development. Before joining Sun, Mr. Laird was employed by LSI Logic, where he held a variety of positions, most recently as Manager of 44 48 SPARC Development. He holds a B.S. in electrical engineering from the Rochester Institute of Technology and an M.S. in computer science from Santa Clara University. Merle A. McClendon has served as Chief Financial Officer and Secretary of Transmeta since March 2000. From January 1997 to March 2000, Ms. McClendon served as Vice President of Finance and Chief Financial Officer for NeoMagic, a supplier of multimedia accelerators for notebooks. From March 1993 to January 1997, Ms. McClendon served as Vice President and Corporate Controller at S3 Incorporated, a semiconductor company. From November 1980 to March 1993, Ms. McClendon was employed by Deloitte & Touche, most recently as a Senior Manager. Ms. McClendon is a Certified Public Accountant and holds a B.S. in business administration from San Jose State University. David P. Jensen has served as Vice President of Operations of Transmeta since February 2000. From January 1999 to January 2000, Mr. Jensen served as Director of Foundry Operations at NVIDIA, Inc. From 1983 to January 1999, Mr. Jensen was employed at National Semiconductor Corp., where he held a variety of positions, most recently as Senior Product Engineering Manager. Mr. Jensen holds a B.S. in mechanical engineering and a B.S. in aeronautical engineering from California Polytechnic State University. Barry L. Rubinson has served as Vice President of Software of Transmeta since August 2000. From August 1999 to July 2000, Mr. Rubinson was employed at AltaVista, an Internet search services company, where he held a variety of positions, most recently as Vice President of Engineering and then as Chief Technology Officer of the AltaVista search division. From June 1998 to August 1999, Mr. Rubinson was employed at Compaq Computer, a computer manufacturer company, as Vice President of Engineering. From April 1974 until June, 1998, Mr. Rubinson was employed at Digital Equipment Corporation, a computer manufacturer company, where he held a variety of positions, most recently as Corporate Consulting Engineer. Mr. Rubinson holds a B.S. in Management Science and an M.S. in Computer Engineering from Case Western Reserve University. John O. Horsley has served as General Counsel of Transmeta since July 2000. From November 1997 to July 2000, Mr. Horsley served at the Federal Trade Commission in appointed positions within the Bureau of Competition, most recently as Chief Counsel for Intellectual Property and Technology Matters. From October 1988 to October 1997, Mr. Horsley practiced law as an associate and partner with Pillsbury Madison & Sutro, where he specialized in litigation and strategic counseling in intellectual property, antitrust and securities law matters. Mr. Horsley holds a B.A. in Philosophy and a B.A. in English from the University of Utah, and a J.D. from the University of California at Berkeley. Murray A. Goldman has served as Chairman of the Board of Directors of Transmeta since November 1998. Dr. Goldman served as a business advisor to Transmeta from March 1997 to November 1998. From July 1969 to January 1997, Dr. Goldman was employed at Motorola, where he held a variety of positions, most recently as Executive Vice President and Assistant General Manager of the Semiconductor Products Sector. Dr. Goldman also serves on the board of directors of ZiLOG, Inc., a semiconductor company, as well as several privately held companies. Dr. Goldman holds a B.S. in electrical engineering from the University of Pittsburgh and an M.S. and Ph.D. in electrical engineering from New York University. R. Hugh Barnes has served as a director of Transmeta since November 1998. Mr. Barnes served as a business advisor to Transmeta from March 1997 to November 1998. From April 1984 to January 1997, Mr. Barnes was employed at Compaq Computer, where he held a variety of positions, most recently as Vice President and Chief Technical Officer. Mr. Barnes also serves on the boards of directors of several privately held companies. Mr. Barnes holds a B.S. in electrical engineering from Iowa State University. Paul M. McNulty has served as a director of Transmeta since July 1999. Since September 1999, Mr. McNulty has served as President and Managing Member of Five Points Capital, Inc., a hedge fund. From January 1996 to August 1999, Mr. McNulty served as Managing Director at Soros Fund Management. From January 1993 to December 1995, Mr. McNulty served as the sector analyst responsible for technology stocks at Soros Fund Management. Mr. McNulty also serves on the boards of directors of several privately held companies. Mr. McNulty holds an A.B. in Fine Arts from Harvard College and an M.B.A. from Stanford University. 45 49 William P. Tai has served as a director of Transmeta since December 1995. Since July 1997, Mr. Tai has served as a general partner and managing director of Institutional Venture Partners, a venture capital firm. From August 1995 to February 1998, he served as founding Chief Executive Officer of iAsiaWorks, Inc., a pan-Asia Internet services provider. He also served as Chairman of the Board of iAsiaWorks from August 1995 to August 1999. From August 1991 to July 1997, Mr. Tai was affiliated with Walden Group of Venture Capital Funds, a venture capital firm. Mr. Tai also serves on the board of directors of iAsia Works, Microtune, a provider of broadband RF silicon, and Netergy Networks, a provider of IP telephony solutions, as well as several privately held companies. Mr. Tai holds a B.S. in electrical engineering with honors from the University of Illinois and an M.B.A. from the Harvard Graduate School of Business. T. Peter Thomas has served as a director of Transmeta since December 1995. Since November 1985, Mr. Thomas has served as a general partner of Institutional Venture Partners. Mr. Thomas serves on the boards of directors of Atmel Corp. and Telcom Semiconductor, as well as several privately held companies. Mr. Thomas holds a B.S. in electrical engineering from Utah State University and an M.S. in computer science from Santa Clara University. Each officer serves at the discretion of our board of directors. Each of our officers and directors, other than nonemployee directors, devotes his or her full time to our affairs. Our nonemployee directors devote the amount of time necessary to discharge their duties to us. There are no family relationships among any of our directors or officers. BOARD OF DIRECTORS Our bylaws currently provide for a board of directors consisting of seven persons. All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. Our current directors were elected pursuant to a voting agreement that we entered into with some of our principal stockholders. The holders of our Series B preferred stock and Series C preferred stock, voting together, designated Messrs. Tai and Thomas for election to our board. Quantum Industrial Partners LDC, one of the holders of our Series F preferred stock, designated Mr. McNulty for election to our board. Upon the closing of this offering, these board representation rights will terminate and no stockholders will have any special rights with respect to board representation. The term of each of our current directors will expire at the next annual meeting of stockholders. Our board will be divided into three classes, serving staggered three-year terms: Class I, whose term will expire at the first annual meeting of stockholders following this offering; Class II, whose term will expire at the second annual meeting of stockholders following this offering; and Class III, whose term will expire at the third annual meeting of stockholders following this offering. As a result, only one class of directors will be elected at each annual meeting of stockholders, with the other classes continuing for the remainder of their respective terms. Messrs. Barnes and Tai have been designated as Class I directors; Messrs. Ditzel, Goldman and Thomas have been designated as Class II directors; and Messrs. Allen and McNulty have been designated as Class III directors. BOARD COMMITTEES The audit committee consists of Messrs. McNulty, Tai and Thomas. The audit committee: - reviews our financial statements and accounting practices; - reviews and recommends to our board the selection of independent auditors; and - reviews the results and scope of the audit and other services provided by our independent auditors. 46 50 The compensation committee consists of Messrs. Barnes and Thomas. The compensation committee: - reviews and recommends to our board the compensation and benefits of all of our officers and directors; and - reviews general policy relating to compensation and benefits. Our board currently administers the issuance of stock options and other awards under our 1997 Equity Incentive Plan. Our board has delegated to Mr. Ditzel the non-exclusive authority to grant common stock options under our 1997 Equity Incentive Plan, subject to certain restrictions, until such time as the board revokes its delegation of authority. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of our compensation committee has at any time been an officer or employee of Transmeta. None of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board or compensation committee. DIRECTOR COMPENSATION Mr. Goldman, the chairman of our board of directors, is paid an annual base salary of $150,000. Other than Mr. Goldman, our directors are not compensated for their services as directors other than reimbursement for travel expenses related to board meeting attendance and the grant of stock options. Directors have been eligible to participate in our 1997 Equity Incentive Plan. In December 1997, we granted Mr. Tai a nonqualified option to purchase 60,000 shares of our common stock at an exercise price of $.25 per share. In July 1998, Mr. Tai exercised this option in full. Mr. Tai's shares are fully vested. In July 1997, June 1998, November 1998 and March 1999, we granted Mr. Goldman nonqualified options to purchase 40,000, 40,000, 150,000 and 250,000 shares of our common stock at exercise prices of $.25, $1.00, $1.30 and $1.30 per share. In December 1998, March 1999 and February 2000, Mr. Goldman exercised these options in full. The shares received upon exercise vest over periods of either three years and nine months or four years. As of June 30, 2000, 243,129 of the shares issued to Mr. Goldman were unvested and subject to repurchase by us upon termination of Mr. Goldman's service to us. In July 1997 and November 1998, we granted Mr. Barnes nonqualified options to purchase 40,000 and 60,000 shares of our common stock at exercise prices of $.25 and $1.30 per share, respectively. In December 1998 and June 1999, Mr. Barnes exercised these options in full. The shares received upon exercise vest over periods of either three years and nine months or four years. As of June 30, 2000, 43,752 of the shares issued to Mr. Barnes were unvested and subject to repurchase by us upon termination of Mr. Barnes's service to us. Each director will be eligible to participate in our 2000 Equity Incentive Plan. Under this plan, option grants to directors who are not our employees, or employees of a parent or subsidiary of ours, will be automatic and non-discretionary. Each non-employee director who is a member of our board of directors before the date of this offering and who has not received a prior option grant will receive an option to purchase shares of our common stock effective upon the offering. Each non-employee director who becomes a member of our board of directors on or after the date of this offering will be granted an option to purchase shares of our common stock as of the date that director joins the board. Immediately after each annual meeting of our stockholders, each non-employee director will automatically be granted an additional option to purchase shares of our common stock; provided, that the non-employee director is a member of the Board of Directors on such date and has served continuously as a member of the Board of Directors for a period of at least twelve months since the last option grant to such non-employee director. If less than twelve months has passed, then the number of shares subject to the option granted after the annual meeting will be equal to multiplied by a fraction, the numerator of which is the number of days that have elapsed since the last option grant to that director and the denominator of which is 365 days. Each option will have an exercise price equal to the fair market value of our common stock on the date of grant. The options will have ten-year terms and will terminate three months after the date the director ceases 47 51 to be a director or consultant or twelve months if the termination is due to death or disability. All options granted to non-employee directors will vest over a four-year period at a rate of 25% of the total shares granted on the first anniversary of the date of grant, and 2.08333% of the total shares granted at the end of each full succeeding month thereafter, so long as the non-employee director continuously remains our director or consultant. In the event of our dissolution or liquidation or a "change in control" transaction, options granted to our non-employee directors under the plan will become 100% vested and exercisable in full. EXECUTIVE COMPENSATION The following table presents information regarding the compensation awarded to, earned by or paid to our chief executive officer and each of our other executive officers at December 31, 1999 whose salary and bonus for 1999 equaled or exceeded $100,000.
LONG-TERM COMPENSATION AWARDS ANNUAL COMPENSATION ---------------------- ------------------- SHARES OF COMMON STOCK NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS --------------------------- -------- -------- ---------------------- David R. Ditzel Chief Executive Officer............................ $170,615 $110,554 250,000 James N. Chapman Senior Vice President of Sales and Marketing....... 155,907 73,889 250,000 Douglas A. Laird Senior Vice President of Engineering............... 154,364 74,564 250,000 Daniel E. Steimle(1) Former Chief Financial Officer..................... 155,349 76,589 250,000
- ------------ (1) Mr. Steimle's employment with us terminated as of March 15, 2000. Mark K. Allen, our President and Chief Operating Officer, was hired in January 2000 at an annual base salary of $233,000. Merle A. McClendon, our Chief Financial Officer and Secretary, was hired in March 2000 at an annual base salary of $210,000. David P. Jensen, our Vice President of Operations, was hired in February 2000 at an annual base salary of $170,000. John O. Horsley, our General Counsel, was hired in July 2000 at an annual base salary of $155,000. Barry L. Rubinson, our Vice President of Software, was hired in August 2000 at an annual base salary of $200,000. OPTION GRANTS IN LAST YEAR The following table presents information about grants of stock options during 1999 to the executive officers listed in the above summary compensation table during 1999.
INDIVIDUAL GRANTS POTENTIAL REALIZABLE ------------------------------------------------------- VALUE AT ASSUMED % OF TOTAL ANNUAL RATES OF STOCK SECURITIES OPTIONS PRICE APPRECIATION UNDERLYING GRANTED TO FOR OPTION TERM OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION --------------------- NAME GRANTED FISCAL YEAR PER SHARE DATE 5% 10% ---- ---------- ------------ -------------- ---------- --------- --------- David R. Ditzel............. 250,000 6.2% $1.30 3/18/2009 James N. Chapman............ 250,000 6.2 1.30 3/18/2009 Douglas A. Laird............ 250,000 6.2 1.30 3/18/2009 Daniel E. Steimle........... 250,000 6.2 1.30 11/22/2008
In 1999, we granted to our employees options to purchase a total of 4,033,500 shares of common stock. Potential realizable values are calculated by: - multiplying the number of shares of common stock subject to a given option by $ , which is the assumed initial public offering price; 48 52 - assuming that the amount derived from that calculation compounds at the annual 5% or 10% rates shown in the table for the entire ten-year term of the option; and - subtracting from that result the aggregate option exercise price. The 5% and 10% assumed annual rates of stock price appreciation are required by the rules of the Securities and Exchange Commission and do not reflect our estimate or projection of future stock price growth. The options granted to Messrs. Ditzel, Chapman and Laird in 1999 were immediately exercisable nonqualified stock options and were exercised prior to December 31, 1999. We retain the right to repurchase at cost any shares that remain unvested at the time the officer ceases to be employed by us. Our right of repurchase lapses with respect to 20% of the shares after one year, 2% of the shares each month during the second year and 2.333% of the shares each month during the third and fourth years. The option granted to Mr. Steimle in 1999 was an immediately exercisable nonqualified stock option and was exercised prior to December 31, 1999. The shares issued upon exercise of this option were subject to our right of repurchase, which lapsed with respect to 25% of the shares after one year and 2.083% of the shares each month thereafter. In addition, during 2000, we have granted options to purchase shares of common stock to the following executive officers: In January 2000, we granted Mark K. Allen an option to purchase 1,000,000 shares with an exercise price of $6.00 per share. In March 2000, we granted David P. Jensen an option to purchase 275,000 shares with an exercise price of $7.25 per share. In July 2000, we granted Merle A. McClendon an option to purchase 550,000 shares with an exercise price of $12.00 per share and we granted John O. Horsley an option to purchase 60,000 shares with an exercise price of $12.00 per share. The options granted to Mr. Allen, Mr. Jensen, Ms. McClendon and Mr. Horsley are immediately exercisable nonqualified stock options, but the shares issued upon exercise are subject to our right of repurchase, which lapses with respect to 25% of the shares after one year and 2.083% of the shares each month thereafter. Mr. Allen's option is also subject to accelerated vesting upon a change in control of our company. The options discussed in this section expire ten years from the date of grant. They were granted at an exercise price equal to the fair market value of our common stock as determined by our board on the date of grant. AGGREGATED OPTION EXERCISES IN 1999 The following table presents the number of shares acquired and the value realized upon exercise of stock options during 1999 by the executive officers listed in the above summary compensation table. None of these executive officers holds any unexercised options.
NUMBER OF SHARES NAME ACQUIRED ON EXERCISE VALUE REALIZED ---- -------------------- -------------- David R. Ditzel........................................... 250,000 $ -- James N. Chapman.......................................... 250,000 -- Douglas A. Laird.......................................... 250,000 -- Daniel E. Steimle(1)...................................... 250,000 --
- ------------ (1) 170,000 of the 250,000 shares granted to Mr. Steimle in 1999 were repurchased by us on March 15, 2000 when Mr. Steimle's employment with us terminated. In January 2000, Mark K. Allen exercised his option to purchase 1,000,000 shares of common stock. In March 2000, David P. Jensen exercised his option to purchase 275,000 shares of common stock. In August 2000, Merle A. McClendon exercised her option to purchase 550,000 shares of common stock. All of the shares issued to Mr. Allen, Mr. Jensen and Ms. McClendon upon exercise of their stock options are subject to repurchase by us upon termination of their employment. This repurchase right lapses over four years after the date of the option grant. 49 53 CHANGE IN CONTROL ARRANGEMENT Mr. Allen, our President and Chief Operating Officer, has purchased shares of common stock under an agreement that provides for accelerated vesting under specified circumstances following a change in control of Transmeta. Upon a change in control transaction followed within twelve months by a non-justified termination of Mr. Allen's employment or his resignation for good reason, vesting will accelerate as to 50% of any unvested portion of the 1,000,000 shares of common stock that he holds. Mr. Allen may be terminated with justification if he commits any willful act of material fraud or dishonesty or gross misconduct against Transmeta or its subsidiaries or is indicted or convicted for certain felonies, or in the event of his death or disability. Mr. Allen may resign with good reason if, after a change of control, his salary is reduced, his workplace is relocated more than 50 miles away from his original workplace or his responsibilities are substantially changed. SEVERANCE AGREEMENTS WITH EXECUTIVE OFFICERS In March 2000, we entered into a severance agreement with Daniel E. Steimle, our former Chief Financial Officer. Mr. Steimle's employment with us terminated as of March 15, 2000. Under this agreement, Mr. Steimle received a severance payment of $110,000. We repurchased 318,960 shares of common stock for a price of $1.30 per share and Mr. Steimle's remaining 70,103 unvested shares will continue to vest until September 23, 2000. The agreement also provides for the extension until December 31, 2001 of the maturity date of two secured full recourse promissory notes with unpaid principal amounts of $163,852 and $104,000, together with interest compounded semi-annually on the unpaid principal at rates of 4.47% and 4.77%, which were issued by Mr. Steimle to exercise his options. EMPLOYEE BENEFIT PLANS AND OPTION GRANTS 1995 EQUITY INCENTIVE PLAN AND 1997 EQUITY INCENTIVE PLAN As of June 30, 2000, options to purchase 427,760 shares of our common stock were outstanding under our 1995 Equity Incentive Plan and no shares were available for future option grants. These options had a weighted average exercise price of $.08 per share. As of June 30, 2000, options to purchase 5,176,064 shares of our common stock were outstanding under our 1997 Equity Incentive Plan and 1,097,644 shares of our common stock remained available for future option grants. The options outstanding under the 1997 Equity Incentive Plan as of June 30, 2000 had a weighted average exercise price of $5.09 per share. In addition, in May 1998, we issued a total of 34,000 shares of common stock to 34 employees, under our 1997 Equity Incentive Plan. Our 2000 Equity Incentive Plan will become effective upon the date of this prospectus. No options will be granted under our 1997 Equity Incentive Plan after this offering. However, any outstanding options under our 1995 Equity Incentive Plan or 1997 Equity Incentive Plan will remain outstanding and subject to our 1995 Equity Incentive Plan or 1997 Equity Incentive Plan, as applicable, and related stock option agreements until they are exercised or until they terminate or expire by their terms. Options granted under our 1995 Equity Incentive Plan or 1997 Equity Incentive Plan are subject to terms substantially similar to those described below with respect to options granted under our 2000 Equity Incentive Plan. NON-PLAN GRANTS From November 1, 1998 through June 30, 2000, we granted options to purchase a total of 3,610,000 shares of our common stock, with a weighted average exercise price of $4.21 per share, to a number of our employees, including officers and directors, outside of any option plan. As of June 30, 2000, options to purchase a total of 3,010,000 shares had been exercised. 2000 EQUITY INCENTIVE PLAN In 2000, our board adopted our 2000 Equity Incentive Plan, subject to stockholder approval. The 2000 Equity Incentive Plan will become effective on the date of this prospectus and will serve as 50 54 the successor to our 1995 Equity Incentive Plan and 1997 Equity Incentive Plan. The 2000 Equity Incentive Plan authorizes the award of options, restricted stock and stock bonuses. The 2000 Equity Incentive Plan will be administered by the compensation committee of our board of directors, each member of which is an outside director as defined under applicable federal tax laws. The compensation committee will have the authority to interpret this plan and any agreement entered into under the plan, grant awards and make all other determinations for the administration of the plan. Our 2000 Equity Incentive Plan provides for the grant of both incentive stock options that qualify under Section 422 of the Internal Revenue Code and nonqualified stock options. The incentive stock options may be granted only to our employees or employees of any of our subsidiaries. The nonqualified stock options, and all awards other than incentive stock options, may be granted to our employees, officers, directors, consultants, independent contractors and advisors and those of any of our subsidiaries. However, consultants, independent contractors and advisors are only eligible to receive awards if they render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. The exercise price of incentive stock options must be at least equal to the fair market value of our common stock on the date of grant. The exercise price of incentive stock options granted to 10% stockholders must be at least equal to 110% of the fair market value of our common stock on the date of grant. The maximum term of the options granted under our 2000 Equity Incentive Plan is ten years. The awards granted under this plan may not be transferred in any manner other than by will or by the laws of descent and distribution and may be exercised during the lifetime of the optionee only by the optionee. The compensation committee may allow exceptions to this restriction for awards that are not incentive stock options. Options granted under our 2000 Equity Incentive Plan generally expire three months after the termination of the optionee's service to us or to a parent or subsidiary of ours, or twelve months if the termination is due to death or disability. In the event of a liquidation, dissolution or change in control transaction, except for options granted to non-employee directors, the options may be assumed or substituted by the successor company. Except for options granted to non-employee directors, in the event these options are not assumed or substituted, such options will expire on such transaction at such time and on such conditions as the compensation committee will determine. We have reserved 3,500,000 shares of our common stock for issuance under the 2000 Equity Incentive Plan. The number of shares reserved for issuance under this plan will be increased by: - the number of shares of our common stock reserved under our 1997 Equity Incentive Plan that are not issued or subject to outstanding grants on the date of this prospectus; - the number of shares of our common stock issued under our 1997 Equity Incentive Plan that we repurchase at the original purchase price; and - the number of shares of our common stock issuable upon exercise of options granted under our 1997 Equity Incentive Plan that expire or become unexercisable at any time after this offering without having been exercised in full. In addition, under the terms of the 2000 Equity Incentive Plan, the number of shares of our common stock reserved for issuance under the plan will increase automatically on January 1 of each year commencing in 2001 by an amount equal to 5% of our total outstanding shares of common stock as of the immediately preceding December 31. Shares available for grant and issuance under our 2000 Equity Incentive Plan include: - shares of our common stock issuable upon exercise of an option granted under the plan that is terminated or cancelled before the option is exercised; - shares of our common stock issued upon exercise of any option granted under this plan that we repurchase at the original purchase price; - shares of our common stock subject to awards granted under this plan that are forfeited or that we repurchase at the original issue price; and 51 55 - shares of our common stock subject to stock bonuses granted under this plan that otherwise terminate without shares being issued. During any calendar year, no person will be eligible to receive more than 2,000,000 shares, or 3,000,000 shares in the case of a new employee, under the 2000 Equity Incentive Plan. The 2000 Equity Incentive Plan will terminate in , 2010, unless it is terminated earlier by our board. 2000 EMPLOYEE STOCK PURCHASE PLAN In 2000, our board adopted our 2000 Employee Stock Purchase Plan, subject to stockholder approval. The 2000 Employee Stock Purchase Plan will become effective on the first day on which price quotations are available for our common stock on the Nasdaq National Market. The employee stock purchase plan is designed to enable eligible employees to purchase shares of our common stock at a discount on a periodic basis. Our compensation committee will administer the 2000 Employee Stock Purchase Plan. Our employees generally will be eligible to participate in this plan if they are employed by us, or a subsidiary of ours that we designate, for more than 20 hours per week and more than five months in a calendar year. Our employees are not eligible to participate in our 2000 Employee Stock Purchase Plan if they are 5% stockholders or would become 5% stockholders as a result of their participation in the plan. Under the 2000 Employee Stock Purchase Plan, eligible employees may acquire shares of our common stock through payroll deductions (or through a single lump sum payment in the case of the first offering period). Our eligible employees may select a rate of payroll deduction between 1% and 15% of their cash compensation. For the first offering period employees shall be automatically granted an option based on 15% of their cash compensation during the first purchase period. An employee's participation in this plan will end automatically upon termination of employment for any reason. No participant will be able to purchase shares having a fair market value of more than $25,000, determined as of the first day of the applicable offering period, for each calendar year in which the employee participates in the 2000 Employee Stock Purchase Plan. Except for the first offering period, each offering period will be for two years and will consist of four six-month purchase periods. The first offering period is expected to begin on the first day on which price quotations are available for our common stock on the Nasdaq National Market. The first purchase period may be more or less than six months long. After that, the offering periods will begin on February 1 and August 1. The purchase price for shares of our common stock purchased under the 2000 Employee Stock Purchase Plan will be 85% of the lesser of the fair market value of our common stock on the first day of the applicable offering period or the last day of each purchase period. Our compensation committee will have the power to change the starting date of any later offering period, the purchase date of a purchase period and the duration of any offering period or purchase period without stockholder approval if this change is announced before the relevant offering period or purchase period. Our 2000 Employee Stock Purchase Plan is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code. We have initially reserved 1,000,000 shares of our common stock for issuance under the 2000 Employee Stock Purchase Plan. The number of shares reserved for issuance under the plan will increase automatically on January 1 of each year, commencing in 2001, by an amount equal to 1% of our total outstanding shares as of the immediately preceding December 31. Our board or compensation committee may reduce the amount of the increase in any particular year. The 2000 Employee Stock Purchase Plan will terminate in , 2010, unless it is terminated earlier by our board of directors. 401(K) PLAN We sponsor a defined contribution plan intended to qualify under Section 401 of the Internal Revenue Code, or a 401(k) Plan. Employees who are at least 21 years old are generally eligible to participate and may enter the 401(k) Plan as of the first day of any month. Participants may make pre-tax contributions to the plan of up to 15% of their eligible earnings, subject to a statutorily prescribed annual limit. Each participant is fully vested in his or her contributions and the investment earnings. We may make matching contributions on a 52 56 discretionary basis to the 401(k) Plan but had not done so as of June 30, 2000. Contributions by the participants or us to the plan, and the income earned on these contributions, are generally not taxable to the participants until withdrawn. Contributions by us, if any, would generally be deductible by us when made. Contributions are held in trust as required by law. Individual participants may direct the trustee to invest their accounts in authorized investment alternatives. INDEMNIFICATION OF DIRECTORS AND OFFICERS AND LIMITATION ON LIABILITY Our certificate of incorporation includes a provision that limits or eliminates the personal liability of a director for monetary damages resulting from breach of his or her fiduciary duty as a director, except for liability: - for any breach of the director's duty of loyalty to Transmeta or its stockholders; - for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; - unlawful payments of dividends or unlawful stock repurchases, redemptions or other distributions; or - for any transaction from which the director derived an improper personal benefit. Our bylaws provide that: - we are required to indemnify our directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions where indemnification is not permitted by applicable law; - we are required to advance expenses, as incurred, to our directors and officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions; and - the rights conferred in the bylaws are not exclusive. In addition to the indemnification required in our certificate of incorporation and bylaws, before the completion of this offering, we intend to enter into indemnification agreements with each of our current directors and officers. These agreements will provide for the indemnification of our officers and directors for all expenses and liabilities incurred in connection with any action or proceeding brought against them by reason of the fact that they are or were agents of Transmeta. We also intend to obtain directors' and officers' insurance to cover our directors, officers and some of our employees for liabilities, including liabilities under securities laws. We believe that these indemnification provisions and agreements and this insurance are necessary to attract and retain qualified directors and officers. The limitation of liability and indemnification provisions in our certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against directors and officers, even though an action, if successful, might benefit us and other stockholders. Furthermore, a stockholder's investment may be adversely affected to the extent we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees regarding which indemnification by Transmeta is sought, nor are we aware of any threatened litigation that may result in claims for indemnification. 53 57 RELATED PARTY TRANSACTIONS Since January 1, 1997, we have not been a party to, and we have no plans to be a party to, any transaction or series of similar transactions in which the amount involved exceeded or will exceed $60,000 and in which any current director, executive officer or holder of more than 5% of our common stock had or will have an interest, other than as described where required under "Management" and the transactions described below. STOCK PURCHASES The following table summarizes purchases of shares of our common stock since January 1, 1997 by our executive officers, directors and holders of more than 5% of our common stock on an as-converted basis.
NUMBER OF TOTAL PURCHASE DATE OF PURCHASER SHARES PRICE PURCHASE --------- --------- -------------- -------- David R. Ditzel........................................ 250,000 $ 325,000 3/24/99 Mark K. Allen.......................................... 1,000,000 6,000,000 1/17/00 Merle A. McClendon..................................... 550,000 6,600,000 8/03/00 James N. Chapman....................................... 400,000 100,000 12/09/97 250,000 325,000 3/24/99 Douglas A. Laird....................................... 250,000 325,000 3/24/99 David P. Jensen........................................ 275,000 1,993,750 3/06/00 Murray A. Goldman...................................... 100,000 130,000 12/18/98 50,000 65,000 12/18/98 250,000 325,000 3/24/99 40,000 40,000 2/18/00 40,000 10,000 2/18/00 R. Hugh Barnes......................................... 40,000 10,000 6/15/99 60,000 78,000 12/18/98 William P. Tai......................................... 60,000 15,000 7/30/98
The following table summarizes purchases of shares of Series D, Series E, Series F and Series G preferred stock since January 1, 1997 by our directors and holders of more than 5% of our common stock on an as-converted basis. Upon completion of this offering, each share of Series D preferred stock will automatically convert into two shares of common stock and each share of Series E, Series F and Series G preferred stock will automatically convert into one share of common stock.
SHARES OF PREFERRED STOCK -------------------------------------------------- PURCHASER SERIES D SERIES E SERIES F SERIES G --------- ------------ ----------- ---------- -------- William P. Tai(1).............................. 60,000 -- -- 19,200 Entities affiliated with Five Points Capital(2)................................... -- -- -- 120,000 Entities affiliated with Institutional Venture Partners(3).................................. 809,818 1,666,666 -- -- Entities affiliated with Walden................ 758,736 -- 40,000 Vulcan Ventures Incorporated................... 3,036,000 233,333 525,000 160,000 Entities affiliated with Quantum Industrial Partners LDC................................. -- -- 2,600,000 208,000 Date(s) of Purchase............................ 4/97 - 11/97 6/98 - 7/98 7/99 4/00 Price per share................................ $2.50 $6.00 $10.00 $12.50
- ------------ (1) Represents shares held of record by WT Technology, which Mr. Tai, one of our directors, and his family members may be deemed to beneficially own. (2) Mr. McNulty, a director of Transmeta, is a general partner of Five Points Capital. (3) Messrs. Tai and Thomas, directors of Transmeta, are general partners of Institutional Venture Partners. 54 58 REGISTRATION RIGHTS We have entered into an investors' rights agreement with each of the purchasers of preferred stock set forth above. Under this agreement, these and other stockholders are entitled to registration rights with respect to their shares of common stock issuable upon conversion of their preferred stock upon the closing of this offering. Following this offering, holders of 36,587,171 shares of our common stock, the holder of a convertible promissory note to purchase 600,000 shares of our common stock and holders of warrants to purchase 610,392 shares of our common stock will be entitled to registration rights for their shares of common stock. See "Description of Capital Stock -- Registration Rights." LOANS TO EXECUTIVE OFFICERS AND DIRECTORS In connection with the option exercises described under "Management -- Director Compensation" and "Management -- Executive Compensation," the following executive officers and directors delivered full recourse promissory notes, each with a five-year term, bearing interest semi-annually on the principal amounts as indicated in the table below.
PRINCIPAL INTEREST LOAN BORROWER AMOUNT RATE DATE -------- ---------- -------- -------- David R. Ditzel............................................. $ 325,000 4.77% 3/24/99 Mark K. Allen............................................... 6,000,000 6.12 1/17/00 Merle A. McClendon.......................................... 6,600,000 6.23 8/03/00 James N. Chapman............................................ 100,000 5.93 12/09/97 325,000 4.77 3/24/99 Douglas A. Laird............................................ 325,000 4.77 3/24/99 David P. Jensen............................................. 1,993,750 6.69 3/06/00 Murray A. Goldman........................................... 130,000 4.47 12/18/98 65,000 4.47 12/18/98 325,000 4.77 3/24/99 24,167 6.46 2/18/00 2,709 6.46 2/18/00 R. Hugh Barnes.............................................. 78,000 4.47 12/18/98 10,000 5.30 6/15/99
In addition, on May 17, 2000, we loaned $750,000 to each of David R. Ditzel and Douglas A. Laird. Mr. Ditzel and Mr. Laird each delivered a promissory note secured by shares of common stock held by them. Each note has a five-year term and bears interest annually at 6.40% on the principal amount. 55 59 PRINCIPAL STOCKHOLDERS The following table presents information regarding the beneficial ownership of our common stock as of July 31, 2000, and as adjusted to reflect the sale of the shares in this offering, for: - each person or entity known by us to own beneficially more than 5% of our common stock; - each of the executive officers named in the Summary Compensation Table above; - each of our directors; and - all executive officers and directors as a group. The percentage of beneficial ownership for the following table is based on 56,672,755 shares of common stock outstanding as of July 31, 2000, assuming the conversion of all outstanding shares of our preferred stock into 36,587,171 shares of our common stock and the conversion of a convertible promissory note into 600,000 shares of common stock, which will occur upon the closing of this offering. The percentage of beneficial ownership after the offering is based on shares of our common stock issued in connection with this offering, assuming no exercise of the underwriters' over-allotment option. To our knowledge, except under community property laws or as otherwise noted, the persons named in the table have sole voting and sole investment power with respect to all shares beneficially owned. Unless otherwise indicated, each five percent stockholder listed below maintains a mailing address of c/o Transmeta Corporation, 3940 Freedom Circle, Santa Clara, California 95054. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and does not necessarily indicate beneficial ownership for any other purpose. Under these rules, beneficial ownership includes those shares of common stock over which the stockholder has sole or shared voting or investment power. It also includes shares of common stock that the stockholder has a right to acquire within 60 days after July 31, 2000 through the exercise of any option, warrant or other right. The percentage ownership of the outstanding common stock, however, is based on the assumption, expressly required by the rules of the Securities and Exchange Commission, that only the person or entity whose ownership is being reported has converted options or warrants into shares of our common stock.
PERCENTAGE SHARES SUBJECT TO A BENEFICIALLY OWNED NUMBER OF SHARES RIGHT OF ------------------- OF COMMON STOCK REPURCHASE BEFORE AFTER NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED AS OF JULY 31, 2000 OFFERING OFFERING ------------------------ ------------------ ------------------- -------- -------- T. Peter Thomas(1)............................ 7,288,848 -- 12.7% Entities affiliated with Institutional Venture Partners William P. Tai(2)............................. 5,256,535 -- 9.3 Entities affiliated with Walden(3)............ 4,809,038 -- 8.5 Vulcan Ventures Incorporated.................. 3,954,333 7.0 Quantum Industrial Partners(4)................ 2,808,000 -- 5.0 David R. Ditzel............................... 2,210,000 180,000 3.9 Douglas A. Laird(5)........................... 1,368,472 180,000 2.4 James N. Chapman.............................. 650,000 296,667 1.2 Murray A. Goldman(6).......................... 480,000 230,004 * Daniel E. Steimle............................. 206,040 21,458 * Paul M. McNulty(7)............................ 120,000 -- * Entities affiliated with Five Points Capital, Inc. R. Hugh Barnes................................ 100,000 41,669 * All executive officers and directors as a group (11 persons)(8)....................... 17,981,358 2,654,798 31.8%
(footnotes on next page) 56 60 - ------------ * Less than 1%. (1) Includes 975,000 shares held by Institutional Venture Partners VIII, L.P., 646,666 shares held by Institutional Venture Partners VII, L.P., 13,333 shares held by Institutional Venture Management VII, L.P., 10,500 shares held by IVM Investment Fund VIII, LLC, and 4,500 shares held by IVM Investment Fund VIII-A, LLC. Mr. Tai and Mr. Thomas are each a general partner of the general partner of these entities, and as such may be deemed to be the beneficial owner of these shares. Also includes 5,284,852 shares held by Institutional Venture Partners VI, L.P., 241,553 shares held by IVP Founders Fund I, L.P, and 112,444 shares held by Institutional Venture Management VI, L.P. Mr. Thomas is a general partner of the general partner of these entities, and as such may be deemed to be the beneficial owner of these shares. Mr. Tai and Mr. Thomas each disclaim beneficial ownership of these shares, except to the extent of his respective pecuniary interest in these shares. The address of Institutional Venture Partners is 3000 Sand Hill Road, Building Two, Suite 290, Menlo Park, CA 94025. (2) Represents 60,000 shares held of record by Mr. Tai, 60,000 shares held by WT Technology, which Mr. Tai and his family members may be deemed to beneficially own. Also includes 1,649,999 shares held by entities affiliated with Institutional Venture Partners and 3,486,536 shares held by entities affiliated with Walden. The address of WT Technology is c/o Institutional Venture Partners, 3000 Sand Hill Road, Building Two, Suite 290, Menlo Park, CA 94025. (3) Represents 799,896 shares held by Walden-SBIC, L.P., 729,638 shares held by Walden Investors, 561,236 shares held by International Venture Capital Investment Corporation; 548,224 shares held by Walden International III, C.V.; 503,280 shares held by OCBC, Wearnes & Walden Investments (Singapore) Ltd.; 365,138 shares held by Walden Ventures; 342,868 shares held by O,W&W Pacrim Investments Ltd.; 320,824 shares held by BI Walden Ventures Kedua Sdn. Bhd.; 194,156 shares held by Seed Ventures II, Limited; 187,726 shares held by Walden Capital Partners, L.P.; 113,802 shares held by Walden Technology Ventures II, L.P.; 102,250 shares held by O,W&W Investments Limited; and 40,000 shares held by WIIG Japan Partners II, L.P. Mr. Tai is a limited partner in the general partner of funds managed by Walden and a shareholder in Walden International Investment Group, and as such may be deemed to be the beneficial owner of shares held by Walden-SBIC, L.P., Walden International III, C.V., Walden Technology Ventures II, L.P., International Venture Capital Investment Corporation, OCBC, Wearnes & Walden Investments (Singapore) Ltd., O,W&W Pacrim Investments Ltd., BI Walden Ventures Kedua Sdn. Bhd., Seed Ventures II, Ltd. and O,W&W Investments Limited. The address of these stockholders is 750 Battery Street, San Francisco, CA 94111. Mr. Tai disclaims beneficial ownership of these shares except for his pecuniary interest in these shares. (4) Represents 1,490,000 shares held by Quantum Industrial Partners LDC, 1,167,880 shares held by Quantum Partners LDC, and 150,120 shares held by SFM Domestic Investments LLC. George Soros is the sole shareholder of the general partner of the investment advisor for Quantum Industrial Partners LDC, the Chairman and President of the investment manager for Quantum Partners LDC and a managing member of SFM Domestic Investments LLC. Mr. Soros has also agreed to use his best efforts to cause the general partner of the investment advisor for Quantum Industrial Partners LDC to act at the discretion of Soros Fund Management LLC, of which he is the Chairman and President. Mr. Soros may be deemed to be a beneficial owner of all of the shares held by Quantum Industrial Partners LDC, Quantum Partners LDC and SFM Domestic Investments LLC. The address of Quantum Industrial Partners LDC and Quantum Partners LDC is Kaya Flamboyan 9, Willemstad, Curacao, Netherlands Antilles. The address of SFM Domestic Investments LLC is 888 Seventh Avenue, New York, NY 10106. (5) Represents shares held of record jointly by Mr. Laird and his wife, as trustees for the Douglas A. & Joan G. Laird Trust dated August 30, 1989. (6) Includes 88,748 shares held of record by Murray A. Goldman, as trustee for the Murray A. Goldman Irrevocable Deed of Trust dated February 29, 2000. (7) Represents 86,000 shares held by Five Points Fund, L.P. and 34,000 shares held by Five Points Offshore Fund, Ltd. Mr. McNulty, one of our directors, is a general partner of Five Points Capital, Inc., which is the management company of each of Five Points Fund, L.P. and Five Points Offshore Fund, Ltd. (8) Includes the shares held by Institutional Venture Partners described in note 1, the shares held by WT Technology and Walden described in note 2 and the shares held by Five Points Capital described in note 7. 57 61 DESCRIPTION OF CAPITAL STOCK GENERAL Immediately following the closing of this offering, our authorized capital stock will consist of 1,000,000,000 shares of common stock, $.00001 par value per share, and 5,000,000 shares of undesignated preferred stock, $.00001 par value per share. As of June 30, 2000, we had outstanding 56,526,243 shares of common stock, assuming the conversion of all outstanding preferred stock into common stock and the conversion of a convertible promissory note into 600,000 shares of common stock, which will occur upon the closing of this offering. As of June 30, 2000, we had approximately 345 shareholders. COMMON STOCK DIVIDEND RIGHTS Subject to preferences that may apply to shares of preferred stock outstanding at the time, the holders of outstanding shares of common stock are entitled to received dividends out of assets legally available at the times and in the amounts that our board may determine from time to time. VOTING RIGHTS Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of stockholders. We have not provided for cumulative voting for the election of directors in our certificate of incorporation. This means that the holders of a majority of the shares voted can elect all of the directors then standing for election. Prior to that time, however, cumulative voting in the election of directors will be in effect, meaning that each share of voting stock will be entitled to a number of votes equal to the number of votes to which that share would normally be entitled multiplied by the number of directors to be elected. A stockholder may then cast all of these votes for a single candidate or may allocate them among as many candidates as the stockholder may choose. In addition, our certificate of incorporation and bylaws require the approval of two-thirds, rather than a majority, of the shares entitled to vote for some matters. For a description of these matters, see "-- Anti-Takeover Effects of Delaware Law and our Certificate of Incorporation and Bylaws" below. NO PREEMPTIVE, CONVERSION OR REDEMPTION RIGHTS Our common stock is not entitled to preemptive rights and is not subject to conversion or redemption. RIGHT TO RECEIVE LIQUIDATION DISTRIBUTIONS Upon a liquidation, dissolution or winding-up of our company, the holders of common stock are entitled to share ratably in all assets remaining after payment of all liabilities and the liquidation preferences of any outstanding preferred stock. Each outstanding share of common stock is, and all shares of common stock to be outstanding upon completion of this offering will be, fully paid and nonassessable. PREFERRED STOCK Following this offering, we will be authorized, subject to limitations imposed by Delaware law, to issue preferred stock in one or more series, to establish from time to time the number of shares to be included in each series, and to fix the rights, preferences and privileges of the shares of each wholly unissued series and any of its qualifications, limitations or restrictions. Our board can also increase or decrease the number of shares of any series, but not below the number of shares of that series then outstanding, without any further vote or action by the stockholders. The board may authorize the issuance of preferred stock with voting or conversion rights that could harm the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in control of Transmeta and might harm 58 62 the market price of our common stock and the voting and other rights of the holders of common stock. We have no current plans to issue any shares of preferred stock. WARRANTS As of June 30, 2000, we had outstanding warrants to purchase 1,073,216 shares of our common stock at a weighted average exercise price of $2.27 per share. The warrants are exercisable at any time up to their expiration date and expire variously from August 2001 through April 2008. CONVERTIBLE PROMISSORY NOTE As of June 30, 2000, we had outstanding a promissory note in favor of IBM in the principal amount of $600,000. The note does not bear interest and is convertible into 600,000 shares of our common stock upon the closing of this offering at the option of IBM. Unless converted, the promissory note is due on December 31, 2003. REGISTRATION RIGHTS The holders of 36,587,171 shares of common stock issuable upon conversion of the preferred stock have the right to require us to register their shares with the Securities and Exchange Commission so that those shares may be publicly resold or to include their shares in any registration statement we file. In addition, the holders of 1,210,392 shares of common stock issuable upon exercise of warrants and the conversion of the promissory note in favor of IBM have piggyback registrations rights. Demand Registration Rights. At any time six months after the closing of this offering, the holders of at least 20% of the shares having demand registration rights have the right to require that we register all or a portion of their shares. We are only obligated to file two registration statements in response to these demand registration rights. The first demand registration right exercised must cover a sale of securities with a total public offering price of at least $25 million and the second demand registration right exercised must cover a sale of at least $15 million of securities. We may postpone the filing of a registration statement for up to 120 days once in a 12-month period if we determine that the filing would be seriously detrimental to us and our stockholders. The underwriters of any underwritten offering will have the right to limit the number of shares to be included in a registration statement filed in response to the exercise of these demand registration rights due to marketing reasons. Piggyback Registration Rights. If we register any securities for public sale, the stockholders with registration rights will have the right to include their shares in this registration, subject to specified exceptions. The underwriters of any underwritten offering will have the right to limit the number of shares registered by these holders under specified conditions. Form S-3 Registration Statements. The holders of the shares having registration rights can request that we register their shares if we are eligible to file a registration statement on Form S-3 and if the total price of the shares of common stock offered to the public is at least $500,000. These holders may only require us to file one Form S-3 Registration Statement in any 12-month period. We may postpone the filing of any registration statement for up to 120 days if we determine that the filing would be seriously detrimental to us and our stockholders, although we may exercise this right only once in any 12-month period. We will pay all expenses related to any demand or piggyback registration and up to two registrations on Form S-3, except for underwriters' discounts and commissions, which will be paid by the selling stockholders. The registration rights described above will expire eight years following the completion of this offering. ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND OUR CERTIFICATE OF INCORPORATION AND BYLAWS The provisions of Delaware law, our certificate of incorporation and our bylaws may have the effect of delaying, deferring or discouraging another party from acquiring control of us. 59 63 DELAWARE LAW We will be subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. This section prevents some Delaware corporations from engaging, under some circumstances, in a business combination, which includes a merger or sale of more than 10% of the corporation's assets with any interested stockholder, which is a stockholder who owns 15% or more of the corporation's outstanding voting stock, as well as affiliates and associates of the stockholder, for three years following the date that the stockholder became an "interested stockholder" unless: - the transaction is approved by the board of directors prior to the date the interested stockholder attained that status; - upon consummation of the transaction that resulted in the stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or - on or subsequent to that date the business combination is approved by the board and authorized at an annual or special meeting of stockholders by at least two-thirds of the outstanding voting stock that is not owned by the interested stockholder. A Delaware corporation may opt out of this provision with an express provision in its original certificate of incorporation or an express provision in its certificate of incorporation or bylaws resulting from a stockholders' amendment approved by at least a majority of the outstanding voting shares. However, we have not opted out of this provision. The statute could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us. CHARTER AND BYLAWS Our certificate of incorporation and bylaws provide that: - following the completion of this offering, no action can be taken by stockholders except at an annual or special meeting of the stockholders called in accordance with our bylaws and stockholders may not act by written consent; - following the completion of this offering, the approval of holders of two-thirds of the shares entitled to vote at an election of directors will be required to adopt, amend or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of directors and ability of stockholders to take action; - stockholders may not call special meetings of the stockholders or fill vacancies on the board; - our board of directors will be divided into three classes, each serving staggered three-year terms. This means that only one class of directors will be elected at each annual meeting of stockholders, with the other classes continuing for the remainder of their respective terms. Directors may only be removed for cause by the holders of two-thirds of the shares entitled to vote at an election of directors; and - we will indemnify officers and directors against losses that they may incur in investigations and legal proceedings resulting from their services to us, which may include services in connection with takeover defense measures. CALIFORNIA FOREIGN CORPORATION LAW Section 2115 of the California Corporations Code provides that under some circumstances several provisions of the California Corporations Code may be applied to foreign corporations qualified to do business in California notwithstanding the law of the jurisdiction where the corporation is incorporated. These corporations are referred to in this section as "quasi-California" corporations. Section 2115 applies to foreign corporations that have more than half of their voting stock held by stockholders residing in California and more than half of their business deriving from California. If we were determined to be a quasi-California corporation, we would have to comply with California law with respect to, among other things, elections of 60 64 directors and distributions to stockholders. Under the California Corporations Code, a corporation is prohibited from paying dividends unless: - the retained earnings of the corporation immediately prior to the distribution equal or exceed the amount of the proposed distribution; or - (a) the assets of the corporation, exclusive of specific non-tangible assets, equal or exceed 1.25 times its liabilities, exclusive of specific liabilities; and (b) the current assets of the corporation at least equal its current liabilities. If the average pre-tax net earnings of the corporation before interest expense for the two years preceding the distribution were less than the average interest expense of the corporation for those years, however, the current assets of the corporation must exceed 1.25 times its current liabilities. Following this offering, we will be exempt from the application of Section 2115 if we remain listed on the Nasdaq National Market and our voting stock is held by more than 800 stockholders. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is ChaseMellon Shareholder Services. LISTING We have applied to list our common stock on the Nasdaq National Market under the trading symbol "TMTA." 61 65 SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of our common stock, including shares issued upon exercise of outstanding options and warrants, in the public market after this offering could cause the prevailing market price of our common stock to fall or impair our ability to raise equity capital in the future. Upon completion of this offering, we will have outstanding shares of our common stock, or shares if the underwriters' over-allotment option is exercised in full, assuming that there are no exercises of outstanding options or warrants after June 30, 2000. Of these shares, all of the shares sold in this offering will be freely tradable in the public market without restriction or further registration under the Securities Act, unless these shares are held by "affiliates," as that term is defined in Rule 144 under the Securities Act. For purposes of Rule 144, an "affiliate" of an issuer is a person that, directly or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with, the issuer. Shares purchased by an affiliate may not be resold except pursuant to an effective registration statement or an applicable exemption from registration, including an exemption under Rule 144 of the Securities Act. The remaining 56,526,243 shares of our common stock held by existing stockholders are "restricted securities," as that term is defined in Rule 144 of the Securities Act. These restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption from registration under Rule 144 or 701 under the Securities Act. These rules are summarized below. Subject to the lock-up agreements described below and the provisions of Rule 144 and Rule 701, additional shares will be available in the public market as follows:
NUMBER OF SHARES DATE ---------------- ---- No shares............ On the date of this prospectus shares....... 180 days after the date of this prospectus shares....... At various times beginning more than 180 days after the date of this prospectus
In addition, based on options outstanding as of June 30, 2000, after this offering, 7,277,040 shares will be issuable under outstanding options and warrants, of which approximately will be exercisable 180 days after this offering. LOCK-UP AGREEMENTS The officers, directors and substantially all of our stockholders have agreed, subject to limited exceptions, not to sell, transfer or otherwise dispose of directly or indirectly, any of their shares of common stock or any securities convertible or exchangeable, of shares of common stock for a period of 180 days after the date of this offering without the prior written consent of Morgan Stanley & Co. Incorporated. Morgan Stanley & Co. Incorporated, however, may at its sole discretion, at any time without notice, release all or any portion of the shares subject to lock-up agreements. RULE 144 In general, under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year from the later of the date those shares of common stock were acquired from us or from an affiliate of ours would be entitled to sell, within any three-month period, a number of shares that is not more than the greater of: (1) 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering; or (2) the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks before a notice of the sale on Form 144 is filed. Sales under Rule 144 are also subject to manner of sale provisions, notice requirements and the availability of current public information about us. 62 66 RULE 144(K) In addition, under Rule 144(k), a person who is not one of our affiliates 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 from the later of the date these shares of common stock were acquired from us or from an affiliate of ours, including the holding period of any prior owner other than an affiliate, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted pursuant to the lock-up agreements, those shares may be sold immediately upon the completion of this offering. RULE 701 In general, under Rule 701 of the Securities Act as currently in effect, subject to specified exceptions, our employees, consultants or advisors who purchased shares from us in connection with a stock option plan can resell, unless otherwise restricted pursuant to the lock-up agreements, those shares 90 days after the date of this prospectus in reliance on Rule 144, but without complying with some of the restrictions, including the holding period, contained in Rule 144. REGISTRATIONS After this offering, we intend to file a registration statement on Form S-8 under the Securities Act covering 10,263,824 shares of our common stock subject to options outstanding under our 1995 Equity Incentive Plan, 1997 Equity Incentive Plan or non-plan grants, shares reserved for issuance under our 2000 Equity Incentive Plan and 2000 Employee Stock Purchase Plan and 3,761,040 shares issued upon exercise of options by employees. This registration statement is expected to be filed as soon as practicable after this offering. However, none of the shares registered will be eligible for resale until expiration of the 180-day lock-up restriction to which they are subject. In addition, the holders of 36,587,171 shares of common stock issuable upon conversion of the preferred stock and the holders of 1,210,392 shares of common stock issuable upon exercise of warrants and the conversion of a promissory note are entitled pursuant to contractual provisions providing for registration rights to require us to register our securities owned by them for public sale. 63 67 UNDERWRITERS Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. Incorporated, Deutsche Bank Securities Inc., Salomon Smith Barney Inc., Banc of America Securities LLC and SG Cowen Securities Corporation are acting as representatives, have severally agreed to purchase, and we have agreed to sell to them, severally, the number of shares indicated below:
NUMBER OF NAME SHARES ---- --------- Morgan Stanley & Co. Incorporated........................... Deutsche Bank Securities Inc. .............................. Salomon Smith Barney Inc. .................................. Banc of America Securities LLC.............................. SG Cowen Securities Corporation............................. -------- Total..................................................... ========
The underwriters are offering the shares of common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock offered by this prospectus if any such shares are taken. However, the underwriters are not required to take or pay for the shares covered by the underwriters' over-allotment option described below. The underwriters initially propose to offer part of the shares of common stock directly to the public at the initial public offering price listed on the cover page of this prospectus and part to certain dealers at a price that represents a concession not in excess of $ a share under the initial public offering price. Any underwriter may allow, and such dealers may reallow, a concession not in excess of $ a share to other underwriters or to certain dealers. After the initial offering of the shares of common stock, the offering price and other selling terms may from time to time be varied by the representatives of the underwriters. We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of additional shares of common stock at the public offering price listed on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase about the same percentage of the additional shares of common stock as the number listed next to the underwriter's name in the preceding table bears to the total number of shares of common stock listed next to the names of all underwriters in the preceding table. If the underwriters' option is exercised in full, the total price to the public would be $ , the total underwriters' discounts and commissions would be $ and the total proceeds to us would be $ . The underwriters have informed us that they do not intend sales to discretionary accounts to exceed five percent of the total number of shares of common stock offered by them. We have filed an application for our common stock to be listed, subject to official notice of issuance, on the Nasdaq National Market under the symbol "TMTA." We and our directors, executive officers and substantially all of our stockholders and holders of rights to acquire our common stock have agreed that, without the prior written consent of Morgan Stanley & Co. 64 68 Incorporated on behalf of the underwriters, we and they will not, during the period ending 180 days after the date of this prospectus: - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for common stock; or - enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of common stock, whether any transaction described above is to be settled by delivery of common stock or such other securities, in cash or otherwise. The restrictions described in this paragraph do not apply to: - the sale of shares to the underwriters; - transactions by any person other than us relating to shares of common stock or other securities acquired in open market transactions after the completion of the offering of the shares; - the transfer of shares of common stock or any security convertible into common stock by gift, if no filing under Section 16 of the Exchange Act is required; and - the distribution of shares of common stock or any security convertible into common stock to limited partners, members or stockholders, if no filing under Section 16 of the Exchange Act is required. In order to facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in the common stock for their own account. In addition, to cover over-allotments or to stabilize the price of the common stock, the underwriters may bid for, and purchase, shares of common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing the common stock in the offering if the syndicate repurchases previously distributed shares of common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time. We and the underwriters have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act. DIRECTED SHARE PROGRAM PROSPECTUS DISCLOSURE At our request, the underwriters have reserved for sale, at the initial offering price, up to approximately shares of common stock offered hereby for directors, officers, employees, business associates and other persons related to us. There can be no assurance that any of the reserved shares will be purchased. The number of shares of common stock available for sale to the general public will be reduced to the extent these parties purchase the reserved shares. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. Certain entities and individuals affiliated with Morgan Stanley & Co. Incorporated, Deutsche Bank Securities Inc. and SG Cowen Securities Corporation own 266,666, 1,425,764 and 64,566 shares of preferred stock, respectively, which were purchased in private placements on the same terms and conditions as the other investors in each respective private placement, including the price per share. 65 69 PRICING OF THE OFFERING Prior to this offering, there has been no public market for the shares of common stock. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters. Among the factors to be considered in determining the initial public offering price will be: - our future prospects and our industry in general; - sales, earnings and certain other financial and operating information in recent periods; and - the price-earnings ratios, price-sales ratios and market prices of securities and financial and operating information of companies engaged in activities similar to ours. The estimated initial public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors. LEGAL MATTERS Fenwick & West LLP, Palo Alto, California, will pass upon the validity of the common stock that we are selling in this offering. Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, will pass upon legal matters for the underwriters. An investment partnership affiliated with Fenwick & West LLP holds a total of 50,882 shares of our common stock. EXPERTS Our consolidated financial statements as of December 31, 1998 and 1999, and for each of the three years in the period ended December 31, 1999, 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 on the authority of such firm as experts in accounting and auditing. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1, including exhibits and a schedule, under the Securities Act with respect to the common stock to be sold in this offering. This prospectus, which constitutes a part of the registration statement, does not contain all of the information in the registration statement or the exhibits and schedule. Statements made in this prospectus regarding the contents of any contract, agreement or other document are only summaries. With respect to each contract, agreement or other document filed as an exhibit to the registration statement, we refer you to the exhibit for a more complete description of the matter involved. You may read and copy all or any portion of the registration statement or any reports, statements or other information in the files at the following public reference facilities of the Commission: Room 1024, Judiciary Plaza Seven World Trade Center 500 West Madison Street 450 Fifth Street, N.W Suite 1300 Suite 1400 Washington, D.C., 20549 New York, New York 10048 Chicago, Illinois 60661
You can request copies of these documents upon payment of a duplicating fee by writing to the Commission. You may call the Commission at 1-800-SEC-0330 for further information on the operation of its public reference rooms. Our filings, including the registration statement, will also be available to you on the website maintained by the Commission at http://www.sec.gov. We intend to furnish our stockholders with annual reports containing consolidated financial statements audited by our independent auditors, and make available to our stockholders quarterly reports for the first three quarters of each year containing unaudited interim consolidated financial statements. 66 70 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors........... F-2 Consolidated Balance Sheets................................. F-3 Consolidated Statements of Operations....................... F-4 Consolidated Statements of Stockholders' Equity (Deficit)... F-5 Consolidated Statements of Cash Flows....................... F-7 Notes to Consolidated Financial Statements.................. F-8
F-1 71 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Transmeta Corporation We have audited the accompanying consolidated balance sheets of Transmeta Corporation (a development stage company) as of December 31, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transmeta Corporation at December 31, 1998 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles in the United States. Palo Alto, California February 17, 2000 except for Note 11 as to which the date is , 2000. - -------------------------------------------------------------------------------- The foregoing report is in the form that will be signed upon the reincorporation of Company as described in Note 11 to the consolidated financial statements. /s/ ERNST & YOUNG LLP Palo Alto, California August 17, 2000. F-2 72 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
PRO FORMA LIABILITIES AND STOCKHOLDERS' EQUITY AT JUNE 30, DECEMBER 31, JUNE 30, 2000 ------------------- ----------- -------------------- 1998 1999 2000 -------- -------- ----------- (UNAUDITED) (UNAUDITED) ASSETS Current assets: Cash and cash equivalents............................... $27,809 $46,645 $ 112,353 Restricted cash......................................... 1,990 -- -- Short-term investments.................................. -- 19,799 3,015 Accounts receivable..................................... 114 -- 243 Inventories............................................. -- -- 4,047 Prepaid expenses and other current assets............... 663 1,808 2,650 -------- -------- --------- Total current assets................................ 30,576 68,252 122,308 Property and equipment, net............................... 12,489 8,537 7,072 Deferred charges under license agreements................. -- 18,927 22,545 Loans to founders......................................... -- -- 5,250 Other assets.............................................. 432 511 795 -------- -------- --------- Total assets........................................ $43,497 $96,227 $ 157,970 -------- -------- --------- -------- -------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable........................................ $ 802 $ 853 $ 4,873 Accrued compensation and related compensation liabilities........................................... 850 1,113 1,830 Other accrued liabilities............................... 2,154 1,880 3,603 Borrowing under line of credit agreement................ 1,575 -- -- Current portion of long-term debt and capital lease obligations........................................... 3,286 5,494 5,937 -------- -------- --------- Total current liabilities........................... 8,667 9,340 16,243 Long-term debt and capital lease obligations.............. 10,356 7,256 5,303 Deposits received under subleasing agreements............. 99 231 138 Payable to a development partner under license agreement............................................... 343 19,533 20,866 $ 20,455 Commitments and contingencies Stockholders' equity: Convertible preferred stock, $0.00001 par value at amounts paid in; 13,427,374 shares authorized at December 31, 1998, 21,119,835 shares authorized at December 31, 1999, and 28,159,835 shares authorized at June 30, 2000; 13,427,335, 21,119,835 and 28,159,835 shares issued and outstanding at December 31, 1998 and 1999, and at June 30, 2000, respectively; aggregate liquidation preference of $58,224,603, $135,149,603, and $219,629,603 at December 31, 1998 and 1999, and June 30, 2000, respectively, (none pro forma)......... 58,149 134,980 222,922 -- Common stock, $0.00001 par value at amounts paid in; 80,000,000 shares authorized; 14,941,740, 17,089,952 and 19,339,072 shares issued and outstanding at December 31, 1998 and 1999, and at June 30, 2000, respectively (80,000,000 shares authorized and 56,526,243 shares outstanding pro forma).............. 1,761 3,967 37,724 261,057 Notes receivable from stockholders...................... (961) (3,071) (11,019) (11,019) Deferred stock compensation............................. -- -- (14,808) (14,808) Accumulated other comprehensive loss.................... -- (3) -- -- Deficit accumulated during development stage............ (34,917) (76,006) (119,399) (119,399) -------- -------- --------- --------- Total stockholders' equity.......................... 24,032 59,867 115,420 $ 115,831 -------- -------- --------- ========= Total liabilities and stockholders' equity.......... $43,497 $96,227 $ 157,970 ======== ======== =========
(See accompanying notes) F-3 73 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
PERIOD FROM MARCH 3, 1995 (DATE OF INCORPORATION) THROUGH JUNE 30, YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, 2000 ------------------------------ -------------------------- -------------- 1997 1998 1999 1999 2000 -------- -------- -------- ----------- ----------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Revenue: Product............................. $ -- $ 326 $ 76 $ 74 $ 358 $ 1,010 License............................. 1,400 28,000 5,000 5,000 -- 34,400 -------- -------- -------- -------- -------- --------- Total revenue............... 1,400 28,326 5,076 5,074 358 35,410 Cost of revenue....................... -- 71 18 16 223 312 -------- -------- -------- -------- -------- --------- Gross profit.......................... 1,400 28,255 5,058 5,058 135 35,098 -------- -------- -------- -------- -------- --------- Operating expenses: Research and development(1)......... 12,828 23,467 33,122 16,143 26,549 102,901 Selling, general and administrative(2)................ 4,584 12,616 12,811 5,805 11,447 43,458 Amortization of deferred charge under license agreements......... -- -- 218 -- 4,461 4,679 Amortization of deferred stock compensation..................... -- -- -- -- 3,140 3,140 -------- -------- -------- -------- -------- --------- Total operating expenses.... 17,412 36,083 46,151 21,948 45,597 154,178 -------- -------- -------- -------- -------- --------- Operating loss........................ (16,012) (7,828) (41,093) (16,890) (45,462) (119,080) Interest and other income........... 96 892 2,456 507 2,945 6,625 Interest expense.................... (271) (1,154) (1,952) (1,001) (876) (4,284) -------- -------- -------- -------- -------- --------- Loss before income taxes.............. (16,187) (8,090) (40,589) (17,384) (43,393) (116,739) ======== ======== ======== ======== ======== ========= Provision for income taxes.......... -- 2,000 500 500 -- 2,500 -------- -------- -------- -------- -------- --------- Net loss.............................. $(16,187) $(10,090) $(41,089) $(17,884) $(43,393) $(119,239) ======== ======== ======== ======== ======== ========= Net loss per share -- basic and diluted............................. $ (1.57) $ (0.87) $ (3.02) $ (1.37) $ (2.81) ======== ======== ======== ======== ======== Weighted average shares outstanding -- basic and diluted................... 10,288 11,537 13,618 13,048 15,419 ======== ======== ======== ======== ======== Pro forma net loss per share -- basic and diluted (unaudited)............. $ (1.03) $ (0.88) ======== ======== Pro forma weighted average shares outstanding -- basic and diluted (unaudited)......................... 39,782 49,227 ======== ========
- ------------ (1) Excludes $507 in amortization of deferred stock compensation for the six months ended June 30, 2000 and for the period from March 3, 1995 (Date of Incorporation) through June 30, 2000. (2) Excludes $2,633 in amortization of deferred stock compensation for the six months ended June 30, 2000 and for the period from March 3, 1995 (Date of Incorporation) through June 30, 2000. (See accompanying notes) F-4 74 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
DEFICIT NOTES ACCUMULATED ACCUMULATED TOTAL CONVERTIBLE RECEIVABLE DEFERRED OTHER DURING THE STOCKHOLDERS' PREFERRED COMMON FROM STOCK COMPREHENSIVE DEVELOPMENT EQUITY STOCK STOCK STOCKHOLDERS COMPENSATION LOSS STAGE (DEFICIT) ----------- ------- ------------ ------------ ------------- ----------- ------------- Issuance of 4,000,000 shares of common stock to founders of the Company at $0.00075 per share for cash in March 1995........ $ -- $ 3 $ -- $ -- $ -- $ -- $ 3 Issuance of 6,000,000 shares of common stock to founders of the Company at $0.005 per share for cash in July 1995.............. -- 30 -- -- -- -- 30 Issuance of 1,515,151 shares of Series A convertible preferred stock in September 1995 to investors for cash at $1.65 per share, net of issuance costs............ 2,500 -- -- -- -- -- 2,500 Issuance of 3,345,454 shares of Series B convertible preferred stock at $1.65 per share and warrants to purchase 1,081,920 shares of Series C convertible preferred stock to investors for cash in a private placement in December 1995............. 5,521 -- -- -- -- -- 5,521 Net loss.................... -- -- -- -- -- (1,009) (1,009) -------- ------- -------- -------- -------- --------- -------- Balance at December 31, 1995........................ 8,021 33 -- -- -- (1,009) 7,045 Repurchase of 1,515,151 shares of Series A convertible preferred stock by the Company in November 1996............. (2,500) -- -- -- -- (160) (2,660) Net loss.................... -- -- -- -- -- (7,471) (7,471) -------- ------- -------- -------- -------- --------- -------- Balance at December 31, 1996........................ 5,521 33 -- -- -- (8,640) (3,086) Issuance of 1,028,866 shares of common stock to employees under option exercises at various dates in 1996................... -- 155 (124) -- -- -- 31 Issuance of 1,081,920 shares of Series C convertible preferred stock in January 1997 to investors for cash at $2.50 per share upon exercise of warrants...... 2,705 -- -- -- -- -- 2,705 Issuance of 3,999,962 shares of Series D convertible preferred stock in April 1997 to investors for cash at $5.00 per share........ 20,000 -- -- -- -- -- 20,000 Issuance of equity purchase right included in non- interest-bearing convertible notes in connection with development agreement..... -- 302 -- -- -- -- 302 Net loss.................... -- -- -- -- -- (16,187) (16,187) -------- ------- -------- -------- -------- --------- -------- Balance at December 31, 1997........................ 28,226 490 (124) -- -- (24,827) 3,765 Issuance of warrants to purchase 367,516 shares of common stock in connection with lease financing at various dates in 1997..... -- 78 -- -- -- -- 78 Issuance of 3,878,874 shares of common stock to employees under option exercises, net of repurchases at various dates in 1997............. -- 1,167 (837) -- -- -- 330 Issuance of 34,000 shares of common stock to employees under bonus plan at various dates............. -- 26 -- -- -- -- 26 Issuance of 4,999,999 shares of Series E convertible preferred stock in June 1998 to investors for cash at $6.00 per share, net of issuance costs............ 29,923 -- -- -- -- -- 29,923 Net loss.................... -- -- -- -- -- (10,090) (10,090) -------- ------- -------- -------- -------- --------- -------- Balance at December 31, 1998........................ $ 58,149 $ 1,761 $ (961) $ -- $ -- $ (34,917) $ 24,032
(See accompanying notes) F-5 75 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
DEFICIT NOTES ACCUMULATED ACCUMULATED TOTAL CONVERTIBLE RECEIVABLE DEFERRED OTHER DURING THE STOCKHOLDERS' PREFERRED COMMON FROM STOCK COMPREHENSIVE DEVELOPMENT EQUITY STOCK STOCK STOCKHOLDERS COMPENSATION LOSS STAGE (DEFICIT) ----------- ------- ------------ ------------ ------------- ----------- ------------- Issuance of 7,692,500 shares of Series F convertible preferred stock in July 1999 to investors for cash at $10.00 per share, net of issuance costs......... $ 76,831 $ -- $ -- $ -- $ -- $ -- $ 76,831 Issuance of 10,000 shares of common stock to consultants in connection with Series F financing in July 1999................. -- 35 -- -- -- -- 35 Issuance of 2,138,212 shares of common stock to employees under option exercises, net of repurchases at various dates in 1998............. -- 2,154 (2,110) -- -- -- 44 Issuance of warrants to purchase 34,000 shares of common stock in connection with consulting agreement in July 1999.............. -- 17 -- -- -- -- 17 Other comprehensive loss -- unrealized loss on available-for-sale investments, net.......... -- -- -- -- (3) -- (3) Net loss.................... -- -- -- -- -- (41,089) (41,089) -------- Comprehensive loss.......... -- -- -- -- -- -- (41,092) -------- ------- -------- -------- -------- --------- -------- Balance at December 31, 1999........................ 134,980 3,967 (3,071) -- (3) (76,006) 59,867 Issuance of 7,040,000 shares of Series G convertible preferred stock in April 2000 to investors for cash at $12.50 per share, net of issuance costs (unaudited)............... 87,942 -- -- -- -- -- 87,942 Issuance of 1,997,831 shares of common stock to employees under option exercises, net of repurchases at various dates (unaudited)......... -- 8,084 (7,948) -- -- -- 136 Stock compensation in connection with severance arrangement (unaudited)... -- 945 -- -- -- -- 945 Issuance of warrants to purchase 4,000 shares of common stock in connection with consulting agreement in January 2000 (unaudited)............... -- 30 -- -- -- -- 30 Issuance of common stock to a development partner in February 2000 (unaudited)............... -- 6,750 -- -- -- -- 6,750 Deferred stock compensation (unaudited)............... -- 17,948 -- (17,948) -- -- -- Amortization of deferred stock compensation (unaudited)............... -- -- -- 3,140 -- -- 3,140 Change in other comprehensive loss, net (unaudited)............... -- -- -- -- 3 -- 3 Net loss (unaudited)........ -- -- -- -- -- (43,393) (43,393) -------- Comprehensive loss (unaudited)............... -- -- -- -- -- -- (43,390) -------- ------- -------- -------- -------- --------- -------- Balance at June 30, 2000 (unaudited)................. $222,922 $37,724 $(11,019) $(14,808) $ -- $(119,399) $115,420 ======== ======= ======== ======== ======== ========= ========
(See accompanying notes) F-6 76 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PERIOD FROM MARCH 3, 1995 (DATE OF SIX MONTHS ENDED INCORPORATION) YEARS ENDED DECEMBER 31, JUNE 30, THROUGH ------------------------------ ------------------------- JUNE 30, 1997 1998 1999 1999 2000 2000 -------- -------- -------- ----------- ----------- -------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss............................................ $(16,187) $(10,090) $(41,089) $(17,884) $ (43,393) $(119,239) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred stock compensation....... -- -- -- -- 3,140 3,140 Depreciation and amortization..................... 493 3,809 5,275 2,482 2,867 12,546 Fair value of equity instruments issued for services........................................ -- 20 52 17 30 102 Stock compensation in connection with severance agreement....................................... -- -- -- -- 945 945 Amortization of deferred charges under license agreements...................................... -- -- 218 -- 4,461 4,679 Accretion of interest payable to a development partner......................................... -- 45 45 20 4 94 Changes in operating assets and liabilities: Accounts receivable............................. -- (114) 114 105 (243) (243) Inventories..................................... -- -- -- -- (4,047) (4,047) Prepaid expenses and other current assets....... (434) (121) (1,145) (977) (842) (2,650) Accounts payable and accrued liabilities........ 2,092 1,168 40 (1,001) 6,460 10,306 Deposits received under subleasing agreements... -- 99 132 -- (93) 138 -------- -------- -------- -------- --------- --------- Net cash used in operating activities............... (14,036) (5,184) (36,358) (17,238) (30,711) (94,229) -------- -------- -------- -------- --------- --------- Cash flows used in investing activities: Purchase of available-for-sale investments........ -- -- (57,312) -- (111,551) (170,853) Change in restricted cash......................... -- (1,990) -- 1,990 -- -- Proceeds from sale or maturity of available-for-sale investments.................. -- -- 39,500 -- 128,338 167,838 Purchase of property and equipment................ (2,486) (13,543) (1,323) (723) (1,402) (19,618) Loans to founders................................. -- -- -- -- (5,250) (5,250) Other assets...................................... (101) (332) (79) (80) (284) (796) -------- -------- -------- -------- --------- --------- Net cash provided by (used in) investing activities........................................ (2,587) (15,865) (19,214) 1,187 9,851 (28,679) -------- -------- -------- -------- --------- --------- Cash flows from financing activities: Net proceeds from sale of preferred stock......... 16,273 29,923 76,831 -- 87,942 218,990 Advance proceeds from sale of preferred stock..... -- -- -- 19,409 -- -- Common stock issued under stock option plans...... 30 356 44 5 136 600 Issuance of debt and capital lease obligations.... 110 13,564 2,773 1,932 658 17,773 Repayment of debt and capital lease obligations... (262) (327) (3,665) (1,704) (2,168) (6,474) Proceeds from bridge loan......................... -- -- -- -- -- 6,432 Redemption of convertible preferred stock......... -- -- -- -- -- (2,660) Borrowings under line of credit................... 1,575 -- (1,575) (1,575) -- -- Net proceeds from issuance of convertible promissory note................................. 600 -- -- -- -- 600 -------- -------- -------- -------- --------- --------- Net cash provided by financing activities........... 18,326 43,516 74,408 18,067 86,568 235,261 -------- -------- -------- -------- --------- --------- Change in cash and cash equivalents................. 1,703 22,467 18,836 2,016 65,708 112,353 Cash and cash equivalents at beginning of period.... 3,639 5,342 27,809 27,809 46,645 -- -------- -------- -------- -------- --------- --------- Cash and cash equivalents at end of period.......... $ 5,342 $ 27,809 $ 46,645 $ 29,825 $ 112,353 $ 112,353 ======== ======== ======== ======== ========= ========= Supplemental disclosure of cash paid during the period: Cash paid for interest............................ $ 174 $ 1,080 $ 1,846 $ 976 $ 816 $ 3,945 Cash paid for taxes............................... 1 2,105 500 500 1 2,608 Supplemental disclosure of noncash financing and investing activities: Issuance of warrants.............................. -- 78 17 17 30 125 Issuance of common stock to consultants in connection with Series F financing.............. -- -- 35 -- -- 35 Issuance of common stock to employees for notes receivable...................................... 124 837 2,109 1,974 7,948 11,019 Issuance of payable to development partner........ -- -- 18,927 -- -- 18,927 Conversion of bridge loan to Series D preferred stock........................................... 6,432 -- -- -- -- 6,432 Common stock issued in connection with license agreement....................................... -- -- -- -- 6,750 6,750
(See accompanying notes) F-7 77 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES THE COMPANY Transmeta Corporation ("Transmeta" or the "Company") develops and sells software-based microprocessors and develops additional hardware and software technologies that enable computer manufacturers to build computers that simultaneously offer long battery life, high performance and x86 compatibility. Transmeta was incorporated in California as Transmeta Corporation on March 3, 1995, and through June 30, 2000 was in the development stage, principally engaged in research and development, marketing, sales, raising capital, establishing sources of supplies, starting up production and building its management team. Through December 31, 1999, substantially all of Transmeta's revenue was derived from technology license agreements with development partners. In January 2000, the Company introduced its Crusoe family of microprocessors. Revenues for the six months ended June 30, 2000 were comprised of sales of product prototypes. FISCAL YEAR Transmeta changed its fiscal year-end during 1999 to end on the last Friday in December. For ease of presentation, the accompanying financial statements have been shown as ending on December 31 and calendar quarter ends for all annual and quarterly financial statement captions. Fiscal years 1997, 1998 and 1999 each consisted of 52 weeks and ended on December 31. Fiscal year 2000 will end on December 29. The first six months of fiscal 1999 ended on July 2, 1999, and the first six months of fiscal 2000 ended on June 30, 2000. UNAUDITED INTERIM FINANCIAL STATEMENTS The financial information at June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited but includes all adjustments (consisting of only normal recurring adjustments) that the Company considers necessary for a fair presentation of its financial position at such date and the operating results and cash flows for those interim periods. Results for the six months ended June 30, 2000 are not necessarily indicative of results that may be expected for the year ending December 31, 2000. USE OF ESTIMATES The preparation of the financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Significant estimates made in preparing the financial statements include estimates of potentially excess and obsolete inventory after considering forecasted demand and average selling prices and income tax valuation allowances. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the financial statements of Transmeta and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation. RISK FACTORS AND CONCENTRATIONS Transmeta is subject to various risks similar to other companies in a comparable stage of growth, including dependence on key individuals, competition from substitute products and larger companies, the need to obtain additional financing, and the continued successful development and marketing of its products. F-8 78 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED Financial instruments that subject the Company to credit risk consist primarily of cash and cash equivalents and notes receivable from certain founders and stockholders. Substantially all of the Company's cash and equivalents are invested in highly liquid money market funds and commercial securities with high-quality financial institutions in the United States. Short-term investments consist of U.S. government and commercial bonds and notes. Transmeta sells its products principally to original equipment manufacturers and their subcontract manufacturers. The Company performs ongoing credit evaluations of its customers, maintains an allowance for potential credit losses and does not generally require collateral. The Company currently relies exclusively on IBM to fabricate its wafers and provide assembly and test services. REVENUE RECOGNITION Transmeta recognizes revenue from product sales upon transfer of title, providing for expected product returns and warranty costs at that time. The Company defers revenue recognition on products sold to distributors until the distributor sells such products to its customers. Transmeta recognizes license revenue from technology license agreements when earned. Transmeta recognized $1.4 million, $28.0 million and $5.0 million of license revenue in 1997, 1998 and 1999, respectively, in connection with technology license agreements (see Note 2). No license revenue was recognized for the six months ended June 30, 2000 (unaudited). CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Highly liquid debt securities with insignificant interest rate risk and original maturities of three months or less are classified as cash equivalents. Debt securities with maturities greater than three months and remaining maturities less than one year are classified as short-term investments. Transmeta's policy is to minimize principal risk by investing in high credit-quality financial instruments and earning returns based on current interest rates. All of Transmeta's marketable investments are classified as available-for-sale as of the balance sheet date and, accordingly, are reported at fair value with unrealized gains and losses recorded in stockholders' equity. Fair values of cash and cash equivalents approximate cost due to the short period of time to maturity. The cost of securities sold is based on the specific identification method. Realized gains or losses and declines in value, if any, judged to be other than temporary on available-for-sale securities are reported in interest income or expense. F-9 79 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. The Company did not have inventories as of December 31, 1998 and 1999. The components of inventories as of June 30, 2000 were as follows:
JUNE 30, 2000 -------------- (IN THOUSANDS) (UNAUDITED) Work in progress....................................... $1,799 Finished goods......................................... 2,248 ------ $4,047 ======
PROPERTY AND EQUIPMENT Property and equipment are carried at cost. Depreciation and amortization have been provided on the straight-line method over the related asset's estimated useful lives ranging from three to five years. Leasehold improvements and assets recorded under capital leases are amortized on a straight-line basis over the lesser of the related asset's estimated useful life or the remaining lease term. IMPAIRMENT OF LONG-LIVED ASSETS Transmeta evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. RESEARCH AND DEVELOPMENT Costs to develop Transmeta's products are expensed as incurred in accordance with the Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 2, "Accounting for Research and Development Costs," which establishes accounting and reporting standards for research and development costs. Transmeta accounts for software development costs in accordance with the FASB's SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed", which requires capitalization of certain software development costs once technological feasibility for the software component is established and research and development activities for the hardware component are completed. Based on Transmeta's development process the time period between the establishment of technological feasibility and completion of the hardware component and the release of the product is short and capitalization of internal development costs has not been material to date. SOFTWARE DEVELOPMENT COST Costs of software developed internally by us for use in our operations are accounted for under the American Institute of Certified Public Accountant's Statement of Position ("SOP") 98-1, "Internal Use Software," which the Company adopted on January 1, 1999. Under SOP 98-1, the Company expenses costs of research, including pre-development efforts prior to establishing technological feasibility, and costs incurred F-10 80 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED for training and maintenance. Software development costs are capitalized when technological feasibility has been established, it is provable that the project will be completed and the software will be used as intended. Costs incurred during the application development stage were insignificant and accordingly no costs related to internal use software have been capitalized through June 30, 2000. INCOME TAXES Transmeta accounts for income taxes in accordance with the FASB's SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"), which requires the use of the liability method in accounting for income taxes. Under SFAS 109, deferred tax assets and liabilities are measured based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates and laws that will be in effect when differences are expected to reverse. FAIR VALUES OF FINANCIAL INSTRUMENTS The fair values of Transmeta's cash equivalents, short-term investments, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities approximate their carrying values due to the short-term nature of those instruments. The fair values of short-term and long-term capital lease obligations are estimated based on current interest rates available to Transmeta for debt instruments with similar terms, degrees of risk and remaining maturities. The carrying values of these obligations approximate their respective fair values. The fair values of long-term assets are valued on the basis of present value calculations and are amortized over the useful life of these assets. WARRANTY Transmeta typically provides a warranty that includes factory repair services as needed for replacement parts on its products for a period of one year from shipment. Transmeta records a provision for estimated warranty costs upon shipment of its products. Warranty costs have been within management's expectations to date and have not been material. DEFERRED CHARGES UNDER LICENSE AGREEMENTS AND RELATED PAYMENT OBLIGATIONS Transmeta has capitalized the cost of intangibles associated with license agreements with third-party developers (see Note 2). These intangibles are amortized over their estimated useful lives. Payment obligations under the license agreement with IBM are accreted using the effective interest method over the payment period. SEGMENT INFORMATION Transmeta has adopted the FASB's SFAS No. 131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"). Transmeta operates solely in one segment, the development, marketing and sale of platform solutions for the mobile computing market. The Company also currently operates in one geographic region and is evaluated by management on a single segment basis. Therefore, there was no impact on Transmeta's consolidated financial statements from the adoption of SFAS 131. F-11 81 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED ADVERTISING EXPENSES All advertising costs are expensed as incurred. To date, advertising costs have not been material. STOCK-BASED COMPENSATION Transmeta accounts for its stock options and equity awards in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and has elected to follow the "disclosure only" alternative prescribed by SFAS 123. Expense associated with stock-based compensation is amortized on an accelerated basis over the vesting period of the individual award consistent with the method described in FASB Interpretation No. 28. Accordingly, approximately 59% of the unearned deferred compensation is amortized in the first year, 25% in the second year, 12% in the third year, and 4% in the fourth year following the date of grant. Pursuant to the FASB's SFAS 123 ("SFAS 123"), "Accounting for Stock-Based Compensation", Transmeta discloses the pro-forma effect of using the fair value method of accounting for its stock-based compensation arrangements. Options and warrants granted to consultants and vendors are accounted for at fair value determined by using the Black-Scholes method in accordance with Emerging Issues Task Force consensus No. 96-18. The assumptions used to value stock-based awards to consultants and vendors are similar to those used for employees except that a volatility of 0.80 was used (see Note 8 for pro forma disclosures of stock-based compensation pursuant to SFAS 123.) NET LOSS PER SHARE Basic and diluted net loss per share is presented in conformity with the FASB's SFAS No. 128, "Earnings Per Share" ("SFAS 128"), for all periods presented. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 98, common stock and convertible preferred stock issued or granted for nominal consideration prior to the anticipated effective date of the Company's initial public offering must be included in the calculation of basic and diluted net loss per share as if they had been outstanding for all periods presented (see Note 8). In accordance with SFAS 128, basic and diluted net loss per share have been computed using the weighted-average number of shares of common stock outstanding during each period, less shares subject to repurchase. Pro forma basic and diluted net loss per share, as presented in the statements of operations, has been computed as described above and also gives effect, under Securities and Exchange Commission guidance, to the conversion of the convertible preferred stock (using the if-converted method) from the original date of issuance. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended, establishes methods for recording derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities. The Company is required to adopt SFAS 133 effective January 1, 2001. Because the Company currently does not hold any derivative instruments and does not engage in hedging activities, the Company does not currently believe that the adoption of SFAS 133, as amended, will have a significant impact on its financial position or results of operations. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of the Staff's views in applying generally accepted F-12 82 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED accounting principles to revenue recognition in financial statements. Transmeta believes that its current revenue recognition principles comply with SAB 101. In March 2000, the Emerging Issues Task Force ("EITF") of the FASB issued EITF Issue 00-2, "Accounting for Website Development Costs." The issue addresses how an entity should account for costs incurred to develop a website. The total capitalizable costs associated with the development of Transmeta's website have been immaterial to date and have not been capitalized. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation, Interpretation of APB Opinion No. 25." Interpretation No. 44 clarifies the application of Accounting Principle Board Opinion No. 25 to certain issues including: (i) the definition of employee for purposes of applying APB Opinion No. 25, (ii) the criteria for determining whether a plan qualifies as a noncompensatory plan, (iii) the accounting consequences of various modifications to the terms of a previously fixed stock option or award, and (iv) the accounting for an exchange of stock compensation awards in business combinations. In general, Interpretation No. 44 is effective July 1, 2000. The Company does not expect the adoption of Interpretation No. 44 to have a material effect on our consolidated financial position or results of operations. RECLASSIFICATIONS Certain prior-year amounts have been reclassified to conform to the current year's presentation. 2. TECHNOLOGY LICENSE AGREEMENTS In December 1997, Transmeta entered into a technology license agreement with IBM Corporation ("IBM"), which was amended in 1999 as described below. The term of the original agreement was for five years. Under the original agreement, Transmeta granted to IBM a worldwide non-exclusive license to certain technology developed and under development by Transmeta. In return, Transmeta received $2.0 million in cash and issued IBM a non-interest-bearing convertible promissory note in the face amount of $600,000. The note is contingently convertible into common stock of Transmeta upon completion of an initial public offering of common stock or upon certain defined acquisition or merger transactions involving the Company. In 1997, Transmeta recognized $1.4 million of revenue and the net present value of the note was recorded as a payable to development partner on the balance sheet and accretes interest to its maturity on December 31, 2003. The difference between the face amount and the present value of the note was credited to additional paid-in capital. The agreement also entitled Transmeta to earn royalties on sales by IBM of products incorporating the licensed technology. During 1998, IBM made additional license payments of $8.0 million upon the Company's meeting certain milestones. In addition, IBM agreed to perform certain engineering and product services without charge and to provide credits against future sales to Transmeta in connection with the agreement. In November 1999, the parties amended the technology license agreement. IBM relinquished certain of the worldwide license rights previously obtained in exchange for commitments by Transmeta. These commitments included paying a total of $33.0 million to IBM during the period from December 15, 2001 through December 15, 2004 and paying a total of $4.3 million for engineering and production services ($1.4 million in 1999 and $2.9 million in 2000). Transmeta's payments to IBM for expenses related to the engineering and production services are expensed as incurred. In addition, the convertibility of the convertible promissory note described above was fixed at 600,000 shares of Transmeta's common stock upon completion of an initial public offering. F-13 83 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED The net present value of the $33.0 million commitment (approximately $18.9 million) has been recorded on the balance sheet as a deferred charge under license agreement with a corresponding liability. This liability is being accreted to its future value using the effective interest method at a rate of approximately 15% per annum and is being recorded as part of deferred charges under license agreements. The deferred charge under license agreement is being amortized on a straight-line basis over the remaining initial license term. Management assesses the realizability of the intangible asset at each balance sheet date. In February 1998, Transmeta also entered into a technology license agreement with Toshiba Corporation ("Toshiba"). Under this agreement, Transmeta granted to Toshiba a worldwide non-exclusive license to certain technology developed and under development by Transmeta. In return, Transmeta received nonrefundable cash payments totaling $20.0 million and $5.0 million upon the attainment of certain milestones in 1998 and 1999, respectively. The agreement also entitles Transmeta to earn royalties on sales by Toshiba of products incorporating the licensed technology. This agreement was amended in February 2000, (see Note 12). 3. AVAILABLE-FOR-SALE INVESTMENTS All cash equivalents and short-term investments as of December 31, 1998, 1999 and June 30, 2000 (unaudited) were classified as available-for-sale securities and consisted of the following:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- --------- (IN THOUSANDS) As of December 31, 1999: Money market funds................................... $ 21,994 $ -- $ -- $ 21,994 Federal agency discount notes........................ 29,032 5 3 29,034 Bank obligations..................................... 14,630 2 7 14,625 -------- -------- -------- --------- Total available-for-sale securities.................. $ 65,656 $ 7 $ 10 $ 65,653 ======== ======== ======== Less amounts classified as cash equivalents.......... (45,854) --------- Total short-term investments......................... $ 19,799 ========= As of June 30, 2000: (unaudited) Money market funds (unaudited)....................... $ 41,804 $ -- $ -- $ 41,804 Federal agency discount notes (unaudited)............ 3,015 -- -- 3,015 Commercial paper (unaudited)......................... 69,863 -- 69,863 -------- -------- -------- --------- Total available-for-sale securities (unaudited)...... $114,682 $ -- $ -- $ 114,682 ======== ======== ======== Less amounts classified as cash equivalents (unaudited)........................................ (111,667) --------- Total short term-investments (unaudited)............. $ 3,015 =========
The Company did not have any short-term investments as of December 31, 1998. Cash equivalents of $27,372,000 were stated at cost which approximated fair value. F-14 84 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED Available-for-sale securities with a fair value at the date of sale of $39.5 million and $128.3 million were sold during the year ended December 31, 1999 and the six months ended June 30, 2000 (unaudited), respectively. No securities were sold in 1998. All investments in debt securities mature in less than one year. 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
DECEMBER 31, ------------------ JUNE 30, 1998 1999 2000 ------- ------- ----------- (IN THOUSANDS) (UNAUDITED) Furniture and fixtures...................................... $ 1,344 $ 1,368 $ 1,422 Computer equipment.......................................... 8,096 8,438 9,226 Computer software........................................... 6,574 7,236 7,645 Leasehold improvements...................................... 745 1,040 1,191 ------- ------- -------- 16,759 18,082 19,484 Less accumulated depreciation and amortization.............. (4,270) (9,545) (12,412) ------- ------- -------- Total....................................................... $12,489 $ 8,537 $ 7,072 ======= ======= ========
5. LEASES AND COMMITMENTS OPERATING LEASES Transmeta leases its facilities and certain equipment under noncancelable operating leases expiring through 2008. Gross operating lease and rental expenses were $1,981,000, $4,283,000, $5,335,000 and $2,785,000 during the years ended December 31, 1997, 1998 and 1999 and the six months ended June 30, 2000 (unaudited), respectively. During 1998, 1999 and 2000, Transmeta subleased a portion of its facilities. The subleases extend through 2002. Sublease income was $105,000, $1,065,000 and $572,000 for the years ended December 31, 1998 and 1999 and the six months ended June 30, 2000 (unaudited), respectively. Future minimum rentals to be received under the facilities subleases were $1,962,000 at June 30, 2000 (unaudited). CAPITAL LEASES Transmeta leases certain equipment and other assets under noncancelable lease agreements that are accounted for as capital leases. The net book value of equipment recorded under capital lease arrangements, included in property and equipment was $6,202,000, $3,926,000, and $3,012,000 as of December 31, 1998 and 1999 and June 30, 2000 F-15 85 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED (unaudited), respectively. At December 31, 1999, future minimum payments for the obligations described above were as follows:
CAPITAL OPERATING LEASES LEASES ------- --------- (IN THOUSANDS) Years ending December 31, 2000..................................................... $3,395 $ 5,457 2001..................................................... 3,624 4,054 2002..................................................... 1,397 3,661 2003..................................................... 13 4,135 2004..................................................... -- 4,241 Thereafter............................................... -- 16,018 ------ ------- Total minimum lease payments................... 8,429 $37,566 ======= Less amount representing interest........................ (1,343) ------ Present value of capital lease obligations............... 7,086 Less current portion..................................... (2,553) ------ Noncurrent portion....................................... $4,533 ======
COMMITMENTS As of June 30, 2000 (unaudited), the Company had non-cancelable outstanding purchase commitments of approximately $18.4 million in connection with the manufacturing services performed by IBM. 6. DEBT Transmeta opened a $3.0 million revolving line of credit with a bank during July 1998. The line of credit bore interest at the bank's reference rate plus 2% (7.0% at December 31, 1998), and was payable monthly and expired in July 2001. Borrowings against this line at December 31, 1998 were $1,575,000. The line was secured by $1,990,000 of cash held as collateral at the bank. Borrowings under this line of credit were repaid and the line was closed in January 1999. In 1998 and 1999, Transmeta issued promissory notes to financing companies in the principal amounts of $3,473,000 and $1,368,000, respectively, which mature through January 2003. These notes bear interest at 10.5% and are secured by certain tangible assets with net book value of approximately $1,872,000 as of December 31, 1999. No notes were issued during the six months ended June 30, 2000 (unaudited). Transmeta signed a note during 1998 with a supplier in the principal amount of $1,116,000 in connection with an equipment purchase. The note is due on the earlier of December 30, 2000 or the closing of an initial public offering. Interest will begin to accrue on any unpaid principal balance at the rate of 10% per annum, starting on the date of the initial public offering. The note is secured by the equipment financed. In connection with the notes issued to the financing companies and the supplier, Transmeta issued to the note holders warrants to purchase 367,516 shares of common stock. These warrants were assigned an aggregate value of $78,000 on the basis of Black-Scholes valuation models using the contractual lives ranging from six to ten years and a volatility of 0.80. The value of the warrants was recorded as a discount against the respective borrowing and is being amortized over the respective terms of the notes. The remaining discount on the notes of $20,000 at June 30, 2000 (unaudited) is being accreted as additional financing (interest) expense F-16 86 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED over the term of each respective note. The amount of discount accreted and recorded as interest expense for the years ended December 31, 1998 and 1999 and the six months ended June 30, 2000 (unaudited) was $19,000, $26,000 and $13,000, respectively. At December 31, 1999, aggregate future minimum principal payments on the obligations described above were as follows:
NOTES PAYABLE -------------- (IN THOUSANDS) Years ending December 31, 2000........................................................ $2,941 2001........................................................ 1,775 2002........................................................ 950 2003........................................................ 31 ------ Total minimum principal payments....................... 5,697 Less current portion........................................ (2,941) Less unamortized discounts.................................. (33) ------ Noncurrent portion.......................................... $2,723 ======
Additionally, as discussed in Note 2, Transmeta issued a convertible promissory note in the face amount of $600,000 in December 1997. The present value of the note at June 30, 2000 (unaudited) was $411,000 and is recorded on the balance sheet as a payable to development partner. Interest will accrete to its maturity on December 31, 2003, or until the note is converted subsequent to completion of an initial public offering or upon certain defined acquisition or merger transactions. 7. STOCKHOLDERS' EQUITY NONCUMULATIVE CONVERTIBLE PREFERRED STOCK Transmeta has sold shares of several series of its convertible preferred stock since its inception, as follows:
NUMBER OF SHARES PRICE DIVIDEND LIQUIDATION ISSUED AND PER NET PER PREFERENCES SERIES OUTSTANDING SHARE PROCEEDS SHARE PER SHARE ------ ----------- ------ ----------- -------- ----------- A......................... -- $ 1.65 $ 2,500,000 N/A N/A B......................... 3,345,454 $ 1.65 $ 5,521,082 $0.132 $ 1.65 C......................... 1,081,920 $ 2.50 $ 2,704,800 $0.20 $ 2.50 D......................... 3,999,962 $ 5.00 $19,999,810 $0.40 $ 5.00 E......................... 4,999,999 $ 6.00 $29,923,374 $0.48 $ 6.00 F......................... 7,692,500 $10.00 $76,831,141 $0.80 $10.00
Transmeta's original financing was from the sale of 1,515,151 shares of Series A preferred stock for $2.5 million in July 1995. In November 1996, Transmeta repurchased all of the outstanding shares of Series A preferred stock from the Series A investors for $2.7 million. The difference of $160,000 between the repurchase price and the original amount paid by these investors has been charged to the accumulated deficit. In connection with the sale of Series B preferred stock during 1995, Transmeta sold warrants to purchase 1,081,920 shares of Series C preferred stock with an exercise price of $2.50 per share at a purchase price of $0.001 per warrant. These warrants were exercised in 1997, resulting in proceeds to the Company of $2,705,000. F-17 87 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED Each share of Series B, C and D preferred stock is convertible at the holder's option into two shares of common stock, and this conversion ratio is subject to adjustment under antidilution provisions as stated in the Company's Certificate of Incorporation. Each share of Series E and F preferred stock is convertible at the holders' option into one share of common stock, and this conversion ratio is subject to adjustment under antidilution provisions as stated in the Certificate of Incorporation. Each share of preferred stock will automatically convert into shares of common stock at the then-effective conversion price immediately upon the closing of the sale of the Company's common stock in a firm commitment, underwritten public offering registered under the Securities Act of 1933 at an offering price to the public equal to or exceeding $2.50 per share of common stock for Series B and C preferred stock, equal to or exceeding $7.50 per share of common stock for Series D and E preferred stock, equal to or exceeding $10.00 per share of common stock for Series F preferred stock and resulting in aggregate gross proceeds to the Company of at least $15 million. The holder of each share of Series B, C, D, E and F preferred stock is entitled to receive, when and as declared by the board of directors, noncumulative dividends. Through June 30, 2000 (unaudited), no dividends had been declared. The Series B, C, D, E and F preferred stockholders are entitled to liquidation preferences, adjusted for any combinations, consolidations or stock splits with respect to their shares and, in addition, an amount equal to all declared but unpaid dividends for each share of Series B, C, D, E and F preferred stock then held. After payment of these liquidation preferences, any remaining assets would be distributed to the holders of common stock and Series B, C, D, E and F preferred stock on a pro rata basis as if the Series B, C, D, E and F preferred stock were converted into common stock at the then applicable conversion price for each respective series of preferred stock until the holders of the preferred stock received an aggregate amount equal to $3.50, $5.303, $10.606, $12.7272, and $21.2121, respectively, per share (plus an amount equal to all declared but unpaid dividends on the preferred stock). The holders of preferred shares are entitled to the number of votes that they would have upon conversion of their preferred shares into common shares. In April 2000, Transmeta sold Series G preferred stock, (see Note 12). F-18 88 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED COMMON STOCK WARRANTS Transmeta has periodically granted warrants in connection with certain lease and bank agreements. The Company had the following warrants outstanding to purchase common stock at December 31, 1999:
EXERCISE NUMBER PRICE ISSUANCE DATE OF SHARES PER SHARE EXPIRATION DATE ------------- --------- --------- --------------- October 1995........................... 138,642 $0.825 October 2005 March 1996............................. 164,182 $0.825 March 2006 May 1996............................... 48,484 $0.825 December 2001 August 1996............................ 40,000 $ 1.25 August 2001 September 1996......................... 19,392 $0.825 December 2001 April 1997............................. 80,000 $ 2.50 March 2003 April 1997............................. 72,000 $ 2.50 April 2007 August 1997............................ 80,000 $ 2.50 August 2007 December 1997.......................... 62,516 $ 2.50 December 2007 April 1998............................. 120,000 $ 2.50 April 2008 April 1998............................. 160,000 $ 2.50 March 2004 May 1998............................... 25,000 $ 6.00 May 2005 March 1999............................. 34,000 $ 6.00 March 2004
All warrants have been valued using the Black-Scholes valuation model based on the assumptions used for stock based awards to employees (see Note 8) except that a volatility of 0.80 was used. Assigned value of $78,000 and $17,000 associated with these warrant issuances were recorded as additional paid-in capital in 1998 and 1999, respectively and is being amortized as interest expense over the term of the lease and bank agreements. Costs associated with earlier periods were immaterial. In connection with consulting services the Company issued warrants to purchase 4,000 and 25,000 shares in January and February 2000, respectively (unaudited). The warrants expire in January and February 2005, respectively, and have exercise prices of $10.00 per share. The aggregate assigned value of $30,000 associated with the warrants issued in January 2000 was computed using the Black-Scholes valuation model and was amortized over the period the services were rendered. The fair value of the warrants issued in February 2000 to purchase 25,000 shares will be computed as the warrants vest upon achieving certain performance milestones and accordingly no value was assigned upon issuance of these warrants. COMMON STOCK At the inception of the Company, certain founders, employees, directors and consultants purchased ten million shares of the Company's common stock. Transmeta has not paid dividends with respect to the common stock. The holders of common stock are entitled to liquidation preferences on a pro rata basis with the preferred stockholders after the preferred stockholders have received their preferential amounts. F-19 89 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED Transmeta's Certificate of Incorporation provides that the Company must at all times reserve a number of shares of its common stock that would be sufficient to effect the conversion of all outstanding shares of preferred stock as well as exercises of the warrants and employee and consultant options granted under the stock option plans. Shares reserved for future issuance and are as follows:
DECEMBER 31, JUNE 30, 1999 2000 ------------ ----------- (UNAUDITED) Preferred stock conversion......................... 29,547,171 36,587,171 Warrants outstanding............................... 1,044,216 1,073,216 Options outstanding................................ 4,347,480 6,203,824 Future option grants............................... 3,047,068 1,097,644 ---------- ---------- 37,985,935 44,961,855 ========== ========== Shares subject to repurchase....................... 2,648,497 2,867,481 ========== ==========
Transmeta's equity incentive plans permit option holders to exercise stock options before they are vested, subject to certain limitations. Common stock issued in connection with these exercises is subject to repurchase at the exercise price until vesting occurs. Notes issued to employees to exercise stock options bear interest at rates ranging from 4.47% to 6.69% and have terms extending to five years. All such notes are full recourse and are recorded as a reduction of stockholders' equity when issued. 8. STOCK-BASED COMPENSATION STOCK OPTION PLANS Transmeta has two stock option plans: the 1995 Equity Incentive Plan and the 1997 Equity Incentive Plan (the "Plans") were adopted on September 5, 1995 and July 11, 1997, respectively. The Plans provide for the grant to employees of incentive stock options ("ISOs") and the grant to employees, directors and consultants of nonstatutory stock options. As of June 30, 2000 (unaudited), the maximum number of common shares available under the Plans was 13.0 million. Options granted under the Plans may be designated as "ISO" or "nonstatutory stock options" at the discretion of Transmeta, with exercise prices not less than the fair market value at the date of grant. Options generally vest 25% on the first anniversary of the vesting start date and then monthly over the next three years. Options expire ten years from the grant date. NON-PLAN GRANTS Transmeta has from time to time granted options outside of the Plans ("non-plan stock options"). There were non-plan stock options for an aggregate of 485,000, 1,735,000 and 3,610,000 shares of common stock authorized and granted as of December 31, 1998 and 1999 and June 30, 2000 (unaudited), respectively. F-20 90 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED STOCK OPTION SUMMARY The following is a summary of the Company's stock option activity under the Plans and outside the Plans, and related information:
OPTIONS OUTSTANDING -------------------------------------------------- WEIGHTED WEIGHTED SHARES AVERAGE AVERAGE AVAILABLE NUMBER EXERCISE GRANT DATE FOR GRANT OF SHARES PRICE FAIR VALUE ---------- ---------- -------- ---------- Balance at December 31, 1996................. 300,000 3,700,000 $0.08 Additional shares reserved................. 2,000,000 -- Options granted............................ (2,265,900) 2,265,900 $0.32 $0.10 Options exercised.......................... -- (1,028,866) $0.15 Options canceled........................... -- (30,000) $0.09 ---------- ---------- Balance at December 31, 1997................. 34,100 4,907,034 $0.13 ---------- ---------- Additional shares reserved................. 2,485,000 -- Options granted............................ (2,301,000) 2,301,000 $1.08 $0.20 Options exercised.......................... -- (3,878,874) $0.30 Options canceled........................... 64,999 (174,167) $0.23 Bonus shares distributed................... (34,000) -- ---------- ---------- Balance at December 31, 1998................. 249,099 3,154,993 $0.62 ---------- ---------- Additional shares reserved................. 6,250,000 -- Options granted............................ (4,033,500) 4,033,500 $1.89 $0.50 Options exercised.......................... -- (2,416,348) $0.93 Options canceled........................... 303,333 (424,665) $1.12 Options repurchased........................ 278,136 -- ---------- ---------- Balance at December 31, 1999................. 3,047,068 4,347,480 $1.57 ---------- ---------- Additional shares reserved (unaudited)..... 1,875,000 0 Options granted (unaudited)................ (3,959,500) 3,959,500 $8.42 $7.73 Options exercised (unaudited).............. -- (1,997,831) $4.27 Options canceled (unaudited)............... 105,325 (105,325) $3.42 Options repurchased (unaudited)............ 29,751 -- ---------- ---------- Balance at June 30, 2000 (unaudited)......... 1,097,644 6,203,824 $5.05 ========== ==========
F-21 91 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED The exercise prices for options outstanding and exercisable as of December 31, 1999 and the weighted average remaining contractual life were as follows:
OUTSTANDING ----------------------------------------- WEIGHTED AVERAGE WEIGHTED EXERCISABLE NUMBER OF REMAINING AVERAGE ------------------------------ SHARES CONTRACTUAL LIFE EXERCISE SHARES WEIGHTED AVERAGE RANGE OF EXERCISE PRICES OUTSTANDING (YEARS) PRICE EXERCISABLE EXERCISE PRICE - ------------------------ ----------- ---------------- -------- ----------- ---------------- As of December 31, 1999: $0.08 565,463 6.3 $0.08 565,463 $0.08 $0.25 - $0.375 431,967 7.8 $0.27 190,428 $0.26 $1.00 - $2.50 2,825,550 9.1 $1.30 231,325 $1.23 $5.00 - $6.00 524,500 9.8 $5.73 -- $0.00 --------- --- ----- ------- ----- $0.08 - $6.00 4,347,480 8.7 $1.58 987,216 $0.38 ========= === ===== ======= =====
ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has elected to follow APB Opinion No. 25 and related interpretations in accounting for its employee and director stock-based awards because, as discussed below, the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock-based awards. Under APB Opinion No. 25, the Company generally recognizes no compensation expense with respect to awards if the exercise price equals or exceeds the fair value of the underlying security on the date of grant and other terms are fixed. The fair value for these awards was estimated at the date of grant using an option pricing model. Option pricing models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's stock-based awards have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock-based awards. The fair value of options granted was determined using the minimum value method and the following weighted average assumptions:
YEARS ENDED DECEMBER 31, ----------------------- 1997 1998 1999 ----- ----- ----- Expected volatility................................ N/A N/A N/A Expected life of options in years.................. 4 4 4 Risk-free interest rate............................ 6.0% 4.70% 6.10% Expected dividend yield............................ 0 0 0
F-22 92 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED For purposes of pro forma disclosures, the estimated fair value of options is amortized to pro forma expense over the option's vesting period. Pro forma information follows:
YEARS ENDED DECEMBER 31, -------------------------------------- 1997 1998 1999 ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net loss As reported.............................. $(16,187) $(10,090) $(41,089) Pro forma................................ $(16,212) $(10,196) $(41,601) Net loss per share -- basic and diluted As reported.............................. $ (1.57) $ (0.87) $ (3.02) Pro forma................................ $ (1.58) $ (0.88) $ (3.05)
The following table presents the computation of basic and diluted and pro forma basic and diluted net loss per share:
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, -------------------------------- -------------------------- 1997 1998 1999 1999 2000 -------- -------- -------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) (UNAUDITED) Basic and diluted: Net loss.......................... $(16,187) $(10,090) $(41,089) $(17,884) $(43,393) ======== ======== ======== ======== ======== Basic and diluted: Weighted average shares outstanding.................... 10,318 12,701 16,577 15,971 18,650 Less: Weighted average shares subject to repurchase.......... (30) (1,164) (2,959) (2,923) (3,231) -------- -------- -------- -------- -------- Weighted average shares used in computing basic and diluted net loss per share................. 10,288 11,537 13,618 13,048 15,419 ======== ======== ======== ======== ======== Net loss per share -- basic and diluted........................... $ (1.57) $ (0.87) $ (3.02) $ (1.37) $ (2.81) ======== ======== ======== ======== ======== Pro Forma basic and diluted: Shares used above................. 13,618 15,419 Pro forma adjustment to reflect weighted-average effect of the assumed conversion of convertible preferred stock.... 26,164 33,808 -------- -------- Shares used in computing pro forma net loss per share............. 39,782 49,227 ======== ======== Pro forma net loss per share -- basic and diluted..... $ (1.03) $ (0.88) ======== ========
The Company has excluded all outstanding stock options and shares subject to repurchase from the calculation of basic and diluted net loss per share because these securities are antidilutive for all periods presented. Options and warrants to purchase 5,612,250, 4,165,209, 5,391,696, 5,600,889 and 7,277,040 shares of common stock, determined using the treasury stock method, for the years ended December 31, 1997, 1998 and 1999 and the six months ended June 30, 1999 (unaudited) and 2000 (unaudited), respectively, were not included in the computation of diluted net loss per share because the effect would be antidilutive. These F-23 93 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED securities, had they been dilutive, would have been included in the computation of diluted net loss per share using the treasury stock method. 9. INCOME TAXES In 1998 and 1999, the Company recorded tax provisions of $2.0 million and $500,000, respectively, relating to foreign taxes withheld on license revenue. No tax provision was recorded during the six months ended June 30, 2000 (unaudited). The Company has incurred operating losses in all periods that have not been tax benefited. Deferred income taxes reflect the net tax effect of operating loss and tax credit carryforwards and temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and consist of:
YEARS ENDED DECEMBER 31, ------------------------ 1998 1999 ---------- ---------- (IN THOUSANDS) Federal operating loss carryforwards........................ $ 8,300 $ 18,900 State operating loss carryforwards.......................... 1,300 2,200 Federal tax credit carryforwards............................ 1,200 2,200 State tax credit carryforwards.............................. 900 1,450 Non-deductible reserves and capitalized expenses............ 740 960 -------- -------- 12,440 25,710 Valuation allowance......................................... (12,440) (25,710) -------- -------- Net deferred tax assets..................................... $ -- $ -- ======== ========
Based upon the weight of available evidence, which includes the Company's historical operating performance, the Company has always provided a full valuation allowance against its net deferred tax assets as it is not more likely than not that the deferred tax assets will be realized. The valuation allowance increased by $3.0 million and $13.3 million during 1998 and 1999, respectively. The federal operating loss and tax credit carryforwards listed above will expire between 2010 and 2019, if not previously utilized. The state operating loss and tax credit carryforwards will expire beginning in 2003, if not previously utilized. Because of certain ownership change rules under federal and state tax rules, approximately $5.0 million of the December 31, 1999 tax-effected amounts of federal and state operating loss and tax credit carryforwards listed above are not immediately available to offset future tax liabilities. These amounts will be available through 2002. The Company's planned initial public offering should not result in further limitations on the use of tax carryforwards. 10. EMPLOYEE BENEFIT PLAN Transmeta has an Employee Savings and Retirement Plan (the "Benefit Plan") under Section 401(k) of the Internal Revenue Code for its eligible employees. The Benefit Plan is available to all of Transmeta's employees who meet minimum age requirements, and provides employees with tax deferred salary deductions and alternative investment options. Employees may contribute up to 15% of their eligible earnings, subject to certain limitations. There are no matching contributions by the Company under the Benefit Plan. F-24 94 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED 11. SUBSEQUENT EVENTS REINCORPORATION Effective , Transmeta reincorporated as a Delaware corporation. Share capital information for all periods has been retroactively adjusted to reflect the par value of common and preferred stock and amounts of paid-in-capital. 12. SUBSEQUENT EVENTS (UNAUDITED) REGISTRATION STATEMENT On August 14, 2000, the board of directors authorized the Company to file a registration statement with the U.S. Securities and Exchange Commission for an initial public offering ("IPO") of its common stock. If the offering is consummated under the terms presently anticipated, all of the convertible preferred stock outstanding as of June 30, 2000 will convert to 36,587,171 shares of common stock upon the closing of the IPO. The effect of this conversion has been reflected as unaudited pro forma stockholders' equity in the accompanying consolidated balance sheet at June 30, 2000. TOSHIBA TECHNOLOGY LICENSE AGREEMENT AMENDMENT On February 27, 2000, Transmeta and Toshiba amended their technology license agreement. Toshiba relinquished certain of the worldwide license rights previously obtained from Transmeta in exchange for 600,000 shares of Transmeta common stock. The value of the stock, $6,750,000, has been recorded on the balance sheet as a deferred charge under license agreement and is being amortized on a straight-line basis over the remaining initial license term of three years. DEFERRED COMPENSATION Transmeta has recorded deferred stock compensation charges of $17,948,000 during the six months ended June 30, 2000, representing the aggregate difference between the exercise prices of the options and the deemed fair values of common stock subject to the options as of the respective measurement dates. These amounts are being amortized by charges to operations, using the graded vesting method, over the four year vesting periods of the individual stock options. During the six month period ended June 30, 2000, the Company recorded $3,140,000 of amortization expense related to deferred stock compensation. RELATED PARTY TRANSACTIONS Certain founders of Transmeta received loans from the Company in May 2000. The notes received as consideration for these loans, aggregating $5,250,000, are non-recourse and are secured by a total of 525,000 shares of common stock, the shares held by the founders were originally issued and vested in 1995. The notes accrete interest, compounded annually, at 6.4% and are due in May 2005. F-25 95 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED NONCUMULATIVE CONVERTIBLE PREFERRED STOCK Transmeta sold shares of series G preferred stock subsequent to December 31, 1999. The particulars are as follows:
NUMBER OF SHARES PRICE DIVIDEND ISSUED AND PER NET PER LIQUIDATION SERIES OUTSTANDING SHARE PROCEEDS SHARE PREFERENCES - ------ ----------- ------ ----------- -------- ----------- G 7,040,000 $12.50 $87,942,000 $1.00 $12.50
Each share of Series G preferred stock is convertible at the holder's option into one share of common stock, and this conversion ratio is subject to adjustment under antidilution provisions as stated in the Company's Certificate of Incorporation. Each share of preferred stock will automatically convert into a share of common stock at the then-effective conversion price immediately upon the closing of the sale of the Company's common stock in a firm commitment, underwritten public offering registered under the Securities Act of 1933 at an offering price to the public equal to or exceeding $13.40 per share of common stock and resulting in aggregate gross proceeds to the Company of at least $25 million. The holder of each share of Series G preferred stock is entitled to receive, when and as declared by the board of directors, noncumulative dividends. Through June 30, 2000, no dividends had been declared. The Series G preferred stockholders are entitled to liquidation preferences, adjusted for any combinations, consolidations or stock splits with respect to their shares and, in addition, an amount equal to all declared but unpaid dividends for each share of Series G preferred stock then held. After payment of these liquidation preferences, any remaining assets would be distributed to the holders of common stock and Series B, C, D, E, F and G preferred stock on a pro rata basis as if the Series B, C, D, E, F and G preferred stock were converted into common stock at the then applicable conversion price for each respective series of preferred stock until the holders of the preferred stock received an aggregate amount equal to $3.50, $5.303, $10.606, $12.7272, $21.2121 and $26.5151, respectively, per share (plus an amount equal to all declared but unpaid dividends on the preferred stock). The holders of preferred shares are entitled to the number of votes that they would have upon conversion of their preferred shares into common shares. 2000 EMPLOYEE STOCK PURCHASE PLAN Transmeta adopted the 2000 Employee Stock Purchase Plan (the "Purchase Plan") on , it allows employees to designate up to 15% of their total compensation to purchase shares of the Company's common stock at 85% of fair market value. The Company has reserved 1,000,000 shares of common stock for issuance under the Purchase Plan. 2000 EQUITY INCENTIVE PLAN Transmeta adopted the 2000 Equity Incentive Plan in 2000 which will serve as the successor to the 1995 and 1997 Equity Incentive Plans. The 2000 Equity Incentive Plan authorizes the award of options, restricted stock and stock bonuses and provides for the grant of both incentive stock options that qualify under Section 422 of the Internal Revenue Code and nonqualified stock options. The exercise price of the incentive stock options must be at least equal to the fair market value of the common stock on the date of grant. The exercise price of incentive stock options granted to 10% stockholders must be at least equal to 110% of the fair F-26 96 TRANSMETA CORPORATION (A DEVELOPMENT STAGE COMPANY) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000 IS UNAUDITED market value of the common stock on the date of grant. The maximum term of the options granted is ten years. 3,500,000 shares of common stock have been reserved under this plan. EMPLOYEE OPTION GRANTS From July 1, 2000 to October , 2000, options to purchase shares were granted to employees pursuant to the 1997 Equity Incentive Plan with exercise prices of between $ and $ per share. The Company estimates that additional deferred compensation of $ million will be recorded as a result of these option grants and amortized to compensation expense in accordance with the Company's policy. LEASE AGREEMENTS On July 15, 2000, Transmeta entered into a lease agreement for additional building space. The lease agreement is for one year with no option to renew. Monthly payments are $56,000 over the lease term. F-27 97 [LOGO] 98 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses, other than the underwriting discounts and commissions, payable by us in connection with the sale and distribution of the securities being registered. All amounts shown are estimates, except the Securities and Exchange Commission registration fee, the National Association of Securities Dealers, Inc. filing fee and the Nasdaq National Market listing fee. Securities and Exchange Commission registration fee......... $52,800 National Association of Securities Dealers, Inc. filing fee....................................................... 20,500 Nasdaq National Market listing fee.......................... 30,500 Blue sky fees and expenses.................................. Transfer agent and registrar fees........................... Accounting fees and expenses................................ Legal fees and expenses..................................... Printing expenses........................................... Miscellaneous............................................... ------- Total..................................................... $ =======
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to directors and officers under certain circumstances and subject to certain limitations. The terms of Section 145 of the Delaware General Corporation Law are sufficiently broad to permit indemnification under certain circumstances for liabilities, including reimbursement of expenses incurred, arising under the Securities Act of 1933 (the "Securities Act"). As permitted by the Delaware General Corporation Law, the Registrant's certificate of incorporation includes a provision that eliminates the personal liability of a director for monetary damages resulting from breach of his fiduciary duty as a director, except for liability: - for any breach of the director's duty of loyalty to the Registrant or its stockholders; - for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; - under section 174 of the Delaware General Corporation Law regarding unlawful dividends and stock purchases; or - for any transaction from which the director derived an improper personal benefit. As permitted by the Delaware General Corporation Law, the Registrant's bylaws provide that: - the Registrant is required to indemnify its directors and officers to the fullest extent permitted by the Delaware General Corporation Law, subject to limited exceptions where indemnification is not permitted by applicable law; - the Registrant is required to advance expenses, as incurred, to its directors and officers in connection with a legal proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject to certain very limited exceptions; and - the rights conferred in the bylaws are not exclusive. In addition, the Registrant intends to enter into indemnity agreements with each of its current directors and officers. These agreements will provide for the indemnification of the Registrant's officers and directors for II-1 99 all expenses and liabilities incurred in connection with any action or proceeding brought against them by reason of the fact that they are or were agents of the Registrant. The Registrant intends to obtain directors' and officers' insurance to cover its directors, officers and some of its employees for certain liabilities, including public securities matters. Reference is also made to Section 9 of the Underwriting Agreement (Exhibit 1.01 hereto), which provides for indemnification by the Underwriters of the Registrant and its executive officers and directors for certain liabilities, including liabilities arising under the Securities Act, in connection with matters specifically provided in writing by the Underwriters for inclusion in the Registration Statement. See also the undertakings set out in response to Item 17. Reference is made to the following documents filed as exhibits to this Registration Statement regarding relevant indemnification provisions described above and elsewhere herein:
EXHIBIT DOCUMENT NUMBER ---------------- ------ Underwriting Agreement...................................... 1.01 Registrant's Certificate of Incorporation................... 3.01 Form of Registrant's First Amended and Restated Certificate of Incorporation.......................................... 3.02 Form of Registrant's Second Amended and Restated Certificate of Incorporation to be effective after the closing of this offering.................................................. 3.03 Registrant's Bylaws as adopted July 31, 2000................ 3.04 Form of Registrant's Bylaws to be effective prior to completion of this offering............................... 3.05 Fifth Restated Investors' Rights Agreement dated March 31, 2000, between Registrant, certain stockholders and a convertible note holder named therein..................... 4.02 Form of Indemnity Agreement................................. 10.01
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. In the three years prior to the filing of this Registration Statement, the Registrant issued and sold the following unregistered securities, all of which reflect the two-for-one common stock split effected in May 1998: 1. In September and November 1997, the Registrant issued and sold a total of 2,462,400 shares of Series D preferred stock to a group of 8 venture capital and investment funds for a total purchase price of $6,156,000, all of which was paid in cash. 2. In May 1998, the Registrant issued a total of 5,702,306 shares of common stock in a two-for-one common stock split. 3. In June and July 1998, the Registrant issued and sold a total of 4,999,999 shares of Series E preferred stock to a group of 48 investors, consisting of 19 individual investors, one corporate investor and 28 venture capital and investment funds for a total purchase price of $29,999,994, all of which was paid in cash. 4. In March 1999, the Registrant issued a warrant to Aisys Corporation to purchase up to 34,000 shares of common stock at $6.00 per share under a warrant dated March 19, 1999 as partial consideration for consulting services. The warrant is exercisable until March 18, 2004. 5. In July 1999, the Registrant issued and sold a total of 7,692,500 shares of Series F preferred stock to a group of 36 investors, consisting of 13 individual investors and 23 venture capital and investment funds for a total purchase price of $76,925,000, all of which was paid in cash. 6. In October 1999, the Registrant granted International Business Machines Corporation the right to purchase 600,000 shares of our common stock under a Restated and Amended Convertible Promissory Note dated October 29, 1999, for a purchase price of $600,000 to be paid through conversion of the note and for entering into the Amended Technology License Agreement, effective October 29, 1999. II-2 100 7. In January 2000, the Registrant issued a warrant to IDEO Product Development Inc. to purchase up to 4,000 shares of common stock at $10.00 per share, exercisable upon the delivery by January 17, 2000 of a product concept model using the Registrant's product as described in the warrant. The warrant expires January 14, 2005. 8. In February 2000, the Registrant issued a warrant to Uniwill Corporation to purchase up to 25,000 shares of common stock at $10.00 per share, exercisable in various amounts from September 30, 2000 to February 28, 2001 upon the completion of development milestones using our product as described in the warrant. The Warrant expires February 1, 2005. 9. In February 2000, the Registrant issued and sold 600,000 shares of common stock to Toshiba Corporation in consideration for entering into the Restated and Amended Technology License Agreement dated February 17, 2000. 10. In April 2000, the Registrant issued and sold a total of 7,040,000 shares of Series G preferred stock to a group of 71 investors, consisting of 22 individual investors, 14 corporate investors including a company controlled by one of our directors and 35 venture capital and investment funds for a total purchase price of $88,000,000, all of which was paid in cash. 11. Since January 1, 1997, the Registrant has granted each of the following lenders a warrant to purchase shares of common stock as presented in the table below, as partial consideration for the financing of equipment used by the Registrant:
PER SHARE WARRANT EXERCISE DATE OF EXPIRATION WARRANT HOLDER SHARES PRICE ISSUANCE DATE -------------- ------- -------------- -------- ---------- Venture Lending & Leasing, Inc............. 80,000 $2.50 4/07/97 03/31/03 Comdisco, Inc.............................. 72,000 $2.50 4/05/97 04/05/07 Phoenix Leasing Incorporated............... 80,000 $2.50 8/15/97 08/15/07 Quickturn Design Systems Incorporated...... 62,516 $2.50 12/31/97 12/31/07 Venture Lending & Leasing, Inc............. 48,000 $2.50 4/29/98 03/31/04 Venture Lending & Leasing II, Inc.......... 112,000 $2.50 4/29/98 03/31/04 Pentech Financial Services, Inc............ 120,000 $2.50 4/01/98 04/01/08 Transamerica Business Credit Corporation... 25,000 $6.00 5/21/98 05/21/05
12. Since January 1, 1997, the Registrant issued and sold to each of the following officers, directors and employees of Registrant, on the exercise dates below, the number of shares of common stock pursuant to option exercises under non-plan options granted on the dates shown on the table below:
EXERCISE NUMBER PRICE PROMISSORY OPTION NAME DATE OF SHARES PER SHARE NOTE AMOUNT DATE ---- -------- --------- --------- ----------- -------- R. Hugh Barnes.................... 12/18/98 50,000 $ 1.30 $ 65,000 11/20/98 12/18/98 10,000 $ 1.30 $ 13,000 11/20/98 Murray A. Goldman................. 12/18/98 50,000 $ 1.30 $ 65,000 11/20/98 12/18/98 100,000 $ 1.30 $ 130,000 11/20/98 3/24/99 250,000 $ 1.30 $ 325,000 3/19/99 Daniel E. Steimle................. 12/18/98 275,000 $ 1.30 $ 357,500 11/23/98 3/24/99 250,000 $ 1.30 $ 325,000 3/19/99 David R. Ditzel................... 3/24/99 250,000 $ 1.30 $ 325,000 3/19/99 Douglas A. Laird.................. 3/24/99 250,000 $ 1.30 $ 325,000 3/19/99 James N. Chapman.................. 3/24/99 250,000 $ 1.30 $ 325,000 3/19/99 Mark K. Allen..................... 1/17/00 1,000,000 $ 6.00 $6,000,000 1/04/00 David P. Jensen................... 3/06/00 275,000 $ 7.25 $1,933,750 2/18/00 Merle A. McClendon................ 8/03/00 550,000 $12.00 $6,600,000 7/21/00
II-3 101 13. As of June 30, 2000, the Registrant had issued 3,385,696 shares of common stock to its employees, directors, consultants and other service providers upon exercise of options under the Registrant's 1995 Equity Incentive Plan, with exercise prices ranging from $.05 to $.08 per share. 14. As of June 30, 2000, the Registrant had issued 2,921,219 shares of common stock to its employees, directors, consultants and other service providers upon exercise of options under the Registrant's 1997 Equity Incentive Plan, with exercise prices ranging from $.25 to $12.00 per share. In addition, in May 1998, the Registrant issued a total of 34,000 shares of common stock to 34 of its employees under the Registrant's 1997 Equity Incentive Plan. The sales and issuances of securities listed above, other than the sales and issuances in Items 2, 13 and 14 were determined to be exempt from registration under Section 4(2) of the Securities Act or Regulation D thereunder as transactions by an issuer not involving a public offering. The issuance of securities listed above in Item 2 was deemed to be exempt from registration under Section 3(a)(9) of the Securities Act. The sales and issuances of securities listed above in Items 12 and 13 were deemed to be exempt from registration under the Securities Act by virtue of Rule 701 promulgated under Section 3(b) of the Securities Act as transactions pursuant to compensation benefits plans and contracts relating to compensation. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) The following exhibits are filed herewith:
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 1.01 Form of Underwriting Agreement.* 3.01 Registrant's Certificate of Incorporation. 3.02 Amendment to Registrant's Certificate of Incorporation. 3.03 Form of Registrant's First Amended and Restated Certificate of Incorporation.* 3.04 Form of Registrant's Second Amended and Restated Certificate of Incorporation to be effective after the closing of this offering.* 3.05 Registrant's Bylaws. 3.06 Form of Registrant's Bylaws to be effective prior to completion of this offering.* 4.01 Specimen Common Stock Certificate.* 4.02 Fifth Restated Investors' Rights Agreement dated March 31, 2000, between Registrant, certain stockholders and a convertible note holder named therein. 4.03 Form of Piggyback Registration Rights Agreement. 5.01 Form of opinion of Fenwick & West LLP. 10.01 Form of Indemnity Agreement.* 10.02 Registrant's 1995 Equity Incentive Plan. 10.03 Registrant's 1997 Equity Incentive Plan. 10.04 Registrant's 2000 Equity Incentive Plan.* 10.05 Registrant's 2000 Employee Stock Purchase Plan.* 10.06 Form of Option granted to Mark K. Allen and related documents. 10.07 Agreement for Purchase and Sale of Custom Semiconductor Products, effective December 12, 1997, between International Business Machines Corporation and Registrant. + 10.08 Lease Agreement, dated November 1, 1995, between John Arrillaga, as trustee of John Arrillaga Family Trust, Richard T. Peery, as trustee of Richard T. Peery Separate Property Trust, and Registrant, as amended by Amendment No. 1, dated January 29, 1997, and Amendment No. 2, dated April 2, 1998, between John Arrillaga, as trustee of John Arrillaga Survivor's Trust (successor in interest to the Arrillaga Family Trust), Richard T. Peery, as trustee of Richard T. Peery Separate Property Trust, and Registrant. (footnotes on next page)
II-4 102
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 10.09 Lease Agreement, dated January 29, 1997, between John Arrillaga, as trustee of John Arrillaga Family Trust, Richard T. Peery, as trustee of Richard T. Peery Separate Property Trust, and Registrant, as amended by Amendment No. 1, dated April 2, 1998, between John Arrillaga, as trustee of John Arrillaga Survivor's Trust (successor in interest to the Arrillaga Family Trust), Richard T. Peery, as trustee of Richard T. Peery Separate Property Trust, and Registrant. 10.10 Lease Agreement, dated April 2, 1998, between John Arrillaga, as trustee of John Arrillaga Survivor's Trust, Richard T. Peery, as trustee of Richard T. Peery Separate Property Trust, and Registrant. 10.11 Lease Agreement, dated April 2, 1998, between John Arrillaga, as trustee of John Arrillaga Survivor's Trust, Richard T. Peery, as trustee of Richard T. Peery Separate Property Trust, and Registrant. 10.12 Sublease Agreement, dated as of October 28, 1998, between Registrant and Mitel, Inc. 10.13 Sublease Agreement, dated as of April 28, 1999, between Registrant and Xuan Nguyen dba World Marketing Alliance. 10.14 Sublease Agreement, dated as of November 1, 1999, between Registrant and Moscape, Inc. 10.15 Sublease Agreement, dated as of June 15, 2000, between Registrant and Bitlocker, Inc. 10.16 Right of First Offer and Observation Rights Agreement, dated as of June 17, 1998, between Registrant and Van Wagoner Capital Management. 21.01 Subsidiaries of the Registrant. 23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).* 23.02 Consent of Ernst & Young LLP, independent auditors. 24.01 Power of Attorney (see page II-7). 27.01 Financial Data Schedule.
- ------------ * To be filed by amendment. + Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. (b) FINANCIAL STATEMENT SCHEDULES All schedules have been omitted because the information required to be set forth herein is not applicable or is shown in the consolidated financial statements or notes thereto. ITEM 17. UNDERTAKINGS. (a) The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described under "Item 14 -- Indemnification of Directors and Officers" above, 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 Securities 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 Securities Act and will be governed by the final adjudication of such issue. II-5 103 (c) The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, 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 purposes of determining any liability under the Securities Act, 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-6 104 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Santa Clara, State of California, on the 17th day of August, 2000. TRANSMETA CORPORATION By: /s/ DAVID R. DITZEL ------------------------------------ David R. Ditzel Chief Executive Officer POWER OF ATTORNEY KNOW BY ALL PERSONS BY THESE PRESENTS that each individual whose signature appears below constitutes and appoints David R. Ditzel and Merle A. McClendon, and each of them, his or her true and lawful attorneys-in-fact and agents with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments, including post-effective amendments, to this Registration Statement, and to sign any registration statement for the same offering covered by the Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and all documents in connection therewith, making such changes in this Registration Statement as such person or persons so acting deems appropriate, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his, her or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 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 date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ DAVID R. DITZEL Chief Executive Officer August 17, 2000 - ----------------------------------------------------- and Director [Principal David R. Ditzel Executive Officer] /s/ MERLE A. MCCLENDON Chief Financial Officer and August 17, 2000 - ----------------------------------------------------- Secretary Merle A. McClendon [Principal Financial Officer and Principal Accounting Officer] /s/ MARK K. ALLEN President, Chief Operating August 17, 2000 - ----------------------------------------------------- Officer and Director Mark K. Allen /s/ R. HUGH BARNES Director August 17, 2000 - ----------------------------------------------------- R. Hugh Barnes
II-7 105
SIGNATURE TITLE DATE --------- ----- ---- /s/ MURRAY A. GOLDMAN Director August 17, 2000 - ----------------------------------------------------- Murray A. Goldman /s/ PAUL M. MCNULTY Director August 17, 2000 - ----------------------------------------------------- Paul M. McNulty /s/ WILLIAM P. TAI Director August 17, 2000 - ----------------------------------------------------- William P. Tai /s/ T. PETER THOMAS Director August 17, 2000 - ----------------------------------------------------- T. Peter Thomas
II-8 106 EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 1.01 Form of Underwriting Agreement.* 3.01 Registrant's Certificate of Incorporation. 3.02 Amendment to Registrant's Certificate of Incorporation. 3.03 Form of Registrant's First Amended and Restated Certificate of Incorporation.* 3.04 Form of Registrant's Second Amended and Restated Certificate of Incorporation to be effective after the closing of this offering.* 3.05 Registrant's Bylaws. 3.06 Form of Registrant's Bylaws to be effective prior to completion of this offering.* 4.01 Specimen Common Stock Certificate.* 4.02 Fifth Restated Investors' Rights Agreement dated March 31, 2000, between Registrant, certain stockholders and a convertible note holder named therein. 4.03 Form of Piggyback Registration Rights Agreement. 5.01 Form of opinion of Fenwick & West LLP. 10.01 Form of Indemnity Agreement.* 10.02 Registrant's 1995 Equity Incentive Plan. 10.03 Registrant's 1997 Equity Incentive Plan. 10.04 Registrant's 2000 Equity Incentive Plan.* 10.05 Registrant's 2000 Employee Stock Purchase Plan.* 10.06 Form of Option granted to Mark K. Allen and related documents. 10.07 Agreement for Purchase and Sale of Custom Semiconductor Products, effective December 12, 1997, between International Business Machines Corporation and Registrant.+ 10.08 Lease Agreement, dated November 1, 1995, between John Arrillaga, as trustee of John Arrillaga Family Trust, Richard T. Peery, as trustee of Richard T. Peery Separate Property Trust, and Registrant, as amended by Amendment No. 1, dated January 29, 1997, and Amendment No. 2, dated April 2, 1998, between John Arrillaga, as trustee of John Arrillaga Survivor's Trust (successor in interest to the Arrillaga Family Trust), Richard T. Peery, as trustee of Richard T. Peery Separate Property Trust, and Registrant. 10.09 Lease Agreement, dated January 29, 1997, between John Arrillaga, as trustee of John Arrillaga Family Trust, Richard T. Peery, as trustee of Richard T. Peery Separate Property Trust, and Registrant, as amended by Amendment No. 1, dated April 2, 1998, between John Arrillaga, as trustee of John Arrillaga Survivor's Trust (successor in interest to the Arrillaga Family Trust), Richard T. Peery, as trustee of Richard T. Peery Separate Property Trust, and Registrant. 10.10 Lease Agreement, dated April 2, 1998, between John Arrillaga, as trustee of John Arrillaga Survivor's Trust, Richard T. Peery, as trustee of Richard T. Peery Separate Property Trust, and Registrant. 10.11 Lease Agreement, dated April 2, 1998, between John Arrillaga, as trustee of John Arrillaga Survivor's Trust, Richard T. Peery, as trustee of Richard T. Peery Separate Property Trust, and Registrant. 10.12 Sublease Agreement, dated as of October 28, 1998, between Registrant and Mitel, Inc. 10.13 Sublease Agreement, dated as of April 28, 1999, between Registrant and Xuan Nguyen dba World Marketing Alliance. 10.14 Sublease Agreement, dated as of November 1, 1999, between Registrant and Moscape, Inc. 10.15 Sublease Agreement, dated as of June 15, 2000, between Registrant and Bitlocker, Inc. 10.16 Right of First Offer and Observation Rights Agreement, dated as of June 17, 1998, between Registrant and Van Wagoner Capital Management.
107
EXHIBIT NUMBER EXHIBIT TITLE - ------- ------------- 21.01 Subsidiaries of the Registrant. 23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).* 23.02 Consent of Ernst & Young LLP, independent auditors. 24.01 Power of Attorney (see page II-7). 27.01 Financial Data Schedule.
- ------------ * To be filed by amendment. + Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. EX-3.01 2 ex3-01.txt EXHIBIT 3.01 1 EXHIBIT 3.01 CERTIFICATE OF INCORPORATION OF TRANSMETA CORPORATION ARTICLE I The name of the corporation is Transmeta Corporation. ARTICLE II The address of the registered office of the corporation in the State of Delaware is 15 East North Street, City of Dover, County of Kent. The name of its registered agent at that address is Incorporating Services, Ltd. ARTICLE III 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 the State of Delaware. ARTICLE IV The total number of shares of stock that the corporation has authority to issue is One Thousand (1,000) shares, all of which shall be Common Stock, $0.001 par value per share. ARTICLE V The Board of Directors of the corporation shall have the power to adopt, amend or repeal the Bylaws of the corporation. ARTICLE VI Election of directors need not be by written ballot unless the Bylaws of the corporation shall so provide. ARTICLE VII To the fullest extent permitted by law, no director of the corporation shall be personally liable for monetary damages for breach of fiduciary duty as a director. Without limiting the effect of the preceding sentence, if the Delaware General Corporation Law is hereafter amended to authorize the further elimination or limitation of the liability of a director, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. 2 Neither any amendment nor repeal of this Article VII, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article VII, shall eliminate, reduce or otherwise adversely affect any limitation on the personal liability of a director of the corporation existing at the time of such amendment, repeal or adoption of such an inconsistent provision. ARTICLE VIII The name and mailing address of the incorporator is Loytavian T. Harrell, c/o Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California 94306. The undersigned incorporator hereby acknowledges that the foregoing certificate is her act and deed and that the facts stated herein are true. Dated: July 11, 2000 /s/ Loytavian T. Harrell ------------------------------------ Loytavian T. Harrell, Incorporator -2- EX-3.02 3 ex3-02.txt EXHIBIT 3.02 1 EXHIBIT 3.02 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF TRANSMETA CORPORATION BEFORE RECEIPT OF PAYMENT FOR STOCK Transmeta Corporation, a Delaware corporation, does hereby certify that: 1. The corporation has not received any payment for any of its stock. 2. The amendment set forth below to the corporation's Certificate of Incorporation was duly adopted by its sole incorporator in accordance with the provisions of Section 241 of the Delaware General Corporation Law. 3. Article IV of the Certificate of Incorporation, relating to the class of stock that the corporation has authority to issue is amended to read in its entirety as follows: The total number of shares of stock that the corporation has authority to issue is One Thousand (1,000) shares, all of which shall be Common Stock, $0.00001 par value per share. IN WITNESS WHEREOF, said corporation has caused this Certificate of Amendment to be signed by its sole incorporator this 27th day of July, 2000 and the foregoing facts stated herein are true and correct. TRANSMETA CORPORATION By: /s/ Loytavian T. Harrell --------------------------------- LOYTAVIAN T. HARRELL, SOLE INCORPORATOR EX-3.05 4 ex3-05.txt EXHIBIT 3.05 1 EXHIBIT 3.05 BYLAWS OF TRANSMETA CORPORATION (a Delaware corporation) As Adopted July 31, 2000 2 CERTIFICATION OF BYLAWS OF TRANSMETA CORPORATION (a Delaware corporation) KNOW ALL BY THESE PRESENTS: I, Merle McClendon, certify that I am Secretary of Transmeta Corporation, a Delaware corporation (the "COMPANY"), that I am duly authorized to make and deliver this certification, and that the attached Bylaws are a true and correct copy of the Bylaws of the Company in effect as of the date of this certificate. Dated: July 31, 2000 /s/ MERLE McCLENDON ----------------------------------- Merle McClendon, Secretary 3 BYLAWS OF TRANSMETA CORPORATION (a Delaware corporation) TABLE OF CONTENTS PAGE ---- ARTICLE I - STOCKHOLDERS.................................................. 1 Section 1.1: Annual Meetings............................ 1 Section 1.2: Special Meetings........................... 1 Section 1.3: Notice of Meetings......................... 1 Section 1.4: Adjournments............................... 1 Section 1.5: Quorum..................................... 1 Section 1.6: Organization............................... 2 Section 1.7: Voting; Proxies............................ 2 Section 1.8: Fixing Date for Determination of Stockholders of Record..................... 2 Section 1.9: List of Stockholders Entitled to Vote...... 3 Section 1.10: Action by Written Consent of Stockholders.. 3 Section 1.11: Inspectors of Elections.................... 4 ARTICLE II - BOARD OF DIRECTORS........................................... 5 Section 2.1: Number; Qualifications..................... 5 Section 2.2: Election; Resignation; Removal; Vacancies.. 5 Section 2.3: Regular Meetings........................... 5 4 BYLAWS OF TRANSMETA CORPORATION (a Delaware corporation) TABLE OF CONTENTS (CONT'D)
PAGE ---- Section 2.4: Special Meetings......................................... 5 Section 2.5: Telephonic Meetings Permitted............................ 6 Section 2.6: Quorum; Vote Required for Action......................... 6 Section 2.7: Organization............................................. 6 Section 2.8: Written Action by Directors.............................. 6 Section 2.9: Powers................................................... 6 Section 2.10: Compensation of Directors................................ 6 ARTICLE III - COMMITTEES................................................................ 7 Section 3.1: Committees............................................... 7 Section 3.2: Committee Rules.......................................... 7 ARTICLE IV - OFFICERS................................................................... 7 Section 4.1: Generally................................................ 7 Section 4.2: Chief Executive Officer.................................. 8 Section 4.3: Chairperson of the Board................................. 8 Section 4.4: President................................................ 8 Section 4.5: Vice President........................................... 9 Section 4.6: Chief Financial Officer.................................. 9 Section 4.7: Treasurer................................................ 9 Section 4.8: Secretary................................................ 9
5 BYLAWS OF TRANSMETA CORPORATION (a Delaware corporation) TABLE OF CONTENTS (CONT'D)
PAGE ---- Section 4.9: Delegation of Authority.................................. 9 Section 4.10: Removal.................................................. 9 ARTICLE V - STOCK ......................................................... 9 Section 5.l: Certificates............................................. 9 Section 5.2: Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificate.............................. 10 Section 5.3: Other Regulations........................................ 10 ARTICLE VI - INDEMNIFICATION............................................................ 10 Section 6.1: Indemnification of Officers and Directors................ 10 Section 6.2: Advance of Expenses...................................... 10 Section 6.3: Non-Exclusivity of Rights................................ 11 Section 6.4: Indemnification Contracts................................ 11 Section 6.5: Effect of Amendment...................................... 11 ARTICLE VII - NOTICES ......................................................... 11 Section 7.l: Notice................................................... 11 Section 7.2: Waiver of Notice......................................... 12 ARTICLE VIII - INTERESTED DIRECTORS..................................................... 12 Section 8.1: Interested Directors; Quorum............................. 12
6 BYLAWS OF TRANSMETA CORPORATION (a Delaware corporation) TABLE OF CONTENTS (CONT'D)
PAGE ---- ARTICLE IX - MISCELLANEOUS.............................................................. 12 Section 9.1: Fiscal Year.............................................. 12 Section 9.2: Seal..................................................... 12 Section 9.3: Form of Records.......................................... 13 Section 9.4: Reliance Upon Books and Records.......................... 13 Section 9.5: Certificate of Incorporation Governs..................... 13 Section 9.6: Severability............................................. 13 ARTICLE X - AMENDMENT................................................................... 13 Section 10.1: Amendments............................................... 13
7 BYLAWS OF TRANSMETA CORPORATION (a Delaware corporation) As Adopted July 11, 2000 ARTICLE I STOCKHOLDERS Section 1.1: Annual Meetings. Unless directors are elected by written consent in lieu of an annual meeting as permitted by Section 211 of the Delaware General Corporation Law, an annual meeting of stockholders shall be held for the election of directors at such date, time and place, either within or without the State of Delaware, as the Board of Directors shall each year fix. Any other proper business may be transacted at the annual meeting. Section 1.2: Special Meetings. Special meetings of stockholders for any purpose or purposes may be called at any time by the Board of Directors, the Chairperson of the Board of Directors, the Chief Executive Officer, the President, the holders of shares of the Corporation that are entitled to cast not less than ten percent (10%) of the total number of votes entitled to be cast by all stockholders at such meeting, or by a majority of the members of the Board of Directors. Special meetings may not be called by any other person or persons. Section 1.3: Notice of Meetings. Written notice of all meetings of stockholders shall be given stating the place, date and time of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise required by applicable law or the Certificate of Incorporation of the Corporation, such notice shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of record entitled to vote at such meeting. Section 1.4: Adjournments. Any meeting of stockholders may adjourn from time to time to reconvene at the same or another place, and notice need not be given of any such adjourned meeting if the time, date and place thereof are announced at the meeting at which the adjournment is taken; provided, however, that 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, then a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At the adjourned meeting the Corporation may transact any business that might have been transacted at the original meeting. Section 1.5: Quorum. At each meeting of stockholders the holders of a majority of the shares of stock entitled to vote at the meeting, present in person or represented by proxy, shall 8 constitute a quorum for the transaction of business, except if otherwise required by applicable law. If a quorum shall fail to attend any meeting, the chairperson of the meeting or the holders of a majority of the shares entitled to vote who are present, in person or by proxy, at the meeting may adjourn the meeting. Shares of the Corporation's stock belonging to the Corporation (or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation are held, directly or indirectly, by the Corporation), shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation or any other corporation to vote any shares of the Corporation's stock held by it in a fiduciary capacity. Section 1.6: Organization. Meetings of stockholders shall be presided over by such person as the Board of Directors may designate, or, in the absence of such a person, the Chairperson of the Board of Directors, or, in the absence of such person, the President of the Corporation, or, in the absence of such person, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, at the meeting. Such person shall be chairperson of the meeting and, subject to Section 1.11 hereof, shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to him or her to be in order. The Secretary of the Corporation shall act as secretary of the meeting, but in such person's absence the chairperson of the meeting may appoint any person to act as secretary of the meeting. Section 1.7: Voting; Proxies. Unless otherwise provided by law or the Certificate of Incorporation, and subject to the provisions of Section 1.8 of these Bylaws, each stockholder shall be entitled to one (1) vote for each share of stock held by such stockholder. Each stockholder entitled to vote at a meeting of stockholders, or to express consent or dissent to corporate action in writing without a meeting, may authorize another person or persons to act for such stockholder by proxy. Such a proxy may be prepared, transmitted and delivered in any manner permitted by applicable law. Voting at meetings of stockholders need not be by written ballot unless such is demanded at the meeting before voting begins by a stockholder or stockholders holding shares representing at least one percent (1%) of the votes entitled to vote at such meeting, or by such stockholder's or stockholders' proxy; provided, however, that an election of directors shall be by written ballot if demand is so made by any stockholder at the meeting before voting begins. If a vote is to be taken by written ballot, then each such ballot shall state the name of the stockholder or proxy voting and such other information as the chairperson of the meeting deems appropriate. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy at the meeting and entitled to vote on the election of directors. Unless otherwise provided by applicable law, the Certificate of Incorporation or these Bylaws, every matter other than the election of directors shall be decided by the affirmative vote of the holders of a majority of the shares of stock entitled to vote thereon that are present in person or represented by proxy at the meeting and are voted for or against the matter. Section 1.8: Fixing Date for Determination of Stockholders of Record. 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 -2- 9 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 precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and 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 no record date is fixed by the Board of Directors, then the record date shall be as provided by applicable law. 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 1.9: List of Stockholders Entitled to Vote. A complete list of stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder, 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 (10) 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 also be produced and kept at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present at the meeting. Section 1.10: Action by Written Consent of Stockholders. (a) Procedure. Unless otherwise provided by the Certificate of Incorporation, any action required or permitted to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the 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. Written stockholder consents shall bear the date of signature of each stockholder who signs the consent and shall be delivered to the Corporation by delivery to its registered office in the State of Delaware, to its principal place of business or to any officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. No written consent shall be effective to take the action set forth therein unless, within sixty (60) days of the earliest dated consent delivered to the Corporation in the manner provided above, written consents signed by a sufficient number of stockholders to take the action set forth therein are delivered to the Corporation in the manner provided above. (b) Notice of Consent. Prompt notice of the taking of corporate action by stockholders without a meeting by less than unanimous written consent of the stockholders shall be given to those stockholders who have not consented thereto in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of holders to take the action were delivered to the Corporation. In the case of a -3- 10 Certificate Action (as defined below), if the Delaware General Corporation Law so requires, such notice shall be given prior to filing of the certificate in question. If the action which is consented to requires the filing of a certificate under the Delaware General Corporation Law (a "CERTIFICATE ACTION"), then if the Delaware General Corporation Law so requires, the certificate so filed shall state that written stockholder consent has been given in accordance with Section 228 of the Delaware General Corporation Law and that written notice of the taking of corporate action by stockholders without a meeting as described herein has been given as provided in such section. Section 1.11: Inspectors of Elections. (a) Applicability. Unless otherwise provided in the Corporation's Certificate of Incorporation or required by the Delaware General Corporation Law, the following provisions of this Section 1.11 shall apply only if and when the Corporation has a class of voting stock that is: (i) listed on a national securities exchange; (ii) authorized for quotation on an automated interdealer quotation system of a registered national securities association; or (iii) held of record by more than 2,000 stockholders; in all other cases, observance of the provisions of this Section 1.11 shall be optional, and at the discretion of the Corporation. (b) Appointment. The Corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors of election to act at the meeting and make a written report thereof. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. (c) Inspector's Oath. Each inspector of election, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspector's ability. (d) Duties of Inspectors. At a meeting of stockholders, the inspectors of election shall (i) ascertain the number of shares outstanding and the voting power of each share, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period of time a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. (e) Opening and Closing of Polls. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced by the inspectors at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise. -4- 11 (f) Determinations. In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in connection with proxies in accordance with Section 212(c)(2) of the Delaware General Corporation Law, ballots and the regular books and records of the Corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the limited purpose permitted herein, the inspectors at the time they make their certification of their determinations pursuant to this Section 1.11 shall specify the precise information considered by them, including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors' belief that such information is accurate and reliable. ARTICLE II BOARD OF DIRECTORS Section 2.1: Number; Qualifications. The Board of Directors shall consist of one or more members. The initial number of directors shall be seven (7), and thereafter shall be fixed from time to time by resolution of the Board of Directors. No decrease in the authorized number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Directors need not be stockholders of the Corporation. Section 2.2: Election; Resignation; Removal; Vacancies. The Board of Directors shall initially consist of the person or persons elected by the incorporator or named in the Corporation's initial Certificate of Incorporation. Each director shall hold office until such director's successor is elected and qualified, or until such director's earlier death, resignation or removal. Any director may resign at any time upon written notice to the Corporation. Subject to the rights of any holders of Preferred Stock then outstanding: (i) 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 and (ii) any vacancy occurring in the Board of Directors for any cause, and any newly created directorship resulting from any increase in the authorized number of directors to be elected by all stockholders having the right to vote as a single class, may be filled by the stockholders, by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Section 2.3: Regular Meetings. Regular meetings of the Board of Directors may be held at such places, within or without the State of Delaware, and at such times as the Board of Directors may from time to time determine. Notice of regular meetings need not be given if the date, times and places thereof are fixed by resolution of the Board of Directors. Section 2.4: Special Meetings. Special meetings of the Board of Directors may be called by the Chairperson of the Board of Directors, the President or a majority of the members of the Board of Directors then in office and may be held at any time, date or place, within or -5- 12 without the State of Delaware, as the person or persons calling the meeting shall fix. Notice of the time, date and place of such meeting shall be given, orally or in writing, by the person or persons calling the meeting to all directors at least four (4) days before the meeting if the notice is mailed, or at least twenty-four (24) hours before the meeting if such notice is given by telephone, hand delivery, telegram, telex, mailgram, facsimile or similar communication method. Unless otherwise indicated in the notice, any and all business may be transacted at a special meeting. Section 2.5: Telephonic Meetings Permitted. Members of the Board of Directors, or any committee of the Board, may participate in a meeting of the Board or such 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 participation in a meeting pursuant to conference telephone or similar communications equipment shall constitute presence in person at such meeting. Section 2.6: Quorum; Vote Required for Action. At all meetings of the Board of Directors a majority of the total number of authorized directors shall constitute a quorum for the transaction of business. Except as otherwise provided herein or in the Certificate of Incorporation, or required by law, the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Section 2.7: Organization. Meetings of the Board of Directors shall be presided over by the Chairperson of the Board of Directors, or in such person's absence by the President, or in such person's absence by a chairperson chosen at the meeting. The Secretary shall act as secretary of the meeting, but in such person's absence the chairperson of the meeting may appoint any person to act as secretary of the meeting. Section 2.8: Written Action by Directors. 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 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, respectively. Section 2.9: Powers. The Board of Directors may, except as otherwise required by law or the Certificate of Incorporation, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. Section 2.10: Compensation of Directors. Directors, as such, may receive, pursuant to a resolution of the Board of Directors, fees and other compensation for their services as directors, including without limitation their services as members of committees of the Board of Directors. -6- 13 ARTICLE III COMMITTEES Section 3.1: Committees. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors 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 the committee, the member or members thereof present at any meeting of such committee who are 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 place of any such absent or disqualified member. Any such committee, to the extent provided in a 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 that may require it; but no such committee shall have the power or authority in reference to the following matters: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the Delaware General Corporation Law to be submitted to stockholders for approval or (ii) adopting, amending or repealing any bylaw of the Corporation. Section 3.2: Committee Rules. Unless the Board of Directors otherwise provides, each committee designated by the Board of Directors may make, alter and repeal rules for the conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article II of these Bylaws. ARTICLE IV OFFICERS Section 4.1: Generally. The officers of the Corporation shall consist of a Chief Executive Officer and/or a President, a Secretary, a Treasurer and such other officers as may from time to time be appointed by the Board of Directors. All officers shall be elected by the Board of Directors; provided, however, that the Board of Directors may empower the Chief Executive Officer of the Corporation to appoint officers other than the Chairperson of the Board, the Chief Executive Officer, the President, the Chief Financial Officer or the Treasurer. Each officer shall hold office until such person's successor is elected and qualified or until such person's earlier resignation or removal. Any number of offices may be held by the same person. Any officer may resign at any time upon written notice to the Corporation. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled by the Board of Directors. -7- 14 Section 4.2: Chief Executive Officer. Subject to the control of the Board of Directors and such supervisory powers, if any, as may be given by the Board of Directors, the powers and duties of the Chief Executive Officer of the Corporation are: (a) To act as the general manager and, subject to the control of the Board of Directors, to have general supervision, direction and control of the business and affairs of the Corporation; (b) To preside at all meetings of the stockholders; (c) To call meetings of the stockholders to be held at such times and, subject to the limitations prescribed by law or by these Bylaws, at such places as he or she shall deem proper; and (d) To affix the signature of the Corporation to all deeds, conveyances, mortgages, guarantees, leases, obligations, bonds, certificates and other papers and instruments in writing which have been authorized by the Board of Directors or which, in the judgment of the Chief Executive Officer, should be executed on behalf of the Corporation; to sign certificates for shares of stock of the Corporation; and, subject to the direction of the Board of Directors, to have general charge of the property of the Corporation and to supervise and control all officers, agents and employees of the Corporation. The President shall be the Chief Executive Officer of the Corporation unless the Board of Directors shall designate another officer to be the Chief Executive Officer. If there is no President, and the Board of Directors has not designated any other officer to be the Chief Executive Officer, then the Chairperson of the Board of Directors shall be the Chief Executive Officer. Section 4.3: Chairperson of the Board. The Chairperson of the Board of Directors shall have the power to preside at all meetings of the Board of Directors and shall have such other powers and duties as provided in these Bylaws and as the Board of Directors may from time to time prescribe. Section 4.4: President. The President shall be the Chief Executive Officer of the Corporation unless the Board of Directors shall have designated another officer as the Chief Executive Officer of the Corporation. Subject to the provisions of these Bylaws and to the direction of the Board of Directors, and subject to the supervisory powers of the Chief Executive Officer (if the Chief Executive Officer is an officer other than the President), and subject to such supervisory powers and authority as may be given by the Board of Directors to the Chairperson of the Board of Directors, and/or to any other officer, the President shall have the responsibility for the general management the control of the business and affairs of the Corporation and the general supervision and direction of all of the officers, employees and agents of the Corporation (other than the Chief Executive Officer, if the Chief Executive Officer is an officer other than the President) and shall perform all duties and have all powers that are commonly incident to the office of President or that are delegated to the President by the Board of Directors. -8- 15 Section 4.5: Vice President. Each Vice President shall have all such powers and duties as are commonly incident to the office of Vice President, or that are delegated to him or her by the Board of Directors or the Chief Executive Officer. A Vice President may be designated by the Board to perform the duties and exercise the powers of the Chief Executive Officer in the event of the Chief Executive Officer's absence or disability. Section 4.6: Chief Financial Officer. The Chief Financial Officer shall be the Treasurer of the Corporation unless the Board of Directors shall have designated another officer as the Treasurer of the Corporation. Subject to the direction of the Board of Directors and the Chief Executive Officer, the Chief Financial Officer shall perform all duties and have all powers that are commonly incident to the office of Chief Financial Officer. Section 4.7: Treasurer. The Treasurer shall have custody of all monies and securities of the Corporation. The Treasurer shall make such disbursements of the funds of the Corporation as are authorized and shall render from time to time an account of all such transactions. The Treasurer shall also perform such other duties and have such other powers as are commonly incident to the office of Treasurer, or as the Board of Directors or the Chief Executive Officer may from time to time prescribe. Section 4.8: Secretary. The Secretary shall issue or cause to be issued all authorized notices for, and shall keep, or cause to be kept, minutes of all meetings of the stockholders and the Board of Directors. The Secretary shall have charge of the corporate minute books and similar records and shall perform such other duties and have such other powers as are commonly incident to the office of Secretary, or as the Board of Directors or the Chief Executive Officer may from time to time prescribe. Section 4.9: Delegation of Authority. The Board of Directors may from time to time delegate the powers or duties of any officer to any other officers or agents, notwithstanding any provision hereof. Section 4.10: Removal. Any officer of the Corporation shall serve at the pleasure of the Board of Directors and may be removed at any time, with or without cause, by the Board of Directors. Such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation. ARTICLE V STOCK Section 5.1: Certificates. Every holder of stock shall be entitled to have a certificate signed by or in the name of the Corporation by the Chairperson or Vice-Chairperson of the Board of Directors, or the President or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the Corporation, certifying the number of shares owned by such stockholder in the Corporation. Any or all of the signatures on the certificate may be a facsimile. -9- 16 Section 5.2: Lost, Stolen or Destroyed Stock Certificates; Issuance of New Certificates. The Corporation may issue a new certificate of stock 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 such owner's legal representative, to agree to indemnify the Corporation and/or 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. Section 5.3: Other Regulations. The issue, transfer, conversion and registration of stock certificates shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VI INDEMNIFICATION Section 6.1 Indemnification of Officers and Directors. Each person who was or is made a party to, or is threatened to be made a party to, or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "PROCEEDING"), by reason of the fact that such person (or a person of whom such person is the legal representative), is or was an officer or director of the Corporation or a Reincorporated Predecessor (as defined below) or is or was serving at the request of the Corporation or a Reincorporated Predecessor (as defined below) as an officer or director of another corporation, or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the Delaware General Corporation Law, against all expenses, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes and penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith, provided such person acted in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. Such indemnification shall continue as to a person who has ceased to be an officer or director and shall inure to the benefit of such person's heirs, executors and administrators. Notwithstanding the foregoing, the Corporation shall indemnify any such person seeking indemnity in connection with a Proceeding (or part thereof) initiated by such person only if such Proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. As used herein, the term "REINCORPORATED PREDECESSOR" means a corporation that is merged with and into the Corporation in a statutory merger where (a) the Corporation is the surviving corporation of such merger; (b) the primary purpose of such merger is to change the corporate domicile of the Reincorporated Predecessor to Delaware. Section 6.2: Advance of Expenses. The Corporation shall pay all expenses (including attorneys' fees) incurred by such an officer or director in defending any such Proceeding as they are incurred in advance of its final disposition; provided, however, that if the Delaware General Corporation Law then so requires, the payment of such expenses incurred by such an officer or -10- 17 director in advance of the final disposition of such Proceeding shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such an officer or director, to repay all amounts so advanced if it should be determined ultimately that such an officer or director is not entitled to be indemnified under this Article VI or otherwise; and provided, further, that the Corporation shall not be required to advance any expenses to a person against whom the Corporation directly brings a claim, in a Proceeding, alleging that such person has breached such person's duty of loyalty to the Corporation, committed an act or omission not in good faith or that involves intentional misconduct or a knowing violation of law, or derived an improper personal benefit from a transaction. Section 6.3: Non-Exclusivity of Rights. The rights conferred on any person in this Article VI shall not be exclusive of any other right that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, Bylaw, agreement, vote or consent of stockholders or disinterested directors, or otherwise. Additionally, nothing in this Article VI shall limit the ability of the Corporation, in its discretion, to indemnify or advance expenses to persons whom the Corporation is not obligated to indemnify or advance expenses pursuant to this Article VI. Section 6.4: Indemnification Contracts. The Board of Directors is authorized to cause the Corporation to enter into indemnification contracts with any director, officer, employee or agent of the Corporation, or any person serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, including employee benefit plans, providing indemnification rights to such person. Such rights may be greater than those provided in this Article VI. Section 6.5: Effect of Amendment. Any amendment, repeal or modification of any provision of this Article VI shall be prospective only, and shall not adversely affect any right or protection conferred on a person pursuant to this Article VI and existing at the time of such amendment, repeal or modification. ARTICLE VII NOTICES Section 7.1: Notice. Except as otherwise specifically provided herein or required by law, all notices required to be given pursuant to these Bylaws shall be in writing and may in every instance be effectively given by hand delivery (including use of a delivery service), by depositing such notice in the mail, postage prepaid, or by sending such notice by prepaid telegram, telex, overnight express courier, mailgram or facsimile. Any such notice shall be addressed to the person to whom notice is to be given at such person's address as it appears on the records of the Corporation. The notice shall be deemed given (i) in the case of hand delivery, when received by the person to whom notice is to be given or by any person accepting such notice on behalf of such person, (ii) in the case of delivery by mail, upon deposit in the mail, (iii) in the case of delivery by overnight express courier, when dispatched, and (iv) in the case of delivery via telegram, telex, mailgram or facsimile, when dispatched. -11- 18 Section 7.2: Waiver of Notice. Whenever notice is required to be given under any provision of these Bylaws, a written waiver of notice, 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, directors or members of a committee of directors need be specified in any written waiver of notice. ARTICLE VIII INTERESTED DIRECTORS Section 8.1: Interested Directors; Quorum. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof that authorizes the contract or transaction, or solely because his, her or their votes are counted for such purpose, if: (i) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (ii) the material facts as to his, her or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof, or the stockholders. Interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IX MISCELLANEOUS Section 9.1: Fiscal Year. The fiscal year of the Corporation shall be determined by resolution of the Board of Directors. Section 9.2: Seal. The Board of Directors may provide for a corporate seal, which shall have the name of the Corporation inscribed thereon and shall otherwise be in such form as may be approved from time to time by the Board of Directors. -12- 19 Section 9.3: Form of Records. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on, or be in the form of, magnetic tape, diskettes, photographs, microphotographs or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. Section 9.4: Reliance Upon Books and Records. A member of the Board of Directors, or a member of any committee designated by the Board of Directors shall, in the performance of such person's duties, be fully protected in relying in good faith upon records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of the Corporation's officers or employees, or committees of the Board of Directors, or by any other person as to matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. Section 9.5: Certificate of Incorporation Governs. In the event of any conflict between the provisions of the Corporation's Certificate of Incorporation and Bylaws, the provisions of the Certificate of Incorporation shall govern. Section 9.6: Severability. If any provision of these Bylaws shall be held to be invalid, illegal, unenforceable or in conflict with the provisions of the Corporation's Certificate of Incorporation, then such provision shall nonetheless be enforced to the maximum extent possible consistent with such holding and the remaining provisions of these Bylaws (including without limitation, all portions of any section of these Bylaws containing any such provision held to be invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation, that are not themselves invalid, illegal, unenforceable or in conflict with the Certificate of Incorporation) shall remain in full force and effect. ARTICLE X AMENDMENT Section 10.1: Amendments. Stockholders of the Corporation holding a majority of the Corporation's outstanding voting stock then entitled to vote at an election of directors shall have the power to adopt, amend or repeal Bylaws To the extent provided in the Corporation's Certificate of Incorporation, the Board of Directors of the Corporation shall also have the power to adopt, amend or repeal Bylaws of the Corporation. -13- EX-4.02 5 ex4-02.txt EXHIBIT 4.02 1 EXHIBIT 4.02 FIFTH RESTATED INVESTORS' RIGHTS AGREEMENT This Fifth Restated Investors' Rights Agreement (this "Agreement") is made and entered into as of March 31, 2000 by and among Transmeta Corporation, a California corporation (the "Company"); the persons and entities named on Exhibit A attached hereto (the "Investors"); solely with respect to Section 4 below, the Common Shareholders named on Exhibit B attached hereto (the "Common Holders"); and solely with respect to Section 5 below, the Principal Common Shareholders named on Exhibit C attached hereto. R E C I T A L S A. Certain of the Investors (the "Series B Investors") previously purchased from the Company shares of the Company's Series B Preferred Stock (the "Series B Stock") and warrants (the "Warrants") to purchase shares of the Company's Series C Preferred Stock (the "Series C Stock") pursuant to that certain Series B Preferred Stock and Series C Preferred Stock Warrant Purchase Agreement, dated as of December 19, 1995, by and among the Company and the Series B Investors (the "Series B Agreement"). In connection with the purchase of Series B Stock and the Warrants, the Series B Investors were granted certain information rights, registration rights, rights of first refusal and rights of co-sale under that certain Restated Investors' Rights Agreement, dated as of December 19, 1995, by and among the Company, the Series B Investors and the other parties thereto (the "First Restated Rights Agreement"). The Series B Investors subsequently exercised in full the Warrants to purchase Series C Stock. B. Certain of the Investors (the "Series D Investors") previously purchased from the Company shares of the Company's Series D Preferred Stock (the "Series D Stock") pursuant to that certain Series D Preferred Stock Purchase Agreement, dated as of April 4, 1997, as amended, by and among the Company and the Series D Investors (the "Series D Agreement"). In connection with the purchase of Series D Stock, the Series B Investors and the Series D Investors were granted certain information rights, registration rights, rights of first refusal and rights of co-sale under that certain Second Restated Investors' Rights Agreement, dated as of April 4, 1997, as amended as of December 17, 1997, by and among the Company, the Series B Investors, the Series D Investors and the other parties thereto (the "Second Restated Rights Agreement"), which Second Restated Rights Agreement amended, restated, replaced and terminated in its entirety the First Restated Rights Agreement. C. Certain of the Investors (the "Series E Investors") previously purchased from the Company shares of the Company's Series E Preferred Stock (the "Series E Stock") pursuant to that certain Series E Preferred Stock Purchase Agreement, dated as of June 17, 1998, by and among the Company and the Series E Investors (the "Series E Agreement"). In connection with the purchase of Series E Stock, the Series B Investors, the Series D Investors and the Series E Investors were granted certain information rights, registration rights, rights of first refusal and rights of co-sale under that certain Third Restated Investors' Rights Agreement, dated as of June 17, 1998, by and among the Company, the Prior Investors and the other parties thereto (the "Third Restated Rights Agreement"), which Third Restated Rights Agreement amended, restated, replaced and terminated in its entirety the Second Restated Rights Agreement. D. Certain of the Investors (the "Series F Investors") previously purchased from the Company shares of the Company's Series F Preferred Stock (the "Series F Stock") pursuant to that 2 certain Series F Preferred Stock Purchase Agreement, dated as of July 2, 1999, by and among the Company and the Series F Investors (the "Series F Agreement"). In connection with the purchase of Series F Stock, the Series B Investors, the Series D Investors, the Series E Investors and the Series F Investors (collectively, the "Prior Investors") were granted certain information rights, registration rights, rights of first refusal and rights of co-sale under that certain Fourth Restated Investors' Rights Agreement, dated as of July 2, 1999, as amended as of October 18, 1999, by and among the Company, the Prior Investors and the other parties thereto (as amended, the "Fourth Restated Rights Agreement"), which Fourth Restated Rights Agreement amended, restated, replaced and terminated in its entirety the Third Restated Rights Agreement. E. International Business Machines ("IBM" which, for purposes of this Agreement, is included herein as a "Prior Investor") was issued by the Company a certain Restated and Amended Convertible Promissory Note dated October 29, 1999 (the "IBM Note"), which is currently convertible into 600,000 shares (on a post May 12, 1998 split basis) of the Company's Common Stock. In connection with the issuance of the IBM Note, IBM was granted certain piggyback registration rights under the Fourth Restated Rights Agreement. F. Certain of the Investors (the "New Investors") have agreed to purchase from the Company shares of the Company's Series G Preferred Stock (the "Series G Stock") pursuant to that certain Series G Preferred Stock Purchase Agreement, dated of even date herewith, by and among the Company and the New Investors (the "Series G Agreement"). The Series G Agreement provides that, as a condition to the New Investors' purchase of the Series G Stock, the Company will enter into this Agreement and the New Investors will be granted the rights set forth herein. G. The Company and the Prior Investors desire for the New Investors to purchase the Series G Stock and, to induce such purchase, are willing to amend, restate, replace and terminate the Fourth Rights Agreement as set forth below. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1. INFORMATION RIGHTS. 1.1 Financial Information. Commencing on the date of this Agreement, for so long as an Investor (together with related Investors) holds at least 100,000 shares of (a) Series B Stock issued to such Investor under the Series B Agreement, or (b) Series C Stock issued to such Investor under the Series B Agreement, or (c) Series D Stock issued to such Investor under the Series D Agreement, or (d) Series E Stock issued to such Investor under the Series E Agreement, or (e) Series F Stock issued to such Investor under the Series F Agreement, or (f) Series G Stock issued to such Investor under the Series G Agreement, or (g) the equivalent number (on an as-converted basis) of shares of Common Stock of the Company ("Common Stock") issued upon the conversion of such shares of Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock and/or Series G Stock ("Conversion Stock"), the Company will furnish to such Investor: (i) Quarterly Reports. As soon as practicable, and in any event within forty-five (45) days after the end of each fiscal quarter of the Company (except the last quarter of the Company's fiscal year), unaudited financial statements of the Company, including an unaudited balance sheet, an unaudited statement of income and an unaudited statement of cash flows, for such fiscal quarter. -2- 3 (ii) Annual Reports. As soon as practicable, and in any event within one hundred twenty (120) days after the end of each fiscal year of the Company, a consolidated balance sheet as of the end of such fiscal year, a consolidated statement of income and a consolidated statement of cash flows of the Company and its subsidiaries for such year, setting forth in each case in comparative form the figures from the Company's previous fiscal year (if any), all prepared in accordance with generally accepted accounting principles and practices and audited by nationally recognized independent certified public accountants. (iii) Annual Financial Budget. As soon as practicable, and in any event within one hundred twenty (120) days after the end of each fiscal year of the Company, an annual financial budget for the fiscal year in which such budget is delivered, and, within thirty (30) days after being furnished to the Board of Directors of the Company, a copy of any revised versions of such annual financial budget. 1.2 Confidentiality. Each Investor will hold all information received pursuant to this Section 1 in confidence, and will not, except to the extent such information may otherwise, through no breach by such Investor of its obligations hereunder, become public, and except as may be required of such Investor by law (any such disclosure to be noticed to the Company by such Investor reasonably in advance of the date of such disclosure), use any of such information, or disclose any of such information to (a) any third party, or (b) to personnel within such Investor who are directly engaged in product development and/or marketing activities competitive with the business of the Company (but not including the financial, accounting or operations planning staff personnel of such Investor). 1.3 Termination of Certain Rights. The Company's obligations under Section 1.1 hereof will terminate upon the closing of the Company's initial public offering of its Common Stock (the "IPO") pursuant to an effective registration statement filed under the U.S. Securities Act of 1933, as amended (the "Securities Act"), in which the managing underwriter will be a reputable investment banking firm as determined in good faith by the Company's Board of Directors. 2. REGISTRATION RIGHTS. 2.1 Definitions. For purposes of this Section 2: (a) Registration. The terms "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement. (b) Registrable Securities. The term "Registrable Securities" means: (i) all shares of Common Stock of the Company issued or issuable upon the conversion of any shares of (A) Series B Stock issued under the Series B Agreement, (B) Series C Stock issued under the Series B Agreement, (C) Series D Stock issued under the Series D Agreement, (D) Series E Stock issued under the Series E Agreement, (E) Series F Stock issued under the Series F Agreement and (F) Series G Stock issued under the Series G Agreement (as such agreement may hereafter be amended from time to time), in each case, that are now owned or may hereafter be acquired by any Investor or any Investor's permitted successors and assigns; and (ii) any shares of Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, all such shares of Common Stock described in clause (i) of this sentence; excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which rights under this -3- 4 Section 2 are not assigned in accordance with this Agreement or any Registrable Securities sold to the public or sold pursuant to Rule 144 promulgated under the Securities Act. Additionally, "Registrable Securities" also includes, for purposes only of Sections 2.3, 2.5, 2.6, 2.7, 2.8, 2.9, 2.10, 2.11, 7.2, 7.4, 7.6, 7.7, 7.8, 7.13, 7.14, 7.15 and 7.16 of this Agreement: (i) all shares of Common Stock of the Company issued or issuable upon the conversion of the IBM Note, in each case, that are now owned or may hereafter be acquired by IBM; and (ii) any shares of Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, all such shares of Common Stock described in clause (i) of this sentence; excluding in all cases, however, any Registrable Securities sold by IBM to the public, pursuant to Rule 144 promulgated under the Securities Act or otherwise. (c) Registrable Securities then outstanding. The number of shares of "Registrable Securities Then Outstanding" will mean the number of shares of Common Stock which are Registrable Securities and (i) are then issued and outstanding or (ii) are then issuable pursuant to the exercise or conversion of then outstanding and then exercisable options, warrants or convertible securities. (d) Holder. For purposes of this Section 2, the term "Holder" means any person owning of record Registrable Securities that have not been sold to the public or pursuant to Rule 144 promulgated under the Securities Act or any assignee of record of such Registrable Securities to whom rights under this Section 2 have been duly assigned in accordance with this Agreement; provided, however, that for purposes of this Agreement, a record holder of shares of Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock or Series G Stock or the IBM Note, in each case convertible into such Registrable Securities, will be deemed to be the Holder of such Registrable Securities; provided further, however, that IBM will be deemed a Holder hereunder with respect to the IBM Note or Registrable Securities into which the IBM Note is convertible for purposes only of Sections 2.3, 2.5, 2.6, 2.7, 2.8, 2.9, 2.10, 2.11, 7.2, 7.4, 7.6, 7.7, 7.8, 7.13, 7.14, 7.15 and 7.16 of this Agreement. (e) Form S-3. The term "Form S-3" means such form under the Securities Act as is in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. (f) SEC. The term "SEC" or "Commission" means the U.S. Securities and Exchange Commission. 2.2 Demand Registration. (a) Request by Holders. If the Company receives at any time after the earlier of (i) July 1, 2001, or (ii) one hundred eighty (180) days after the effective date of the Company's initial public offering of its securities pursuant to a registration filed under the Securities Act, a written request from the Holders of at least twenty percent (20%) of the Registrable Securities then outstanding that the Company file a registration statement under the Securities Act covering the registration of Registrable Securities pursuant to this Section 2.2, then the Company will, within ten (10) business days of the receipt of such written request, give written notice of such request ("Request Notice") to all Holders, and will use its best efforts to effect, as soon as practicable, the registration under the Securities Act of all Registrable Securities which Holders request to be registered and included in such registration by written notice given such Holders to the Company -4- 5 within twenty (20) days after receipt of the Request Notice, subject only to the limitations of this Section 2.2; provided that the Registrable Securities requested by all Holders to be registered pursuant to the first registration effected pursuant to this Section 2.2 must have an anticipated aggregate public offering price (before any underwriting discounts and commissions) of not less than $25,000,000.00; provided further that the Registrable Securities requested by all Holders to be registered pursuant to the second registration effected pursuant to this Section 2.2 must have an anticipated aggregate public offering price (before any underwriting discounts and commissions) of not less than $15,000,000.00. (b) Underwriting. If the Holders initiating the registration request under this Section 2.2 ("Initiating Holders") intend to distribute the Registrable Securities covered by their request by means of an underwriting, then they will so advise the Company as a part of their request made pursuant to this Section 2.2 and the Company will include such information in the written notice referred to in Section 2.2(a). In such event, the right of any Holder to include his Registrable Securities in such registration will 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) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting will enter into an underwriting agreement in customary form with the managing underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 2.2, if the underwriter(s) advise(s) the Company in writing that marketing factors require a limitation of the number of securities to be underwritten then the Company will so advise all Holders of Registrable Securities which would otherwise be registered and underwritten pursuant hereto, and the number of Registrable Securities that may be included in the underwriting will be reduced as required by the underwriter(s) and allocated among the Holders of Registrable Securities on a pro rata basis according to the number of Registrable Securities then outstanding held by each Holder requesting registration (including the Initiating Holders); provided, however, that the number of shares of Registrable Securities to be included in such underwriting and registration will not be reduced unless all other securities of the Company are first entirely excluded from the underwriting and registration. Any Registrable Securities excluded and withdrawn from such underwriting will be withdrawn from the registration. (c) Maximum Number of Demand Registrations. The Company is obligated to effect only two (2) such registrations pursuant to this Section 2.2. (d) Deferral. Notwithstanding the foregoing, if the Company will furnish to Holders requesting the filing of a registration statement pursuant to this Section 2.2, a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, then the Company will have the right to defer such filing for a period of not more than one hundred twenty (120) days after receipt of the request of the Initiating Holders; provided, however, that the Company may not utilize this right more than once in any twelve (12) month period. (e) Expenses. All expenses incurred in connection with a registration pursuant to this Section 2.2, including without limitation all registration and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company (but excluding underwriters' discounts and commissions), will be borne by the Company. Each Holder participating in a registration pursuant to this Section 2.2 will bear such Holder's proportionate share (based on the -5- 6 total number of shares sold in such registration other than for the account of the Company) of all discounts, commissions or other amounts payable to underwriters or brokers in connection with such offering. Notwithstanding the foregoing, the Company will not be required to pay for any expenses of any registration proceeding begun pursuant to this Section 2.2 if the registration request is subsequently withdrawn at the request of the Holders of a majority of the Registrable Securities to be registered, unless the Holders of a majority of the Registrable Securities then outstanding agree to forfeit their right to one (1) demand registration pursuant to this Section 2.2 (in which case such right will be forfeited by all Holders of Registrable Securities); provided, further, however, that if at the time of such withdrawal, the Holders have learned of a material adverse change in the condition, business, or prospects of the Company not known to the Holders at the time of their request for such registration and have withdrawn their request for registration with reasonable promptness after learning of such material adverse change, then the Holders will not be required to pay any of such expenses and will retain their rights pursuant to this Section 2.2. 2.3 Piggyback Registrations. The Company will notify all Holders of Registrable Securities in writing at least thirty (30) days prior to filing any registration statement under the Securities Act for purposes of effecting a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding registration statements relating (1) to any registration under Section 2.2 or Section 2.4 of this Agreement or (2) to any employee or director benefit plan, stock purchase agreement or stock option agreement (whether or not exercised), or the resale of shares purchased thereunder, or (3) to a corporate reorganization) and will afford each such Holder an opportunity to include in such registration statement all or any part of the Registrable Securities then held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by such Holder will, within twenty (20) days after receipt of the above-described notice from the Company, so notify the Company in writing, and in such notice will inform the Company of the number of Registrable Securities such Holder wishes to include in such registration statement. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder will nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. (a) Underwriting. If a registration statement under which the Company gives notice under this Section 2.3 is for an underwritten offering, then the Company will so advise the Holders of Registrable Securities. In such event, the right of any such Holder's Registrable Securities to be included in a registration pursuant to this Section 2.3 will 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 Registrable Securities through such underwriting will enter into an underwriting agreement in customary form with the managing underwriter or underwriter(s) selected for such underwriting. Notwithstanding any other provision of this Agreement, if the managing underwriter determine(s) in good faith that marketing factors require a limitation of the number of shares to be underwritten, then the managing underwriter(s) may exclude shares (including Registrable Securities) from the registration and the underwriting, and the number of shares that may be included in the registration and the underwriting will be allocated, first, to the Company, and second, to each of the Holders requesting inclusion of their Registrable Securities in such registration statement on a pro rata basis based on the total number of Registrable Securities then held by each such Holder, provided, however, that the right of the underwriters to exclude shares (including Registrable Securities) from -6- 7 the registration and underwriting as described above will be restricted so that (i) the number of Registrable Securities included in any such registration is not reduced below twenty percent (20%) of the shares included in the registration, except for a (1) registration relating to the Company's initial public offering or (2) a registration pursuant to the first registration statement filed and declared effective after the Company's initial public offering to register the sale of the Company's shares for its own account or (3) an offering solely by shareholders of the Company exercising demand registration rights, in each such case from which all Registrable Securities may be excluded, and (ii) all shares that are not Registrable Securities and are held by persons who are employees or directors of the Company (or any subsidiary of the Company) will first be excluded from such registration and underwriting before any Registrable Securities are so excluded. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the underwriter, delivered at least ten (10) business days prior to the effective date of the registration statement. Any Registrable Securities excluded or withdrawn from such underwriting will be excluded and withdrawn from the registration. For any Holder which is a partnership or corporation, the partners, retired partners and shareholders of such Holder, or the estates and family members of any such partners and retired partners and any trusts for the benefit of any of the foregoing persons will be deemed to be a single "Holder", and any pro rata reduction with respect to such "Holder" will be based upon the aggregate amount of shares carrying registration rights owned by all entities and individuals included in such "Holder", as defined in this sentence. (b) Expenses. All expenses incurred in connection with a registration pursuant to this Section 2.3 (excluding underwriters' and brokers' discounts and commissions), including, without limitation, all federal and "blue sky" registration and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company will be borne by the Company. 2.4 Form S-3 Registration. In case the Company will receive from any Holder or Holders of Registrable Securities a written request or requests that the Company effect a registration on Form S-3 and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders, then the Company will: (a) Notice. Promptly give written notice of the proposed registration and the Holder's or Holders' request therefor, and any related qualification or compliance, to all other Holders of Registrable Securities; and (b) Registration. 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 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 twenty (20) days after receipt of such written notice from the Company; provided, however, that the Company will not be obligated to effect any such registration, qualification or compliance pursuant to this Section 2.4: (i) if Form S-3 is not available for such offering by the Holders; (ii) if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate price to the public of less than $500,000.00; -7- 8 (iii) if the Company will furnish to the Holders a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company will have the right to defer the filing of the Form S-3 registration statement no more than once during any twelve month period for a period of not more than one hundred twenty (120) days after receipt of the request of the Holder or Holders under this Section 2.4; (iv) if the Company has, within the twelve (12) month period preceding the date of such request, already effected one (1) registration on Form S-3 for the Holders pursuant to this Section 2.4; or (v) 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) Expenses. Subject to the foregoing, the Company will file a Form S-3 registration statement covering the Registrable Securities and other securities so requested to be registered pursuant to this Section 2.4 as soon as practicable after receipt of the request or requests of the Holders for such registration. The Company will pay all expenses incurred in connection with the first two registrations requested pursuant to this Section 2.4, (excluding underwriters' or brokers' discounts and commissions), including without limitation all filing, registration and qualification, printers' and accounting fees and the reasonable fees and disbursements of one counsel for the selling Holder or Holders and counsel for the Company, and the Holders will pay such expenses for any subsequent registration requested pursuant to this Section 2.4, payable pro rata by each such Holder based on the total number of shares sold by such Holder in such registration. (d) Not Demand Registration. Form S-3 registrations will not be deemed to be demand registrations as described in Section 2.2 hereof. 2.5 Obligations of the Company. Whenever required to effect the registration of any Registrable Securities under this Agreement, the Company will, as expeditiously as reasonably possible: (a) Registration Statement. Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to ninety (90) days. (b) Amendments and Supplements. Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Prospectus. Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Registrable Securities owned by them that are included in such registration. -8- 9 (d) Blue Sky. Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as will be reasonably requested by the Holders, provided that the Company will not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) Underwriting. In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting will also enter into and perform its obligations under such an agreement. (f) Notification. Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Opinion and Comfort Letter. Furnish, at the request of any Holder requesting registration of Registrable Securities, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a "comfort" letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 2.6 Furnish Information. It will be a condition precedent to the obligations of the Company to take any action pursuant to Sections 2.2, 2.3 or 2.4 hereof that the selling Holders will furnish to the Company such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such securities as will be required to timely effect the registration of their Registrable Securities. 2.7 Delay of Registration. No Holder will have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 2. 2.8 Indemnification. In the event any Registrable Securities are included in a registration statement under Sections 2.2, 2.3 or 2.4 hereof: (a) By the Company. To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, officers and directors of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Securities Exchange Act -9- 10 of 1934, as amended, (the "1934 Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the l934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) 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 violation or alleged violation by the Company of the Securities Act, the 1934 Act, any federal or state securities law or any rule or regulation promulgated under the Securities Act, the 1934 Act or any federal or state securities law in connection with the offering covered by such registration statement; and the Company will reimburse each such Holder, partner, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them, as incurred, in connection with investigating or defending any such loss, claim, damage, liability or action; provided however, that the indemnity agreement contained in this Section 2.8(a) will not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent will not be unreasonably withheld), nor will the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, underwriter or controlling person of such Holder. (b) By Selling Holders. To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder within the meaning of the Securities Act or the 1934 Act, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, partner or director, officer or controlling person of such other Holder may become subject under the Securities Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 2.8(b) will not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent will not be unreasonably withheld; and provided further, that the total amounts payable in indemnity by a Holder under this -10- 11 Section 2.8(b) in respect of any Violation will not exceed the net proceeds received by such Holder in the registered offering out of which such Violation arises. (c) Notice. Promptly after receipt by an indemnified party under this Section 2.8 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 2.8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party will have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party will have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential conflict of interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, will relieve such indemnifying party of any liability to the indemnified party under this Section 2.8, but the omission to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 2.8. (d) Defect Eliminated in Final Prospectus. The foregoing indemnity agreements of the Company and Holders are subject to the condition that, insofar as they relate to any Violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement in question becomes effective or the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final Prospectus), such indemnity agreement will not inure to the benefit of any person if a copy of the Final Prospectus was furnished to the indemnified party and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. (e) Contribution. In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any Holder exercising rights under this Agreement, or any controlling person of any such Holder, makes a claim for indemnification pursuant to this Section 2.8 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 2.8 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any such selling Holder or any such controlling person in circumstances for which indemnification is provided under this Section 2.8; then, and in each such case, the Company and such Holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such Holder is responsible for the portion represented by the percentage that the public offering price of its Registrable Securities offered by and sold under the registration statement bears to the public offering price of all securities offered by and sold under such registration statement, and the Company and other selling Holders are responsible for the remaining portion; provided, however, that, in any such case, (A) no such Holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered and sold by such Holder pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be -11- 12 entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. (f) Survival. The obligations of the Company and Holders under this Section 2.8 will survive the completion of any offering of Registrable Securities in a registration statement, and otherwise. 2.9 "Market Stand-Off" Agreement. Each Holder hereby agrees that it will not, to the extent requested by the Company or an underwriter of securities of the Company, sell or otherwise transfer or dispose of any Registrable Securities or other shares of stock of the Company then owned by such Holder (other than to donees or partners of the Holder who agree to be similarly bound) for up to one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act; provided, however, that each executive officer and director of the Company then holding Common Stock of the Company enter into substantially the same agreement. In order to enforce the foregoing covenant, the Company will have the right to place restrictive legends on the certificates representing the shares subject to this Section and to impose stop transfer instructions with respect to the Registrable Securities and such other shares of stock of each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 2.10 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Registrable Securities to the public without registration, after such time as a public market exists for the Common Stock of the Company, 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 after 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 1934 Act (at any time after it has become subject to such reporting requirements); and (c) So long as a Holder owns any Registrable Securities, to furnish to the Holder forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 (at any time after ninety (90) days after 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 1934 Act (at any time after it has become subject to the reporting requirements of the 1934 Act), a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company as a Holder may reasonably request in availing itself of any rule or regulation of the Commission allowing a Holder to sell any such securities without registration (at any time after the Company has become subject to the reporting requirements of the 1934 Act). 2.11 Termination of the Company's Obligations. The Company will have no obligations pursuant to Sections 2.2 through 2.4 with respect to: (a) any request or requests for registration made by any Holder on a date more than eight (8) years after the closing date of the IPO; or (b) any Registrable Securities proposed to be sold by a Holder in a registration pursuant to Section 2.2, 2.3 or 2.4 hereof if, in the opinion of counsel to the Company, all such Registrable Securities -12- 13 proposed to be sold by a Holder may be sold in a three-month period without registration under the Securities Act pursuant to Rule 144 under the Securities Act and such Holder holds less than one percent (1%) of the outstanding stock of the Company. 3. RIGHT OF FIRST OFFER. 3.1 Right of First Offer. Each time after the date hereof that the Company proposes to offer any shares of, or securities convertible into or exercisable for any shares of, any class of its capital stock ("Offered Securities") other than Excluded Securities (as defined below), the Company will first make an offering of such Offered Securities to the Investors in accordance with the following provisions: (a) Delivery of Right of First Offer Notice. The Company will deliver a notice ("Right of First Offer Notice") to each Investor stating (i) the Company's bona fide intention to offer such Offered Securities, subject to the provisions of Section 3.1(b) below, (ii) the number of such Offered Securities to be offered, and (iii) the price and terms, if any, upon which it proposes to offer such Offered Securities. (b) Exercise of Right of First Offer. By written notification received by the Company, within thirty (30) calendar days after the Company gives the Right of First Offer Notice, each Investor may elect to purchase, at the price and on the terms specified in the Right of First Offer Notice, up to that portion of such Offered Securities which equals such Investor's Percentage Share (as defined below). For the purpose of this Section 3.1(b), an "Investor's Percentage Share" will be equal to that proportion that the number of shares of Common Stock issued and held, or issuable upon conversion of the Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock and Series G Stock then issued and held by the relevant Investor bears to (i) the total number of shares of Common Stock of the Company then outstanding, plus (ii) the total number of shares of Common Stock of the Company into which all then outstanding shares of Preferred Stock of the Company are then convertible, plus (iii) up to a total of 2,000,000 shares of Common Stock of the Company issued and reserved for issuance under stock purchase and stock option plans of the Company from the date of its incorporation, plus (iv) the total number of shares of Common Stock of the Company then issuable under all then outstanding warrants or then issuable upon conversion of all shares of Preferred Stock issuable under such warrants. If all Offered Securities that the Investors are entitled to obtain pursuant to this Section 3.1 are not elected to be purchased by the Investors as provided in this Section 3.1, the Company may, during the one hundred twenty (120) day period following the expiration of the thirty (30) day period provided in the first sentence of this Section 3.1, offer the remaining unsubscribed portion of such Offered Securities to any person or persons at a price not less than, and upon terms no more materially favorable, to the offeree than those specified in the Right of First Offer Notice. If the Company does not enter into a written agreement for the sale of the Offered Securities within such one hundred twenty (120) day period, or if such written agreement is not consummated within thirty (30) days after the execution thereof by all parties thereto, the right of first offer provided hereunder will be deemed to be revived and such Offered Securities will not be offered to any third party unless first reoffered to the Investors in accordance herewith. (c) Hart-Scott Rodino Filings. The Company agrees to cooperate with the reasonable requests of an Investor purchasing Offered Securities respecting filings which must be made by the Company under the Hart-Scott Rodino Antitrust Improvements Act in order for such Investor to purchase such Offered Securities; provided, however, that such obligation of the Company is conditioned upon such Investor paying to the Company the reasonable costs and expenses which the Company incurs respecting such filings. -13- 14 3.2 Excluded Securities. The right of first offer in this Section 3 will not be applicable to the following (the "Excluded Securities"): (a) shares of the Company's Common Stock (and/or options, warrants or rights therefor) issued to employees, officers, or directors of, or contractors, advisors or consultants to the Company or any subsidiary pursuant to stock purchase or stock option plans, stock bonuses or awards, warrants, contracts or other arrangements (collectively, the "Awards") that are approved by (i) one or more officers of the Company to whom authority to grant the Awards has been delegated in accordance with the Company's applicable equity incentive plan and which Award(s) in question are issued to a person who is not then a Director of the Company or officer of the Company who performs policy-making functions for the Company or (ii) the Board of Directors of the Company, which approval, in the case of any shares of the Company's Common Stock (and/or options, warrants or rights therefor) issued to a Principal Common Shareholder, must include the approval of at least one Board Designee (as defined below) then a member of the Board of Directors of the Company; (b) shares of Common Stock issued or issuable upon the exercise of options or warrants granted on or before the date hereof; (c) securities offered by the Company to the public pursuant to a registration statement filed under the Securities Act, including the IPO; (d) securities issued pursuant to the conversion or exercise of convertible or exercisable securities which themselves were Excluded Securities when originally issued; (e) securities issued pursuant to the acquisition of another corporation or entity by the Company by consolidation, merger, purchase of all or substantially all of the assets, or other reorganization in which the Company acquires, in a single transaction or series of related transactions, all or substantially all of the assets of such other corporation or entity or fifty percent (50%) or more of the voting power of such other corporation or entity or fifty percent (50%) or more of the equity ownership of such other entity; (f) shares of Common Stock or options, warrants or rights therefor issued to equipment lessors, real estate lessors, banks and other financial institutional lenders to the Company or any subsidiary in connection with commercial credit arrangements, equipment financings, real property leases or similar transactions, and to entities in connection with a contractual relationship of joint venture or strategic partnering (as such relationship is so determined by the Board in good faith on a case-by-case basis), in each case pursuant to stock purchase agreements, options, warrants or rights therefor that are approved by the Board; (g) shares of the Company's Common Stock or Preferred Stock issued in connection with any stock split or stock dividend; or (h) the Series B Stock, the Series C Stock, the Series D Stock, Series E Stock, Series F Stock, Series G Stock or the Conversion Stock. 3.3 Termination. This right of first offer will terminate (a) immediately before the closing of the IPO, or (b) upon the acquisition of all or substantially all the assets of the Company or (c) upon an acquisition of the Company by another corporation or entity by consolidation, merger or other reorganization in which the holders of the Company's outstanding voting stock immediately prior to such transaction own, immediately after such transaction, securities representing less than fifty percent (50%) of the voting power of the corporation or other entity surviving such transaction pursuant to this Section 3. 4. RIGHT OF CO-SALE. 4.1 Purchase Offer Notice. If one or more of the Common Holders listed in Exhibit B hereto receive one or more bona fide offers (collectively, the "Purchase Offer") that, if consummated, would result in the transfer by any single Common Holder of shares of the Company's Common Stock to any persons (individually a "Purchase Offeror" and collectively, if there is more than one offeror at the time, the "Purchase Offerors"), which persons have the apparent ability and intent to purchase from the Common Holder(s) such shares of the Common Stock then held by such -14- 15 Common Holder(s), upon specific terms and conditions (including a specified purchase price payable in cash or other property), and if the Common Holder(s) desire to accept such Purchase Offer, then the Common Holder(s) will promptly notify the Company and the Investors in writing (a "Purchase Offer Notice") of the terms and conditions of such Purchase Offer, identifying the Purchase Offeror(s) therein. 4.2 Investors' Right of Co-Sale. Each Investor will have the right, exercisable upon written notice to the Common Holder(s) within twenty (20) calendar days after such Investor's receipt of the Purchase Offer Notice of the Purchase Offer, to participate in the Common Holder(s)' sale of such Common Stock pursuant to the specified terms and conditions of such Purchase Offer, except that such Investor may substitute that number of shares of then outstanding Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock and Series G Stock convertible into the number of shares of Common Stock that such Investor would otherwise be entitled to sell pursuant to such Investor's exercise of its right of co-sale hereunder. 4.3 Terms and Conditions of Co-Sale Right. The right of co-sale of each Investor hereunder will be subject to the following terms and conditions: (a) Investors' Pro Rata Share. Each Investor may sell all or any part of that number of shares of Common Stock (or then outstanding Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock and Series G Stock, on an as if converted to Common Stock basis) of the Company held by such Investor as is equal to the product obtained by multiplying (i) the aggregate number of shares of Common Stock covered by the Purchase Offer included in the Purchase Offer Notice by (ii) a fraction, the numerator of which will be the number of shares of Common Stock of the Company at the time owned by such Investor and the denominator of which will be the combined number of shares of Common Stock of the Company at the time owned by the selling Common Holder and all Investors (such number referred to herein as the "Investor's Pro Rata Share"). For purposes of making such computation, the selling Common Holder(s) and each Investor will be deemed to own the number of shares of Common Stock that are outstanding and held by such parties plus the number of shares of Common Stock into which all then outstanding Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock and/or Series G Stock held by such Common Holder(s) or Investor is at the time convertible. (b) Procedure. Each Investor may effect its right of co-sale in the sale by delivering to the Common Holder(s), for transfer to the Purchase Offeror(s) one or more certificates, properly endorsed for transfer, that represent: (i) the number of shares of Common Stock that such Investor elects to sell pursuant to this Section 4; or (ii) that number of shares of then outstanding Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock and/or Series G Stock that is at such time convertible into the number of shares of Common Stock that such Investor elects to sell pursuant to this Section 4 or that is at such time convertible into that number of shares of Common Stock issuable on conversion of the then outstanding Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock and/or Series G Stock that such Investor would otherwise be entitled to sell pursuant to its rights of co-sale hereunder; provided, however, that if the Purchase Offeror(s) object to the delivery of Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock and/or Series G Stock in lieu of Common Stock, such -15- 16 Investor may convert such stock and deliver Common Stock as provided in subsection (i) of this Section 4.3(b). (c) Consummation. The stock certificates that an Investor delivers to the Common Holder(s) pursuant to this Section 4 in exercise of such Investor's right of co-sale hereunder will be transferred by the Common Holder(s) to the Purchase Offeror in consummation of the sale of the Common Holder Stock pursuant to the terms and conditions specified in the Purchase Offer Notice to the Investors, and the Common Holder(s) will promptly thereafter remit to such Investor that portion of the sale proceeds to which such Investor is entitled by reason of its participation in such sale. (d) No Limitation on Further Co-Sale. The exercise or non-exercise of the rights of co-sale of any Investor hereunder to participate in one or more sales of Common Stock made by the Common Holder(s) will not adversely affect such Investor's rights to participate, pursuant to its rights of co-sale hereunder, in subsequent sales of Common Stock by any Common Holder. (e) Exclusions. The rights of co-sale hereunder of the Investors will not pertain or apply to (i) any pledge of the Common Stock made by the Common Holder(s) that creates only a security interest, or (ii) any transfer to the ancestors, descendants or spouse, or to trusts for the benefit of any of the aforementioned persons, of the Common Holder(s), or (iii) any bona fide gift; provided the pledgee, transferee or donee will furnish the Company and the Investors with a written agreement to be bound by and comply with all provisions of Section 4 of this Agreement applicable to the relevant transferring Common Holder, or (iv) the sale by such Common Holder of any Preferred Stock of the Company then held by such Common Holder (but will apply to Common Stock issued upon any conversion of such Preferred Stock and then held as Common Stock by such Common Holder), or (v) the sale by a Common Holder of such Common Holder's Common Stock to the public pursuant to a registration statement filed under the Securities Act, including the IPO, or (vi) the sale or transfer by a Common Holder of an aggregate of 100,000 shares of the Common Stock of the Company in one or more transactions. (f) Prohibited Transfers. If any Common Holder sells any Common Stock in contravention of the co-sale rights of any Investor under this Agreement (a "Prohibited Transfer"), such Investor will have the right to sell to the Common Holder, and the Common Holder will purchase from such Investor, a number of shares of Common Stock of the Company (either directly or through delivery of then outstanding Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock and/or Series G Stock held by such Investor), not to exceed such Investor's Pro Rata Share, equal to the number of shares of Common Stock sold by the Common Holder in contravention of such rights, on the following terms and conditions: (i) Price Per Share. The price per share at which such shares are to be sold by such Investor to the Common Holder will be equal to the price per share paid by the third-party purchaser or purchasers of the Common Stock to the Common Holder(s). (ii) Delivery of Investor's Certificates to Common Holder. Such Investor will deliver to the Common Holder, within ninety (90) days after such Investor has received notice from the Common Holder of, or otherwise become aware of, the Prohibited Transfer, the certificate or certificates representing shares to be sold -16- 17 by such Investor to the Common Holder hereunder, each certificate to be properly endorsed for transfer. (iii) Payment by Common Holder to Investor. The Common Holder will, upon receipt of the certificates for the shares to be sold to the Common Holder by such Investor hereunder, pay the aggregate purchase price therefor, by certified check or bank draft made payable to the order of such Investor, and will reimburse such Investor for all reasonable additional expenses, including reasonable legal fees and expenses, incurred by such Investor in effecting such purchase and resale. (g) Hart-Scott Rodino Filings. The Company agrees to cooperate with the reasonable requests of an Investor exercising its right of co-sale hereunder respecting filings which must be made by the Company under the Hart-Scott Rodino Antitrust Improvements Act in order for such Investor to so exercise its right of co-sale; provided, however, that such obligation of the Company is conditioned upon such Investor paying to the Company the reasonable costs and expenses which the Company incurs respecting such filings. 4.4 Termination of Right of Co-Sale. The right of co-sale of the Investors hereunder will terminate immediately prior to the closing of the IPO, if not terminated earlier by termination of this Agreement. 4.5 Legended Certificates. (a) Legend. Each certificate representing shares of Common Stock now owned by the Common Holder(s) or owned by them while the right of co-sale hereunder then is in effect, will be endorsed with a legend substantially in the following form: "THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF A CERTAIN INVESTORS' RIGHTS AGREEMENT BY AND BETWEEN THE HOLDER AND INVESTORS IN THE CAPITAL STOCK OF THE ISSUER. COPIES OF SUCH AGREEMENT MAY BE OBTAINED UPON WRITTEN REQUEST TO THE ISSUER." (b) Removal of Legend. The legend required under this Section 4.5 will be removed upon termination of this Agreement. 5. VOTING AGREEMENT. 5.1 Election of Board of Directors. (a) Voting; Board Composition. During the term of this Agreement, each Investor and each Principal Common Shareholder agrees to vote all shares of capital stock of the Company now or hereafter directly or indirectly owned (of record or beneficially) by such Investor or Principal Common Shareholder in such manner as may be necessary to elect (and maintain in office) as members of the Company's Board of Directors: (i) two (2) individuals designated from time to time in a writing delivered to the Company and to the Principal Common Shareholders signed by -17- 18 Investors who, at the time in question, hold then outstanding shares of Series B Stock, Series C Stock and/or Common Stock issued upon conversion of Series B and/or Series C Stock representing at least a majority of the voting power of all outstanding shares of Series B Stock, Series C Stock and Common Stock issued upon conversion of Series B Stock and/or Series C Stock held by all Investors, (ii) one (1) individual designated from time to time in a writing delivered to the Company and to the Principal Common Shareholders signed by Investors who, at the time in question, hold then outstanding shares of Series D Stock and/or Common Stock issued upon conversion of Series D Stock representing at least a majority of the voting power of all outstanding shares of Series D Stock and Common Stock issued upon conversion of Series D Stock held by all Investors, and (iii) one (1) individual designated from time to time in a writing delivered to the Company and to the Principal Common Shareholders signed by (a) Quantum Industrial Partners, LDC so long as 2,500,000 shares of Series F Preferred and/or Common Stock issued upon conversion of Series F Stock are held at the time in question by Quantum Industrial Partners, LDC and related parties or (b) at and following such time that Quantum Industrial Partners, LDC and related parties no longer hold 2,500,000 shares of Series F Preferred and/or Common Stock issued upon conversion of Series F Stock, Investors who, at the time in question, hold then outstanding shares of Series F Stock and/or Common Stock issued upon conversion of Series F Stock representing at least a majority of the voting power of all outstanding shares of Series F Stock and Common Stock issued upon conversion of Series F Stock held by all Investors. For purposes of this Agreement: (i) any individual who is designated for election to the Company's Board of Directors pursuant to the foregoing subsection 5.1(a)(i) is hereinafter referred to as a "Series B/C Board Designee"; (ii) any individual who is designated for election to the Company's Board of Directors pursuant to subsection 5.1(a)(ii) is hereinafter referred to as a "Series D Board Designee"; (iii) any individual who is designated for election to the Company's Board of Directors pursuant to subsection 5.1(a)(iii) is hereinafter referred to as a "Series F Board Designee", and collectively, with the Series B/C Board Designee and Series D Board Designee, are hereinafter referred to as the "Board Designees"; and (iv) the individuals and/or entities who have the right hereunder to designate the Board Designees for election to the Company's Board of Directors pursuant to the foregoing sentence are hereinafter referred to as the "Designators". (b) Initial Board Members. The initial Series B/C Board Designees will be T. Peter Thomas and William Tai and the initial Series F Designee will be Paul McNulty. (c) Changes in Board Designees. From time to time during the term of this Agreement, the Designators may, in their sole discretion, designate a new Board Designee for election to a Board seat for which such Designators are entitled to designate the Board Designee under Section 5.1(a) hereof (whether to replace a prior Board Designee or to fill a vacancy in such Board seat); provided such designation of a Board Designee is approved in a writing signed by Designators who are entitled to designate such Board Designee under Section 5.1(a), in which case such election of a new Board Designee will be binding on all Investors and Principal Common Shareholders. In the event of such a designation of a Board Designee under -18- 19 this Section 5.1(c), the Investors and the Principal Common Shareholders will vote their shares of the Company's capital stock as provided in Section 5.1(a) to cause the election to the Company's Board Directors of any new Board Designee or Designees so designated for election to the Company's Board of Directors by the Designators. (d) Notice; Cumulative Voting. The Company will promptly give each of the Investors and the Principal Common Shareholders written notice of any change in composition of the Company's Board of Directors and of any proposal by the Designators to elect a new Board Designee or Designees. In any election of Directors pursuant to this Section 5, the Investors and the Principal Common Shareholders will vote their shares in a manner sufficient to elect to the Company's Board of Directors the Board Designee or Designees to be elected thereto as provided in this Section 5, utilizing cumulative voting if and to the extent necessary to do so. 5.2 Further Assurances. Each of the Investors and the Principal Common Shareholders agrees not to vote any shares of Company Stock, or to take any other actions, that would in any manner defeat, impair, be inconsistent with or adversely affect the stated intentions of the parties under Section 5 of this Agreement. 5.3 Transferees; Legends on Certificates. (a) Effect on Transferees. Each transferee or assignee of any shares of capital stock of the Company from any Investor or Principal Common Shareholder will be bound by and subject to the terms and conditions of this Section 5, and the Company will require, as a condition precedent to the transfer of any shares of capital stock of the Company subject to this Section 5, that the transferee agree in writing to be bound by, and subject to, all the terms and conditions of this Section 5. (b) Legend. The Investors and the Principal Common Shareholders agree that all Company share certificates now or hereafter held by them that represent shares of capital stock of the Company subject to this Section 5 will be imprinted with the following legend: "THE SHARES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO AGREEMENTS AND RESTRICTIONS WITH REGARD TO THE VOTING OF SUCH SHARES AND THEIR TRANSFER, AS PROVIDED IN THE PROVISIONS OF AN INVESTORS' RIGHTS AGREEMENT, A COPY OF WHICH IS ON FILE IN THE OFFICE OF THE SECRETARY OF THE CORPORATION." 5.4 Term. The provisions of Section 5 of this Agreement will terminate upon the first to occur of the following: (a) The closing of the IPO; or (b) Immediately prior to the closing of (i) any consolidation or merger of the Company with or into any other corporation or corporations in which the holders of the Company's outstanding shares immediately before such consolidation or merger do not, immediately after such consolidation or merger, retain stock representing a majority of the -19- 20 voting power of the surviving corporation of such consolidation or merger or stock representing a majority of the voting power of a corporation that wholly owns, directly or indirectly, the surviving corporation of such consolidation or merger; (ii) the sale, transfer or assignment of securities of the Company representing a majority of the voting power of all the Company's outstanding voting securities by the holders thereof to an acquiring party in a single transaction or series of related transactions; or (iii) any other sale, transfer or assignment of securities of the Company representing over fifty percent (50%) of the voting power of the Company's then outstanding voting securities by the holders thereof to an acquiring party. 6. ASSIGNMENT. 6.1 Information Rights. Notwithstanding anything herein to the contrary, the rights of an Investor under Section 1.1 hereof may be assigned only to a party who acquires from an Investor (or an Investor's permitted assigns) at least that number of shares of Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock, Series G Stock and/or an equivalent number (on an as-converted basis) of shares of Conversion Stock described in Section 1.1 hereof, respectively. 6.2 Registration Rights; Rights of First Offer; Rights of Co-Sale. Notwithstanding anything herein to the contrary, the rights of a Holder or an Investor under Sections 2, 3 and 4 hereof may be assigned only to a party who acquires at least 200,000 shares of (i) Series B Stock issued under the Series B Agreement, and/or (ii) Series C Stock issued under the Series B Agreement, and/or (iii) Series D Stock issued under the Series D Agreement, and/or (iv) Series E Stock issued under the Series E Agreement, and/or (v) Series F Stock issued under the Series F Agreement, and/or (vi) Series G Stock issued under the Series G Agreement, and/or (vii) an equivalent number (on an as-converted basis) of Registrable Securities issued upon conversion thereof; provided, however that no party may be assigned any of the foregoing rights unless the Company is given written notice by the assigning party at the time of such assignment stating the name and address of the assignee and identifying the securities of the Company as to which the rights in question are being assigned; and provided further that any such assignee will receive such assigned rights subject to all the terms and conditions of this Agreement, including without limitation the provisions of Section 5. Notwithstanding the foregoing, such rights may be transferred by a Holder to a limited partner, general partner or other affiliate of such Holder at any time and for any number of shares of Registrable Securities. 7. GENERAL PROVISIONS. 7.1 Termination of This Agreement. This Agreement may be terminated voluntarily by written agreement of (1) the Company and (2) the holders of then outstanding shares of Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock, Series G Stock and shares of Conversion Stock issued upon the conversion of Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock or Series G Stock representing at least sixty-six and two-thirds percent (66.67%) of the voting power of all such shares together. Such termination will be binding upon all holders, if any, of then outstanding shares of Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock, Series G Stock and Conversion Stock who do not sign such termination agreement. 7.2 Notices. Unless otherwise provided, any notice required or permitted under this Agreement will be given in writing and will be deemed effectively given upon personal delivery to the party to be notified, or three (3) days after deposit with the United States Post Office, by -20- 21 registered or certified mail, postage prepaid, or by deposit with a nationally recognized courier service such as FedEx, or by facsimile with confirmed receipt and addressed to the party to be notified at the address indicated for the Company on the signature page hereof as to the Company and the Principal Common Shareholders and on Exhibit A as to each Investor, or at such other address as any party may designate by giving at least ten (10) days advance written notice to all other parties, pursuant to this Section 7.2. 7.3 Entire Agreement. This Agreement, together with all Exhibits and schedules hereto, constitutes the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes any and all prior negotiations, correspondence, agreements, understandings duties or obligations between the parties with respect to the subject matter hereof. This Agreement amends, restates, replaces and terminates in its entirety the Fourth Restated Rights Agreement. 7.4 Amendment and Waiver. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of (1) the Company and (2) persons (and/or any of their permitted successors or assigns) holding then outstanding shares of Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock, Series G Stock and shares of Conversion Stock issued upon the conversion of Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock or Series G Stock representing at least sixty-six and two-thirds percent (66.67%) of the voting power of all such shares together; provided, however, that any amendment of Sections 2.3, 2.5, 2.6, 2.7, 2.8, 2.9, 2.10, 2.11, 7.2, 7.4, 7.6, 7.7, 7.8, 7.13, 7.14, 7.15 and/or 7.16 of this Agreement or the waiver of the observance thereof (either generally or in a particular instance and either retroactively or prospectively) may be effected only with the written consent of (1) the Company and (2) persons (and/or any of their permitted successors or assigns) holding then outstanding shares of Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock, Series G Stock and shares of Conversion Stock issued upon the conversion of Series B Stock, Series C Stock, Series D Stock, Series E Stock, Series F Stock or Series G Stock (the "Investors Shares") and/or the IBM Note and/or shares of Registrable Securities issued upon conversion of the IBM Note, representing at least sixty-six and two-thirds percent (66.67%) of the voting power of the total of all the Investors Shares plus the Registrable Shares issuable upon conversion of the IBM Note; provided further, that no such amendment or waiver will increase the obligation of any Investor, any Principal Common Shareholder or any Holder hereunder without the specific written consent of such Investor, such Principal Common Shareholder or such Holder, as applicable. Any amendment or waiver effected in accordance with this Section 7.4 will be binding upon each Investor, each Principal Common Shareholder, each Holder, each permitted successor or assignee of such Investor, Principal Common Shareholder or Holder, and the Company. Notwithstanding the foregoing, no amendment or supplement to this Agreement may be made without the consent of each party affected by such amendment or supplement if such amendment or supplement would (i) impose any new obligation on such party under this Agreement, (ii) increase any existing obligations of such party under this Agreement or (iii) diminish or waive the rights of such party under this Agreement without similarly diminishing or waiving the rights of all similarly situated parties. 7.5 New Investors. Notwithstanding anything herein to the contrary, if pursuant to Section 2.2 of the Series G Agreement, additional parties may purchase shares of Series G Stock as "New Investors" thereunder, then each such New Investor shall become a party to this Agreement as an "Investor" hereunder, without the need for any consent, approval or signature of any Investor when such New Investor has both: (i) purchased shares of Series G Stock under the Series G -21- 22 Agreement and paid the Company all consideration payable for such shares, and (2) executed one or more counterpart signature pages to this Agreement as an "Investor" with the Company's consent. 7.6 Governing Law. This Agreement will be governed by and construed under the internal laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California, without reference to principles of conflict of laws or choice of laws. 7.7 Severability. If any provision of this Agreement is held to be unenforceable under applicable law, such provision will be excluded from this Agreement and the balance of the Agreement will be interpreted as if such provision were so excluded and will be enforceable in accordance with its terms. 7.8 Third Parties. Nothing in this Agreement, express or implied, is intended to confer upon any person, other than the parties hereto and their successors and assigns, any rights or remedies under or by reason of this Agreement. 7.9 Successors And Assigns. The terms and conditions of this Agreement will inure to the benefit of and be binding upon the respective successors and assigns of the parties. 7.10 Headings. The headings and captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. All references in this Agreement to sections, paragraphs, exhibits and schedules will, unless otherwise provided, refer to sections and paragraphs hereof and exhibits and schedules attached hereto, all of which exhibits and schedules are incorporated herein by this reference. 7.11 Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. 7.12 Costs And Attorneys' Fees. In the event that any action, suit or other proceeding is instituted concerning or arising out of this Agreement or any transaction contemplated hereunder, the prevailing party will recover all of such party's costs and attorneys' fees incurred in each such action, suit or other proceeding, including any and all appeals or petitions therefrom. 7.13 No Finder's Fees. Each party represents that it neither is nor will be obligated for any finder's or broker's fee or commission in connection with this transaction. Each Investor will indemnify and hold harmless the Company from any liability for any commission or compensation in the nature of a finders' or broker's fee (and any asserted liability) for which such Investor or any of its officers, partners, employees, or representatives is responsible. The Company will indemnify and hold the Investors harmless from any liability for any commission or compensation in the nature of a finder's or broker's fee (and any asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 7.14 Adjustments for Stock Splits, Etc. Wherever in this Agreement there is a reference to a specific number of shares of Common Stock or Preferred Stock of the Company of any class or series, then, upon the occurrence of any subdivision, combination or stock dividend of such class or series of stock, the specific number of shares so referenced in this Agreement will automatically be proportionally adjusted to reflect the effect on the outstanding shares of such class or series of stock by such subdivision, combination or stock dividend. On May 12, 1998, the -22- 23 Company effected a two for one split of the outstanding shares of its Common Stock. Without limiting the generality of the foregoing, in order to reflect that stock split, each reference in this Agreement to a specific number of shares of Common Stock of the Company shall be multiplied by two effective as of the date of this Agreement, but each reference in this Agreement to a specific number of shares of Preferred Stock of the Company shall not be so multiplied by two and shall remain a reference to that number of shares effective as of the date of this Agreement. 7.15 Aggregation of Stock. All shares held or acquired by entities or persons, which are affiliated or related or as to which a single third party has common investment discretion, will be aggregated together for the purpose of determining the availability of any rights under this Agreement. 7.16 Further Assurances. From and after the date of this Agreement, upon the request of any Investor or the Company, the Company and the Investors, and the Principal Common Shareholders as to Section 5 hereof, will execute and deliver such instruments, documents or other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement. [THE REST OF THIS PAGE HAS BEEN LEFT INTENTIONALLY BLANK] -23- 24 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. TRANSMETA CORPORATION: INVESTOR: By: /s/ DAVID R. DITZEL -------------------------------- ------------------------------------ Name: David R. Ditzel Print Investor's Name ------------------------------ Title: CEO ----------------------------- Date signed: By: ----------------------- --------------------------------- Address: Name: 3940 Freedom Circle ------------------------------- Santa Clara, CA 95054 Title: Attention: President ------------------------------ Facsimile: 408-327-9840 Date signed: ------------------------ [SIGNATURE PAGE TO TRANSMETA CORPORATION FIFTH RESTATED INVESTORS' RIGHTS AGREEMENT] -24- 25 COMMON HOLDERS: /s/ DAVID R. DITZEL /s/ JOAN C. HOOD - ----------------------------------- ------------------------------------ David R. Ditzel Joan C. Hood /s/ COLIN B. HUNTER /s/ GWENDOLYN H. DITZEL - ----------------------------------- ------------------------------------ Colin B. Hunter Gwendolyn H. Ditzel /s/ DOUGLAS A. & JOAN G. LAIRD /s/ JOANNE J. HUNTER - ----------------------------------- ------------------------------------ FBO Douglas A. & Joan G. Laird Joanne J. Hunter Trust U/A dtd 8-30-89 /s/ STEVEN P. GOLDSTEIN & /s/ JACK H. GAFFANEY & SUSAN G. GOLDSTEIN MARGARET GAFFANEY - ----------------------------------- ------------------------------------ Steven P. Goldstein and Jack H. Gaffaney and Margaret Susan G. Goldstein Gaffaney as Trustees of the Gaffaney Revocable Trust dated May 1, 1986 /s/ EDMUND J. KELLY & /s/ GEORGE LAIRD MARIA M. E. KELLY ------------------------------------ - ----------------------------------- George Laird Edmund J. Kelly and Maria M. E. Kelly /s/ GRZEGORZ B. ZYNER & /s/ RUTH LAIRD LEANNE F. ZYNER ------------------------------------ - ----------------------------------- Ruth Laird Grzegorz B. Zyner and Leanne F. Zyner /s/ MALCOM J. WING & /s/ MITCHELL GOLDSTEIN TATIANA ZOUBKOVA ------------------------------------ - ----------------------------------- Mitchell Goldstein Malcom J. Wing and Tatiana Zoubkova /s/ ROBERT F. CMELIK /s/ GLORIA GOLDSTEIN - ----------------------------------- ------------------------------------ Robert F. Cmelik Gloria Goldstein /s/ FARRELL GOLDSTEIN ------------------------------------ Farrell Goldstein [SIGNATURE PAGE TO TRANSMETA CORPORATION FIFTH RESTATED INVESTORS' RIGHTS AGREEMENT - CONT.] -25- 26 /s/ JILL DORFMAN ------------------------------------ Jill Dorfman /s/ JILL DORFMAN ------------------------------------ Jill Dorfman as custodian for Joshua Goldstein under the Texas Uniform Transfers to Minors Act /s/ JILL DORFMAN ------------------------------------ Jill Dorfman as custodian for Aleah Goldstein under the Texas Uniform Transfers to Minors Act /s/ MARLA KAY ------------------------------------ Marla Kay /s/ ALEKSANDRA ZUBKOVA ------------------------------------ Aleksandra Zubkova /s/ SUSAN CARTER ------------------------------------ Susan Carter [SIGNATURE PAGE TO TRANSMETA CORPORATION FIFTH RESTATED INVESTORS' RIGHTS AGREEMENT - CONT.] -26- 27 PRINCIPAL COMMON SHAREHOLDERS: /s/ DAVID R. DITZEL /s/ JOAN C. HOOD - ---------------------------------- ------------------------------------------ David R. Ditzel Joan C. Hood /s/ COLIN B. HUNTER /s/ GWENDOLYN H. DITZEL - ---------------------------------- ------------------------------------------ Colin B. Hunter Gwendolyn H. Ditzel /s/ DOUGLAS A. & JOAN G. LAID /s/ JOANNE J. HUNTER - ---------------------------------- ------------------------------------------ FBO Douglas A. & Joan G. Laid Joanne J. Hunter Trust U/A dtd 8-30-89 /s/ JACK H. GAFFANEY and MARGARET GAFFANEY ------------------------------------------ Jack H. Gaffaney and Margaret Gaffaney as Trustees of the Gaffaney Revocable Trust dated May 1, 1986 /s/ GEORGE LAIRD ------------------------------------------ George Laird /s/ RUTH LAIRD ------------------------------------------ Ruth Laird [SIGNATURE PAGE TO TRANSMETA CORPORATION FIFTH RESTATED INVESTORS' RIGHTS AGREEMENT - CONT.] -27- 28 EXHIBIT A INVESTORS Allen D. Wheat America Online Andrew R. Taussig Attractor Institutional LP Attractor LP Attractor Offshore Ltd. Attractor QP LP Attractor Ventures LLC Bayview Investors, Ltd. Brilliant World Limited Compal Electronics, Inc. Consolidated Overseas Incorporation CPQ Holdings, Inc. Credit Suisse First Boston Equity Partners (Bermuda), L.P. Credit Suisse First Boston Equity Partners, L.P. Credit Suisse First Boston Finders and Screeners, L.P. Credit Suisse First Boston U.S. Executive Advisors, L.P. Cristina H. Kepner Cuttyhunk Fund Ltd. David T. Leyrer DB Ventures TMT LLC Dennis Crow, Trustee, U/T/A Dated 3/2/00 Drew D. Peck Duquesne Fund, L.P. EMA Private Equity Fund 1999, L.P. Enrichment I Venture Capital Corp. Eric Greenberg eSamsung Corporation F&W Investments 2000 Five Points Fund L.P. Five Points Offshore Fund, Ltd. Gabriella Sarlo Gateway Companies, Inc. George Brown Bolton Imran Maskatia Invemed Catalyst Fund, L.P. Invemed Fund, L.P. Jasmine Beauchamp Jay Chang Jeffrey W. Lin John E. Schmidt Marina Capital II Orcland Inc. Phoenix Technologies Ltd. Quanta Computer, Inc. Quantum Partners LDC Raj Seth Richard S. Chu Robert P. Horning Robert S. Colman, Trustee, U/D/T 3/13/85 Samsung Electronics Co., Ltd. SFM Domestic Investments LLC Steeler Fund, Ltd. Stephen R. Weber Steven Lucco Sunsino International Development Associate Inc. Supreme Image Limited The Raptor Global Portfolio Ltd. Tonga Partners, L.P. Tudor BVI Futures, Ltd. Tudor Private Equity Fund, L.P. Van Wagoner Funds Vulcan Ventures Inc. Weiss, Peck & Greer Venture Associates IV Cayman, L.P. Weiss, Peck & Greer Venture Associates IV, L.L.C. Wen-hua Wang WIIG Japan Partners II, L.P. William P. Weathersby WPG Enterprise Fund III, L.L.C. WPG Information Sciences Entrepreneur Fund, L.P. WT Technology 29 EXHIBIT B COMMON HOLDERS David R. Ditzel Colin B. Hunter FBO Douglas A. & Joan G. Laird Trust U/A dtd 8-30-89 Steven P. Goldstein and Susan G. Goldstein Edmund J. Kelly and Maria M. E. Kelly Grzegorz B. Zyner and Leanne F. Zyner Malcom J. Wing and Tatiana Zoubkova Robert F. Cmelik Joan C. Hood Gwendolyn H. Ditzel Joanne J. Hunter Jack H. Gaffaney and Margaret Gaffaney as Trustees of the Gaffaney Revocable Trust dated May 1, 1986 George Laird Ruth Laird Mitchell Goldstein Gloria Goldstein Farrell Goldstein Jill Dorfman Jill Dorfman as custodian for Joshua Goldstein Jill Dorfman as custodian for Aleah Goldstein Marla Kay Aleksandra Zubkova Susan Carter 30 EXHIBIT C PRINCIPAL COMMON HOLDERS David R. Ditzel Colin B. Hunter FBO Douglas A. & Joan G. Laird Trust U/A dtd 8-30-89 Joan C. Hood Gwendolyn H. Ditzel Joanne J. Hunter Jack H. Gaffaney and Margaret Gaffaney as Trustees of the Gaffaney Revocable Trust dated May 1, 1986 George Laird Ruth Laird EX-4.03 6 ex4-03.txt EXHIBIT 4.03 1 EXHIBIT 4.03 PIGGYBACK REGISTRATION RIGHTS AGREEMENT This Piggyback Registration Rights Agreement (this "Agreement") is made and entered into as of _______________ by and among Transmeta Corporation, a California corporation (the "Company"), and _______________ ("_________"). R E C I T A L S A. In connection with certain _______________ being made available by _______ to the Company pursuant to that certain _______________ Agreement between the Company and _______, the Company has agreed to grant to _______ that certain Warrant, of even date herewith (the "Warrant"), to purchase _______________ shares of the Company's Common Stock ("Common Stock") and to grant _______ certain piggyback registration rights with respect to such shares of Common Stock. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1 Definitions. (a) Registration. The terms "register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act of 1933, as amended (the "Securities Act"), and the declaration or ordering of effectiveness of such registration statement. (b) Registrable Securities. The term "Registrable Securities" means (i) all the shares of Common Stock issued or issuable upon the exercise of the Warrant, in each case that are now owned or may hereafter be acquired by Holder or any of Holder's permitted successors and assigns; (ii) any shares of Common Stock issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, all such shares of Common Stock described in clause (i) of this subsection (b); excluding in all cases, however, any Registrable Securities sold by a person in a transaction in which rights under this Agreement are not assigned in accordance with this Agreement or any Registrable Securities sold to the public or sold pursuant to Rule 144 promulgated under the Securities Act. (c) Registrable Securities Then Outstanding. The number of shares of "Registrable Securities then outstanding" will mean the number of shares of Common Stock which are Registrable Securities and (i) are then issued and outstanding or (ii) are then issuable pursuant to the exercise or conversion of then outstanding and then exercisable options, warrants or convertible securities, including without limitation the Warrant. (d) Holder. The term "Holder" means any person (i) owning of record (A) the Warrant or (B) Registrable Securities that have not been sold to the public or pursuant to Rule 144 promulgated under the Securities Act and (ii) if such person is not _______, then who is an assignee of record of such Warrant or Registrable Securities to whom rights under this Agreement have been duly assigned in accordance with this Agreement. 2 (e) SEC. The term "SEC" or "Commission" means the U.S. Securities and Exchange Commission. 2. Piggyback Registrations. The Company will notify all Holders in writing at least thirty (30) days prior to filing any registration statement under the Securities Act for purposes of effecting a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding registration statements relating to any employee benefit plan or a corporate reorganization) and will afford each such Holder an opportunity to include in such registration statement all or any part of the Registrable Securities then held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by such Holder will, within twenty (20) days after receipt of the above-described notice from the Company, so notify the Company in writing, and in such notice will inform the Company of the number of Registrable Securities such Holder wishes to include in such registration statement. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder will nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. (a) Underwriting. If a registration statement under which the Company gives notice under this Section 2 is for an underwritten offering, then the Company will so advise the Holders. In such event, the right of any Holder to be included in a registration pursuant to this Section 2 will 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 Registrable Securities through such underwriting will enter into an underwriting agreement in customary form with the managing underwriter or underwriter(s) selected for such underwriting. Notwithstanding any other provision of this Agreement, if the managing underwriter determine(s) in good faith that marketing factors require a limitation of the number of shares to be underwritten, then the managing underwriter(s) may exclude any and all shares (including Registrable Securities) from the registration and the underwriting; provided, however, that the right of the underwriters to exclude shares (including Registrable Securities) in any proportion from the registration and underwriting as described above will be restricted so that all shares that are not Registrable Securities and are held of record by persons who are employees or directors of the Company (or any subsidiary of the Company) will first be excluded from such registration and underwriting before any Registrable Securities are so excluded. If any Holder disapproves of the terms of any such underwriting, such Holder may elect to withdraw therefrom by written notice to the Company and the underwriter, delivered at least ten (10) business days prior to the effective date of the registration statement. Any Registrable Securities excluded or withdrawn from such underwriting will be excluded and withdrawn from the registration. (b) Expenses. All expenses incurred in connection with a registration pursuant to this Section 2 (excluding underwriters' and brokers' discounts and commissions), including, without limitation all federal and "blue sky" registration and qualification fees, printers' and accounting fees, fees and disbursements of counsel for the Company, will be borne by the Company. 2 3 3. Obligations of the Company. Whenever required to effect the registration of any Registrable Securities under this Agreement, the Company will, as expeditiously as reasonably possible: (a) Registration Statement. Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to ninety (90) days. (b) Amendments and Supplements. Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. (c) Prospectus. Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of the Registrable Securities owned by them that are included in such registration. (d) Blue Sky. Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as will be reasonably requested by the Holders, provided that the Company will not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. (e) Underwriting. In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting will also enter into and perform its obligations under such an agreement. (f) Notification. Notify each Holder of Registrable Securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. (g) Opinion and Comfort Letter. Furnish, at the request of any Holder requesting registration of Registrable Securities, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a 3 4 "comfort" letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities. 4. Furnish Information. It will be a condition precedent to the obligations of the Company to take any action pursuant to Section 2 hereof that the selling Holders will furnish to the Company such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such securities as will be required to timely effect the registration of their Registrable Securities. 5. Delay of Registration. No Holder will have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Agreement. 6. Indemnification. In the event any Registrable Securities are included in a registration statement under Section 2 hereof: (a) By the Company. To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, officers and directors of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended, (the "1934 Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the l934 Act or other federal or state law, insofar as such losses, claims, damages, or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto; (ii) 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 violation or alleged violation by the Company of the Securities Act, the 1934 Act, any federal or state securities law or any rule or regulation promulgated under the Securities Act, the 1934 Act or any federal or state securities law in connection with the offering covered by such registration statement; and the Company will reimburse each such Holder, partner, officer or director, underwriter or controlling person for any legal or other expenses reasonably incurred by them, as incurred, in connection with investigating or defending any such loss, claim, damage, liability or action; provided however, that the indemnity agreement contained in this Section 6 will not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent will not be unreasonably 4 5 withheld), nor will the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, underwriter or controlling person of such Holder. (b) By Selling Holders. To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the registration statement, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder within the meaning of the Securities Act or the 1934 Act, against any losses, claims, damages or liabilities (joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, partner or director, officer or controlling person of such other Holder may become subject under the Securities Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder expressly for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 6 will not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Holder, which consent will not be unreasonably withheld; and provided further, that the total amounts payable in indemnity by a Holder under this Section 6 in respect of any Violation will not exceed the net proceeds received by such Holder in the registered offering out of which such Violation arises. (c) Notice. Promptly after receipt by an indemnified party under this Section 6 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 6, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party will have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party will have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential conflict of interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if prejudicial to its ability to defend such action, will relieve such indemnifying party of any liability to the indemnified party under this Section 6, but the omission to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 6. 5 6 (d) Defect Eliminated in Final Prospectus. The foregoing indemnity agreements of the Company and Holders are subject to the condition that, insofar as they relate to any Violation made in a preliminary prospectus but eliminated or remedied in the amended prospectus on file with the SEC at the time the registration statement in question becomes effective or the amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final Prospectus), such indemnity agreement will not inure to the benefit of any person if a copy of the Final Prospectus was furnished to the indemnified party and was not furnished to the person asserting the loss, liability, claim or damage at or prior to the time such action is required by the Securities Act. (e) Contribution. In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any Holder exercising rights under this Agreement, or any controlling person of any such Holder, makes a claim for indemnification pursuant to this Section 6 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 6 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any such selling Holder or any such controlling person in circumstances for which indemnification is provided under this Section 6; then, and in each such case, the Company and such Holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such Holder is responsible for the portion represented by the percentage that the public offering price of its Registrable Securities offered by and sold under the registration statement bears to the public offering price of all securities offered by and sold under such registration statement, and the Company and other selling Holders are responsible for the remaining portion; provided, however, that, in any such case, (A) no such Holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered and sold by such Holder pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. (f) Survival. The obligations of the Company and Holders under this Section 6 will survive the completion of any offering of Registrable Securities in a registration statement, and otherwise. 7. "Market Stand-Off" Agreement. _______ and each Holder hereby agrees that it will not, to the extent requested by the Company or an underwriter of securities of the Company, sell or otherwise transfer or dispose of any Registrable Securities or other shares of stock of the Company, or subject to options, warrants or other rights, then owned by such _______ or Holder (other than to donees or partners of _______ or the Holder who agree to be similarly bound) for up to one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act; provided, however, that all executive officers and directors of the Company then holding Common Stock of the Company enter into similar agreements. In order to enforce the foregoing covenant, the Company will have the right to place restrictive legends on the certificates representing the shares subject to this Section and to impose stop transfer instructions with respect to the Registrable Securities and such other shares of stock 6 7 of _______ and each Holder (and the shares or securities of every other person subject to the foregoing restriction) until the end of such period. 8. Termination of the Company's Obligations. The Company will have no obligations pursuant to Section 2 with respect to: (a) any request or requests for registration made by any Holder on a date more than five (5) years after the closing date of the Company's initial public offering of its Common Stock pursuant to an effective registration statement filed under the Securities Act; or (b) any Registrable Securities proposed to be sold by a Holder in a registration pursuant to Section 2 hereof if, in the opinion of counsel to the Company, all such Registrable Securities proposed to be sold by a Holder may be sold in a three-month period without registration under the Securities Act pursuant to Rule 144 under the Securities Act and such Holder holds less than one percent (1%) of the outstanding stock of the Company. 9. Assignment. Notwithstanding anything herein to the contrary, the rights of a Holder under this Agreement may be assigned only to a party who acquires the Warrant or at least 10,000 shares of Registrable Securities; provided, however that no party may be assigned any of the foregoing rights unless the Company is given written notice by the assigning party at the time of such assignment stating the name and address of the assignee and identifying the securities of the Company as to which the rights in question are being assigned; and provided further that any such assignee will receive such assigned rights subject to all the terms and conditions of this Agreement, including without limitation the provisions of this Section 9. 10. Miscellaneous. (a) Termination of this Agreement. This Agreement may be terminated voluntarily by written agreement of (1) the Company and (2) the Holders of the Warrant and/or then outstanding shares of Common Stock issued upon exercise of the Warrant representing at least sixty-six and two-thirds percent (66.67%) of the voting power of all shares of Common Stock then issuable upon exercise of the Warrant and such outstanding shares of Common Stock together. Such termination will be binding upon all Holders, if any, of the Warrant and/or Registrable Securities who do not sign such termination agreement. (b) Notices. Unless otherwise provided, any notice required or permitted under this Agreement will be given in writing and will be deemed effectively given upon personal delivery to the party to be notified, or three (3) days after deposit with the United States Post Office, by registered or certified mail, postage prepaid, or by deposit with a nationally recognized courier service such as FedEx, or by facsimile with confirmed receipt and addressed to the party to be notified at the address indicated for the Company and _______ on the signature page hereof, or at such other address as any party may designate by giving at least ten (10) days advance written notice to all other parties, pursuant to this Section 10(b). (c) Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes any and all prior negotiations, correspondence, agreements, understandings duties or obligations between the parties with respect to the subject matter hereof. (d) Amendment and Waiver. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance 7 8 and either retroactively or prospectively) only with the written consent of (1) the Company and (2) the Holders of the Warrant and/or then outstanding shares of Common Stock issued upon exercise of the Warrant representing at least sixty-six and two-thirds percent (66.67%) of the voting power of all shares of Common Stock then issuable upon exercise of the Warrant and such outstanding shares of Common Stock together; provided that no such amendment or waiver will increase the obligation of Holder or any Holder hereunder without the specific written consent of such Holder or Holder, as applicable. Any amendment or waiver effected in accordance with this Section 10(d) will be binding upon Holder, each Holder, each permitted successor or assignee of Holder or such Holder, and the Company. (e) Governing Law. This Agreement will be governed by and construed under the internal laws of the State of California as applied to agreements among California residents entered into and to be performed entirely within California, without reference to principles of conflict of laws or choice of laws. (f) Severability. If any provision of this Agreement is held to be unenforceable under applicable law, such provision will be excluded from this Agreement and the balance of the Agreement will be interpreted as if such provision were so excluded and will be enforceable in accordance with its terms. (g) Third Parties. Nothing in this Agreement, express or implied, is intended to confer upon any person, other than the parties hereto and their successors and assigns, any rights or remedies under or by reason of this Agreement. (h) Successors And Assigns. The terms and conditions of this Agreement will inure to the benefit of and be binding upon the respective successors and assigns of the parties. (i) Headings. The headings and captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. All references in this Agreement to sections, paragraphs, exhibits and schedules will, unless otherwise provided, refer to sections and paragraphs hereof and exhibits and schedules attached hereto, all of which exhibits and schedules are incorporated herein by this reference. (j) Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. (k) Costs And Attorneys' Fees. In the event that any action, suit or other proceeding is instituted concerning or arising out of this Agreement or any transaction contemplated hereunder, the prevailing party will recover all of such party's costs and reasonable attorneys' fees incurred in each such action, suit or other proceeding, including any and all appeals or petitions therefrom. (l) No Finder's Fees. Each party represents that it neither is nor will be obligated for any finder's or broker's fee or commission in connection with this transaction. _______ will indemnify and hold harmless the Company from any liability for any commission or compensation in the nature of a finders' or broker's fee (and any asserted liability) for which _______ or any of its officers, partners, employees, or representatives is responsible. The 8 9 Company will indemnify and hold _______ harmless from any liability for any commission or compensation in the nature of a finder's or broker's fee (and any asserted liability) for which the Company or any of its officers, employees or representatives is responsible. (m) Adjustments for Stock Splits, Etc. Wherever in this Agreement there is a reference to a specific number of shares of Common Stock or other securities of the Company, then, upon the occurrence of any subdivision, combination or stock dividend of such class or series of stock, the specific number of shares so referenced in this Agreement will automatically be proportionally adjusted to reflect the effect on the outstanding shares of such class or series of stock by such subdivision, combination or stock dividend. (n) Aggregation of Stock. All shares held or acquired by affiliated entities or persons will be aggregated together for the purpose of determining the availability of any rights under this Agreement. (o) Further Assurances. From and after the date of this Agreement, upon the request of _______ or the Company, the Company and _______ will execute and deliver such instruments, documents or other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. Transmeta Corporation, _______ a California corporation By: By: -------------------------------- --------------------------------- Name: Name: ------------------------------ ------------------------------- Title: Title: ----------------------------- ------------------------------ Address: Address: 3940 Freedom Circle Santa Clara, CA 95054 Attention: President Attention: President Facsimile: 408-327-9840 Facsimile: (___) ___-____ [SIGNATURE PAGE TO PIGGYBACK REGISTRATION RIGHTS AGREEMENT] 9 EX-5.01 7 ex5-01.txt EXHIBIT 5.01 1 [FENWICK & WEST LLP LETTERHEAD] EXHIBIT 5.01 __________, 2000 Transmeta Corporation 3940 Freedom Circle Santa Clara, California 95054 Gentlemen/Ladies: At your request, we have examined the Registration Statement, as amended, on Form S-1 (File Number 333-___________) filed by Transmeta Corporation, a Delaware corporation (the "COMPANY"), with the Securities and Exchange Commission (the "COMMISSION") on ____________, 2000, Amendment No. 1 thereto filed on __________, 2000 and Amendment No. 2 thereto to be filed on or about the date hereof (the "REGISTRATION STATEMENT"), in connection with the registration under the Securities Act of 1933, as amended, of up to __________________ shares of the Company's Common Stock (the "STOCK"). In rendering this opinion, we have examined the following: (1) the Company's Certificate of Incorporation, certified by the Delaware Secretary of State on _____________, 2000. (2) the Company's Certificate of Designation of Preferred Stock, certified by the Delaware Secretary of State on ____________, 2000. (3) the Company's Bylaws, certified by the Company's Secretary on ____________, 2000. (4) the Registration Statement, together with the Exhibits filed as a part thereof or incorporated therein by reference. (5) the Prospectus prepared in connection with the Registration Statement. (6) the minutes of meetings and actions by written consent of the stockholders and Board of Directors that are contained in the Company's minute books and the minute books of Transmeta Corporation, a California corporation ("TRANSMETA 2 __________, 2000 Page 2 CALIFORNIA") to which the Company will be the successor, that are in our possession. (7) the stock records for both the Company and Transmeta California that the Company has provided to us (consisting of a list of shareholders dated of even date herewith and a list of option and warrant holders respecting the Company's and Transmeta California's capital stock and of any rights to purchase capital stock that was prepared by the Company and dated ____________, 2000 verifying the number of such issued and outstanding securities). (8) a Management Certificate addressed to us and dated of even date herewith executed by the Company and Transmeta California containing certain factual and other representations. (9) Transmeta California's Amended and Restated Articles of Incorporation, as amended, certified by the California Secretary of State on ________________, 2000. (10) Transmeta California's Bylaws, certified by the Secretary of Transmeta California on _____________, 2000. (11) the form of the Merger Agreement pursuant to which Transmeta California will merge with and into the Company in connection with its Delaware reincorporation (the "DELAWARE REINCORPORATION"). In our examination of documents for purposes of this opinion, we have assumed, and express no opinion as to, the genuineness of all signatures on original documents, the authenticity and completeness of all documents submitted to us as originals, the conformity to originals and completeness of all documents submitted to us as copies, the legal capacity of all persons or entities executing the same, the lack of any undisclosed termination, modification, waiver or amendment to any document reviewed by us and the due authorization, execution and delivery of all documents where due authorization, execution and delivery are prerequisites to the effectiveness thereof. We have also assumed that the certificates representing the Stock have been, or will be when issued, properly signed by authorized officers of the Company or their agents. As to matters of fact relevant to this opinion, we have relied solely upon our examination of the documents referred to above and have assumed the current accuracy and completeness of the information obtained from public officials, records and documents referred to above. We have made no independent investigation or other attempt to verify the accuracy of any of such information or to determine the existence or non-existence of any other factual matters; however, we are not aware of any facts that would cause us to believe that the opinion expressed herein is not accurate. 3 __________, 2000 Page 3 We are admitted to practice law in the State of California, and we render this opinion only with respect to, and express no opinion herein concerning the application or effect of the laws of any jurisdiction other than, the existing laws of the United States of America, of the State of California and, with respect to the validity of corporate action and the requirements for the issuance of stock, of the State of Delaware. In connection with our opinion expressed below, we have assumed that, at or prior to the time of the delivery of any shares of Stock, the Registration Statement will have been declared effective under the Securities Act of 1933, as amended, that the registration will apply to such shares of Stock and will not have been modified or rescinded and that there will not have occurred any change in law affecting the validity or enforceability of such shares of Stock. In addition, we have assumed that prior to the effectiveness of the Registration Statement, Transmeta California will have merged with and into the Company to complete the Delaware Reincorporation. Based upon the foregoing, it is our opinion that the up to ______________ shares of Stock to be issued and sold by the Company, when issued, sold and delivered in the manner and for the consideration stated in the Registration Statement and the Prospectus, will be validly issued, fully paid and nonassessable. We consent to the use of this opinion as an exhibit to the Registration Statement and further consent to all references to us, if any, in the Registration Statement, the Prospectus constituting a part thereof and any amendments thereto. This opinion speaks only as of its date and we assume no obligation to update this opinion should circumstances change after the date hereof. This opinion is intended solely for use in connection with issuance and sale of shares subject to the Registration Statement and is not to be relied upon for any other purpose. Very truly yours, FENWICK & WEST LLP By: _______________________________ EX-10.02 8 ex10-02.txt EXHIBIT 10.02 1 EXHIBIT 10.02 TRANSMETA CORPORATION 1995 EQUITY INCENTIVE PLAN As Adopted As Of September 5, 1995 And As Amended As Of June 19, 1996 And As Amended As Of July 19, 1996 1. PURPOSE. The purpose of the Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, its Parent, Subsidiaries and Affiliates, by offering them an opportunity to participate in the Company's future performance through awards of Options, Restricted Stock and Stock Bonuses. Capitalized terms not defined in the text are defined in Section 23. 2. SHARES SUBJECT TO THE PLAN. 2.1 Number of Shares Available. Subject to Sections 2.2 and 18, the total number of Shares reserved and available for grant and issuance pursuant to the Plan shall be 2,000,000 Shares. Subject to Sections 2.2 and 18, Shares shall again be available for grant and issuance in connection with future Awards under the Plan that: (a) are subject to issuance upon exercise of an Option but cease to be subject to such Option for any reason other than exercise of such Option, (b) are subject to an Award granted hereunder but are forfeited or are repurchased by the Company at the original issue price, or (c) are subject to an Award that otherwise terminates without Shares being issued. 2.2 Adjustment of Shares. In the event that the number of outstanding Shares is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under the Plan, (b) the Exercise Prices of and number of Shares subject to outstanding Options, and (c) the number of Shares subject to other outstanding Awards shall be proportionately adjusted, subject to any required action by the Board or the shareholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share shall not be issued but shall either be paid in cash at Fair Market Value or shall be rounded up to the nearest Share, as determined by the Committee. 3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company. All other Awards may be granted to employees, officers, directors, consultants and advisors of the Company or any Parent, Subsidiary or Affiliate of the Company; provided such consultants and advisors render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. A person may be granted more than one Award under the Plan. 2 4. ADMINISTRATION. 4.1 Committee Authority. The Plan shall be administered by the Committee or the Board acting as the Committee. Subject to the general purposes, terms and conditions of the Plan, and to the direction of the Board, the Committee shall have full power to implement and carry out the Plan. The Committee shall have the authority to: (a) construe and interpret the Plan, any Award Agreement and any other agreement or document executed pursuant to the Plan; (b) prescribe, amend and rescind rules and regulations relating to the Plan; (c) select persons to receive Awards; (d) determine the form and terms of Awards; (e) determine the number of Shares or other consideration subject to Awards; (f) determine whether Awards will be granted singly, in combination, in tandem with, in replacement of, or as alternatives to, other Awards under the Plan or any other incentive or compensation plan of the Company or any Parent, Subsidiary or Affiliate of the Company; (g) grant waivers of Plan or Award conditions; (h) determine the vesting, exercisability and payment of Awards; (i) correct any defect, supply any omission, or reconcile any inconsistency in the Plan, any Award or any Award Agreement; (j) determine whether an Award has been earned; and (k) make all other determinations necessary or advisable for the administration of the Plan. 4.2 Committee Discretion. Any determination made by the Committee with respect to any Award shall be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of the Plan or Award, at any later time, and such determination shall be final and binding on the Company and all persons having an interest in any Award under the Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under the Plan to Participants who are not Insiders of the Company. -2- 3 4.3 Exchange Act Requirements. If the Company is subject to the Exchange Act, the Company will take appropriate steps to comply with the disinterested director requirements of Section 16(b) of the Exchange Act, including but not limited to, the appointment by the Board of a Committee consisting of not less than two persons (who are members of the Board), each of whom is a Disinterested Person. 5. OPTIONS. The Committee may grant Options to eligible persons and shall determine whether such Options shall be Incentive Stock Options within the meaning of the Code ("ISOs") or Nonqualified Stock Options ("NQSOs"), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following: 5.1 Form of Option Grant. Each Option granted under the Plan shall be evidenced by an Award Agreement which shall expressly identify the Option as an ISO or NQSO ("Stock Option Agreement"), and be in such form and contain such provisions (which need not be the same for each Participant) as the Committee shall from time to time approve, and which shall comply with and be subject to the terms and conditions of the Plan. 5.2 Date of Grant. The date of grant of an Option shall be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of the Plan will be delivered to the Participant within a reasonable time after the granting of the Option. 5.3 Exercise Period. Options shall be exercisable within the times or upon the events determined by the Committee as set forth in the Stock Option Agreement; provided, however, that no Option shall be exercisable after the expiration of ten (10) years from the date the Option is granted, and provided further that no Option granted to a person who directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company ("Ten Percent Shareholder") shall be exercisable after the expiration of five (5) years from the date the Option is granted. The Committee also may provide for the exercise of Options to become exercisable at one time or from time to time, periodically or otherwise, in such number or percentage as the Committee determines. 5.4 Exercise Price. The Exercise Price shall be determined by the Committee when the Option is granted and may be not less than 85% of the Fair Market Value of the Shares on the date of grant; provided that (i) the Exercise Price of an ISO shall be not less than 100% of the Fair Market Value of the Shares on the date of grant and (ii) the Exercise Price of any Option granted to a Ten Percent Shareholder shall not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased may be made in accordance with Section 8 of the Plan. -3- 4 5.5 Method of Exercise. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "Exercise Agreement") in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares, if any, and such representations and agreements regarding Participant's investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price for the number of Shares being purchased. 5.6 Termination. Notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option shall always be subject to the following: (a) If the Participant is Terminated for any reason except death or Disability, then Participant may exercise such Participant's Options only to the extent that such Options would have been exercisable upon the Termination Date no later than three (3) months after the Termination Date (or such shorter time period as may be specified in the Stock Option Agreement), but in any event, no later than the expiration date of the Options. (b) If the Participant is terminated because of death or Disability (or the Participant dies within three months of such termination), then Participant's Options may be exercised only to the extent that such Options would have been exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant's legal representative or authorized assignee) no later than twelve (12) months after the Termination Date (or such shorter time period as may be specified in the Stock Option Agreement), but in any event no later than the expiration date of the Options; provided, however, that in the event of termination due to Disability other than as defined in Section 22(e)(3) of the Code, any ISO that remains exercisable after 90 days after the date of termination shall be deemed a NQSO. 5.7 Limitations on Exercise. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable. 5.8 Limitations on ISOs. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISOs are exercisable for the first time by a Participant during any calendar year (under the Plan or under any other incentive stock option plan of the Company or any Affiliate, Parent or Subsidiary of -4- 5 the Company) shall not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISOs are exercisable for the first time by a Participant during any calendar year exceeds $100,000, the Options for the first $100,000 worth of Shares to become exercisable in such calendar year shall be ISOs and the Options for the amount in excess of $100,000 that become exercisable in that calendar year shall be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date of the Plan to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, such different limit shall be automatically incorporated herein and shall apply to any Options granted after the effective date of such amendment. 5.9 Modification, Extension or Renewal. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of Participant, impair any of Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered shall be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 of the Plan for Options granted on the date the action is taken to reduce the Exercise Price. 5.10 No Disqualification. Notwithstanding any other provision in the Plan, no term of the Plan relating to ISOs shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code. 6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company to sell to an eligible person Shares that are subject to restrictions. The Committee shall determine to whom an offer will be made, the number of Shares the person may purchase, the price to be paid (the "Purchase Price"), the restrictions to which the Shares shall be subject, and all other terms and conditions of the Restricted Stock Award, subject to the following: 6.1 Form of Restricted Stock Award. All purchases under a Restricted Stock Award made pursuant to the Plan shall be evidenced by an Award Agreement ("Restricted Stock Purchase Agreement") that shall be in such form (which need not be the same for each Participant) as the Committee shall from time to time approve, and shall comply with and be subject to the terms and conditions of the Plan. The offer of Restricted Stock shall be accepted by the Participant's execution and delivery of the Restricted Stock Purchase Agreement and full payment for the Shares to the Company within thirty (30) days from the date the Restricted Stock Purchase Agreement is delivered to the person. If such person does not execute and deliver the Restricted Stock Purchase -5- 6 Agreement along with full payment for the Shares to the Company within thirty (30) days, then the offer shall terminate, unless otherwise determined by the Committee. 6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a Restricted Stock Award shall be determined by the Committee and shall be at least 85% of the Fair Market Value of the Shares on the date the Restricted Stock Award is granted, except in the case of a sale to a Ten Percent Shareholder, in which case the Purchase Price shall be 100% of the Fair Market Value. Payment of the Purchase Price may be made in accordance with Section 8 of the Plan. 6.3 Restrictions. Restricted Stock Awards shall be subject to such restrictions as the Committee may impose. The Committee may provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions, in whole or part, based on length of service, performance or such other factors or criteria as the Committee may determine. 7. STOCK BONUSES. 7.1 Awards of Stock Bonuses. A Stock Bonus is an award of Shares (which may consist of Restricted Stock) for services rendered to the Company or any Parent, Subsidiary or Affiliate of the Company. A Stock Bonus may be awarded for past services already rendered to the Company, or any Parent, Subsidiary or Affiliate of the Company pursuant to an Award Agreement (the "Stock Bonus Agreement") that shall be in such form (which need not be the same for each Participant) as the Committee shall from time to time approve, and shall comply with and be subject to the terms and conditions of the Plan. A Stock Bonus may be awarded upon satisfaction of such performance goals as are set out in advance in Participant's individual Award Agreement (the "Performance Stock Bonus Agreement") that shall be in such form (which need not be the same for each Participant) as the Committee shall from time to time approve, and shall comply with and be subject to the terms and conditions of the Plan. Stock Bonuses may vary from Participant to Participant and between groups of Participants, and may be based upon the achievement of the Company, Parent, Subsidiary or Affiliate and/or individual performance factors or upon such other criteria as the Committee may determine; provided, however, that performance-based bonuses shall be restricted to individuals earning at least $60,000 per year and of adequate sophistication and sufficiently empowered to achieve the performance goals. 7.2 Terms of Stock Bonuses. The Committee shall determine the number of Shares to be awarded to the Participant and whether such Shares shall be Restricted Stock. If the Stock Bonus is being earned upon the satisfaction of performance goals pursuant to a Performance Stock Bonus Agreement, then the Committee shall determine: (a) the nature, length and starting date of any period during which performance is to be measured (the "Performance Period") for each Stock Bonus; (b) the performance goals and criteria to be used to measure the performance, if any; (c) the number of Shares that may be awarded to the Participant; and (d) the extent to which such Stock Bonuses -6- 7 have been earned. Performance Periods may overlap and Participants may participate simultaneously with respect to Stock Bonuses that are subject to different Performance Periods and different performance goals and other criteria. The number of Shares may be fixed or may vary in accordance with such performance goals and criteria as may be determined by the Committee. The Committee may adjust the performance goals applicable to the Stock Bonuses to take into account changes in law and accounting or tax rules and to make such adjustments as the Committee deems necessary or appropriate to reflect the impact of extraordinary or unusual items, events or circumstances to avoid windfalls or hardships. 7.3 Form of Payment. The earned portion of a Stock Bonus may be paid currently or on a deferred basis with such interest or dividend equivalent, if any, as the Committee may determine. Payment may be made in the form of cash, whole Shares, including Restricted Stock, or a combination thereof, either in a lump sum payment or in installments, all as the Committee shall determine. 7.4 Termination During Performance Period. If a Participant is Terminated during a Performance Period for any reason, then such Participant shall be entitled to payment (whether in Shares, cash or otherwise) with respect to the Stock Bonus only to the extent earned as of the date of Termination in accordance with the Performance Stock Bonus Agreement, unless the Committee shall determine otherwise. 8. PAYMENT FOR SHARE PURCHASES. 8.1 Payment. Payment for Shares purchased pursuant to the Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law: (a) by cancellation of indebtedness of the Company to the Participant; (b) by surrender of Shares that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such Shares); or (2) were obtained by Participant in the public market; (c) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that Participants who are not employees of the Company shall not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares. -7- 8 (d) by waiver of compensation due or accrued to Participant for services rendered; (e) by tender of property; (f) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD Dealer") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (2) through a "margin" commitment from Participant and an NASD Dealer whereby Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the exercise price directly to the Company; or (g) by any combination of the foregoing. 8.2 Loan Guarantees. The Committee may help the Participant pay for Shares purchased under the Plan by authorizing a guarantee by the Company of a third-party loan to the Participant. 9. WITHHOLDING TAXES. 9.1 Withholding Generally. Whenever Shares are to be issued in satisfaction of Awards granted under the Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under the Plan, payments in satisfaction of Awards are to be made in cash, such payment shall be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 9.2 Stock Withholding. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that -8- 9 is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). All elections by a Participant to have Shares withheld for this purpose shall be made in writing in a form acceptable to the Committee 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, then except as provided below, the election shall be irrevocable as to the particular Shares as to which the election is made; (c) all elections shall be subject to the consent or disapproval of the Committee; (d) if the Participant is an Insider and if the Company is subject to Section 16(b) of the Exchange Act: (1) the election may not be made within six (6) months of the date of grant of the Award, except as otherwise permitted by SEC Rule 16b-3(e) under the Exchange Act, and (2) either (A) the election to use stock withholding must be irrevocably made at least six (6) months prior to the Tax Date (although such election may be revoked at any time at least six (6) months prior to the Tax Date) or (B) the exercise of the Option or election to use stock withholding must be made in the ten (10) day period beginning on the third day following the release of the Company's quarterly or annual summary statement of sales or earnings; and (e) in the event that the Tax Date is deferred until six (6) months after the delivery of Shares under Section 83(b) of the Code, the Participant shall receive the full number of Shares with respect to which the exercise occurs, but such Participant shall be unconditionally obligated to tender back to the Company the proper number of Shares on the Tax Date. 10. PRIVILEGES OF STOCK OWNERSHIP. 10.1 Voting and Dividends. No Participant shall have any of the rights of a shareholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant shall be a shareholder and have all the rights of a shareholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such -9- 10 Shares; provided, that if such Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company shall be subject to the same restrictions as the Restricted Stock; provided, further, that the Participant shall have no right to retain such stock dividends or stock distributions with respect to Shares that are repurchased at the Participant's original Purchase Price pursuant to Section 12. 10.2 Financial Statements. The Company shall provide financial statements to each Participant prior to such Participant's purchase of Shares under the Plan, and to each Participant annually during the period such Participant has Awards outstanding; provided, however, the Company shall not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information. 11. TRANSFERABILITY. Awards granted under the Plan, and any interest therein, shall not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution or as consistent with the specific Plan and Award Agreement provisions relating thereto. During the lifetime of the Participant an Award shall be exercisable only by the Participant, and any elections with respect to an Award, may be made only by the Participant. 12. RESTRICTIONS ON SHARES. At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) in the Award Agreement (a) a right of first refusal to purchase all Shares that a Participant (or a subsequent transferee) may propose to transfer to a third party, and/or (b) a right to repurchase all Shares held by a Participant following such Participant's Termination at any time within ninety (90) days after the later of Participant's Termination Date or the date Participant purchases Shares under the Plan, for cash or cancellation of purchase money indebtedness, at: (A) with respect to Shares that are "Vested" (as defined in the Award Agreement), the higher of: (l) Participant's original Purchase Price, or (2) the Fair Market Value of such Shares on Participant's Termination Date, provided, such right of repurchase terminates when the Company's securities become publicly traded; or (B) with respect to Shares that are not "Vested" (as defined in the Award Agreement), at the Participant's original Purchase Price, provided, that the right to repurchase at the original Purchase Price lapses at the rate of at least 20% per year over 5 years from the date the Shares were purchased, and if the right to repurchase is assignable, the assignee must pay the Company, upon assignment of the right to repurchase, cash equal to the excess of the Fair Market Value of the Shares over the original Purchase Price. 13. CERTIFICATES. All certificates for Shares or other securities delivered under the Plan shall be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and -10- 11 other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed. 14. ESCROW; PLEDGE OF SHARES. To enforce the Company's right of repurchase set forth in Section 12 on a Participant's Shares that are not Vested (as defined in the Award Agreement), the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such right of repurchase shall have lapsed or terminated (provided, however, that such Shares will be retained in escrow so long as such Shares secure any debts to the Company), and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under the Plan shall be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant's obligation to the Company under the promissory note; provided, however, that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company shall have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant's Shares or other collateral. In connection with any pledge of the Shares, Participant shall be required to execute and deliver a written pledge agreement in such form as the Committee shall from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a prorata basis as the promissory note is paid. 15. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, Shares (including Restricted Stock) or other consideration, based on such terms and conditions as the Committee and the Participant shall agree. 16. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. An Award shall not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in the Plan, the Company shall have no obligation to issue or deliver certificates for Shares under the Plan prior to (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable, and/or (b) completion of any registration or other qualification of such shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company shall be under no obligation to register the Shares with the SEC or to effect compliance with the registration, qualification or listing requirements of any state -11- 12 securities laws, stock exchange or automated quotation system, and the Company shall have no liability for any inability or failure to do so. 17. NO OBLIGATION TO EMPLOY. Nothing in the Plan or any Award granted under the Plan shall confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent, Subsidiary or Affiliate of the Company or limit in any way the right of the Company or any Parent, Subsidiary or Affiliate of the Company to terminate Participant's employment or other relationship at any time, with or without cause. 18. CORPORATE TRANSACTIONS. 18.1 Assumption or Replacement of Awards by Successor. In the event of (a) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the shareholders of the Company and the Awards granted under the Plan are assumed or replaced by the successor corporation, which assumption shall be binding on all Participants), (b) a dissolution or liquidation of the Company, (c) the sale of substantially all of the assets of the Company, or (d) any other transaction which qualifies as a "corporate transaction" under Section 424(a) of the Code wherein the shareholders of the Company give up all of their equity interest in the Company (except for the acquisition, sale or transfer of all or substantially all of the outstanding shares of the Company), any or all outstanding Awards may be assumed or replaced by the successor corporation (if any), which assumption or replacement shall be binding on all Participants. In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to shareholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions no less favorable to the Participant. In the event such successor corporation (if any) refuses to assume or substitute Options, as provided above, pursuant to a transaction described in this Subsection 18.1, such Options shall expire on such transaction at such time and on such conditions as the Board shall determine. 18.2 Other Treatment of Awards. Subject to any greater rights granted to Participants under the foregoing provisions of this Section 18, in the event of the occurrence of any transaction described in Section 18.1, any outstanding Awards shall be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation, sale of assets or other "corporate transaction." 18.3 Assumption of Awards by the Company. The Company, from time to time, also may substitute or assume outstanding awards granted by another -12- 13 company, whether in connection with an acquisition of such other company or otherwise, by either (a) granting an Award under the Plan in substitution of such other company's award, or (b) assuming such award as if it had been granted under the Plan if the terms of such assumed award could be applied to an Award granted under the Plan. Such substitution or assumption shall be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under the Plan if the other company had applied the rules of the Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award shall remain unchanged (except that the exercise price and the number and nature of Shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price. 19. ADOPTION AND SHAREHOLDER APPROVAL. The Plan shall become effective on the date that it is adopted by the Board (the "Effective Date"). The Plan shall be approved by the shareholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within twelve months before or after the Effective Date. Upon the Effective Date, the Board may grant Awards pursuant to the Plan; provided, however, that: (a) no Option may be exercised prior to initial shareholder approval of the Plan; (b) no Option granted pursuant to an increase in the number of Shares approved by the Board shall be exercised prior to the time such increase has been approved by the shareholders of the Company; and (c) in the event that shareholder approval is not obtained within the time period provided herein, all Awards granted hereunder shall be cancelled, any Shares issued pursuant to any Award shall be cancelled and any purchase of Shares hereunder shall be rescinded. After the Company becomes subject to Section 16(b) of the Exchange Act, the Company will comply with the requirements of Rule 16b-3 (or its successor), as amended, with respect to shareholder approval. 20. TERM OF PLAN. The Plan will terminate ten (10) years from the Effective Date or, if earlier, the date of shareholder approval. 21. AMENDMENT OR TERMINATION OF PLAN. The Board may at any time terminate or amend the Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to the Plan; provided, however, that the Board shall not, without the approval of the shareholders of the Company, amend the Plan in any manner that requires such shareholder approval pursuant to the Code or the regulations promulgated thereunder as such provisions apply to ISO plans or pursuant to the Exchange Act or Rule 16b-3 (or its successor), as amended, thereunder. 22. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board, the submission of the Plan to the shareholders of the Company for approval, nor any provision of the Plan shall be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem -13- 14 desirable, including, without limitation, the granting of stock options and bonuses otherwise than under the Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 23. DEFINITIONS. As used in the Plan, the following terms shall have the following meanings: "Affiliate" means any corporation that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, another corporation, where "control" (including the terms "controlled by" and "under common control with") means the possession, direct or indirect, of the power to cause the direction of the management and policies of the corporation, whether through the ownership of voting securities, by contract or otherwise. "Award" means any award under the Plan, including any Option, Restricted Stock or Stock Bonus. "Award Agreement" means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means the committee appointed by the Board to administer the Plan, or if no committee is appointed, the Board. "Company" means Transmeta Corporation, a corporation organized under the laws of the State of California, or any successor corporation. "Disability" means a disability, whether temporary or permanent, partial or total, as determined by the Committee. "Disinterested Person" means a director who has not, during the period that person is a member of the Committee and for one year prior to service as a member of the Committee, been granted or awarded equity securities pursuant to the Plan or any other plan of the Company or any Parent, Subsidiary or Affiliate of the Company, except in accordance with the requirements set forth in Rule 16b-3(c)(2)(i) (and any successor regulation thereto) as promulgated by the SEC under Section 16(b) of the Exchange Act, as such rule is amended from time to time and as interpreted by the SEC. "Exchange Act" means the Securities Exchange Act of 1934, as amended. -14- 15 "Exercise Price" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option. "Fair Market Value" means, as of any date, the value of a share of the Company's Common Stock determined as follows: (a) if such Common Stock is then quoted on the Nasdaq National Market, its last reported sale price on the Nasdaq National Market or, if no such reported sale takes place on such date, the average of the closing bid and asked prices; (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, the last reported sale price or, if no such reported sale takes place on such date, the average of the closing bid and asked prices on the principal national securities exchange on which the Common Stock is listed or admitted to trading; (c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on such date, as reported by The Wall Street Journal, for the over-the-counter market; or (d) if none of the foregoing is applicable, by the Board of Directors of the Company in good faith. "Insider" means an officer or director of the Company or any other person whose transactions in the Company's Common Stock are subject to Section 16 of the Exchange Act. "Option" means an award of an option to purchase Shares pursuant to Section 5. "Parent" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if at the time of the granting of an Award under the Plan, each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "Participant" means a person who receives an Award under the Plan. "Plan" means this Transmeta Corporation 1995 Equity Incentive Plan, as amended from time to time. -15- 16 "Restricted Stock Award" means an award of Shares pursuant to Section 6. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Shares" means shares of the Company's Common Stock reserved for issuance under the Plan, as adjusted pursuant to Sections 2 and 15, and any successor security. "Stock Bonus" means an award of Shares, or cash in lieu of Shares, pursuant to Section 7. "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of granting of the Award, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "Termination" or "Terminated" means, for purposes of the Plan with respect to a Participant, that the Participant has ceased to provide services as an employee, director, consultant or adviser, to the Company or a Parent, Subsidiary or Affiliate of the Company, except in the case of sick leave, military leave, or any other leave of absence approved by the Committee, provided, that such leave is for a period of not more than ninety (90) days, or reinstatement upon the expiration of such leave is guaranteed by contract or statute. The Committee shall have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "Termination Date"). -16- EX-10.03 9 ex10-03.txt EXHIBIT 10.03 1 EXHIBIT 10.03 TRANSMETA CORPORATION 1997 EQUITY INCENTIVE PLAN AS ADOPTED JULY 11, 1997 AS AMENDED FEBRUARY 20, 1998 AS AMENDED FEBRUARY 19, 1999 1. PURPOSE. The purpose of this Plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company, its Parent and Subsidiaries, by offering them an opportunity to participate in the Company's future performance through awards of Options and Restricted Stock. Capitalized terms not defined in the text are defined in Section 22. This Plan is intended to be a written compensatory benefit plan within the meaning of Rule 701 promulgated under the Securities Act. 2. SHARES SUBJECT TO THE PLAN. 2.1 Number of Shares Available. Subject to Sections 2.2 and 17, the total number of Shares reserved and available for grant and issuance pursuant to this Plan will be 9,000,000 Shares or such lesser number of Shares as permitted under Section 260.140.45 of Title 10 of the California Code of Regulations. Subject to Sections 2.2 and 17, Shares subject to Awards previously granted will again be available for grant and issuance in connection with future Awards under this Plan to the extent such Shares: (a) cease to be subject to issuance upon exercise of an Option, other than due to exercise of such Option, (b) are subject to an Award granted hereunder but the Shares subject to such Award are forfeited or repurchased by the Company at the original issue price or (c) are subject to an Award that otherwise terminates without Shares being issued. At all times the Company will reserve and keep available a sufficient number of Shares as will be required to satisfy the requirements of all Awards granted under this Plan. 2.2 Adjustment of Shares. In the event that the number of outstanding shares of the Company's Common Stock is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then (a) the number of Shares reserved for issuance under this Plan, (b) the Exercise Prices of and number of Shares subject to outstanding Options, and (c) the Purchase Price of and number of Shares subject to other outstanding Awards will be proportionately adjusted, subject to any required action by the Board or the shareholders of the Company and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be paid in cash at Fair Market Value of such fraction of a Share or will be rounded down to the nearest whole Share, as determined by the Committee. 3. ELIGIBILITY. ISOs (as defined in Section 5 below) may be granted only to employees (including officers and directors who are also employees) of the Company or of a Parent or Subsidiary of the Company. All other Awards may be granted to employees, officers, directors and consultants of the Company or any Parent or Subsidiary of the Company; provided such consultants render bona fide services not in connection with the offer and sale of securities in a capital-raising transaction. A person may be granted more than one Award under this Plan. 4. ADMINISTRATION. 4.1 Committee Authority. This Plan will be administered by the Committee or the Board acting as the Committee. Subject to the general purposes, terms and conditions of this Plan, and to the direction of the Board, the Committee will have full power to implement and carry out this Plan. Without limitation, the Committee will have the authority to: 2 (a) construe and interpret this Plan, any Award Agreement and any other agreement or document executed pursuant to this Plan; (b) prescribe, amend and rescind rules and regulations relating to this Plan; (c) select persons to receive Awards; (d) determine the form and terms of Awards; (e) determine the number of Shares or other consideration subject to Awards; (f) determine whether Awards will be granted singly, in combination with, in tandem with, in replacement of, or as alternatives to, other Awards under this Plan or any other incentive or compensation plan of the Company or any Parent or Subsidiary of the Company; (g) grant waivers of Plan or Award conditions; (h) determine the vesting, exercisability and payment of Awards; (i) correct any defect, supply any omission, or reconcile any inconsistency in this Plan, any Award, any Award Agreement, any Exercise Agreement or any Restricted Stock Purchase Agreement; (j) determine whether an Award has been earned; and (k) make all other determinations necessary or advisable for the administration of this Plan. 4.2 Committee Discretion. Any determination made by the Committee with respect to any Award will be made in its sole discretion at the time of grant of the Award or, unless in contravention of any express term of this Plan or Award, and subject to Section 5.9, at any later time, and such determination will be final and binding on the Company and on all persons having an interest in any Award under this Plan. The Committee may delegate to one or more officers of the Company the authority to grant an Award under this Plan to Participants who are not Insiders of the Company. 5. OPTIONS. The Committee may grant Options to eligible persons and will determine whether such Options will be Incentive Stock Options within the meaning of the Code ("ISOS") or Nonqualified Stock Options ("NQSOS"), the number of Shares subject to the Option, the Exercise Price of the Option, the period during which the Option may be exercised, and all other terms and conditions of the Option, subject to the following: 5.1 Form of Option Grant. Each Option granted under this Plan will be evidenced by an Award Agreement which will expressly identify the Option as an ISO or an NQSO ("STOCK OPTION AGREEMENT"), and will be in such form and contain such provisions (which need not be the same for each Participant) as the Committee may from time to time approve, and which will comply with and be subject to the terms and conditions of this Plan. 5.2 Date of Grant. The date of grant of an Option will be the date on which the Committee makes the determination to grant such Option, unless otherwise specified by the Committee. The Stock Option Agreement and a copy of this Plan will be delivered to the Participant within a reasonable time after the granting of the Option. 5.3 Exercise Period. Options may be exercisable immediately (subject to repurchase pursuant to Section 11 of this Plan) or may be exercisable within the times or upon the events determined by the 2 3 Committee as set forth in the Stock Option Agreement governing such Option; provided, however, that no Option will be exercisable after the expiration of ten (10) years from the date the Option is granted; and provided further that no ISO granted to a person who directly or by attribution owns more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary of the Company ("TEN PERCENT SHAREHOLDER") will be exercisable after the expiration of five (5) years from the date the ISO is granted. The Committee also may provide for Options to become exercisable at one time or from time to time, periodically or otherwise, in such number of Shares or percentage of Shares as the Committee determines. Subject to earlier termination of the Option as provided herein, each Participant who is not an officer, director or consultant of the Company or of a Parent or Subsidiary of the Company shall have the right to exercise an Option granted hereunder at the rate of at least twenty percent (20%) per year over five (5) years from the date such Option is granted. 5.4 Exercise Price. The Exercise Price of an Option will be determined by the Committee when the Option is granted and may not be less than 85% of the Fair Market Value of the Shares on the date of grant; provided that (i) the Exercise Price of an ISO will not be less than 100% of the Fair Market Value of the Shares on the date of grant and (ii) the Exercise Price of any Option granted to a Ten Percent Shareholder will not be less than 110% of the Fair Market Value of the Shares on the date of grant. Payment for the Shares purchased must be made in accordance with Section 7 of this Plan. 5.5 Method of Exercise. Options may be exercised only by delivery to the Company of a written stock option exercise agreement (the "EXERCISE AGREEMENT") in a form approved by the Committee (which need not be the same for each Participant), stating the number of Shares being purchased, the restrictions imposed on the Shares purchased under such Exercise Agreement, if any, and such representations and agreements regarding Participant's investment intent and access to information and other matters, if any, as may be required or desirable by the Company to comply with applicable securities laws, together with payment in full of the Exercise Price, and any applicable taxes, for the number of Shares being purchased. 5.6 Termination. Subject to earlier termination pursuant to Sections 17 and 18 and notwithstanding the exercise periods set forth in the Stock Option Agreement, exercise of an Option will always be subject to the following: (a) If the Participant is Terminated for any reason except death, Disability or for Cause, then the Participant may exercise such Participant's Options, only to the extent that such Options are exercisable upon the Termination Date, no later than three (3) months after the Termination Date (or such shorter time period, not less than thirty (30) days, as may be specified in the Stock Option Agreement) or such longer time period not exceeding five (5) years after the Termination Date as may be determined by the Committee, with any exercise beyond three (3) months after the Termination Date deemed to be an NQSO, but in any event, no later than the expiration date of the Options. (b) If the Participant is Terminated because of Participant's death or Disability (or the Participant dies within three (3) months after a Termination other than because of Participant's death or Disability or Cause), then Participant's Options may be exercised only to the extent that such Options are exercisable by Participant on the Termination Date and must be exercised by Participant (or Participant's legal representative or authorized assignee), no later than twelve (12) months after the Termination Date (or such shorter time period, not less than six (6) months, as may be specified in the Stock Option Agreement) or such longer time period not exceeding five (5) years after the Termination Date as may be determined by the Committee, with any exercise beyond (a) three (3) months after the Termination Date when the Termination is for any reason other than the Participant's death or disability, within the meaning of Section 22(e)(3) of the Code, or (b) twelve (12) months after the Termination Date when the 3 4 Termination is for Participant's death or disability, within the meaning of Section 22(e)(3) of the Code, deemed to be an NQSO, but in any event no later than the expiration date of the Options. (c) If the Participant is terminated for Cause, then Participant's Options shall expire on such Participant's Termination Date, or at such later time and on such conditions as determined by the Committee. 5.7 Limitations on Exercise. The Committee may specify a reasonable minimum number of Shares that may be purchased on any exercise of an Option, provided that such minimum number will not prevent Participant from exercising the Option for the full number of Shares for which it is then exercisable. 5.8 Limitations on ISOs. The aggregate Fair Market Value (determined as of the date of grant) of Shares with respect to which ISOs are exercisable for the first time by a Participant during any calendar year (under this Plan or under any other incentive stock option plan of the Company or any Parent or Subsidiary of the Company) will not exceed $100,000. If the Fair Market Value of Shares on the date of grant with respect to which ISOs are exercisable for the first time by a Participant during any calendar year exceeds $100,000, then the Options for the first $100,000 worth of Shares to become exercisable in such calendar year will be ISOs and the Options for the amount in excess of $100,000 that become exercisable in that calendar year will be NQSOs. In the event that the Code or the regulations promulgated thereunder are amended after the Effective Date (as defined in Section 18 below) to provide for a different limit on the Fair Market Value of Shares permitted to be subject to ISOs, then such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date of such amendment. 5.9 Modification, Extension or Renewal. The Committee may modify, extend or renew outstanding Options and authorize the grant of new Options in substitution therefor, provided that any such action may not, without the written consent of a Participant, impair any of such Participant's rights under any Option previously granted. Any outstanding ISO that is modified, extended, renewed or otherwise altered will be treated in accordance with Section 424(h) of the Code. The Committee may reduce the Exercise Price of outstanding Options without the consent of Participants affected by a written notice to them; provided, however, that the Exercise Price may not be reduced below the minimum Exercise Price that would be permitted under Section 5.4 of this Plan for Options granted on the date the action is taken to reduce the Exercise Price. 5.10 No Disqualification. Notwithstanding any other provision in this Plan, no term of this Plan relating to ISOs will be interpreted, amended or altered, nor will any discretion or authority granted under this Plan be exercised, so as to disqualify this Plan under Section 422 of the Code or, without the consent of the Participant affected, to disqualify any ISO under Section 422 of the Code. 6. RESTRICTED STOCK. A Restricted Stock Award is an offer by the Company to sell to an eligible person Shares that are subject to restrictions. The Committee will determine to whom an offer will be made, the number of Shares the person may purchase, the Purchase Price, the restrictions to which the Shares will be subject, and all other terms and conditions of the Restricted Stock Award, subject to the following: 6.1 Form of Restricted Stock Award. All purchases under a Restricted Stock Award made pursuant to this Plan will be evidenced by an Award Agreement ("RESTRICTED STOCK PURCHASE AGREEMENT") that will be in such form (which need not be the same for each Participant) as the Committee will from time to time approve, and will comply with and be subject to the terms and conditions of this Plan. The Restricted Stock Award will be accepted by the Participant's execution and delivery of the Restricted Stock Purchase Agreement and full payment for the Shares to the Company within thirty (30) days from the date the Restricted Stock Purchase Agreement is delivered to the person. If such person does not execute and deliver the Restricted Stock Purchase Agreement along with full payment for the Shares to the Company within thirty (30) days, then the offer will terminate, unless otherwise determined by the Committee. 4 5 6.2 Purchase Price. The Purchase Price of Shares sold pursuant to a Restricted Stock Award will be determined by the Committee and will be at least 85% of the Fair Market Value of the Shares on the date the Restricted Stock Award is granted or at the time the purchase is consummated, except in the case of a sale to a Ten Percent Shareholder, in which case the Purchase Price will be 100% of the Fair Market Value on the date the Restricted Stock Award is granted or at the time the purchase is consummated. Payment of the Purchase Price may be made in accordance with Section 7 of this Plan. 6.3 Restrictions. Restricted Stock Awards may be subject to the restrictions set forth in Section 11 of this Plan or such other restrictions not inconsistent with Section 25102(o) of the California Corporations Code. 7. PAYMENT FOR SHARE PURCHASES. 7.1 Payment. Payment for Shares purchased pursuant to this Plan may be made in cash (by check) or, where expressly approved for the Participant by the Committee and where permitted by law: (a) by cancellation of indebtedness of the Company to the Participant; (b) by surrender of shares that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (2) were obtained by Participant in the public market; (c) by tender of a full recourse promissory note having such terms as may be approved by the Committee and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code; provided, however, that Participants who are not employees or directors of the Company will not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares. (d) by waiver of compensation due or accrued to the Participant for services rendered; (e) with respect only to purchases upon exercise of an Option, and provided that a public market for the Company's stock exists: (1) through a "same day sale" commitment from the Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD DEALER") whereby the Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (2) through a "margin" commitment from the Participant and an NASD Dealer whereby the Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (f) by any combination of the foregoing. 7.2 Loan Guarantees. The Committee may help the Participant pay for Shares purchased under this Plan by authorizing a guarantee by the Company of a third-party loan to the Participant. 5 6 8. WITHHOLDING TAXES. 8.1 Withholding Generally. Whenever Shares are to be issued in satisfaction of Awards granted under this Plan, the Company may require the Participant to remit to the Company an amount sufficient to satisfy federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such Shares. Whenever, under this Plan, payments in satisfaction of Awards are to be made in cash, such payment will be net of an amount sufficient to satisfy federal, state, and local withholding tax requirements. 8.2 Stock Withholding. When, under applicable tax laws, a Participant incurs tax liability in connection with the exercise or vesting of any Award that is subject to tax withholding and the Participant is obligated to pay the Company the amount required to be withheld, the Committee may in its sole discretion allow the Participant to satisfy the minimum withholding tax obligation by electing to have the Company withhold from the Shares to be issued that number of Shares having a Fair Market Value equal to the minimum amount required to be withheld, determined on the date that the amount of tax to be withheld is to be determined. All elections by a Participant to have Shares withheld for this purpose will be made in accordance with the requirements established by the Committee for such elections and be in writing in a form acceptable to the Committee. 9. PRIVILEGES OF STOCK OWNERSHIP. 9.1 Voting and Dividends. No Participant will have any of the rights of a shareholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a shareholder and have all the rights of a shareholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such Shares are Restricted Stock, then any new, additional or different securities the Participant may become entitled to receive with respect to such Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company will be subject to the same restrictions as the Restricted Stock; provided, further, that the Participant will have no right to retain such stock dividends or stock distributions with respect to Unvested Shares that are repurchased pursuant to Section 11. The Company will comply with Section 260.140.1 of Title 10 of the California Code of Regulations with respect to the voting rights of Common Stock. 9.2 Financial Statements. The Company will provide financial statements to each Participant prior to such Participant's purchase of Shares under this Plan, and to each Participant annually during the period such Participant has Awards outstanding, or as otherwise required or permitted under Section 260.140.46 of Title 10 of the California Code of Regulations. Notwithstanding the foregoing, the Company will not be required to provide such financial statements to Participants whose services in connection with the Company assure them access to equivalent information. 10. TRANSFERABILITY. Awards granted under this Plan, and any interest therein, will not be transferable or assignable by Participant, and may not be made subject to execution, attachment or similar process, otherwise than by will or by the laws of descent and distribution. During the lifetime of the Participant an Award will be exercisable only by the Participant, and any elections with respect to an Award, may be made only by the Participant. 11. RESTRICTIONS ON SHARES. At the discretion of the Committee, the Company may reserve to itself and/or its assignee(s) in the Award Agreement (a) a right of first refusal to purchase all Shares that a Participant (or a subsequent transferee) may propose to transfer to a third party, unless otherwise not permitted by Section 25102(o) of the California Corporations Code, provided, that such right of first refusal terminates upon the Company's initial public offering of Common Stock pursuant an effective registration statement filed under the Securities Act and/or (b) a right to repurchase Unvested Shares held by a Participant following such Participant's Termination at any time within ninety (90) days after Participant's Termination Date (or, in the case of securities issued upon exercise of an Option after the Participant's Termination Date, within 90 days after the date of such exercise) for cash and/or cancellation of purchase money indebtedness, at the Participant's Exercise Price or 6 7 Purchase Price, as the case may be, provided, that to the extent the Participant is not an officer, director or consultant of the Company or of a Parent or Subsidiary of the Company, such right of repurchase lapses at the rate of at least twenty percent (20%) per year over five (5) years from: (A) the date of grant of the Option or (B) in the case of Restricted Stock, the date the Participant purchases the Shares. 12. CERTIFICATES. All certificates for Shares or other securities delivered under this Plan will be subject to such stock transfer orders, legends and other restrictions as the Committee may deem necessary or advisable, including restrictions under any applicable federal, state or foreign securities law, or any rules, regulations and other requirements of the SEC or any stock exchange or automated quotation system upon which the Shares may be listed or quoted. 13. ESCROW; PLEDGE OF SHARES. To enforce any restrictions on a Participant's Shares, the Committee may require the Participant to deposit all certificates representing Shares, together with stock powers or other instruments of transfer approved by the Committee, appropriately endorsed in blank, with the Company or an agent designated by the Company to hold in escrow until such restrictions have lapsed or terminated, and the Committee may cause a legend or legends referencing such restrictions to be placed on the certificates. Any Participant who is permitted to execute a promissory note as partial or full consideration for the purchase of Shares under this Plan will be required to pledge and deposit with the Company all or part of the Shares so purchased as collateral to secure the payment of Participant's obligation to the Company under the promissory note; provided, however, that the Committee may require or accept other or additional forms of collateral to secure the payment of such obligation and, in any event, the Company will have full recourse against the Participant under the promissory note notwithstanding any pledge of the Participant's Shares or other collateral. In connection with any pledge of the Shares, Participant will be required to execute and deliver a written pledge agreement in such form as the Committee will from time to time approve. The Shares purchased with the promissory note may be released from the pledge on a pro rata basis as the promissory note is paid. 14. EXCHANGE AND BUYOUT OF AWARDS. The Committee may, at any time or from time to time, authorize the Company, with the consent of the respective Participants, to issue new Awards in exchange for the surrender and cancellation of any or all outstanding Awards. The Committee may at any time buy from a Participant an Award previously granted with payment in cash, shares of Common Stock of the Company (including restricted stock) or other consideration, based on such terms and conditions as the Committee and the Participant may agree. 15. SECURITIES LAW AND OTHER REGULATORY COMPLIANCE. This Plan is intended to comply with Section 25102(o) of the California Corporations Code. Any provision of the Plan which is inconsistent with Section 25102(o) shall, without further act or amendment by the Company or the Board, be reformed to comply with the requirements of Section 25102(o). An Award will not be effective unless such Award is in compliance with all applicable federal and state securities laws, rules and regulations of any governmental body, and the requirements of any stock exchange or automated quotation system upon which the Shares may then be listed or quoted, as they are in effect on the date of grant of the Award and also on the date of exercise or other issuance. Notwithstanding any other provision in this Plan, the Company will have no obligation to issue or deliver certificates for Shares under this Plan prior to (a) obtaining any approvals from governmental agencies that the Company determines are necessary or advisable, and/or (b) compliance with any exemption, completion of any registration or other qualification of such Shares under any state or federal law or ruling of any governmental body that the Company determines to be necessary or advisable. The Company will be under no obligation to register the Shares with the SEC or to effect compliance with the exemption, registration, qualification or listing requirements of any state securities laws, stock exchange or automated quotation system, and the Company will have no liability for any inability or failure to do so. 16. NO OBLIGATION TO EMPLOY. Nothing in this Plan or any Award granted under this Plan will confer or be deemed to confer on any Participant any right to continue in the employ of, or to continue any other relationship with, the Company or any Parent or Subsidiary of the Company or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant's employment or other relationship at any time, with or without cause. 7 8 17. CORPORATE TRANSACTIONS. 17.1 Assumption or Replacement of Awards by Successor. In the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the shareholders of the Company or their relative stock holdings and the Awards granted under this Plan are assumed, converted or replaced by the successor corporation, which assumption will be binding on all Participants), (c) a merger in which the Company is the surviving corporation but after which the shareholders of the Company immediately prior to such merger (other than any shareholder which merges, or which owns or controls another corporation which merges, with the Company in such merger) cease to own their shares or other equity interests in the Company, or (d) the sale of substantially all of the assets of the Company, any or all outstanding Awards may be assumed, converted or replaced by the successor corporation (if any), which assumption, conversion or replacement will be binding on all Participants. In the alternative, the successor corporation may substitute equivalent Awards or provide substantially similar consideration to Participants as was provided to shareholders (after taking into account the existing provisions of the Awards). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions and other provisions no less favorable to the Participant than those which applied to such outstanding Shares immediately prior to such transaction described in this Subsection 17.1. In the event such successor corporation (if any) refuses to assume or substitute Awards, as provided above, pursuant to a transaction described in this Subsection 17.1, then notwithstanding any other provision in this Plan to the contrary, such Awards will expire on such transaction at such time and on such conditions as the Board will determine. 17.2 Other Treatment of Awards. Subject to any greater rights granted to Participants under the foregoing provisions of this Section 17, in the event of the occurrence of any transaction described in Section 17.1, any outstanding Awards will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation or sale of assets. 17.3 Assumption of Awards by the Company. The Company, from time to time, also may substitute or assume outstanding awards granted by another company, whether in connection with an acquisition of such other company or otherwise, by either (a) granting an Award under this Plan in substitution of such other company's award or (b) assuming such award as if it had been granted under this Plan if the terms of such assumed award could be applied to an Award granted under this Plan. Such substitution or assumption will be permissible if the holder of the substituted or assumed award would have been eligible to be granted an Award under this Plan if the other company had applied the rules of this Plan to such grant. In the event the Company assumes an award granted by another company, the terms and conditions of such award will remain unchanged (except that the exercise price and the number and nature of shares issuable upon exercise of any such option will be adjusted appropriately pursuant to Section 424(a) of the Code). In the event the Company elects to grant a new Option rather than assuming an existing option, such new Option may be granted with a similarly adjusted Exercise Price. 18. ADOPTION AND SHAREHOLDER APPROVAL. This Plan will become effective on the date that it is adopted by the Board (the "EFFECTIVE DATE"). This Plan will be approved by the shareholders of the Company (excluding Shares issued pursuant to this Plan), consistent with applicable laws, within twelve (12) months before or after the Effective Date. Upon the Effective Date, the Board may grant Awards pursuant to this Plan; provided, however, that no Option may be exercised prior to shareholder approval of this Plan. In the event that shareholder approval is not obtained within twelve (12) months before or after the date this Plan is adopted by the Board, all Awards granted hereunder will be canceled, any Shares issued pursuant to any Award will be canceled and any purchase of Shares hereunder will be rescinded. 19. TERM OF PLAN/GOVERNING LAW. Unless earlier terminated as provided herein, this Plan will terminate ten (10) years from the Effective Date or, if earlier, the date of shareholder approval. This Plan and all agreements hereunder shall be governed by and construed in accordance with the laws of the State of California. 8 9 20. AMENDMENT OR TERMINATION OF PLAN. Subject to Section 5.9, the Board may at any time terminate or amend this Plan in any respect, including without limitation amendment of any form of Award Agreement or instrument to be executed pursuant to this Plan; provided, however, that the Board will not, without the approval of the shareholders of the Company, amend this Plan in any manner that requires such shareholder approval pursuant to the Code or the regulations promulgated thereunder as such provisions apply to ISO plans. 21. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of this Plan by the Board, the submission of this Plan to the shareholders of the Company for approval, nor any provision of this Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensation arrangements as it may deem desirable, including, without limitation, the granting of stock options otherwise than under this Plan, and such arrangements may be either generally applicable or applicable only in specific cases. 22. DEFINITIONS. As used in this Plan, the following terms will have the following meanings: "AWARD" means any award under this Plan, including any Option or Restricted Stock Award. "AWARD AGREEMENT" means, with respect to each Award, the signed written agreement between the Company and the Participant setting forth the terms and conditions of the Award. "BOARD" means the Board of Directors of the Company. "CAUSE" means Termination because of (i) any willful material violation by the Participant of any law or regulation applicable to the business of the Company or a Parent or Subsidiary of the Company, the Participant's conviction for, or guilty plea to, a felony or a crime involving moral turpitude, any willful perpetration by the Participant of a common law fraud or any unlawful use by the Participant of drugs or other controlled substances, (ii) the Participant's commission of an act of personal dishonesty which involves personal profit in connection with the Company or any other entity having a business relationship with the Company, (iii) any material breach by the Participant of any provision of any agreement or understanding between the Company and the Participant regarding the terms of the Participant's service as an employee, director or consultant to the Company or a Parent or Subsidiary of the Company, including without limitation, the willful and continued failure or refusal of the Participant to perform the material duties required of such Participant as an employee, director or consultant of the Company or a Parent or Subsidiary of the Company, other than as a result of having a Disability, or a breach of any applicable invention assignment and confidentiality agreement or similar agreement between the Company and the Participant, (iv) Participant's disregard of the policies of the Company so as to cause loss, damage or injury to the property, reputation or employees of the Company or a Parent or Subsidiary of the Company, or (v) any other misconduct by the Participant which is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Company or a Parent or Subsidiary of the Company. "CODE" means the Internal Revenue Code of 1986, as amended. "COMMITTEE" means the committee appointed by the Board to administer this Plan, or if no committee is appointed, the Board. "COMPANY" meanS Transmeta Corporation, or any successor corporation. "DISABILITY" means a disability, whether temporary or permanent, partial or total, as determined by the Committee. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. "EXERCISE PRICE" means the price at which a holder of an Option may purchase the Shares issuable upon exercise of the Option. 9 10 "FAIR MARKET VALUE" means, as of any date, the value of a share of the Company's Common Stock determined as follows: (a) if such Common Stock is then quoted on the Nasdaq National Market, its closing price on the Nasdaq National Market on the date of determination as reported in The Wall Street Journal; (b) if such Common Stock is publicly traded and is then listed on a national securities exchange, its closing price on the date of determination on the principal national securities exchange on which the Common Stock is listed or admitted to trading as reported in The Wall Street Journal; (c) if such Common Stock is publicly traded but is not quoted on the Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the average of the closing bid and asked prices on the date of determination as reported by The Wall Street Journal (or, if not so reported, as otherwise reported by any newspaper or other source as the Board may determine); or (d) if none of the foregoing is applicable, by the Committee in good faith. "INSIDER" means an officer or director of the Company or any other person whose transactions in the Company's Common Stock are subject to Section 16 of the Exchange Act. "OPTION" means an award of an option to purchase Shares pursuant to Section 5. "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "PARTICIPANT" means a person who receives an Award under this Plan. "PLAN" means this Transmeta Corporation 1997 Equity Incentive Plan, as amended from time to time. "PURCHASE PRICE" the price at which a Participant may purchase Restricted Stock. "RESTRICTED STOCK" means Shares purchased pursuant to a Restricted Stock Award. "RESTRICTED STOCK AWARD" means an award of Shares pursuant to Section 6. "SEC" means the Securities and Exchange Commission. "SECURITIES ACT" means the Securities Act of 1933, as amended. "SHARES" means shares of the Company's Common Stock reserved for issuance under this Plan, as adjusted pursuant to Sections 2 and 17, and any successor security. "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "TERMINATION" or "TERMINATED" means, for purposes of this Plan with respect to a Participant, that the Participant has for any reason ceased to provide services as an employee, officer, director or consultant to 10 11 the Company or a Parent or Subsidiary of the Company. An employee will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Committee, provided that such leave is for a period of not more than 90 days unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated in writing. In the case of any Participant on (i) sick leave, (ii) military leave or (iii) an approved leave of absence, the Committee may make such provisions respecting suspension of vesting of the Award while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event may an Option be exercised after the expiration of the term set forth in the Stock Option Agreement. The Committee will have sole discretion to determine whether a Participant has ceased to provide services and the effective date on which the Participant ceased to provide services (the "TERMINATION DATE"). "UNVESTED SHARES" means "Unvested Shares" as defined in the Award Agreement. "VESTED SHARES" means "Vested Shares" as defined in the Award Agreement. 11 EX-10.06 10 ex10-06.txt EXHIBIT 10.06 1 EXHIBIT 10.06 TRANSMETA CORPORATION NON-PLAN STOCK OPTION AGREEMENT This Non-Plan Stock Option Agreement ("AGREEMENT") is made and entered into as of the date of grant set forth below (the "DATE OF GRANT") by and between Transmeta Corporation, a California corporation (the "COMPANY"), and the participant named below ("PARTICIPANT"). PARTICIPANT: Mark Allen SOCIAL SECURITY NUMBER: _________________________________________________ ADDRESS: _________________________________________________ _________________________________________________ TOTAL OPTION SHARES: 1,000,000 EXERCISE PRICE PER SHARE: $6.00 DATE OF GRANT: January 4, 2000 FIRST VESTING DATE: January 4, 2001 EXPIRATION DATE: January 3, 2010 (unless earlier terminated under Section 3 below) 1. GRANT OF OPTION. The Company hereby grants to Participant a nonqualified stock option (the "OPTION") to purchase the total number of shares of Common Stock of the Company set forth above (the "SHARES") at the Exercise Price Per Share set forth above (the "EXERCISE PRICE"), subject to all of the terms and conditions of this Agreement. 2. EXERCISE PERIOD. 2.1 Exercise Period of Option. This Option is exercisable in full on the date hereof; provided, that the Shares issued upon exercise of the Option will be subject to the repurchase option set forth in Section 7 below and the right of first refusal set forth in the Company's Bylaws. Provided Participant continues to provide services to the Company or to any Parent or Subsidiary of the Company, the Shares issuable upon exercise of this Option will become vested with respect to twenty-five percent (25%) of the Total Option Shares (as set forth on the first page of this Agreement) on January 4, 2001 (the "FIRST VESTING DATE") and thereafter at the end of each full succeeding month after the First Vesting Date an additional two and eight hundred thirty-three ten thousandths percent (2.0833%) of the Total Option Shares will become vested until the Shares are vested with respect to 100% of the Shares, provided that if application of the vesting percentage causes a fractional share, such share shall be rounded down to the nearest whole share. Notwithstanding anything in this Agreement to the contrary, an additional 50% of the Total Option Shares will become vested (which accelerated vesting will be in addition to the vesting occurring in accordance with the preceding provisions of this paragraph) immediately prior to the occurrence of a Non-Justifiable Termination (as defined below) that occurs during the period beginning on the date of consummation of a Change of Control (as defined in Section 16.1 below) and ending twelve months thereafter. Notwithstanding any provision in this Agreement to the contrary, the Option will not be exercisable for Unvested Shares (as defined in Section 2.2 of this Agreement) on or after Participant's Termination Date. "NON-JUSTIFIABLE TERMINATION" means any Termination of Participant by the Company other than for Cause (as defined below) or any Termination of Participant by Participant for Good Reason (as defined below). "CAUSE" means Termination because of (i) any willful participation by Participant in acts of either material fraud or material dishonesty against the Company or any Subsidiary or Parent of the Company; (ii) any indictment or conviction of 2 Participant of any felony (excluding drunk driving); (iii) any willful act of gross misconduct by Participant which is materially and demonstrably injurious to the Company or any Subsidiary or Parent of the Company; or (iv) the death or Disability of Participant. "GOOD REASON" means any of the following conditions which occurs without Participant's written consent, which condition remains in effect ten (10) days after written notice to the Company from Participant of such condition: (i) a decrease in Participant's base salary from the Company (or, as applicable, any Subsidiary or Parent of the Company) from that in effect immediately prior to the Change of Control; (ii) the relocation of Participant's work place for the Company (or, as applicable, any Subsidiary or Parent of the Company) to a location more than 50 miles from the location of Participant's work place prior to the Change of Control; or (iii) the assignment of responsibilities and duties with the Company (or, as applicable, any Subsidiary or Parent of the Company) that are not the Substantive Functional Equivalent (as defined below) of the position which Participant occupied immediately prior to the Change of Control. "SUBSTANTIVE FUNCTIONAL EQUIVALENT" means an employment position that: (i) is in a substantive area of competence (such as, accounting; engineering management; executive management; finance; human resources; marketing, sales and service; operations and manufacturing; etc.) that is consistent with Participant's experience; (ii) requires Participant to serve in a role and perform duties, respecting a business substantially similar to that of the Company's prior to the Change in Control, that are functionally equivalent to those performed by Participant for the Company prior to the Change in Control, and (iii) does not otherwise constitute a material, adverse change in Participant's responsibilities or duties, as measured against Participant's responsibilities or duties for the Company prior to the Change in Control, in each case, causing it to be of materially lesser rank or responsibility. Notwithstanding the foregoing, any change in role, responsibilities or duties that is solely attributable to the change in the Company's status from that of an independent company to that of a subsidiary of a buyer of the Company shall not constitute a change in role, responsibilities or duties for purposes of items (ii) or (iii) in the preceding sentence. "PARENT" means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company if each of such corporations other than the Company owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. "SUBSIDIARY" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. 2.2 Vesting of Options. Shares that are vested pursuant to the schedule set forth in Section 2.1 are "VESTED SHARES." Shares that are not vested pursuant to the schedule set forth in Section 2.1 are "UNVESTED SHARES." Unvested Shares may not be sold or otherwise transferred by Participant without the Company's prior written consent. 2.3 Expiration. The Option shall expire on the Expiration Date set forth above or earlier as provided in Section 3 below. 3. TERMINATION. 3.1 Termination for Any Reason Except Death, Disability or Cause. If Participant is Terminated for any reason, except death, Disability or Cause, the Option, to the extent (and only to the extent) that it would have been exercisable by Participant on the Termination Date, may be exercised by Participant no later than three (3) months after the Termination Date, but in any event no later than the Expiration Date. 3.2 Termination Because of Death or Disability. If Participant is Terminated because of death or Disability of Participant (or Participant dies within three (3) months of Termination other than for Cause or because of Participant's death or Disability), the Option, to the extent that it is exercisable by Participant on the Termination Date, may be exercised by Participant (or Participant's legal representative) no later than twelve (12) months after the Termination Date, but in any event no later than the Expiration Date. 3.3 Termination for Cause. If Participant is Terminated for Cause (excluding for death or Disability of Participant), then the Option will expire on Participant's Termination Date, or at such later time and on such conditions as determined by the Company's Board of Directors. -2- 3 3.4 No Obligation to Employ. Nothing in this Agreement shall confer on Participant any right to continue in the employ of, or other relationship with, the Company or any Parent or Subsidiary of the Company, or limit in any way the right of the Company or any Parent or Subsidiary of the Company to terminate Participant's employment or other relationship at any time, with or without Cause. 3.5 Definitions. The following terms used in this Agreement will have the meanings set forth in this Section. "TERMINATION" or "TERMINATED" means, for purposes of this Agreement with respect to Participant, that the Participant has for any reason ceased to provide services as an employee, officer, director or consultant to the Company or a Parent or Subsidiary of the Company. An employee will not be deemed to have ceased to provide services in the case of (i) sick leave, (ii) military leave, or (iii) any other leave of absence approved by the Company's Board of Directors, provided that such leave is for a period of not more than 90 days unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to formal policy adopted from time to time by the Company and issued and promulgated in writing. In the case of Participant on (i) sick leave, (ii) military leave or (iii) an approved leave of absence, the Company's Board of Directors may make such provisions respecting suspension of vesting of the Shares while on leave from the employ of the Company or a Subsidiary as it may deem appropriate, except that in no event may the Option be exercised after the expiration of the term set forth herein. The Company's Board of Directors will have sole discretion to determine whether Participant has ceased to provided services and the effective date on which Participant ceased to provided services (the "TERMINATION DATE"). "DISABILITY" means a disability, whether temporary or permanent, partial or total, as determined by the Company's Board of Directors. 4. MANNER OF EXERCISE. 4.1 Stock Option Exercise Agreement. To exercise this Option, Participant (or in the case of exercise after Participant's death or incapacity, Participant's executor, administrator, heir or legatee, as the case may be) must deliver to the Company an executed stock option exercise agreement in the form attached hereto as Exhibit A, or in such other form as may be approved by the Company from time to time (the "EXERCISE AGREEMENT"), which shall set forth, inter alia, Participant's election to exercise the Option, the number of Shares being purchased, any restrictions imposed on the Shares and any representations, warranties and agreements regarding Participant's investment intent and access to information as may be required by the Company to comply with applicable securities laws. If someone other than Participant exercises the Option, then such person must submit documentation reasonably acceptable to the Company that such person has the right to exercise the Option. 4.2 Limitations on Exercise. The Option may not be exercised unless such exercise is in compliance with all applicable federal and state securities laws, as they are in effect on the date of exercise. The Option may not be exercised as to fewer than one hundred (100) Shares unless it is exercised as to all Shares as to which the Option is then exercisable. 4.3 Payment. The Exercise Agreement shall be accompanied by full payment of the Exercise Price for the shares being purchased in cash (by check), or where permitted by law: (a) by cancellation of indebtedness of the Company to the Participant; (b) at the discretion of the Company's Board of Directors, by surrender of shares of the Company's Common Stock that either: (1) have been owned by Participant for more than six (6) months and have been paid for within the meaning of SEC Rule 144 (and, if such shares were purchased from the Company by use of a promissory note, such note has been fully paid with respect to such shares); or (2) were obtained by Participant in the open public market; and (3) are clear of all liens, claims, encumbrances or security interests; (c) at the discretion of the Company's Board of Directors, by tender of a full recourse promissory note having such terms as may be approved by the Company's Board of Directors and bearing interest at a rate sufficient to avoid imputation of income under -3- 4 Sections 483 and 1274 of the Code; provided, however, that Participant who is not an employee or director of the Company shall not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares; (d) by waiver of compensation due or accrued to Participant for services rendered; (e) provided that a public market for the Company's stock exists, (1) through a "same day sale" commitment from Participant and a broker-dealer that is a member of the National Association of Securities Dealers (an "NASD DEALER") whereby Participant irrevocably elects to exercise the Option and to sell a portion of the Shares so purchased to pay for the Exercise Price and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company, or (2) through a "margin" commitment from Participant and an NASD Dealer whereby Participant irrevocably elects to exercise the Option and to pledge the Shares so purchased to the NASD Dealer in a margin account as security for a loan from the NASD Dealer in the amount of the Exercise Price, and whereby the NASD Dealer irrevocably commits upon receipt of such Shares to forward the Exercise Price directly to the Company; or (f) by any combination of the foregoing. 4.4 Tax Withholding. Prior to the issuance of the Shares upon exercise of the Option, Participant must pay or provide for any applicable federal, state and local withholding obligations of the Company. If the Company's Board of Directors permits, Participant may provide for payment of withholding taxes upon exercise of the Option by requesting that the Company retain Shares with a fair market value (as determined in good faith by the Company's Board of Directors) equal to the minimum amount of taxes required to be withheld. In such case, the Company shall issue the net number of Shares to the Participant by deducting the Shares retained from the Shares issuable upon exercise. 4.5 Issuance of Shares. Provided that the Exercise Agreement and payment are in form and substance satisfactory to counsel for the Company, the Company shall issue the Shares registered in the name of Participant, Participant's authorized assignee, or Participant's legal representative, and shall deliver certificates representing the Shares with the appropriate legends affixed thereto. 5. COMPLIANCE WITH LAWS AND REGULATIONS. The exercise of the Option and the issuance and transfer of Shares shall be subject to compliance by the Company and Participant with all applicable requirements of federal and state securities laws and with all applicable requirements of any stock exchange on which the Company's Common Stock may be listed at the time of such issuance or transfer. Participant understands that the Company is under no obligation to register or qualify the Shares with the Securities and Exchange Commission, any state securities commission or any stock exchange to effect such compliance. 6. NONTRANSFERABILITY OF OPTION. The Option may not be transferred in any manner other than by will or by the laws of descent and distribution and may be exercised during the lifetime of Participant only by Participant. The terms of the Option shall be binding upon the executors, administrators, successors and assigns of Participant. 7. COMPANY'S REPURCHASE OPTION FOR UNVESTED SHARES. The Company, or its assignee, shall have the option to repurchase Participant's Unvested Shares (as defined in Section 2.2 of this Agreement) on the terms and conditions set forth in the Exercise Agreement (the "REPURCHASE OPTION") if Participant is Terminated for any reason, or no reason, including without limitation Participant's death, Disability, voluntary resignation or termination by the Company with or without Cause. Notwithstanding the foregoing, the Company shall retain the Repurchase Option for Unvested Shares only as to that number of Unvested Shares (whether or not exercised) that exceeds the number of shares which remain exercisable. -4- 5 8. TAX CONSEQUENCES. Set forth below is a brief summary as of the date hereof of some of the federal and California tax consequences of exercise of the Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. PARTICIPANT SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES. 8.1 Exercise of Option. There may be a regular federal and California income tax liability upon the exercise of the Option. Participant will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. If Participant is or was an employee of the Company, the Company will be required to withhold from Participant's compensation or collect from Participant and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. 8.2 Disposition of Shares. If the Shares are held for more than twelve (12) months after the date of the transfer of the Shares pursuant to the exercise of the Option for Vested Shares, any gain realized on disposition of the Shares will be treated as long term capital gain for federal and California income tax purposes. 8.3 Section 83(b) Election for Unvested Shares. With respect to Unvested Shares, which are subject to the Repurchase Option, unless an election is filed by Participant with the Internal Revenue Service (and, if necessary, the proper state taxing authorities), within 30 days of the purchase of the Unvested Shares, electing pursuant to Section 83(b) of the Internal Revenue Code (and similar state tax provisions, if applicable) to be taxed currently on any difference between the Exercise Price of the Unvested Shares and their fair market value on the date of purchase, there may be a recognition of taxable income (including, where applicable, alternative minimum taxable income) to Participant, measured by the excess, if any, of the fair market value of the Unvested Shares at the time they cease to be Unvested Shares, over the Exercise Price of the Unvested Shares. 9. PRIVILEGES OF STOCK OWNERSHIP. Participant shall not have any of the rights of a shareholder with respect to any Shares until the Shares are issued to Participant. 10. INTERPRETATION. Any dispute regarding the interpretation of this Agreement shall be submitted by Participant or the Company to the Company's Board of Directors for review. The resolution of such a dispute by the Company's Board of Directors shall be final and binding on the Company and Participant. 11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties and supersedes all prior undertakings and agreements with respect to the subject matter hereof. 12. NOTICES. Any notice required to be given or delivered to the Company under the terms of this Agreement shall be in writing and addressed to the Corporate Secretary of the Company at its principal corporate offices. Any notice required to be given or delivered to Participant shall be in writing and addressed to Participant at the address indicated above or to such other address as such party may designate in writing from time to time to the Company. All notices shall be deemed to have been given or delivered upon: personal delivery; three (3) days after deposit in the United States mail by certified or registered mail (return receipt requested); one (1) business day after deposit with any return receipt express courier (prepaid); or one (1) business day after transmission by facsimile, rapifax or telecopier. 13. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under this Agreement including its right to repurchase Shares under the Repurchase Option. This Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Agreement shall be binding upon Participant and Participant's heirs, executors, administrators, legal representatives, successors and assigns. 14. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. If any provision of this Agreement is determined by a court of law -5- 6 to be illegal or unenforceable, then such provision will be enforced to the maximum extent possible and the other provisions will remain fully effective and enforceable. 15. TAX CONSEQUENCES. Participant acknowledges that there may be adverse tax consequences upon exercise of the Option or disposition of the Shares and that Participant should consult a tax adviser prior to such exercise or disposition. 16. CORPORATE TRANSACTIONS. 16.1 Assumption or Replacement of Option by Successor. In the event of (a) a dissolution or liquidation of the Company, (b) a merger or consolidation in which the Company is not the surviving corporation (other than a merger or consolidation with a wholly-owned subsidiary, a reincorporation of the Company in a different jurisdiction, or other transaction in which there is no substantial change in the shareholders of the Company or their relative stock holdings and the Option is assumed, converted or replaced by the successor corporation, which assumption will be binding on Participant), (c) a merger in which the Company is the surviving corporation but after which the shareholders of the Company immediately prior to such merger (other than any shareholder which merges, or which owns or controls another corporation which merges, with the Company in such merger) cease to own their shares or other equity interests in the Company, or (d) the sale of substantially all of the assets of the Company (events described in items (a), (b), (c) or (d) being referred to herein as a "CHANGE OF CONTROL"), the Option may be assumed, converted or replaced by the successor corporation (if any), which assumption, conversion or replacement will be binding on Participant. In the alternative, the successor corporation may substitute an equivalent Option or provide substantially similar consideration to Participant as was provided to shareholders (after taking into account the existing provisions of the Option). The successor corporation may also issue, in place of outstanding Shares of the Company held by the Participant, substantially similar shares or other property subject to repurchase restrictions and other provisions no less favorable to the Participant than those which applied to such outstanding Shares immediately prior to such transaction described in this Subsection 16.1. In the event such successor corporation (if any) refuses to assume or substitute the Option, as provided above, pursuant to a transaction described in this Subsection 16.1, then notwithstanding any other provision in this Agreement to the contrary, the Option will expire on such transaction at such time and on such conditions as the Company's Board of Directors will determine. 16.2 Other Treatment of Option or Shares. Subject to any greater rights granted to Participant under the foregoing provisions of this Section 16, in the event of the occurrence of any transaction described in Section 16.1, the Option and the Shares will be treated as provided in the applicable agreement or plan of merger, consolidation, dissolution, liquidation or sale of assets. 17. REPRESENTATIONS, WARRANTIES AND CERTAIN AGREEMENTS OF PARTICIPANT. Participant hereby represents and warrants to, and agrees with, the Company that: 17.1 AUTHORIZATION. This Agreement constitutes Participant's valid and legally binding obligation, enforceable in accordance with its terms except as may be limited by (i) applicable bankruptcy, insolvency, reorganization or other laws of general application relating to or affecting the enforcement of creditors' rights generally and (ii) the effect of rules of law governing the availability of equitable remedies. 17.2 PURCHASE FOR OWN ACCOUNT. The Option will be acquired for investment for Participant's own account, not as a nominee or agent, and not with a view to the public resale or distribution thereof within the meaning of the Securities Act of 1933, as amended (the "SECURITIES ACT"), and Participant has no present intention of selling, granting any participation in, or otherwise distributing the same. 17.3 DISCLOSURE OF INFORMATION. Participant has received or has had full access to all the information Participant considers necessary or appropriate to make an informed investment decision with respect to the Option. Participant further has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Option and to obtain additional information (to -6- 7 the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify any information furnished to Participant or to which Participant had access. 17.4 INVESTMENT EXPERIENCE. Participant understands that the Option involves substantial risk. Participant: (i) has experience as an investor in securities of companies in the development stage and acknowledges that Participant is able to fend for itself, can bear the economic risk of Participant's investment in the Option and has such knowledge and experience in financial or business matters that Participant is capable of evaluating the merits and risks of this investment in the Option and protecting Participant's own interests in connection with this investment and/or (ii) has a preexisting personal or business relationship with the Company and certain of its officers, directors or controlling persons of a nature and duration that enables Participant to be aware of the character, business acumen and financial circumstances of such persons. 17.5 RESTRICTED SECURITIES. Participant understands that the Option is characterized as "restricted securities" under the Securities Act inasmuch as it is being acquired from the Company in a transaction not involving a public offering and that under the Securities Act and applicable regulations thereunder such securities may be resold without registration under the Securities Act only in certain limited circumstances. In this connection, Participant represents that Participant is familiar with Rule 144 of the U.S. Securities and Exchange Commission (the "SEC"), as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act. Participant understands that the Company is under no obligation to register any of the securities sold hereunder. Participant understands that no public market now exists for the Option or the Shares and that it is uncertain whether a public market will ever exist for the Options or the Shares. 18. ADJUSTMENT OF SHARES. In the event that the number of outstanding shares of the Company's Common Stock is changed by a stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration, then the Exercise Price of and number of Shares subject to the Option will be proportionately adjusted, subject to any required action by the Company's Board of Directors or shareholders and compliance with applicable securities laws; provided, however, that fractions of a Share will not be issued but will either be paid in cash at fair market value of such fraction of a Share or will be rounded down to the nearest whole Share, as determined by the Company's Board of Directors. 19. VOTING AND DIVIDENDS. Participant will not have any of the rights of a shareholder with respect to any Shares until the Shares are issued to the Participant. After Shares are issued to the Participant, the Participant will be a shareholder and have all the rights of a shareholder with respect to such Shares, including the right to vote and receive all dividends or other distributions made or paid with respect to such Shares; provided, that if such Shares are Unvested Shares, then the Participant will have no right to retain any new, additional or different securities securities the Participant may become entitled to receive with respect to such Unvested Shares by virtue of a stock dividend, stock split or any other change in the corporate or capital structure of the Company with respect to Unvested Shares that are repurchased pursuant to Section 7. -7- 8 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in duplicate by its duly authorized representative and Participant has executed this Agreement in duplicate as of the Date of Grant. TRANSMETA CORPORATION PARTICIPANT By: /s/ DAN E. STEIMLE /s/ MARK K. ALLEN ------------------------------- ------------------------------- (Signature) Dan E. Steimle Mark K. Allen - ----------------------------------- ------------------------------- (Please print name) (Please print name) CFO - ----------------------------------- (Please print title) -8- 9 EXHIBIT A NON-PLAN STOCK OPTION EXERCISE AGREEMENT 10 TRANSMETA CORPORATION NON-PLAN STOCK OPTION EXERCISE AGREEMENT This Non-Plan Stock Option Exercise Agreement (this "EXERCISE AGREEMENT") is made and entered into as of January 17, 2000 (the "EFFECTIVE DATE") by and between Transmeta Corporation, a California corporation (the "COMPANY"), and the purchaser named below (the "PURCHASER"). Capitalized terms not defined herein shall have the meaning ascribed to them in that certain Non-Plan Stock Option Agreement, dated as of January 4, 2000, entered into by the Company and Purchaser (the "STOCK OPTION AGREEMENT"). PURCHASER: Mark K. Allen --------------------------------------- SOCIAL SECURITY NUMBER: --------------------------------------- ADDRESS: --------------------------------------- TOTAL NUMBER OF SHARES: 1,000,000 --------------------------------------- EXERCISE PRICE PER SHARE: $6.00 --------------------------------------- TOTAL EXERCISE PRICE: $6,000,000 --------------------------------------- OPTION DATE OF GRANT: January 4, 2000 --------------------------------------- 1. EXERCISE OF OPTION. 1.1 Exercise. Pursuant to exercise of the option granted under the Stock Option Agreement ("OPTION") and subject to the terms and conditions of this Exercise Agreement, Purchaser hereby purchases from the Company, and the Company hereby sells to Purchaser, the Total Number of Shares set forth above ("SHARES") of the Company's Common Stock at the Exercise Price Per Share set forth above ("EXERCISE PRICE"). As used in this Exercise Agreement, the term "SHARES" refers to the Shares purchased under this Exercise Agreement and includes all securities received (a) in replacement of the Shares, (b) as a result of stock dividends or stock splits with respect to the Shares, and (c) all securities received in replacement of the Shares in a merger, recapitalization, reorganization or similar corporate transaction. 1.2 Title to Shares. The exact spelling of the name(s) under which Purchaser will take title to the Shares is: Mark K. Allen ----------------------------------------------------------------- Valerie Allen ----------------------------------------------------------------- Purchaser desires to take title to the Shares as follows: -10- 11 [ ] Individual, as separate property [ ] Husband and wife, as community property [ ] Joint Tenants [X] With spouse as trustee(s) of the following trust (including date): The Allen Living Trust ---------------------------------------------------------- 9-22-92 ---------------------------------------------------------- [ ] Other; please specify: -------------------------------------- ---------------------------------------------------------- 1.3 Payment. Purchaser hereby delivers payment of the Exercise Price in the manner permitted in the Stock Option Agreement as follows (check and complete as appropriate): [ ] in cash in the amount of $____________, receipt of which is acknowledged by the Company; [ ] by cancellation of indebtedness of the Company to Purchaser in the amount of $__________; [ ] at the discretion of the Company's Board of Directors, by delivery of _________ fully-paid, nonassessable and vested shares of the Common Stock of the Company owned by Purchaser for at least six (6) months prior to the date hereof which have been paid for within the meaning of SEC Rule 144, (if purchased by use of a promissory note, such note has been fully paid with respect to such vested shares), or obtained by Purchaser in the open public market, and owned free and clear of all liens, claims, encumbrances or security interests, valued at the current fair market value of $___________ per share; [X] at the discretion of the Company's Board of Directors, by tender of a Full Recourse Promissory Note in the principal amount of $6,000,000.00, having such terms as may be approved by the Company's Board of Directors and bearing interest at a rate sufficient to avoid imputation of income under Sections 483 and 1274 of the Code and secured by a Pledge Agreement herewith; provided, however, that Participants who are not employees or directors of the Company shall not be entitled to purchase Shares with a promissory note unless the note is adequately secured by collateral other than the Shares; [ ] by the waiver hereby of compensation due or accrued for services rendered in the amount of $_________. 2. DELIVERY. 2.1 Deliveries by Purchaser. Purchaser hereby delivers to the Company (i) this Exercise Agreement, (ii) two (2) copies of a blank Stock Power and Assignment Separate from Stock Certificate in the form of Exhibit 1 attached hereto (the "STOCK POWERS"), both executed by Purchaser (and Purchaser's spouse, if any), (iii) if Purchaser is married, a Consent of Spouse in the form of Exhibit 2 attached hereto (the "SPOUSE CONSENT") executed by Purchaser's spouse, and (iv) the Exercise Price and, if all or part of the exercise price is paid with a note, by delivery of a Secured Full Recourse Promissory Note in the form of Exhibit 3 and (v) if all or part of the exercise price is paid with a note, a Stock Pledge Agreement in the form of Exhibit 4 executed by Purchaser (the "Pledge Agreement"). 2.2 Deliveries by the Company. Upon its receipt of the Exercise Price and all the documents to be executed and delivered by Purchaser to the Company under Section 2.1, the Company will issue a duly executed stock certificate evidencing the Shares in the name of Purchaser, to be placed in escrow as provided in Section 10 to secure payment of Purchaser's obligation to the Company under the promissory note and until -11- 12 expiration or termination of the Company's Repurchase Option described in Section 8 and right of first refusal set forth in the Company's Bylaws. 3. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and warrants to the Company that: 3.1 Tax Consequences. Purchaser acknowledges that there may be adverse tax consequences upon exercise of the Option or disposition of the Shares, and that Purchaser should consult a tax adviser prior to such exercise or disposition. 3.2 Purchase for Own Account for Investment. Purchaser is purchasing the Shares for Purchaser's own account for investment purposes only and not with a view to, or for sale in connection with, a distribution of the Shares within the meaning of the Securities Act of 1933, as amended (the "SECURITIES ACT"). Purchaser has no present intention of selling or otherwise disposing of all or any portion of the Shares and no one other than Purchaser has any beneficial ownership of any of the Shares. 3.3 Access to Information. Purchaser has had access to all information regarding the Company and its present and prospective business, assets, liabilities and financial condition that Purchaser reasonably considers important in making the decision to purchase the Shares, and Purchaser has had ample opportunity to ask questions of the Company's representatives concerning such matters and this investment. 3.4 Understanding of Risks. Purchaser is fully aware of: (i) the highly speculative nature of the investment in the Shares; (ii) the financial hazards involved; (iii) the lack of liquidity of the Shares and the restrictions on transferability of the Shares (e.g., that Purchaser may not be able to sell or dispose of the Shares or use them as collateral for loans); (iv) the qualifications and backgrounds of the management of the Company; and (v) the tax consequences of investment in the Shares. Purchaser is capable of evaluating the merits and risks of this investment, has the ability to protect Purchaser's own interests in this transaction and is financially capable of bearing a total loss of this investment. 3.5 No General Solicitation. At no time was Purchaser presented with or solicited by any publicly issued or circulated newspaper, mail, radio, television or other form of general advertising or solicitation in connection with the offer, sale and purchase of the Shares. 3.6 Investment Experience. Purchaser understands that the purchase of the Shares involves substantial risk. Purchaser: (i) has experience as an investor in securities of companies in the development stage and acknowledges that Purchaser is able to fend for itself, can bear the economic risk of Purchaser's investment in the Shares and has such knowledge and experience in financial or business matters that Purchaser is capable of evaluating the merits and risks of this investment in the Shares and protecting Purchaser's own interests in connection with this investment and/or (ii) has a preexisting personal or business relationship with the Company and certain of its officers, directors or controlling persons of a nature and duration that enables Purchaser to be aware of the character, business acumen and financial circumstances of such persons. 3.7 Restricted Securities. Purchaser understands that the Shares are characterized as "restricted securities" under the Securities Act inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under the Securities Act and applicable regulations thereunder such securities may be resold without registration under the Securities Act only in certain limited circumstances. 4. COMPLIANCE WITH SECURITIES LAWS. 4.1 Compliance with Federal Securities Laws. Purchaser understands and acknowledges that the Shares have not been registered with the Securities and Exchange Commission ("SEC") under the Securities Act and that, notwithstanding any other provision of the Stock Option Agreement to the contrary, the exercise of any rights to purchase any Shares is expressly conditioned upon compliance with the -12- 13 Securities Act and all applicable state securities laws. Purchaser agrees to cooperate with the Company to ensure compliance with such laws. 4.2 Compliance with California Securities Laws. THE SALE OF THE SECURITIES THAT ARE THE SUBJECT OF THIS EXERCISE AGREEMENT, IF NOT YET QUALIFIED WITH THE CALIFORNIA COMMISSIONER OF CORPORATIONS AND NOT EXEMPT FROM SUCH QUALIFICATION, IS SUBJECT TO SUCH QUALIFICATION, AND THE ISSUANCE OF SUCH SECURITIES, AND THE RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL UNLESS THE SALE IS EXEMPT. THE RIGHTS OF THE PARTIES TO THIS EXERCISE AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION BEING AVAILABLE. 5. RESTRICTED SECURITIES. 5.1 No Transfer Unless Registered or Exempt. Purchaser understands that Purchaser may not transfer any Shares unless such Shares are registered under the Securities Act or qualified under applicable state securities laws or unless, in the opinion of counsel to the Company, exemptions from such registration and qualification requirements are available. Purchaser understands that only the Company may file a registration statement with the SEC and that the Company is under no obligation to do so with respect to the Shares. Purchaser has also been advised that exemptions from registration and qualification may not be available or may not permit Purchaser to transfer all or any of the Shares in the amounts or at the times proposed by Purchaser. 5.2 SEC Rule 144. In addition, Purchaser has been advised that SEC Rule 144 promulgated under the Securities Act, which permits certain limited sales of unregistered securities, is not presently available with respect to the Shares and, in any event, requires that the Shares be held for a minimum of one year, and in certain cases two years, after they have been purchased and paid for (within the meaning of Rule 144). Purchaser understands that Shares paid for with a Note may not be deemed to be fully "paid for" within the meaning of Rule 144 unless certain conditions are met and that, accordingly, the Rule 144 holding period of such Shares may not begin to run until such Shares are fully paid for within the meaning of Rule 144. Purchaser understands that Rule 144 may indefinitely restrict transfer of the Shares so long as Purchaser remains an "affiliate" of the Company or if "current public information" about the Company (as defined in Rule 144) is not publicly available. 6. RESTRICTIONS ON TRANSFERS. 6.1 Disposition of Shares. Purchaser hereby agrees that Purchaser shall make no disposition of the Shares (other than as permitted by this Exercise Agreement) unless and until: (a) Purchaser shall have notified the Company of the proposed disposition and provided a written summary of the terms and conditions of the proposed disposition; (b) Purchaser shall have complied with all requirements of this Exercise Agreement applicable to the disposition of the Shares; (c) Purchaser shall have provided the Company with written assurances, in form and substance satisfactory to counsel for the Company, that (i) the proposed disposition does not require registration of the Shares under the Securities Act or (ii) all appropriate action necessary for compliance with the registration requirements of the Securities Act or of any exemption from registration available under the Securities Act (including Rule 144) has been taken; and (d) Purchaser shall have provided the Company with written assurances, in form and substance satisfactory to the Company, that the proposed disposition will not result in the contravention of any transfer restrictions applicable to the Shares pursuant to the provisions of the Commissioner Rules identified in Section 4.2. -13- 14 6.2 Restriction on Transfer. Purchaser shall not transfer, assign, grant a lien or security interest in, pledge, hypothecate, encumber or otherwise dispose of any of the Shares which are subject to (i) the Company's Repurchase Option set forth in this Exercise Agreement, except as permitted by this Exercise Agreement, or (ii) the Company's right of first refusal set forth in the Company's Bylaws, except as permitted thereby. 6.3 Transferee Obligations. Each person (other than the Company) to whom the Shares are transferred by means of one of the permitted transfers specified in this Exercise Agreement must, as a condition precedent to the validity of such transfer, acknowledge in writing to the Company that such person is bound by the provisions of this Exercise Agreement and that the transferred Shares are subject to (i) both the Company's Repurchase Option granted hereunder and right of first refusal set forth in the Company's Bylaws and (ii) the market stand-off provisions of Section 7, to the same extent such Shares would be so subject if retained by the Purchaser. 7. MARKET STANDOFF AGREEMENT. Purchaser agrees in connection with any registration of the Company's securities that, upon the request of the Company or the underwriters managing any public offering of the Company's securities, Purchaser will not sell or otherwise dispose of any Shares without the prior written consent of the Company or such underwriters, as the case may be, for such period of time (not to exceed 180 days) after the effective date of such registration requested by such managing underwriters and subject to all restrictions as the Company or the underwriters may specify. 8. COMPANY'S REPURCHASE OPTION FOR UNVESTED SHARES. The Company, or its assignee, shall have the option to repurchase Purchaser's Unvested Shares (as defined in Section 2.2 of the Stock Option Agreement) on the terms and conditions set forth in this Section (the "REPURCHASE OPTION") if Purchaser is Terminated for any reason, or no reason, including without limitation Purchaser's death, Disability, voluntary resignation or termination by the Company with or without cause. Notwithstanding the foregoing, the Company shall retain the Repurchase Option for Unvested Shares only as to that number of Unvested Shares (whether or not exercised) that exceeds the number of shares which remain exercisable. 8.1 Termination and Termination Date. In case of any dispute as to whether Purchaser is Terminated, the Company's Board of Directors shall have discretion to determine whether Purchaser has been Terminated and the effective date of such Termination (the "TERMINATION DATE"). 8.2 Exercise of Repurchase Option. At any time within ninety (90) days after the Purchaser's Termination Date (or, in the case of securities issued upon exercise of an Option after the Purchaser's Termination Date, within ninety (90) days after the date of such exercise), the Company, or its assignee, may elect to repurchase the Purchaser's Unvested Shares by giving Purchaser written notice of exercise of the Repurchase Option. 8.3 Calculation of Repurchase Price for Unvested Shares. The Company or its assignee shall have the option to repurchase from Purchaser (or from Purchaser's personal representative as the case may be) the Unvested Shares at the Purchaser's Exercise Price, proportionately adjusted for any stock dividend, recapitalization, stock split, reverse stock split, subdivision, combination, reclassification or similar change in the capital structure of the Company without consideration. 8.4 Payment of Repurchase Price. The repurchase price shall be payable, at the option of the Company or its assignee, by check or by cancellation of all or a portion of any outstanding indebtedness of Purchaser to the Company or such assignee, or by any combination thereof. The repurchase price shall be paid without interest within sixty (60) days after exercise of the Repurchase Option. 8.5 Right of Termination Unaffected. Nothing in this Exercise Agreement shall be construed to limit or otherwise affect in any manner whatsoever the right or power of the Company (or any Parent or Subsidiary of the Company) to terminate Purchaser's employment or other relationship with Company (or the Parent or Subsidiary of the Company) at any time, for any reason or no reason, with or without cause. -14- 15 9. RIGHTS AS SHAREHOLDER. Subject to the terms and conditions of this Exercise Agreement, Purchaser will have all of the rights of a shareholder of the Company with respect to the Shares from and after the date that Shares are issued to Purchaser until such time as Purchaser disposes of the Shares or the Company and/or its assignee(s) exercise(s) the Repurchase Option set forth in this Exercise Agreement or right of first refusal set forth in the Company's Bylaws. Upon an exercise of the Repurchase Option or right of first refusal, Purchaser will have no further rights as a holder of the Shares so purchased upon such exercise, except the right to receive payment for the Shares so purchased in accordance with the provisions of this Exercise Agreement or the Company's Bylaws, and Purchaser will promptly surrender the stock certificate(s) evidencing the Shares so purchased to the Company for transfer or cancellation. 10. ESCROW. As security for Purchaser's faithful performance of this Exercise Agreement, Purchaser agrees, immediately upon receipt of the stock certificate(s) evidencing the Shares, to deliver such certificate(s), together with the Stock Powers executed by Purchaser and by Purchaser's spouse, if any (with the date and number of Shares left blank), to the Secretary of the Company or other designee of the Company ("ESCROW HOLDER"), who is hereby appointed to hold such certificate(s) and Stock Powers in escrow and to take all such actions and to effectuate all such transfers and/or releases of such Shares as are in accordance with the terms of this Exercise Agreement. Purchaser and the Company agree that Escrow Holder will not be liable to any party to this Exercise Agreement (or to any other party) for any actions or omissions unless Escrow Holder is grossly negligent or intentionally fraudulent in carrying out the duties of Escrow Holder under this Exercise Agreement. Escrow Holder may rely upon any letter, notice or other document executed by any signature purported to be genuine and may rely on the advice of counsel and obey any order of any court with respect to the transactions contemplated by this Exercise Agreement. The Shares will be released from escrow upon termination of both the Repurchase Option set forth in this Exercise Agreement and right of first refusal set forth in the Company's Bylaws; provided, however, that the Shares will be retained in escrow so long as they are subject to the Pledge Agreement. 11. RESTRICTIVE LEGENDS AND STOP-TRANSFER ORDERS. 11.1 Legends. Purchaser understands and agrees that the Company will place the legends set forth below or similar legends on any stock certificate(s) evidencing the Shares, together with any other legends that may be required by state or federal securities laws, the Company's Articles of Incorporation or Bylaws, any other agreement between Purchaser and the Company or any agreement between Purchaser and any third party: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER OR RESALE IS IN COMPLIANCE WITH THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN RESTRICTIONS ON PUBLIC RESALE, TRANSFER, RIGHT OF REPURCHASE AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE ISSUER AND/OR ITS ASSIGNEE(S) AND/OR THE COMPANY'S SHAREHOLDERS AS SET FORTH IN A NON-PLAN STOCK OPTION EXERCISE AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES AND THE BYLAWS OF THE ISSUER, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH PUBLIC SALE AND TRANSFER RESTRICTIONS, RIGHT OF REPURCHASE AND RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES. -15- 16 The California Commissioner of Corporations may require that the following legend also be placed upon the share certificate(s) evidencing ownership of the Shares: 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. 11.2 Stop-Transfer Instructions. Purchaser agrees that, to ensure compliance with the restrictions imposed by this Exercise Agreement, the Company may issue appropriate "stop-transfer" instructions to its transfer agent, if any, and if the Company transfers its own securities, it may make appropriate notations to the same effect in its own records. 11.3 Refusal to Transfer. The Company will not be required (i) to transfer on its books any Shares that have been sold or otherwise transferred in violation of any of the provisions of this Exercise Agreement or (ii) to treat as owner of such Shares, or to accord the right to vote or pay dividends to any purchaser or other transferee to whom such Shares have been so transferred. 12. TAX CONSEQUENCES. PURCHASER UNDERSTANDS THAT PURCHASER MAY SUFFER ADVERSE TAX CONSEQUENCES AS A RESULT OF PURCHASER'S PURCHASE OR DISPOSITION OF THE SHARES. PURCHASER REPRESENTS THAT PURCHASER HAS CONSULTED WITH ANY TAX ADVISER PURCHASER DEEMS ADVISABLE IN CONNECTION WITH THE PURCHASE OR DISPOSITION OF THE SHARES AND THAT PURCHASER IS NOT RELYING ON THE COMPANY FOR ANY TAX ADVICE. IN PARTICULAR, IF UNVESTED SHARES ARE SUBJECT TO REPURCHASE BY THE COMPANY, PURCHASER REPRESENTS THAT PURCHASER HAS CONSULTED WITH PURCHASER'S TAX ADVISER CONCERNING THE ADVISABILITY OF FILING AN 83(b) ELECTION WITH THE INTERNAL REVENUE SERVICE. Set forth below is a brief summary as of the date of the Stock Option Agreement of some of the federal and California tax consequences of exercise of the Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. PURCHASER SHOULD CONSULT A TAX ADVISER BEFORE EXECUTING THIS OPTION OR DISPOSING OF THE SHARES. 12.1 Exercise of Option. There may be a regular federal income tax liability and a California income tax liability upon the exercise of the Option. Purchaser will be treated as having received compensation income (taxable at ordinary income tax rates) equal to the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price. If Purchaser is or was an employee of the Company, the Company will be required to withhold from Purchaser's compensation or collect from Purchaser and pay to the applicable taxing authorities an amount equal to a percentage of this compensation income at the time of exercise. 12.2 Disposition of Shares. If the Shares are held for more than twelve (12) months after the date of the acquisition of the Shares pursuant to the exercise of the Option for Vested Shares, any gain realized on disposition of the Shares will be treated as long term capital gain for federal and California income tax purposes. 12.3 Section 83(b) Election for Unvested Shares. With respect to Unvested Shares, which are subject to the Repurchase Option, unless an election is filed by the Purchaser with the Internal Revenue Service (and, if necessary, the proper state taxing authorities), within 30 days of the purchase of the Unvested Shares, electing pursuant to Section 83(b) of the Internal Revenue Code (and similar state tax provisions, if applicable) to be taxed currently on any difference between the Exercise Price of the Unvested Shares and their fair market value on the date of purchase, there may be a recognition of taxable income (including, where applicable, alternative minimum taxable income) to the Purchaser, measured by the excess, if any, of the fair market value of the Unvested Shares at the time they cease to be Unvested Shares, over the Exercise Price of the Unvested Shares. -16- 17 13. COMPLIANCE WITH LAWS AND REGULATIONS. The issuance and transfer of the Shares will be subject to and conditioned upon compliance by the Company and Purchaser with all applicable state and federal laws and regulations and with all applicable requirements of any stock exchange or automated quotation system on which the Company's Common Stock may be listed or quoted at the time of such issuance or transfer. 14. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under this Exercise Agreement including its rights to repurchase Shares under the Repurchase Option. This Exercise Agreement shall be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer herein set forth, this Exercise Agreement will be binding upon Purchaser and Purchaser's heirs, executors, administrators, legal representatives, successors and assigns. 15. GOVERNING LAW; SEVERABILITY. This Exercise Agreement shall be governed by and construed in accordance with the internal laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within California. If any provision of this Exercise Agreement is determined by a court of law to be illegal or unenforceable, then such provision will be enforced to the maximum extent possible and the other provisions will remain fully effective and enforceable. 16. NOTICES. Any notice required to be given or delivered to the Company shall be in writing and addressed to the Corporate Secretary of the Company at its principal corporate offices. Any notice required to be given or delivered to Purchaser shall be in writing and addressed to Purchaser at the address indicated above or to such other address as Purchaser may designate in writing from time to time to the Company. All notices shall be deemed effectively given upon personal delivery, three (3) days after deposit in the United States mail by certified or registered mail (return receipt requested), one (1) business day after its deposit with any return receipt express courier (prepaid), or one (1) business day after transmission by rapifax or telecopier. 17. FURTHER INSTRUMENTS. The parties agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Exercise Agreement. 18. HEADINGS. The captions and headings of this Exercise Agreement are included for ease of reference only and will be disregarded in interpreting or construing this Exercise Agreement. All references herein to Sections will refer to Sections of this Exercise Agreement. 19. ENTIRE AGREEMENT. The Stock Option Agreement and this Exercise Agreement, together with all its Exhibits, constitute the entire agreement and understanding of the parties with respect to the subject matter of this Exercise Agreement, and supersede all prior understandings and agreements, whether oral or written, between the parties hereto with respect to the specific subject matter hereof. -17- 18 IN WITNESS WHEREOF, the Company has caused this Exercise Agreement to be executed in duplicate by its duly authorized representative and Purchaser has executed this Exercise Agreement in duplicate as of the Effective Date. TRANSMETA CORPORATION PURCHASER By: /s/ Dan E. Steimle /s/ Mark K. Allen -------------------------------- -------------------------------- (Signature) Dan E. Steimle - ----------------------------------- (Please print Name) Mark K. Allen -------------------------------- (Please print name) CFO - ----------------------------------- (Please print title) [SIGNATURE PAGE TO TRANSMETA CORPORATION NON-PLAN STOCK OPTION EXERCISE AGREEMENT] -18- 19 LIST OF EXHIBITS Exhibit 1: Stock Power and Assignment Separate from Stock Certificate Exhibit 2: Spouse Consent Exhibit 3: Copy of Purchaser's Check [AND/OR SECURED FULL RECOURSE PROMISSORY NOTE] Exhibit 4: Section 83(b) Election Exhibit 5: Stock Pledge Agreement 20 EXHIBIT 1 STOCK POWER AND ASSIGNMENT SEPARATE FROM STOCK CERTIFICATE 21 STOCK POWER AND ASSIGNMENT SEPARATE FROM STOCK CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Non-Plan Stock Option Exercise Agreement dated as of _______________, 20___, (the "AGREEMENT"), the undersigned hereby sells, assigns and transfers unto _______________________________, _______ shares of the Common Stock of Transmeta Corporation, a California corporation (the "COMPANY"), standing in the undersigned's name on the books of the Company represented by Certificate No(s). ______ delivered herewith, and does hereby irrevocably constitute and appoint the Secretary of the Company as the undersigned's attorney-in-fact, with full power of substitution, to transfer said stock on the books of the Company. THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND ANY EXHIBITS THERETO. Dated: _______________, 20____ PURCHASER /s/ Mark K. Allen -------------------------------------- (Signature) Mark K. Allen -------------------------------------- (Please Print Name) /s/ Valerie Allen -------------------------------------- (Spouse's Signature, if any) Valerie Allen -------------------------------------- (Please Print Spouse's Name) INSTRUCTIONS: Please do not fill in any blanks other than the signature line. The purpose of this Stock Power and Assignment is to enable the Company to acquire the shares upon a default under Purchaser's Note and to exercise the Repurchase Option set forth in the Agreement and/or right of first refusal set forth in the Company's Bylaws without requiring additional signatures on the part of the Purchaser or Purchaser's Spouse (if any). 22 EXHIBIT 2 SPOUSE CONSENT 23 SPOUSE CONSENT The undersigned spouse of Purchaser has read, understands, and hereby approves the Non-Plan Stock Option Exercise Agreement between Purchaser and the Company (the "AGREEMENT"). In consideration of the Company's granting my spouse the right to purchase the Shares as set forth in the Agreement, the undersigned hereby agrees to be irrevocably bound by the Agreement and further agrees that any community property interest shall similarly be bound by the Agreement. The undersigned hereby appoints Purchaser as my attorney-in-fact with respect to any amendment or exercise of any rights under the Agreement. Date: January 17, 2000 /s/ Valerie Allen ----------------------- ---------------------------------- Signature of Purchaser's Spouse Address: ---------------------------------- ---------------------------------- 24 EXHIBIT 3 COPY OF PURCHASER'S CHECK [AND/OR SECURED FULL RECOURSE PROMISSORY NOTE] 25 SECURED FULL RECOURSE PROMISSORY NOTE Santa Clara, California $6,000,000.00 January 17, 2000 - ---------------- -------------------- 1. OBLIGATION. In exchange for the issuance to the undersigned ("PURCHASER") of 1,000,000 shares (the "SHARES") of the Common Stock of Transmeta Corporation, a California corporation (the "COMPANY"), receipt of which is hereby acknowledged, Purchaser hereby promises to pay to the order of the Company on or before the date which is five (5) years after the date first set forth above, at the Company's principal place of business at 3940 Freedom Circle, Santa Clara, California 95054, or at such other place as the Company may direct, the principal sum of Six Million & no/100's ---- Dollars ($6,000,000.00) together with interest compounded semi-annually on the unpaid principal at the rate of six and twelve/100ths percent (6.12%), which rate is equal to the minimum rate established pursuant to Section 1274(d) of the Internal Revenue Code of 1986, as amended, on the earliest date on which there was a binding contract in writing for the purchase of the Shares; provided, however, that the rate at which interest will accrue on unpaid principal under this Note will not exceed the highest rate permitted by applicable law. 2. SECURITY. Payment of this Note is secured by a security interest in the Shares granted to the Company by Purchaser under a Stock Pledge Agreement dated of even date herewith between the Company and Purchaser (the "PLEDGE AGREEMENT"). This Note is being tendered by Purchaser to the Company as all or part of the Exercise Price of the Shares pursuant to that certain Non-Plan Stock Option Exercise Agreement between Purchaser and the Company dated of even date with this Note (the "PURCHASE AGREEMENT"). 3. DEFAULT; ACCELERATION OF OBLIGATION. Purchaser will be deemed to be in default under this Note and the principal sum of this Note, together with all interest accrued thereon, will immediately become due and payable in full: (a) upon Purchaser's failure to make any payment when due under this Note; (b) in the event Purchaser is Terminated (as defined in the Purchase Agreement) for any reason; (c) upon any transfer of any of the Shares (except a transfer to the Company); (d) upon the filing by or against Purchaser of any voluntary or involuntary petition in bankruptcy or any petition for relief under the federal bankruptcy code or any other state or federal law for the relief of debtors; or (e) upon the execution by Purchaser of an assignment for the benefit of creditors or the appointment of a receiver, custodian, trustee or similar party to take possession of Purchaser's assets or property. 4. REMEDIES ON DEFAULT. Upon any default of Purchaser under this Note, the Company will have, in addition to its rights and remedies under this Note and the Pledge Agreement, full recourse against any real, personal, tangible or intangible assets of Purchaser, and may pursue any legal or equitable remedies that are available to it. 5. PREPAYMENT. Prepayment of principal and/or interest due under this Note may be made at any time without penalty. Unless otherwise agreed in writing by the Company, all payments will be made in lawful tender of the United States and will be applied first to the payment of accrued interest, and the remaining balance of such payment, if any, will then be applied to the payment of principal. If Purchaser prepays all or a portion of the principal amount of this Note, the Shares paid for by the portion of principal so paid will continue to be held in pledge under the Pledge Agreement to serve as independent collateral for the outstanding portion of this Note for the purpose of commencing the holding period under Rule 144(d) of the Securities and Exchange Commission with respect to other Shares purchased with this Note unless Purchaser notifies the Company in writing otherwise and the Company consents to release of the Shares from the Pledge Agreement. 6. GOVERNING LAW; WAIVER. The validity, construction and performance of this Note will be governed by the internal laws of the State of California, excluding that body of law pertaining to conflicts of law. Purchaser hereby waives presentment, notice of non-payment, notice of dishonor, protest, demand and diligence. 26 7. ATTORNEYS' FEES. If suit is brought for collection of this Note, Purchaser agrees to pay all reasonable expenses, including attorneys' fees, incurred by the holder in connection therewith whether or not such suit is prosecuted to judgment. 8. RULE 144 HOLDING PERIOD. PURCHASER UNDERSTANDS THAT THE HOLDING PERIOD SPECIFIED UNDER RULE 144(d) OF THE SECURITIES AND EXCHANGE COMMISSION WILL NOT BEGIN TO RUN WITH RESPECT TO SHARES PURCHASED WITH THIS NOTE UNTIL EITHER (A) THE EXERCISE PRICE OF SUCH SHARES IS PAID IN FULL IN CASH OR BY OTHER PROPERTY ACCEPTED BY THE COMPANY, OR (B) THIS NOTE IS SECURED BY COLLATERAL, OTHER THAN THE SHARES THAT HAVE NOT BEEN FULLY PAID FOR, HAVING A FAIR MARKET VALUE AT LEAST EQUAL TO THE AMOUNT OF PURCHASER'S THEN OUTSTANDING OBLIGATION UNDER THIS NOTE (INCLUDING ACCRUED INTEREST). IN WITNESS WHEREOF, Purchaser has executed this Note as of the date and year first above written. Mark K. Allen /s/ Mark K. Allen - ----------------------------------- ------------------------------------ Purchaser's Name [type or print] Purchaser's Signature [SIGNATURE PAGE TO TRANSMETA CORPORATION SECURED FULL RECOURSE PROMISSORY NOTE] 27 EXHIBIT 4 SECTION 83(b) ELECTION 28 [FOR REGULAR INCOME TAX - NONQUALIFIED OPTIONS] [FOR AMT AND DISQUALIFYING DISPOSITION PURPOSES - INCENTIVE STOCK OPTION] ELECTION UNDER SECTION 83(b) OF THE INTERNAL REVENUE CODE The undersigned Taxpayer hereby elects, pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, to include 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, as compensation for services in the calculation of: (1) regular gross income; (2) alternative minimum taxable income or (3) disqualifying disposition gross income, as the case may be. 1. TAXPAYER'S NAME: Mark K. Allen --------------------------------------- TAXPAYER'S ADDRESS: --------------------------------------- --------------------------------------- SOCIAL SECURITY NUMBER: --------------------------------------- 2. The property with respect to which the election is made is described as follows: 1,000,000 shares of Common Stock of Transmeta Corporation, a California corporation which were transferred upon exercise of an option (the "COMPANY"), which is Taxpayer's employer or the corporation for whom the Taxpayer performs services. 3. The date on which the shares were transferred pursuant to the exercise of the option was January 17, 2000 and this election is made for calendar year 2000. 4. The shares received upon exercise of the option 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 $6.00 per share at the time of exercise of the option. 6. The amount paid for such shares upon exercise of the option was $6.00 per share. 7. The Taxpayer has submitted a copy of this statement to the Company. 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 SHARES, AND MUST ALSO BE FILED WITH THE TAXPAYER'S INCOME TAX RETURNS FOR THE CALENDAR YEAR. THE ELECTION CANNOT BE REVOKED WITHOUT THE CONSENT OF THE IRS. Dated: 1/16/00 /s/ MARK K. ALLEN ---------------------- -------------------------------------- Taxpayer's Signature 29 EXHIBIT 5 STOCK PLEDGE AGREEMENT 30 STOCK PLEDGE AGREEMENT This Agreement is made and entered into as of January 17, 2000 between Transmeta Corporation, a California corporation (the "COMPANY"), and Mark K. Allen ("PLEDGOR"). R E C I T A L S A. In exchange for Pledgor's Secured Full Recourse Promissory Note to the Company of even date herewith (the "NOTE"), the Company has issued and sold to Pledgor 1,000,000 shares of its Common Stock (the "SHARES") pursuant to the terms and conditions of that Non-Plan Stock Option Exercise Agreement between the Company and Pledgor of even date herewith (the "PURCHASE AGREEMENT"). B. Pledgor has agreed that repayment of the Note will be secured by the pledge of the Shares pursuant to this Agreement. NOW, THEREFORE, 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 first and present security interest in the Shares as collateral to secure the payment of Pledgor's obligation to the Company under the Note. Pledgor herewith delivers to the Company Common Stock certificate(s) No(s). _________, representing all the Shares, together with one stock power for each certificate in the form attached as an Exhibit to the Purchase Agreement, duly executed (with the date and number of shares left blank) by Pledgor and Pledgor's spouse, if any. For purposes of this Agreement, the Shares pledged to the Company hereby, together with any additional collateral pledged pursuant to Sections 5 and 6 hereof, will hereinafter be collectively referred to as the "COLLATERAL." Pledgor agrees that the Collateral pledged to the Company will be deposited with and held by the Escrow Holder (as defined in the Purchase Agreement) and that, notwithstanding anything to the contrary in the Purchase Agreement, for purposes of carrying out the provisions of this Agreement, Escrow Holder will act solely for the Company as its agent. 2. REPRESENTATIONS AND WARRANTIES. Pledgor hereby represents and warrants to the Company that Pledgor has good title (both record and beneficial) to the Collateral, free and clear of all claims, pledges, security interests, liens or encumbrances of every nature whatsoever, and that Pledgor has the right to pledge and grant the Company the security interest in the Collateral granted under this Agreement. Pledgor further agrees that, until the entire principal sum and all accrued interest due under the Note has been paid in full, Purchaser will not, without the Company's prior written consent, (i) sell, assign or transfer, or attempt to sell, assign or transfer, any of the Collateral, or (ii) grant or create, or attempt to grant or create, any security interest, lien, pledge, claim or other encumbrance with respect to any of the Collateral. 3. RIGHTS ON DEFAULT. In the event of default (as defined in the Note) by Pledgor under the Note, the Company will 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, in order to satisfy any part of the obligations of Pledgor now existing or hereinafter arising under the Note. On any such sale, the Company or its assigns may purchase all or any part of the Collateral. In addition, at its sole option, the Company may elect to retain all the Collateral in full satisfaction of Pledgor's obligation under the Note, in accordance with the provisions and procedures set forth in the California Commercial Code. 4. ADDITIONAL REMEDIES. The rights and remedies granted to the Company herein upon default under the Note will 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 will be exercisable by the Company with respect to all of the Collateral. Pledgor agrees that 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 31 and remedies of the Company will be cumulative and not alternative. Any forbearance or failure or delay by the Company in exercising any right, power or remedy hereunder will not be deemed to be a waiver of any such right, power or remedy and any single or partial exercise of any such right, power or remedy hereunder will not preclude the further exercise thereof. 5. 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 will be payable to Pledgor so long as Pledgor is not in default under the Note) will be immediately delivered to the Company to be held in pledge under this Agreement. Notwithstanding this Agreement, so long as Pledgor owns the Shares and is not in default under the Note, Pledgor will be entitled to vote any shares comprising the Collateral, subject to any proxies granted by Pledgor. 6. 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, options or securities are issued in respect of the Collateral, then 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, options or securities, will 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. 7. RIGHTS UNDER PURCHASE AGREEMENT. Pledgor understands and agrees that the Company's rights to repurchase the Collateral under the Purchase Agreement, if any, will continue for the periods and on the terms and conditions specified in the Purchase Agreement, whether or not the Note has been paid during such period of time, and that to the extent that the Note is not paid during such period of time, the repurchase by the Company of the Collateral may be made by way of cancellation of all or any part of Pledgor's indebtedness under the Note. 8. REDELIVERY OF COLLATERAL. Upon payment in full of the entire principal sum and all accrued interest due under the Note, and subject to the terms and conditions of the Purchase Agreement, the Company will immediately redeliver the Collateral to Pledgor and this Agreement will terminate; provided, however, that all rights of the Company to retain possession of the Shares pursuant to the Purchase Agreement will survive termination of this Agreement. 9. SUCCESSORS AND ASSIGNS. This Agreement will inure to the benefit of the respective heirs, personal representatives, successors and assigns of the parties hereto. 10. GOVERNING LAW; SEVERABILITY. This Agreement will be governed by and construed in accordance with the internal laws of the State of California, excluding that body of law relating to conflicts of law. Should one or more of the provisions of this Agreement be determined by a court of law to be illegal or unenforceable, the other provisions nevertheless will remain effective and will be enforceable. 11. MODIFICATION; ENTIRE AGREEMENT. This Agreement will not be amended without the written consent of both parties hereto. 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. -2- 32 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. TRANSMETA CORPORATION PLEDGOR By: /s/ DAN E. STEIMLE /s/ MARK K. ALLEN ------------------------------- ------------------------------- (Signature) Dan E. Steimle Mark K. Allen - ----------------------------------- ------------------------------- (Please print name) (Please print name) CFO - ----------------------------------- (Please print title) [SIGNATURE PAGE TO TRANSMETA CORPORATION STOCK PLEDGE AGREEMENT] -3- EX-10.07 11 ex10-07.txt EXHIBIT 10.07 1 EXHIBIT 10.07 Agreement for Purchase and Sale of Custom Semiconductor Products [*] AGREEMENT NUMBER: TM-MFG-121297 This Agreement is entered into by and between International Business Machines Corporation ("IBM"), incorporated under the laws of the State of New York and with an address for purposes of this Agreement of 1000 River Street, Essex Junction, Vermont, 05452 and Transmeta Corporation ("Customer"), incorporated under the laws of the State of California with an address for purposes of this Agreement of 3940 Freedom Circle, Santa Clara, CA. 95054. IBM and Customer agree as follows: The parties acknowledge that work required by this Agreement has occurred prior to the date of execution of this Agreement. Both parties agree that the terms and conditions of this Agreement shall apply to all such work. This Agreement is a master purchase agreement for the manufacture and sale of custom integrated circuit foundry products ("Products(s)"). Unless the parties agree otherwise in writing, this Agreement, and its work orders ("Task Orders") issued under this Agreement, shall define Product deliveries by part number and shall solely govern IBM's manufacture and sale of Products to Customer. A Task Order is not binding unless and until it has been mutually agreed upon and shall become subject to this Agreement when it has been signed by IBM and Customer. Task Orders shall describe the respective responsibilities of the parties (e.g., deliverable materials and specifications, Product description(s), manufacture and qualification of Product prototypes, as well as technical responsibilities) with regard to specific Product(s), as well as specific purchasing information (e.g., manufacturing lead times, Product pricing and ordering, as well as billing locations). Task Orders shall be in the form as set forth in Exhibit A. The term of a Task Order shall run from the effective date on the Task Order until the earlier of: 1) the completion of the Task Order; 2) the expiration date stated in the Task Order; or 3) termination of this Agreement or the Task Order. In the event of an inconsistency between the terms and conditions of this Agreement and those of a Task Order, the Task Order will prevail. 1. TERM OF AGREEMENT: This Agreement is effective on December 12, 1997 (the "Commencement Date"). This Agreement will expire on the later of December 30, 2003 or upon completion of the last Task Order, subject to Section 15 (Termination Rights). 2. FORECASTS: [*]. * Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 2 [*] * Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 3 3. ORDERS: After the parties have executed a Task Order, Customer will request delivery of Products by issuing written purchase orders to IBM's Technical Coordinator by the fifth (5th) day of each calendar month. As set forth in Section 2, Customer will maintain a minimum of four (4) months rolling purchase orders on IBM and may place purchase order(s) for months five (5) and six (6) of each forecast. [*]. Purchase orders shall only specify the following items on their face unless otherwise mutually agreed to in writing by duly authorized representatives of the parties: a) PO NUMBER b) TAX STATUS - EXEMPT OR NON-EXEMPT c) SHIP TO LOCATION - COMPLETE ADDRESS d) BILL TO LOCATION - COMPLETE ADDRESS e) ORDER FROM LOCATION - COMPLETE ADDRESS f) PRODUCT PART NUMBERS AND QUANTITIES BEING ORDERED; g) THE PRODUCT'S APPLICABLE UNIT PRICE; h) SHIPPING INSTRUCTIONS, INCLUDING PREFERRED CARRIER. i) REQUESTED SHIPMENT DATES j) THE AGREEMENT NUMBER OF THIS AGREEMENT. k) NAME OF CUSTOMER CONTACT In accordance with the above language in this Section 3, provided IBM accepts a purchase order, IBM shall issue a written sales acknowledgment within a maximum of ten (10) business days after IBM's receipt of Customer's purchase order, which shall recite the Agreement Number, Product and Customer's shipping instructions, as well as establish the quantities being sold, the Product's applicable unit price and the estimated shipment dates. This Agreement shall take precedence over and govern in case of any additional, different or conflicting terms and conditions in any purchase order(s) or any other form of either party. Purchase orders and other forms of either party may not vary the terms of this Agreement. Additional, different or conflicting terms and conditions on a purchase order or other form shall be of no effect unless specifically agreed to in writing by the parties. This Agreement does not constitute a purchase order. No verbal communications shall result in a financial obligation by Customer or IBM. * Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 4 4. LEAD TIMES, SHIPMENT, TITLE AND RISK OF LOSS: The Product's manufacturing lead times shall be as set forth in the applicable Task Order. IBM will use reasonable efforts to set shipment dates in accordance with the lead time specified for Product as stated in the Task Order. Customer will keep at least a rolling four (4) months worth of purchase orders placed on IBM to support IBM's efforts to schedule and supply Product to Customer's requirements. Customer may request shipment dates with lead times less than those agreed to in the relevant Task Order, and IBM, at its option, may use reasonable efforts to set a shipment date that is coincident with the shipment date requested by Customer. Customer acknowledges that it may be required to pay additional charges for expedited shipment. [*]. Products shall be shipped from the manufacturing location FOB for domestic U.S. destinations and ExWorks (as defined in the 1990 INCO Terms) for international shipments. Title and risk of loss for a Product passes to Customer when IBM delivers the Product to the Customer-specified carrier for shipment (said carrier to be identified in Customer's purchase order). [*]. 5. PRICES, INVOICING, PAYMENT TERMS AND TAXES: The engineering charges and the price/quantity matrix in the applicable Task Order will apply to the Products. IBM will invoice Customer for engineering charges associated with Products in accordance with such Task Order. IBM will invoice Customer for Products upon shipment. All payments owed by Customer to IBM under this Agreement, including, without limitation, cancellation and engineering charges, as well as payment for Products purchased, are payable in U.S. dollars and receipt of payment by IBM will be due net thirty (30) days after the date of the invoice; provided, however, that if Customer's account becomes in arrears or if Customer exceeds a credit limit agreed to by IBM, in addition to any other right under this Agreement, IBM reserves the right to cease manufacturing or stop shipment to Customer or ship to Customer on a cash-in-advance basis until Customer's account is again current. Customer will be liable for interest on any overdue payment under this Agreement, up to the prime interest rate as reported by Citibank of New York on the date the payment was due, plus three percent. Customer is responsible for all taxes actually charged related to Products. However, in no event will Customer be liable for taxes based on IBM's net income. [*]. 6. ORDER CHANGES: a) For a purchase order which is more than thirty (30) days, but less than sixty (60) days, from its scheduled shipment date, Customer may request in writing a onetime deferral of the scheduled shipment date not to exceed thirty (30) days, with no cancellation charge imposed. * Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 5 b) If Customer cancels an order or reduces an order or exceeds the foregoing Product shipment rescheduling rights in this Section 6, Customer agrees to pay the Product cancellation charges as described in the relevant Task Order. 7. SUPPLY CONSTRAINTS: [*]. 8. ENGINEERING CHANGES: IBM may implement engineering changes required to satisfy governmental standards, or for environmental, health or safety reasons ("Mandatory Engineering Changes"). For all previously shipped Product not incorporating Mandatory Engineering Changes, IBM may provide replacement Products (including parts, materials and documentation) [*]. Customer must use reasonable efforts to install Mandatory Engineering Changes on all Customer installed Products and Products in its inventory. If IBM requests the return of Products displaced by installation of replacement Products, Customer will promptly return any displaced Products to IBM after installation of such replacement Products, [*]. In addition to Mandatory Engineering Changes, IBM may implement engineering changes that result in cost reductions to the Product ("Elective Engineering Changes") with prior approval from Customer. Such approval from Customer shall not be unreasonably withheld. IBM shall give Customer prompt notice of proposed Elective Engineering Changes. IBM may make available other Engineering Changes ("Optional Engineering Changes"). The cost of any Optional Engineering Changes that Customer desires to implement will be borne by Customer and will be determined through a request for quote process. 9. CONFIDENTIAL INFORMATION EXCHANGES: Information containing the confidential information of either party shall be identified as that party's confidential information and shall be exchanged pursuant to the terms of the agreement for exchange of confidential information (agreement number: V1290-01), between IBM and Customer dated September 30, 1996 and any amendments thereto, [*]. All other information exchanged by the parties shall be deemed non-confidential, except that the parties agree that the specific terms and conditions of this Agreement constitute mutual confidential information of the parties. * Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 6 10. CUSTOMER REPRESENTATIONS: Customer warrants it is the originator, rightful owner or licensee of all designs, information, and materials supplied to IBM hereunder, and that no part of such materials knowingly infringes the intellectual property rights of any third party. All computer data provided to IBM by Customer will have gone through Customer's best efforts to ensure that it is free from any virus, worm or other routines that would permit unauthorized access or otherwise harm software, hardware or data. Best efforts shall include, but not be limited to, establishing and following a documented process to prevent its computer data from being infected with such virus, worm or other routine. Customer will provide IBM with the process upon request. Customer will be responsible for any damages caused by any virus, worm or other routine. Customer will not utilize Products in conjunction with any medical implantation or other direct life support applications where malfunction may result in injury, harm or death to persons, or used in conjunction with aviation, nuclear materials, or other ultra-hazardous activities (collectively, "Ultra-hazardous Uses"). Customer agrees to incorporate the foregoing restriction in all contracts or sale documents under which Customer sells the Product or a device incorporating the Product to Customer's customers. Customer agrees to defend, indemnify and hold IBM harmless from and against all claims, whether based in contract, tort or otherwise for any losses, expenses, damages and liabilities which may arise out of Customer's use, distribution or sale of Products, except those caused solely by Product defects in materials or workmanship as warranted under Section 13 (Limited Warranty) or by the sole negligence of IBM . 11. INTELLECTUAL PROPERTY RIGHTS: For the purposes of this Agreement, "intellectual property rights" shall mean all legally cognizable rights with regards to applicable patent laws, copyright laws and trade secret laws. IBM shall own any physical masks made by IBM using data provided by Customer. Notwithstanding the foregoing sentence, unless otherwise agreed to in writing, IBM's sole use of such physical masks shall be to perform its obligations under this Agreement. IBM will use tangible GDS II (or any other file format as agreed to by the parties) data received from Customer or generated exclusively for Customer hereunder, and any masks made from such data, only to manufacture Products for sale to Customer. In addition, to the extent that Customer has ownership rights and excluding any rights IBM has in its semiconductor technology or any IBM technology licensed to Customer under the Technology License Agreement, the Customer retains and reserves to itself all rights in, and ownership of, all intellectual property in and to the P95 Processor and other Products manufactured pursuant to Task Orders under this Agreement. The purchase, receipt or possession of Products from or through IBM carries no license or immunity, express or implied, under any patent of IBM covering the combination of such Products with other products purchased from others or the use of any such combination, or under any patent or other intellectual property right of any third party relating to such Products or their combinations with any other products. However, IBM intends that its sale of Products to Customer will, to the extent under law, exhaust the patent rights of IBM as to such Products and the patent rights of third party licensors to IBM. Neither this Agreement, nor the sale of Products hereunder, shall be deemed to give either party any right to use the other party's trademarks or any of the other party's trade names without specific, prior written consent. 12. INTELLECTUAL PROPERTY INDEMNIFICATION: IBM shall indemnify Customer from and against any damages finally settled or awarded by a court of competent jurisdiction resulting from any direct 7 infringement of any intellectual property rights of a third party in any country in which IBM sells similar products, arising as a result of any of IBM's manufacturing process, equipment or testing, that is not specifically required by Customer's designs, specifications or instructions. IBM shall defend at its own expense, including attorney's fees, any suit brought against Customer alleging such infringement. In the event that Customer becomes enjoined from using Product in its inventory or possession due to such infringement, IBM at its option and expense, will secure for Customer the right to continue to use and market the Product, or modify or replace the Product with a non-infringing product. If IBM determines that neither of the foregoing alternatives is reasonably available, Customer may return the Product in Customer's inventory or possession to IBM for a credit equal to the price paid for units of Product affected. IBM shall have no obligation regarding any claim based upon modification of the Product by Customer or its customers, use of the Product in other than its intended operating environment or the combination, operation or use of the Product with non-IBM products or equipment. Customer shall indemnify IBM from and against any damages finally settled or awarded by a court of competent jurisdiction resulting from any direct infringement of any intellectual property rights of a third party in any country where Customer uses or distributes the Product, arising as a result of IBM's compliance with any of Customer's design, specifications, instructions or modifications of the Product by Customer and shall defend at its own expense, including attorney's fees, any suit brought against IBM alleging any such infringement. The rights provided in this Section 12 are contingent upon the party seeking to enforce indemnification giving prompt written notice to the indemnifying party regarding any claim, demand or action for which the indemnified party seeks indemnification. The indemnified party is required to fully cooperate with the indemnifying party at the indemnifying party's expense and shall allow the indemnifying party to control the defense or settlement of any such claim, demand or action, including obtaining the written consent of the indemnifying party prior to any settlement proposal or settlement. IBM shall have the right to waive Customer's obligations under this Section 12 and provide for its own defense, at IBM's sole discretion and expense. Except as expressly stated in this Agreement, this Section 12 states the entire liability of the parties and their exclusive remedies with respect to infringement of third party rights and all other warranties against infringement of any intellectual property rights, statutory, express or implied are hereby disclaimed. 13. LIMITED WARRANTY: [*]. IBM warrants Product(s) to be free from defects in material and workmanship for one (1) year after the date of delivery to Customer. Customer acknowledges that the functionality of Products is contingent upon Customer's designs and, therefore, no warranty applies to the functionality of Products manufactured for or sold to Customer. [*]. This warranty applies only to Customer, as the original purchaser from IBM, and Customer may not transfer this warranty to any third party [*]. If Customer believes that a Product is not as warranted, Customer will: 1) promptly notify IBM in writing; and 2) at IBM's request, return the Product freight prepaid to IBM's designated location. If IBM reasonably determines that the Product does not meet its warranty, IBM will, at IBM's option, repair or replace the Product, or issue a * Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 8 credit or refund of the purchase price. This warranty will not include credit, repair, or replacement of a Product which has a defect due to Customer's or a third party's actions or omissions. PRODUCT PROTOTYPES PROVIDED TO CUSTOMER BY IBM ARE PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND, EXPRESS OR IMPLIED INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS OR USE FOR A PARTICULAR PURPOSE. THE FOREGOING PRODUCT WARRANTIES AS STATED IN THIS SECTION 13 (LIMITED WARRANTY) ARE IN LIEU OF ALL OTHER PRODUCT WARRANTIES FROM IBM, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS OR USE FOR A PARTICULAR PURPOSE. 14. LIMITED LIABILITY: The following sets forth IBM's entire liability and Customer's exclusive remedy: a) [*]. b) IBM's liability for actual damages for any cause whatsoever (other than as set forth in Section 14 a. above), shall be limited to the greater of [*] or the applicable unit price for the specific units of Product that caused the damages or that are the subject matter of, or are directly related to, the cause of action. This limitation will apply, except as otherwise stated in this Section, regardless of the form of action, whether in contract or in tort, including negligence. This limitation will not apply to the payment of costs, damages and attorney's fees referred to in Section 12 (Intellectual Property Indemnification). This limitation will also not apply to claims by Customer for bodily injury or damage to real property or tangible personal property caused by IBM's negligence. c) In no event will either party be liable to the other party for any lost profits, lost savings, incidental damages or other consequential damages, except as provided in Section 12. In addition, IBM will not be liable for any claim based on any third-party claim, except as provided in Section 12. In no event will a party be liable for any damages caused by the other party's failure to perform its responsibilities hereunder. d). In addition, IBM shall have no liability when the Products are used in conjunction with any Ultra-hazardous Uses. 15. TERMINATION RIGHTS: If either party is in default of any material provision of this Agreement, the party not in default may provide a termination notice to the defaulting party. The termination notice shall specify: a) the nature of the default; b) the date, at least thirty (30) days from the date of such notice, by which the defaulting party shall demonstrate a cure of the default; and * Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 9 c) the date upon which the Agreement will terminate if the defaulting party does not cure the default. In addition, either party may terminate this Agreement immediately upon written notice if the other party: becomes insolvent, files a petition in bankruptcy, becomes dissolved or liquidated, files a petition for dissolution or liquidation, makes an assignment for benefit of creditors, or has a receiver appointed for its business; or is subject to property attachment or court injunction or court order which has a substantial negative effect on its ability to fulfill its obligations under this Agreement. [*]. 16. ASSIGNMENT: [*]. 17. RELATIONSHIP OF THE PARTIES: Each party hereto is an independent contractor and is not an agent of the other party for any purpose whatsoever. Neither party shall make any warranties or representations on the other party's behalf, nor shall it assume or create any other obligations on the other party's behalf. [*]. * Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 10 18. COMPETITIVE PRODUCTS AND SERVICES: Neither this Agreement, nor any Task Orders issued hereunder, will impair any right of IBM or Customer to design, develop, manufacture, market, service, or otherwise deal in, directly or indirectly, other products or services, including, without limitation, those which are competitive with those offered by IBM or Customer; provided, however, that nothing in this Agreement or any Task Order authorizes either party to use any of the other party's intellectual property accept as expressly provided herein. 19. PROMOTIONAL ACTIVITY: Press releases and other like publicity, advertising or promotional material which mention the other party by name, this Agreement or any term hereof shall not be released without the prior written consent of both parties. [*]. 20. NOTICES: All notices, requests, consents and other communications under this Agreement shall be in writing and shall be sent by a traceable means of delivery. Such communications shall be deemed delivered when received by the party's designee referenced below. Each party may change its designee upon written notice to the other party's designee. IBM Transmeta Corporation Dept. VLZV/862-1 Dept. 1000 River Street 3940 Freedom Circle Essex Junction, VT 05452 Santa Clara, CA. 95054 FAX: 802-769-3988 FAX: (408) 327-9840 Attn: Contract Administrator Attn: Chief Financial Officer Day to day activities under Task Orders will be directed by technical coordinators who will be responsible for maintaining technical liaison between the parties ("Technical Coordinators"). Task Orders shall designate a Technical Coordinator for each party. Either party may change its respective individual designated for receipt of notices, and/or Technical Coordinator and their addresses designated for notices by notifying the other party's Technical Coordinator. 21. GENERAL: This Agreement may be executed in any number of identical counterparts, each of which shall be deemed to be an original, and all of which together shall be deemed to be one and the same instrument when each party has signed one such counterpart. The activities of each party and its employees, agents or representatives while on the other party's premises (including any design center) shall comply with the host company's policies and procedures for such facilities, including security procedures and visitation guidelines. [*]. If any provision of this Agreement is found to be invalid, illegal or unenforceable under any applicable statute or rule of law, they are to that extent to be deemed omitted from this Agreement . The validity, legality and enforceability of such provision and the remainder of this Agreement shall continue in effect in every other respect, so long as the remaining provisions of this Agreement still expresses the intent of the parties. If the intent of the parties cannot be preserved, this Agreement shall be either renegotiated or terminated. * Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 11 Except for Customer's obligation to pay amounts due under this Agreement, neither party will be responsible for any failure or delay in its performance under this Agreement due to causes, including, without limitation, acts of God, natural disasters, fire, acts of civil or military authority, insurrections, epidemics, riots, wars, sabotage, labor shortages and governmental actions, which are beyond such party's reasonable control, [*]. This Agreement shall be construed, and the legal relations between the parties hereto shall be determined, in accordance with the substantive laws of the State of New York, without regard to the conflict of laws principles thereof. Any proceedings to resolve disputes relating to this Agreement shall be commenced in the State of New York. The parties hereto expressly waive any right they may have to a jury trial and agree that any proceeding under this Agreement shall be tried by a judge without a jury. [*]. Each party will comply with all applicable federal, state and local laws, regulations and ordinances including, without limitation, the regulations of the U.S. Government relating to the export of commodities and technical data insofar as they relate to the activities under this Agreement. Customer agrees that Products, and technical data provided under this Agreement are subject to restrictions under the export control laws and regulations of the United States of America and other country or country group, laws and regulations, including, without limitation, the U.S. Export Administration Act and the U.S. Export Administration Regulations. Customer hereby gives its written assurance that neither Products nor technical data provided by IBM under this Agreement, nor the direct product thereof, will be exported, or re-exported, directly or indirectly, to prohibited countries or nationals thereof without first obtaining applicable government approval. Customer agrees it is responsible for obtaining required government documents and approvals prior to export of any Product, or technical data. All obligations and duties which by their nature survive the expiration or termination of this Agreement shall remain in effect beyond expiration or termination and remain in effect and apply to respective successors and assigns until they have been fulfilled. A waiver or failure by a party to demand performance or to exercise a right, when entitled, will not prejudice the party's ability to enforce such performance or right. The United Nations Convention on Contracts for the International Sale of Goods does not apply to this Agreement. The headings in this Agreement are for reference only. They will not affect the meaning or interpretation of this Agreement. * Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 12 This Agreement, as well as any Task Orders issued hereunder, may only be modified by a written amendment signed by both parties. This Agreement shall not be supplemented or modified by any course of dealing, course of performance or trade usage. The term "this Agreement" as used herein includes any applicable Attachments or future written amendment(s) made in accordance with this Section. 22. SOLE AGREEMENT: Each party acknowledges that it has read this Agreement, understands it, and agrees to be bound by its terms and conditions. Further, the parties agree that this Agreement, any mutually agreed to Confidentiality Disclosure Agreements relating to this Agreement, Task Orders, amendments, [*], represent the entire and complete agreement between the parties, which supersedes all prior proposals, agreements , and all other communications (whether oral or written) between the parties relating to the subject matter hereof. AGREED TO AND ACCEPTED BY: INTERNATIONAL BUSINESS MACHINES CORPORATION TRANSMETA CORPORATION BY: /s/ HANK J. GEIPEL BY: /s/ DAVID R. DITZEL ------------------------------- --------------------------------- NAME: HANK J. GEIPEL NAME: DAVID R. DITZEL TITLE: VP, ADVANCED STANDARD TITLE: PRESIDENT AND CEO PRODUCTS IBM MICROELECTRONICS DATED: DECEMBER 17, 1997 DATED: DECEMBER 18, 1997 ------------------------- ------------------------------- * Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 13 TASK ORDER (TASK ORDER #TASK-121297-P95) This Task Order is governed by the terms and conditions of Agreement Number: TM-MFG-121297 1.0 TERM OF TASK ORDER: This Task Order will be effective on December 12 1997 and will expire on [*]. 2.0 PRODUCT NAME AND DESCRIPTION: Product Name: [*] Description: [*]. 3.0 DELIVERABLE ITEMS: 3.1 Customer Item Date ---------------------------------------------------------- [*] 3.2 IBM Item Date ---------------------------------------------------------- [*] 4.0 PRODUCT SPECIFICATIONS, PROCESS TECHNOLOGY, WAFER ACCEPTANCE CRITERIA, YIELD AND COST REDUCTION INCENTIVES, ASSUMPTIONS: 4.1 Product Specifications: [*] 4.2 Process Technology: [*]. 4.3 Wafer Acceptance Criteria: Exhibit B 4.4 Module Acceptance Criteria: [*]. 5.0 SCHEDULE: ATTACHMENT 3 [*]. * Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 14 6.0 PRODUCT DEMAND FORECAST: The Parties anticipate that they will meet approximately once per calendar quarter to review forecasts under this Task Order. The forecast listed below is for tested modules. [*]. 7.0 ENGINEERING EFFORT AND ENGINEERING CHARGES (NRE CHARGES): Engineering Effort: [*]. * Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 15 8.0 PROTOTYPE UNIT PRICING AND DELIVERY: [*]. 9.0 PRODUCTION PRICE/QUANTITY MATRIX (PRODUCT UNIT PRICE) [*]. * Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 16 10.0 MANUFACTURING LEAD TIME (PURCHASE ORDER LEAD TIME): [*]. 11.0 CANCELLATION CHARGES: [*]. 12.0 TASK ORDER TECHNICAL COORDINATORS: International Business Machines Transmeta Corporation Corporation Dept. Dept. DZOV 3940 Freedom Circle 1000 River Street Santa Clara, CA. 95054 Essex Jct., VT 05452 PH: (408) 327-9830 x 244 PH: (802) 769-3519 FAX: (408) 327-9840 FAX: (802) 769-6800 EMAIL: dal@transmeta.com EMAIL: wslatter@us.ibm.com Attn: Doug Laird, VP VLSI Attn: Bill Slattery Engineering 13.0 SHIPPING/BILLING/ORDERING LOCATIONS: * Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 17 Customer's Ship to Location: To be specified in individual purchase orders Customer's Bill to Location: Transmeta Corporation 3940 Freedom Circle Santa Clara, CA. 95054 Attention: Accounts Payable ph: (408) 327-9830 fax: (408) 327-9840 IBM's Ordering Location: International Business Machines Corporation 1055 Joaquin Rd. Mountain View, CA 94043 Attention: Joe Larkins Fax: (650) 694-3157 AGREED TO AND ACCEPTED BY: INTERNATIONAL BUSINESS MACHINES CORPORATION TRANSMETA CORPORATION BY: /s/ HANK J. GEIPEL BY: /s/ DAVID R. DITZEL ------------------------------------- ---------------------------------- NAME: HANK J. GEIPEL NAME: DAVID R. DITZEL TITLE: VP, ADVANCED STANDARD PRODUCTS TITLE: PRESIDENT AND CEO IBM MICROELECTRONICS DATED: DECEMBER 17, 1997 DATED: DECEMBER 18, 1997 -------------------------------- ------------------------------ 18 EXHIBIT B WAFER ACCEPTANCE CRITERIA (FOR TESTED WAFERS) 1. Nothing in this Exhibit modifies or expands Customer's warranty rights under the Agreement. 2. IBM Products, with the reasonable cooperation of the Customer, will be subject to the following quality standards. A) Wafer Specifications a. Wafer Size: IBM will ship 8 inch diameter wafers. b. Wafer Thickness and Finish: IBM and Customer will agree upon specifications for wafer thickness and back finish. c. Die Layout: IBM will be responsible for the reticle layout and stepping of the Customer's die, consistent with IBM's normal defect monitoring strategy d. Packing: 1. Tested wafers: [*]. 2. Damaged Goods: [*]. B) Wafer Yields: a. Circuit limited yield loss is solely the responsibility of the Customer [*]. b. Minimum Yields: [*]. [*] Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. 19 EXHIBIT B C) Visual Criteria: [*]. D) Electrical Criteria: a. Parametrics: [*]. E) Prototypes: a. Prototypes and other similar non-production material will be accepted by the Customer and may not meet the quality criteria described herein. Customer may not use this material for production shipments. F) Documentation: a. [*]. G) Test: Electrical test using [*]. The details to be identified after the completion of the first prototype wafers delivered 1Q98. [*] Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission. EX-10.08 12 ex10-08.txt EXHIBIT 10.08 1 EXHIBIT 10.08 LEASE AGREEMENT BLDG: Marriott 11 OWNER: 500 PROP: 111 UNIT: 101 TENANT: 11103 THIS LEASE, made this 1st day of November, 1995 between JOHN ARRILLAGA, Trustee, or his Successor Trustee, UTA dated 7/20/77 (ARRILLAGA FAMILY TRUST) as amended, and RICHARD T. PEERY, Trustee, or his Successor Trustee, UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended, hereinafter called Landlord, and TRANSMETA CORPORATION, a California corporation, hereinafter called Tenant. WITNESSETH: Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord those certain premises (the "Premises") outlined in red on Exhibit "A", attached hereto and incorporated herein by this reference thereto more particularly described as follows: All of that certain 22,500+ square foot, one-story building located at 3940 Freedom Circle, Santa Clara, California 95054. Said Premises is more particularly shown within the area outlined in Red on Exhibit A. The entire parcel, of which the Premises, is a part, is shown within the area outlined in Green on Exhibit A attached hereto. The Premises is leased on an "as-is" basis, in its present condition, and in the configuration as shown in Red on Exhibit B to be attached hereto. The interior of the building leased hereunder shall be improved by Landlord and leased by Tenant in the configuration as shown in Red and as detailed on Exhibit B to be attached hereto. As used herein the Complex shall mean and include all of the land outlined in Green and described in Exhibit "A", attached hereto, and all of the buildings, improvements, fixtures and equipment now or hereafter situated on said land. Said letting and hiring is upon and subject to the terms, covenants and conditions hereinafter set forth and Tenant covenants as a material part of the consideration for this Lease to perform and observe each and all of said terms, covenants and conditions. This Lease is made upon the conditions of such performance and observance. 1. USE. Tenant shall use the Premises only in conformance with applicable governmental laws, regulations, rules and ordinances for the purpose of general office, light manufacturing, research and development, and storage and other uses necessary for Tenant to conduct Tenant's business, provided that such uses shall be in accordance with all applicable governmental laws and ordinances, and for no other purpose. Tenant shall not do or permit to be done in or about the 2 Premises or the Complex nor bring or keep or permit to be brought or kept in or about the Premises or the Complex anything which is prohibited by or will in any way increase the existing rate of (or otherwise affect) fire or any insurance covering the Complex or any part thereof, or any of its contents, or will cause a cancellation of any insurance covering the Complex or any part thereof, or any of its contents. Tenant shall not knowingly do or permit to be done anything in, on or about the Premises or the Complex which will in any way obstruct or interfere with the rights of other tenants or occupants of the Complex or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant knowingly cause, maintain or permit any nuisance in, on or about the Premises or the Complex. No sale by auction shall be permitted on the Premises. Tenant shall not place any loads upon the floors, walls, or ceiling, which endanger the structure, or place any harmful fluids or other materials in the drainage system of the building, or overload existing electrical or other mechanical systems. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises or outside of the building in which the Premises are a part, except in trash containers placed inside exterior enclosures designated by Landlord for that purpose or inside of the building proper where designated by Landlord. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain outside the Premises or on any portion of common area of the Complex. No loudspeaker or other device, system or apparatus which can be heard outside the Premises shall be used in or at the Premises without the prior written consent of Landlord. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. Tenant shall indemnify, defend and hold Landlord harmless against any loss, expense, damage, attorneys' fees, or liability arising out of failure of Tenant to comply with any applicable law. Tenant shall comply with any covenant, condition, or restriction ("CC&R's") affecting the Premises. The provisions of this paragraph are for the benefit of Landlord only and shall not be construed to be for the benefit of any tenant or occupant of the Complex. 2. TERM* A. The term of this Lease shall be for a period of seven (7) years (unless sooner terminated as hereinafter provided) and, subject to Paragraphs 2(B) and 3, shall commence on the 1st day of December, 1995 and end on the 30th day November of 2002. B. Possession of the Premises shall be deemed tendered and the term of this Lease shall commence when the first of the following occurs: (a) One day after a Certificate of Occupancy is granted by the proper governmental agency, or, if the governmental agency having jurisdiction over the area in which the Premises are situated does not issue certificates of occupancy, then the same number of days after certification by Landlord's architect or contractor that Landlord's construction work has been completed; or (b) Upon the occupancy of the Premises by any of Tenant's operating personnel; or - -------- * It is agreed in the event said Lease commences on a date other than the first day of the month the term of the Lease will be extended to account for the number of days in the partial month. The Basic Rent during the resulting partial month will be pro-rated (for the number of days in the partial month) at the Basic Rent scheduled for the projected commencement date as shown in Paragraph 43. 2 3 (c) When the Tenant Improvements have been substantially completed for Tenant's use and occupancy, in accordance and compliance with Exhibit B of this Lease Agreement; or (d) As otherwise agreed in writing. 3. POSSESSION. If Landlord, for any reason whatsoever, cannot deliver possession of said premises to Tenant at the commencement of the said term, as hereinbefore specified, this Lease shall not be void or voidable; no obligation of Tenant shall be affected thereby; nor shall Landlord or Landlord's agents be liable to Tenant for any loss or damage resulting therefrom; but in that event the commencement and termination dates of the Lease, and all other dates affected thereby shall be revised to conform to the date of Landlord's delivery of possession, as specified in Paragraph 2(b), above. The above is, however, subject to the provision that the period of delay, of delivery of the Premises shall not exceed 60 days from the commencement date herein (except those delays caused by Acts of God, strikes, war, utilities, governmental bodies, weather, unavailable materials, and delays beyond Landlord's control shall be excluded in calculating such period) in which instance Tenant, at its option, may, by written notice to Landlord, terminate this Lease. 4. RENT. A. Basic Rent. Tenant agrees to pay to Landlord at such place as Landlord may designate without deduction, offset, prior notice, or demand, and Landlord agrees to accept as Basic Rent for the leased Premises the total sum of TWO MILLION SEVEN HUNDRED NINE THOUSAND SEVEN HUNDRED FIVE AND 15/100 ($2,709,705.15) Dollars in lawful money of the United States of America, payable as follows: See Paragraph 43 for Basic Rent Schedule B. Time for Payment. In the event that the term of this Lease commences on a date other than the first day of a calendar month, on the date of commencement of the term hereof Tenant shall pay to Landlord as rent for the period from such date of commencement to the first day of the next succeeding calendar month that proportion of the monthly rent hereunder which the number of days between such date of commencement and the first day of the next succeeding calendar month bears to thirty (30). In the event that the term of this Lease for any reason ends on a date other than the last day of a calendar month, on the first day of the last calendar month of the term hereof Tenant shall pay to Landlord as rent for the period from said first day of said last calendar month to and including the last day of the term hereof that proportion of the monthly rent hereunder which the number of days between said first day of said last calendar month and the last day of the term hereof bears to thirty (30). C. Late Charge. Notwithstanding any other provisions of this Lease, if Tenant is in default in the payment of rental as set forth in this Paragraph 4 when due, or any part thereof, Tenant agrees to pay Landlord, in addition to the delinquent rental due, a late charge for each rental payment in default ten (10) days. Said late charge shall equal ten (10%) percent of each rental payment so in default. 3 4 D. Additional Rent. Beginning with the commencement date of the term of this Lease, Tenant shall pay to Landlord in addition to the Basic Rent and as Additional Rent the following: (a) Tenant's proportionate share of all Taxes relating to the Complex as set forth in Paragraph 12, and (b) Tenant's proportionate share of all insurance premiums relating to the Complex, as set forth in Paragraph 15, and (c) Tenant's proportionate share of expenses for the operation, management, maintenance and repair of the Building (including common areas of the Building) and Common Areas of the Complex in which the Premises are located as set forth in Paragraph 7, and (d) All charges, costs and expenses, which Tenant is required to pay hereunder, together with all interest and penalties, costs and expenses including attorneys' fees and legal expenses, that may accrue thereto in the event of Tenant's failure to pay such amounts, and all damages, reasonable costs and expenses which Landlord may incur by reason of default of Tenant or failure on Tenant's part to comply with the terms of this Lease. In the event of nonpayment by Tenant of Additional Rent Landlord shall have all the rights and remedies with respect thereto as Landlord has for nonpayment of rent. The Additional Rent due hereunder shall be paid to Landlord or Landlord's agent (i) within five days for taxes and insurance and within thirty (30) days for all other Additional Rent items after presentation of invoice from Landlord or Landlord's agent setting forth such Additional Rent and/or (ii) at the option of Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's prorata share of an amount estimated by Landlord to be Landlord's approximate average monthly expenditure of such Additional Rent items, which estimated amount shall be reconciled within 120 days of the end of each calendar year or more frequently if Landlord so elects to do so at Landlord's sole and absolute discretion, as compared to Landlord's actual expenditure for said Additional Rent items, with Tenant paying to Landlord, upon demand, any amount of actual expenses expended by Landlord in excess of said estimated amount, or Landlord refunding to Tenant (providing Tenant is not in default in the performance of any of the terms, covenants and conditions of this Lease) any amount of estimated payments made by Tenant in excess of Landlord's actual expenditures for said Additional Rent items. The respective obligations of Landlord and Tenant under this paragraph shall survive the expiration or other termination of the term of this Lease, and if the term hereof shall expire or shall otherwise terminate on a day other than the last day of a calendar year, the actual Additional Rent incurred for the calendar year in which the term hereof expires or otherwise terminates shall be determined and settled on the basis of the statement of actual Additional Rent for such calendar year and shall be prorated in the proportion which the number of days in such calendar year preceding such expiration or termination bears to 365. E. Place of Payment of Rent and Additional Rent. All Basic Rent hereunder and all payments hereunder for Additional Rent shall be paid to Landlord at the office of Landlord at 4 5 Peery/Arrillaga, File 1504, Box 60000, San Francisco, CA 94160 or to such other person or to such other place as Landlord may from time to time designate in writing. F. Security Deposit. Concurrently with Tenant's execution of this Lease, Tenant shall deposit with Landlord the sum of SEVENTY FOUR THOUSAND TWO HUNDRED FIFTY AND NO/100 ($74,250.00) Dollars. Said sum shall be held by Landlord as a Security Deposit for the faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Lease, including but not limited to, the provisions relating to the payment of rent and ay of the monetary sums due herewith, Landlord may (but shall not be required to) use, apply or retain all or any part of this Security Deposit for the payment of any other amount which Landlord may spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said Deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in the amount sufficient to restore the Security Deposit to its original amount. Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on such Deposit. If Tenant fully and faithfully performs every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall be returned to Tenant (or at Landlord's option, to the last assignee of Tenant's interest hereunder) at the expiration of the Lease term and after Tenant has vacated the Premises. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer said Deposit to Landlord's successor in interest whereupon Tenant agrees to release Landlord from liability for the return of such Deposit or the accounting therefor. 5. RULES AND REGULATIONS AND COMMON AREA. Subject to the terms and conditions of this Lease and such Rules and Regulations as Landlord may from time to time prescribe, Tenant and Tenant's employees, invitees and customers shall, in common with other occupants of the Complex in which the Premises are located, and their respective employees, invitees, and customers, and others entitled to the use thereof, have the non-exclusive right to use the access roads, parking areas, and facilities provided and designated by Landlord for the general use and convenience of the occupants of the Complex in which the Premises are located, which areas and facilities are referred to herein as "Common Area". This right shall terminate upon the termination of this Lease. Landlord reserves the right from time to time to make changes in the shape, size, location, amount and extent of Common Area. Landlord further reserves the right to promulgate such reasonable rules and regulations relating to the use of the Common Area, and any part or parts thereof, as Landlord may deem appropriate for the best interests of the occupants of the Complex. The Rules and Regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall abide by them and cooperate in their observance. Such Rules and Regulations may be amended by Landlord from time to time, with or without advance notice, and all amendments shall be effective upon delivery of a copy to Tenant. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Complex of any of said Rules and Regulations. Landlord shall operate, manage and maintain the Common Area. The manner in which the Common Area shall be maintained and the expenditures for such maintenance shall be at the discretion of Landlord. 5 6 6. PARKING. Tenant shall have the right to use with other tenants or occupants of the Complex 67 parking spaces in the common parking areas of the Complex. Tenant agrees, that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use parking spaces in excess of said 67 spaces allocated to Tenant hereunder. Landlord shall have the right, at Landlord's sole discretion, to specifically designate the location of Tenant's parking spaces within the common parking areas of the Complex in the event of a dispute among the tenants occupying the building and/or Complex referred to herein, in which event Tenant agrees that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use any parking spaces other than those parking spaces specifically designated by Landlord for Tenant's use. Said parking spaces, if specifically designated by Landlord to Tenant, may be relocated by Landlord at any time, and from time to time. Landlord reserves the right, at Landlord's sole discretion, to rescind any specific designation of parking spaces, thereby returning Tenant's parking spaces to the common parking area. Landlord shall give Tenant written notice of any change in Tenant's parking spaces. Tenant shall not, at any time, park, or permit to be parked, any trucks or vehicles adjacent to the loading areas so as to interfere in any way with the use of such areas, nor shall Tenant at any time park, or permit the parking of Tenant's trucks or other vehicles or the trucks and vehicles of Tenant's suppliers or others, in any portion of the common area not designated by Landlord for such use by Tenant. Tenant shall not park nor permit to be parked, any inoperative vehicles or equipment on any portion of the common parking area or other common areas of the Complex. Tenant agrees to assume responsibility for compliance by its employees with the parking provision contained herein. If Tenant or its employees park in other than such designated parking areas, then Landlord may charge Tenant, as an additional charge, and Tenant agrees to pay, ten ($10.00) Dollars per day for each day or partial day each such vehicle is parked in any area other than that designated. Tenant hereby authorizes Landlord at Tenant's sole expense to tow away from the Complex any vehicle belonging to Tenant or Tenant's employees parked in violation of these provisions, or to attached violation stickers or notices to such vehicles. Tenant shall use the parking areas for vehicle parking only, and shall not use the parking areas for storage. 7. EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF THE COMPLEX. As Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of all expenses of operation, management, maintenance and repair of the Common Areas of the Complex including, but not limited to, license, permit, and inspection fees; security; utility charges associated with exterior landscaping and lighting (including water and sewer charges); all charges incurred in the maintenance of landscaped areas, lakes, parking lots, sidewalks, driveways; maintenance, repair and replacement of all fixtures and electrical, mechanical, and plumbing systems; structural elements and exterior surfaces of the buildings; salaries and employee benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord may amortize its investment in said improvements (together with interest at the rate of fifteen (15%) percent per annum on the unamortized balance) as an operating expenses in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses. 6 7 "Additional Rent" as used herein shall not include Landlord's debt repayments; interest on charges; expenses directly or indirectly incurred by landlord for the benefit of any other tenant; cost for the installation of partitioning or any other tenant improvements; cost of attracting tenants; depreciation; interest, or executive salaries. 8. ACCEPTANCE AND SURRENDER OF PREMISES. Subject to Paragraphs 48 and 49, and by entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the building and improvements included in the Premises in their present condition and without representation or warranty by Landlord as to the condition of such building or as to the use or occupancy which may be made thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner termination of this Lease, to surrender the Premises promptly and peaceably to Landlord in good condition and repair (damage by Acts of God, fire, normal wear and tear excepted), with all interior walls painted, or cleaned so that they appear freshly painted, and repaired and replaced, if damaged; all floors cleaned and waxed; all carpets cleaned and shampooed; the airconditioning and heating equipment serviced by a reputable and licensed service firm and in good operating condition (provided the maintenance of such equipment has been Tenant's responsibility during the term of this Lease) together with all alterations, additions, and improvements which may have been made in, to, or on the Premises (except movable trade fixtures installed at the expense of Tenant) except that Tenant shall ascertain from Landlord within thirty (30) days before the end of the term of this Lease whether Landlord desires to have the Premises or any part or parts thereof restored to their condition and configuration as when the Premises were delivered to Tenant and if Landlord shall so desire, then Tenant shall restore said Premises or such part or parts thereof before the end of this Lease at Tenant's sole cost and expense. Tenant, on or before the end of the term or sooner termination of this Lease, shall remove all of Tenant's personal property and trade fixtures from the Premises, and all property not so removed on or before the end of the term or sooner termination of this Lease shall be deemed abandoned by Tenant and title to same shall thereupon pass to Landlord without compensation to Tenant. Landlord may, upon termination of this Lease, remove all moveable furniture and equipment so abandoned by Tenant, at Tenant's sole cost, and repair any damage caused by such removal at Tenant's sole cost. If the Premises be not surrendered at the end of the term or sooner termination of this Lease, Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. Nothing contained herein shall be construed as an extension of the term hereof or as a consent of Landlord to any holding over by Tenant. The voluntary or other surrender of this Lease or the Premises by Tenant ors mutual cancellation of this Lease shall not work as a merger and, at the option of Landlord, shall either terminate all or any existing subleases or subtenancies or operate as an assignment to Landlord of all or any such subleases or subtenancies. 9. ALTERATIONS AND ADDITIONS. Tenant shall not make, or suffer to be made, any alteration or addition to the Premises, or any part thereof, without the written consent of Landlord first had and obtained by Tenant, but at the cost of Tenant, and any addition to, or alteration of, the Premises, except moveable furniture and trade fixtures, shall at once become a part of the Premises and belong to Landlord. Landlord reserves the right to approve all contractors and mechanics proposed by Tenant to make such alterations and additions. Tenant shall retain title to all moveable furniture and trade fixtures placed in the Premises. All heating, 7 8 lighting, electrical, airconditioning, floor to ceiling partitioning, drapery, carpeting, and floor installations made by Tenant, together with all property that has become an integral part of the Premises, shall not be deemed trade fixtures. Tenant agrees that it will not proceed to make such alteration or additions, without having obtained consent from Landlord to do so, and until five (5) days from the receipt of such consent, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. Tenant shall, if required by Landlord, secure at Tenant's own cost and expense, a completion and lien indemnity bond, satisfactory to Landlord, for such work. Tenant further covenants and agrees that any mechanic's lien filed against the Premises or against the Complex for work claimed to have been done for, or materials claimed to have been furnished to Tenant, will be discharged by Tenant, by bond or otherwise, within ten (10) days after the filing thereof, at the cost and expense of Tenant. Any exceptions to the foregoing must be made in writing and executed by both Landlord and Tenant. 10. TENANT MAINTENANCE. Tenant shall at its sole cost and expense, keep and maintain the Premises (including appurtenances) and every part thereof in a high standard of maintenance and repair, and in good and sanitary condition. Tenant's maintenance and repair responsibilities herein referred to include, but are not limited to, all windows, window frames, plate glass, glazing, truck doors, plumbing systems (such as water and drain lines, sinks, toilets, faucets, drains, showers and water fountains), electrical systems (such as panels, conduits, outlets, lighting fixtures, lamps, bulbs, tubes, ballasts), heating and air-conditioning systems (such as compressors, fans, air handlers, ducts, mixing boxes, thermostats, time clocks, boilers, heaters, supply and return grills), store fronts, roofs, downspouts, all interior improvements within the premises including but not limited to wall coverings, window coverings, carpet, floor coverings, partitioning, ceilings, doors (both interior and exteriors, including closing mechanisms, latches, locks, skylights (if any), automatic fire extinguishing systems, and elevators and all other interior improvements of any nature whatsoever. Tenant agrees to provide carpet shields under all rolling chairs or to otherwise be responsible for wear and tear of the carpet caused by such rolling chairs if such wear and tear exceeds that caused by normal foot traffic in surrounding areas. Areas of excessive wear shall be replaced at Tenant's sole expense upon Lease termination. Tenant hereby waives all rights under, and benefits of, subsection 1 of Section 1932 and Section 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect. 11. UTILITIES. Tenant shall pay promptly, as the same become due, all charges for water, gas, electricity, telephone, telex and other electronic communications service, sewer service, waste pick-up and any other utilities, materials or services furnished directly to or used by Tenant on or about the Premises during the term of this Lease, including, without limitation, any temporary or permanent utility surcharge or other exactions whether or not hereinafter imposed. Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of rent by reason of any interruption or failure of utility services to the Premises when such interruption or failure is caused by accident, breakage, repair, strikes, lockouts, or other labor disturbances or labor disputes of any nature, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. 8 9 12. TAXES A. As Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share of all Real Property Taxes, which prorata share shall be allocated to the leased Premises by square footage or other equitable basis, as calculated by Landlord. The term "Real Property Taxes", as used herein, shall mean (i) all taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting, from reassessment caused by any change in ownership of the Complex) now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessment, which are levied or assessed against, or with respect to the value, occupancy or use of, all or any portion of the Complex (as now constructed or as may at any time hereafter be constructed, altered, or otherwise changed) or Landlord's interest therein: any improvements located within the Complex (regardless of ownership); the fixtures, equipment and other property of Landlord, real or personal, that are an integral part of and located in the Complex; or parking areas, public utilities, or energy within the Complex; (ii) all charges, levies or fees imposed by reason of environmental regulation or other governmental control of the Complex; and (iii) all costs and fees (including attorneys' fees) incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If at any time during the term of this Lease the taxation or assessment of the Complex prevailing as of the commencement date of this Lease shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate or additional tax or charge (i) on the value, use or occupancy of the Complex or Landlord's interest therein or (ii) on or measured by the gross receipts, income or rentals from the Complex, on Landlord's business of leasing the Complex, or computed in any manner with respect to the operation of the Complex, then any such tax or charge, however designated, shall be included within the meaning of the term "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is based upon property or rents unrelated to the Complex, then only that part of such Real Property Tax that is fairly allocable to the Complex shall be included within the meaning of the term "Real Property Taxes". Notwithstanding the foregoing, the term "Real Property Taxes" shall not include estate, inheritance, gift or franchise taxes of Landlord or the federal or state net income imposed on Landlord's income from all sources. B. Taxes on Tenant's Property (a) Tenant shall be liable for and shall pay ten days before delinquency, taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises. If any such taxes on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant and if Landlord, after written notice to Tenant, pays the taxes based on such increased assessment, which Landlord shall have the right to do regardless of the validity thereof, but only under proper protest if requested by Tenant, Tenant shall upon demand, as the case may be, repay to Landlord the taxes so levied against Landlord, or the proportion of such taxes resulting from such increase in the assessment; provided that in any such event Tenant shall have the right, in the name of Landlord and with Landlord's full cooperation, to bring suit in any court of competent jurisdiction to 9 10 recover the amount of any such taxes so paid under protest, and any amount so recovered shall belong to Tenant. (b) If the Tenant improvements in the Premises, whether installed, and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which standard office improvements in other space in the Complex are assessed, then the real property taxes and assessments levied against Landlord or the Complex by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of 12Ba, above. If the records of the County Assessor are available and sufficiently detailed to serve as a basis for determining whether said Tenant improvements are assessed at a higher valuation than standard office improvements in other space in the Complex, such records shall be binding on both the Landlord and the Tenant. If the records of the County Assessor are not available or sufficiently detailed to serve as a basis for making said determination, the actual cost of construction shall be used. 13. LIABILITY INSURANCE. Tenant at Tenant's expense, agrees to keep in force during the term of this Lease a policy of commercial general insurance with combined single limit coverage of not less than Two Million Dollars ($2,000,000) for injuries to or death of persons occurring in, on or about the Premises or the Complex, and property damage insurance, with limits of $500,000. The policy or policies affecting such insurance, certificate of insurance of which shall be furnished to Landlord, shall name Landlord as additional insureds, and shall insure any liability of Landlord, contingent or otherwise, as respects acts or omissions of Tenant, its agents, employees or invitees or otherwise by any conduct or transactions of any of said persons in or about or concerning the Premises, including any failure of Tenant to observe or perform any of its obligations hereunder; shall be issued by an insurance company admitted to transact business in the State of California; and shall provide that the insurance effected thereby shall not be canceled, except upon thirty (30) days' prior written notice to Landlord. If, during the term of this Lease, in the considered opinion of Landlord's Lender, insurance advisor, or counsel, the amount of insurance described in this paragraph 13 is not adequate. Tenant agrees to increase said coverage to such reasonable amount as Landlord's Lender, insurance advisor, or counsel shall deem adequate. 14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE. Tenant shall maintain a policy or policies of fire and property damage insurance in "all risk" form with a sprinkler leakage endorsement insuring the personal property, inventory, trade fixtures, and leasehold improvements within the leased Premises for the full replacement value thereof. The proceeds from any of such policies shall be used for the repair or replacement of such items so insured. Tenant shall also maintain a policy or policies of workman's compensation insurance and any other employee benefit insurance sufficient to comply with all laws. 15. PROPERTY INSURANCE. Landlord shall purchase and keep in force and as Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's proportionate share (calculated on a square footage or other equitable basis as reasonably calculated by Landlord) of the deductibles on 10 11 insurance claims and the cost of policy or policies of insurance covering loss or damage to the Premises and Complex in the amount of the full replacement value thereof, providing protection against those perils included within the classification of "all risks" insurance and flood and/or earthquake insurance, if available, plus a policy of rental income insurance in the amount of one hundred (100%) percent of twelve (12) months Basic Rent, plus sums paid as Additional Rent and any deductibles related thereto. If such insurance cost is increased due to Tenant's use of the Premises or the Complex, Tenant agrees to pay to Landlord the full cost of such increase. Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord for the Complex. Landlord and Tenant do each hereby respectively release the other, to the extent of insurance coverage of the releasing party, from any liability for loss or damage caused by fire or any of the extended coverage casualties included in the releasing party's insurance policies, irrespective of the cause of such fire or casualty; provided, however, that if the insurance policy of either releasing party prohibits such waiver, then this waiver shall not take effect until consent to such waiver is obtained. If such waiver is so prohibited, the insured party affected shall promptly notify the other party thereof. 16. INDEMNIFICATION. Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or death of any person or damage to or destruction of property in or about the Premises or the Complex by or from any cause whatsoever, including, without limitation, gas, fire, oil, electricity or leakage of any character from the roof, walls, basement or other portion of the Premises or the Complex but excluding, however, the willful misconduct or negligence of Landlord, its agents, servants, employees, invitees, or contractors of which negligence Landlord has knowledge and reasonable time to correct. Except as to injury to persons or damage to property to the extent arising from the willful misconduct or the negligence of Landlord, its agents, servants, employees, invitees, or contractors. Tenant shall hold Landlord harmless from and defend Landlord against any and all expenses, including reasonable attorneys' fees, in connection therewith, arising out of any injury to or death of any person or damage to or destruction of property occurring in, on or about the Premises, or any part thereof, from any cause whatsoever. 17. COMPLIANCE. Tenant, at its sole cost and expense, shall promptly comply with all laws, statutes, ordinances and governmental roles, regulations or requirements now or hereafter in effect; with the requirements of any board of fire underwriters or other similar body now or hereafter constituted; and with any direction or occupancy certificate issued pursuant to law by any public officer; provided, however, that no such failure shall be deemed a breach of the provision if Tenant, immediately upon notification, commences to remedy or rectify said failure. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such law, statute, ordinance or governmental rule, regulation, requirement, direction or provision, shall be conclusive of that fact as between landlord and Tenant. This paragraph shall not be interpreted as requiring tenant to make structural changes or improvements, except to the extent such changes or improvement are required as a result of Tenant's use of the Premises. Tenant shall, at its sole cost and expense, comply with any and all requirements pertaining to said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance covering the Premises. 11 12 18. LIENS. Tenant shall keep the Premises and the Complex free from any liens arising out of any work perfumed, materials furnished or obligation incurred by Tenant. In the event that Tenant shall not within twenty (20) days following the imposition or such lien, cause the same to be released of record. Landlord shall have, in addition to all other remedies provided herein and by law, the right, but no obligation, to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord for such purpose, and all expenses incurred by it in connection therewith, shall be payable to Landlord by Tenant on demand with interest at the prime rate of interest as quoted by the Bank of America. 19. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, transfer, or hypothecate the leasehold estate under this Lease. or any interest herein, and shall not sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person or entity to occupy or use the Premises, or any portion thereof, without, in each case, the prior written consent of Landlord which consent will not be unreasonably withheld. As a condition for granting this consent to any assignment, transfer, or subletting, Landlord may require that Tenant agrees to pay to Landlord, as additional rent, fifty percent (50%) of all rents or additional consideration received by Tenant from its assignees, transferees. or subtenants in excess of the rent payable by Tenant to Landlord hereunder. Tenant shall, by thirty (30) days written notice, advise Landlord of its intent to assign or transfer Tenant's interest in the Lease or sublet the Premises or any portion thereof for any part of the term hereof. Within thirty (30) days after receipt of said written notice, Landlord may, in its sole discretion, elect to terminate this Lease as to the portion of the Premises described in Tenant's notice on the date specified in Tenant's notice by giving written notice of such election to terminate. If no such notice to terminate is given to Tenant within said thirty (30) day period, Tenant may proceed to locate an acceptable sublessee, assignee, or other transferee for presentment to Landlord for Landlord's approval, all in accordance with the terms, covenants, and conditions of this paragraph 19. If Tenant intends to sublet the entire Premises and Landlord elects to terminate this Lease, this Lease shall be terminated on the date specified in Tenant's notice. If, however, this Lease shall terminate pursuant to the foregoing with respect to less than all the Premises, the rent, as defined and reserved hereinabove shall be adjusted on a pro rata basis to the number of square feet retained by Tenant, and this Lease as so amended shall continue in full force and effect. In the event Tenant is allowed to assign, transfer or sublet the whole or any part of the Premises, with the prior written consent of Landlord, no assignee, transferee or subtenant shall assign or transfer this Lease, either in whole or in part, or sublet the whole or any part of the Premises, without also having obtained the prior written consent of Landlord which consent shall not be unreasonably withheld. A consent of Landlord to one assignment, transfer, hypothecation, subletting, occupation or use by any other person shall not release Tenant from any of Tenant's obligations hereunder or be deemed to be a consent to any subsequent similar or dissimilar assignment, transfer, hypothecation, subletting, occupation or use by any other person. Any such assignment, transfer, hypothecation, subletting, occupation or use without such consent shall be void and shall constitute a breach of this Lease by Tenant and shall, at the option of Landlord exercised by written notice to Tenant, terminate this Lease. The leasehold estate under this Lease shall not, nor shall any interest therein, be assignable for any purpose by operation of law without the written consent of Landlord which consent shall not be unreasonably withheld. As a condition to its consent, Landlord may require Tenant to pay all expenses in connection with the assignment, and Landlord may require Tenant's assignee or transferee (or other assignees or transferees) to 12 13 assume in writing all of the obligations under this Lease and for Tenant to remain liable to Landlord under the Lease. 20. SUBORDINATION AND MORTGAGES. In the event Landlord's title or leasehold interest is now or hereafter encumbered by a deed of trust, upon the interest of Landlord in the land and buildings in which the demised Premises are located, to secure a loan from a lender (hereinafter referred to as "Lender") to Landlord, Tenant shall, at the request of Landlord or Lender, execute in writing an agreement subordinating its rights under this Lease to the lien of such deed of trust, or, if so requested, agreeing that the lien of Lender's deed of trust shall be or remain subject and subordinate to the rights of Tenant under this Lease. Notwithstanding any such subordination, Tenant's possession under this Lease shall not be disturbed if Tenant is not in default and so long as Tenant shall pay all rent and observe and perform all of the provisions set forth in this Lease. 21. ENTRY BY LANDLORD. Landlord reserves, and shall at all reasonable times after at least 24 hours notice (except in emergencies) have, the right to enter the Premises to inspect them; to perform any services to be provided by Landlord hereunder; to submit the Premises to prospective purchasers, mortgagers, or tenants; to post notices of nonresponsibility; and to alter, improve or repair the Premises and any portion of the Complex, all without abatement of rent; and may erect scaffolding and other necessary structures in or through the Premises where reasonably required by the character of the work to be performed; provided, however that the business of Tenant shall be interfered with to the least extent that is reasonably practical. For each of the foregoing purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. Landlord shall also have the right at any time to change the arrangement or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets or other public parts of the Complex and to change the name, number or designation by which the Complex is commonly known, and none of the foregoing shall be deemed an actual or constructive eviction of Tenant, or shall entitle Tenant to any reduction of rent hereunder. 22. BANKRUPTCY AND DEFAULT. The commencement of a bankruptcy action or liquidation action or reorganization action or insolvency action or an assignment of or by Tenant for the benefit of creditors, or any similar action undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option, constitute a breach of this Lease by Tenant. If the trustee or receiver appointed to serve during a bankruptcy, liquidation, reorganization, insolvency or similar action elects to reject Tenant's unexpired Lease, the trustee or receiver shall notify Landlord in writing of its election within thirty (30) days after an order for relief in a liquidation action or within thirty (30) days after the commencement of any action. Within thirty (30) days after court approval of the assumption or this Lease, the trustee or receiver shall cure (or provide adequate assurance to the reasonable satisfaction of Landlord that the trustee or receiver shall cure) any and all previous defaults under the unexpired Lease and shall compensate Landlord for all actual pecuniary loss and shall provide adequate assurance of future performance under said Lease to the reasonable satisfaction of Landlord. Adequate 13 14 assurance of future performance, as used herein, includes, but shall not be limited to: (i) assurance of source and payment rent, and other consideration due under this Lease; (ii) assurance that the assumption or assignment of this Least will not breach substantially any provision, such as radius, location, use, or exclusivity provision, in any agreement relating to the above described Premises. Nothing contained in this section shall affect the existing right of Landlord to refuse to accept an assignment upon commencement of or in connection with a bankruptcy, liquidation, reorganization or insolvency action or an assignment of Tenant for the benefit of creditors or other similar act. Nothing contained in this Lease shall be construed as giving or granting or creating an equity in the demised Premises to Tenant. In no event shall the leasehold estate under this Lease, or any interest therein, be assigned by voluntary or involuntary bankruptcy proceeding without the prior written consent or Landlord. In no event shall this Lease or any rights or privileges hereunder be an asset of Tenant under any bankruptcy, insolvency or reorganization proceedings. The failure to perform or honor any covenant, condition or representation made under this Lease shall constitute a default hereunder by Tenant upon expiration of the appropriate grace period hereinafter provided. Tenant shall have a period or five (5) days from the date of written notice from Landlord within which to cure any default in the payment of rental or adjustment thereto. Tenant shall have a period of thirty (30) days from the date of written notice from Landlord within which to cure any other default under this Lease; provided, however, that if the nature of Tenant's failure is such that more than thirty (30) days is reasonably required to cure the same, Tenant shall not be in default so long as Tenant commences performance within such thirty (30) day period and thereafter prosecutes the same to completion. Upon an uncured default of this Lease by Tenant, Landlord shall have the following rights and remedies in addition to any other rights or remedies available to Landlord at law or in equity; (a) The rights and remedies provided for by California Civil Code Section 1951.2, including but not limited to, recovery of the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount or rental loss for the same period that Tenant proves could be reasonably avoided, as computed pursuant to subsection (b) of said Section 1951.2. Any proof by Tenant under subparagraphs (2) and (3) of Section 1951.2 of the California Civil Code of the amount of rental loss that could be reasonably avoided shall be made in the following manner: Landlord and Tenant shall each select a licensed real estate broker in the business of renting property of the same type and use as the Premises and in the same geographic vicinity. Such two real estate brokers shall select a third licensed real estate broker, and the three licensed real estate brokers so selected shall determine the amount of the rental loss that could be reasonably avoided from the balance of the term of this Lease after the time of award. The decision of the majority of said licensed real estate brokers shall be final and binding upon the parties hereto. (b) The rights and remedies provided by California Civil Code Section which allows Landlord to continue the Lease in effect and to enforce all or its rights and remedies under this Lease, including the right to recover rent as it becomes due, for so long as Landlord does not terminate Tenant's right to possession: acts of maintenance or preservation, efforts to select the 14 15 Premises, or the appointment of a receiver upon Landlord's initiative to protect its interest under this Lease shall not constitute a termination of Tenant's right to possession. (c) The right to terminate this Lease by giving notice to Tenant in accordance with applicable law. (d) To the extent permitted by law, the right and power, to enter the Premises and remove therefrom all persons and property, to store such property in a public warehouse or elsewhere at the cost of and for the account of Tenant, and to sell such property and apply such proceeds therefrom pursuant to applicable California law. Landlord, may from time to time sublet the Premises or any part thereof for such term or terms (which may extend beyond the term of this Lease) and at such rent and other terms as Landlord in its sole discretion may deem advisable, with the right to make alterations and repairs to the Premises. Upon each subletting, (i) Tenant shall be immediately liable to pay Landlord, in addition to indebtedness other than rent due hereunder, the cost of such subletting, including, but not limited to, reasonable attorneys' fees, and any real estate commissions actually paid, and the cost of such alterations and repairs incurred by Landlord and the amount, if any, by which the rent hereunder for the period of such subletting (to the extent such period does not exceed the term hereof) exceeds the amount to be paid as rent for the Premises for such period or (ii) at the option of Landlord, rents received from such subletting shall be applied first to payment or indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such subletting and of such alterations and repairs; third to payment of rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same becomes due hereunder. If Tenant has been credited with any rent to be received by such subletting under option (i) and such rent shall not be promptly paid to Landlord by the subtenants), or if such rentals received from such subletting under option (ii) during any month be less than that to be paid during that month by Tenant hereunder. Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No taking possession of the Premises by Landlord, shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant. Notwithstanding any such subletting without termination, Landlord may at any time hereafter elect to terminate this Lease for such previous breach. (e) The right to have a receiver appointed for Tenant upon application by Landlord, to take possession of the Premises, and to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Landlord pursuant to subparagraph d above (except that Tenant may vacate so long as it pays rent, provides an on-site security guard during normal business hours from Monday through Friday, and otherwise performs its obligations hereunder). 24. DESTRUCTION. In the event the Premises are destroyed in whole or in part from any cause, except for routine maintenance and repairs and incidental damage and destruction caused from vandalism and accidents for which Tenant is responsible for under Paragraph 10, Landlord may, at its option: (a) Rebuild or restore the Premises to their condition prior to the damage or destruction, or 15 16 (b) Terminate this Lease, (providing that the Premises is damaged to the extent of 33 1/3% or more of the replacement cost). If landlord does not give Tenant notice in writing within thirty (30) days from the destruction of the Premises of its election to either rebuild and restore them, or to terminate this Lease, Landlord shall be deemed to have elected to rebuild or restore them, in which event Landlord agrees, at its expense, promptly to rebuild or restore the Premises to their condition prior to the damage or destruction. Tenant shall be entitled to a reduction in rent while such repair is being made in the proportion that the area of the Promises rendered untenantable by such damage bears to the total area of the Premises. If Landlord initially estimates that the rebuilding or restoration will exceed 180 days or 60 days if the destruction occurs within the last eighteen (18) months of the Lease Term, or if Landlord does not complete the rebuilding or restoration within one hundred eighty (180) days (or sixty (60) days if the destruction occurs within the last eighteen (18) months of the Lease Term) following the date of destruction (such period of time to be extended for delays caused by the fault or neglect of Tenant or because of Acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond the control of Landlord), then Tenant shall have the right to terminate this Lease by giving fifteen (15) days prior written notice to Landlord. Notwithstanding anything herein to the contrary, Landlord's obligation to rebuild or restore shall be limited to the building and interior improvements constructed by Landlord as they existed as of the commencement date of the Lease and shall not include restoration of Tenant's trade fixtures, equipment, merchandise, or any improvements, alterations or additions made by Tenant to the Premises, which Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense provided this Lease is not cancelled according to the provisions above. Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect. Tenant hereby expressly waives the provisions of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of the California Civil Code. In the event that the building in which the Premises arc situated is damaged or destroyed to the extent of not less than 33 1/2% or the replacement cost thereof. Landlord may elect to terminate this Lease, whether the Premises be injured or not. 25. EMINENT DOMAIN. If all or any part of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, this Lease shall terminate as to any portion of the Premises so taken or conveyed on the date when title vests in the condemnor, and Landlord shall be entitled to any and all payment, income, rent, award, or any interest therein whatsoever which maybe paid or made in connection with such taking or conveyance, and Tenant shall have no claim against Landlord or otherwise for the value of any unexpired term of this Lease. Notwithstanding the foregoing paragraph, any compensation specifically awarded Tenant for loss of business, Tenant's personal property, moving cost or loss of goodwill, shall be and remain the property of Tenant. If (i) any action or proceeding is commenced for such taking of the Premises or any part thereof, or if Landlord is advised in writing by any entity or body having the right or power of 16 17 condemnation of its intention to condemn the premises or any portion thereof, or (ii) any of the foregoing events occur with respect to the taking of any space in the Complex not leased hereby, or if any such spaces so taken or conveyed in lieu of such taking and Landlord shall decide to discontinue the use and operation of the Complex, or decide to demolish, alter or rebuild the Complex, then, in any of such events Landlord shall have the right to terminate this Lease by giving Tenant written notice thereof within sixty (60) days of the date of receipt of said written advice, or commencement of said action or proceeding, or taking conveyance, which termination shall take place as of the first to occur or the last day of the calendar month next following the month in which such notice is given or the date on which title to the Premises shall vest in the condemnor. In the event of such a partial taking or conveyance of the Premises, if the portion of the Premises taken or conveyed is so substantial that the Tenant can no longer reasonably conduct its business, Tenant shall have the privilege of terminating this Lease within sixty (60) days from the date of such taking or conveyance, upon written notice to Landlord of its intention so to do, and upon giving of such notice this Lease shall terminate on the last day of the calendar month next following the month in which such notice is given, upon payment by Tenant of the rent from the date of such taking or conveyance to the date of termination. If a portion of the Premises be taken by condemnation or conveyance in lieu thereof and neither Landlord nor Tenant shall terminate this Lease as provided herein, this Lease shall continue in full force and effect as to the part of the Premises not so taken or conveyed, and the rent herein shall be apportioned as of the date of such taking or conveyance so that thereafter the rent to be paid by Tenant shall be in the ratio that the area of the portion of the Premises not so taken or conveyed bears to the total area of the Premises prior to such taking. 26. SALE OR CONVEYANCE BY LANDLORD. In the event of a sale or conveyance of the Complex or any interest therein, by any owner of the reversion then constituting Landlord, the transferor shall thereby be released from any further liability upon any of the terms, covenants or conditions (express or implied) herein contained in favor of Tenant, and in such event, insofar as such transfer is concerned, Tenant agrees to look solely to the responsibility of the successor in interest of such transferor in and to the Complex and this Lease. This Lease shall not be affected by any such sale or conveyance, and Tenant agrees to attorn to the successor in interest of such transferor. 27. ATTORNMENT TO LENDER OR THIRD PARTY. In the event the interest of Landlord in the land and buildings in which the leased Premises arc located (whether such interest of Landlord is a fee title interest or a leasehold interest is encumbered by deed of trust, and such interest is acquired by the lender or any third party through judicial foreclosure or by exercise of a power of sale at private trustee's foreclosure sale. Tenant hereby agrees to attorn to the purchase at any such foreclosure sale and to recognize such purchaser as the Landlord under this lease. In the event the lien of the deed of trust securing the loan from a Lender to Landlord is prior and paramount to the Lease, this lease shall nonetheless continue in full force and effect for the remainder of the unexpired tern hereof, at the same rental herein reserved and upon all the other terms, conditions and covenants herein contained. 17 18 28. HOLDING OVER. Any holding over by Tenant after expiration or other termination of the term of this Lease with the written consent of Landlord delivered to Tenant shall not constitute a renewal or extension of the lease or give Tenant any rights in or to the leased Premises except as expressly provided in this Lease. Any holding over after the expiration or other termination of the term of this Lease, with the consent of Landlord, shall be construed to be a tenancy from month to month, on the same terms and conditions herein specified insofar as applicable except that the monthly Basic Rent shall be increased to an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent required during the last month of the Lease term. 29. CERTIFICATE OF ESTOPPEL. Tenant shall at any time upon not less than ten (10) days' prior written notice to Landlord execute, acknowledge and deliver to Landlord a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults, if any, are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord, that there arc no uncured defaults in Landlord's performance, and that not more than one month's rent has been paid in advance. 30. CONSTRUCTION CHANGES. It is understood that the description of the Premises and the location of ductwork, plumbing and other facilities therein are subject to such minor changes as Landlord or Landlord's architect determines to be desirable in the course of construction of the Premises, and no such changes, or any changes in plans for any other portions of the Complex shall affect this Lease or entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. Landlord does not guarantee the accuracy of any drawings supplied to Tenant and verification of the accuracy of such drawings rests with Tenant. 31. RIGHT OF LANDLORD TO PERFORM. All terms, covenants and conditions of this Lease to be performed or observed by Tenant shall be performed or observed by Tenant at Tenant's sole cost and expense and without any reduction of rent. If Tenant shall fail to pay any sum of money, or other rent, required to be paid by it hereunder or shall fail to perform any other term or covenant hereunder on its part to be performed, and such failure shall continue for five (5) days after written notice thereof by Landlord, Landlord, without waiving or releasing Tenant from any obligation of Tenant hereunder, may, but shall not be obligated to, make any such payment or perform any such other term or covenant on Tenant's part to be performed. All sums so paid by Landlord and all necessary costs of such performance by Landlord together with Interest thereon at the rate of the prime rate of interest per annum as quoted by the Bank of America from the date of such payment or performance by Landlord, shall be paid (and Tenant covenants to make such payment) to Landlord on demand by Landlord, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of nonpayment by Tenant as in the case of failure by Tenant in the payment of rent hereunder. 18 19 32. ATTORNEYS' FEES. (A) In the event that either Landlord or Tenant should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease, or for any other relief against the other party hereunder, then all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment. (B) Should Landlord be named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including a reasonable attorney's fee. 33. WAIVER. The waiver by either party of the other party's failure to perform or observe any term, covenant or condition herein contained to be performed or observed by such waiving party shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent failure of the party failing to perform or observe the same or any other such term, covenant or condition therein contained, and no custom or practice which may develop between the parties hereto during the term hereof shall be deemed a waiver of, or in anyway affect, the right of either party to insist upon performance and observance by the other party in strict accordance with the terms hereof. 34. NOTICES. All notices, demands, requests, advices or designations which may be or are required to be given by either party to the other hereunder shall be in writing. All notices, demands, requests, advices or designations by Landlord to Tenant shall be sufficiently given, made or delivered if personally served on Tenant by leaving the same at the Premises or if sent by United States certified or registered mail, postage prepaid, addressed to Tenant at the Premises. All notices demands, requests, advices or designations by Tenant to Landlord shall be sent by United States certified or registered mail, postage prepaid, addressed to Landlord at its offices at Peery/Arrillaga; 2560 Mission College Blvd., Suite 101, Santa Clara, CA 95054. Each notice, request, demand, advice or designation referred to in this paragraph shall be deemed received on the date of the personal service or mailing thereof in the manner herein provided, as the case may be. 35. EXAMINATION OF LEASE. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for a lease, and this instrument is not effective as a lease or otherwise until its execution and delivery by both Landlord and Tenant. 36. DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event earlier than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have heretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligations; provided, however, that if the nature if Landlord's obligations is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord 19 20 commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 37. CORPORATE AUTHORITY. If Tenant is a corporation. (or a partnership) each individual executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation (or partnership) in accordance with the by-laws of said corporation (or partnership in accordance with the partnership agreement) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. If Tenant is a corporation, Tenant shall, within thirty (30) days after execution of this Lease, deliver to Landlord a certified copy of the resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Lease. 38. [Intentionally Deleted.] 39. LIMITATION OF LIABILITY. In consideration of the benefits accruing hereunder, Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord: (i) the sole and exclusive remedy shall be against Landlord and Landlord's assets; (ii) no partner of Landlord shall be sued or named as a party in any suitor action (except as maybe necessary to secure jurisdiction of the partnership); (iii) no service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership); (iv) no partner of Landlord shall be required to answer or otherwise plead to any service of process; (v) no judgment will be taken against any partner of Landlord; (vi) any judgment taken against any partner of landlord may be vacated and set aside at any time without hearing; (vii) no writ of execution will ever be levied against the assets of any partner of Landlord; (viii) these covenants and agreements are enforceable both by Landlord and also by any partner of Landlord. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by statute or at common law. 20 21 40. MISCELLANEOUS AND GENERAL PROVISIONS. a. Tenant shall not, without the written consent of Landlord, use the name of the building for any purpose other than as the address or the business conducted by Tenant in the Premises. b. This Lease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any provision of this Lease shall be invalid, unenforceable or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. c. The term "Premises" includes the space leased hereby and any improvements now or hereafter installed therein or attached thereto. The term "Landlord" or any pronoun used in place thereof includes the plural as well as the singular and the successors and assigns of landlord. The term "Tenant" or any pronoun used in place thereof includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations, and their and each of their respective heirs, executors, administrators, successors and permitted assigns, according to the context hereof, and the provisions of this Lease shall inure to the benefit of and bind such heirs, executors, administrators, successors and permitted assigns. The term "person" includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations. Words used in any gender include other genders. If there be more than one Tenant the obligations of Tenant hereunder are joint and several. The paragraph headings of this Lease are for convenience of reference only and shall have no effect upon the construction or interpretation of any provision hereof. d. Time is of the essence of this Lease and of each and all of its provisions. e. At the expiration or earlier termination of this Lease, Tenant shall execute, acknowledge and deliver to Landlord, within ten (10) days after written demand from Landlord to Tenant, any quitclaim deed or other document required by any reputable title company, licensed to operate in the State of California, to remove the cloud or encumbrance created by this Lease from the real property of which Tenant's Premises are a part. f. This instrument along with any exhibits and attachments hereto constitutes the entire agreement between Landlord and Tenant relative to the Premises and this agreement and the exhibits and attachments may be altered, amended or revoked only by an instrument in writing signed by both Landlord and Tenant. Landlord and Tenant agree hereby that all prior or contemporaneous oral agreements between and among themselves and their agents or representatives relative to the leasing of the Premises are merged in or revoked by this agreement. g. Neither Landlord nor Tenant shall record this Lease or a short form memorandum hereof without the consent of the other. h. Tenant further agrees to execute any amendments required by a tender to enable Landlord to obtain financing, so long as Tenant's rights hereunder arc not substantially affected. 21 22 i. Paragraphs 43 through 49 are added hereto and are included as a part of this lease. j. Clauses, plats and riders, if any, signed by Landlord and Tenant and endorsed on or affixed to this Lease are a part hereof. k. Tenant covenants and agrees that no diminution or shutting off of light, air or view by any structure which may be hereafter erected (whether or not by Landlord) shall in any way affect his Lease, entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. 41. BROKERS. Tenant warrants that it had dealings with only the following real estate brokers or agents in connection with the negotiation or this Lease: none and that it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. 42. SIGNS. No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or to any part of the outside of the Premises or any exterior windows of the Premises without the written consent of Landlord first had and obtained and Landlord shall have the right to remove any unauthorized sign, placard, picture, advertisement, name or notice without notice to and at the expense of Tenant. If Tenant is allowed to print or affix or in any way place a sign in, on, or about the Premises, upon expiration or other sooner termination of this Lease, Tenant at Tenant's sole cost and expense shall both remove such sign and repair all damage in such a manner as to restore all aspects of the appearance of the Premises to the condition prior to the placement of said sign. All approved signs or lettering on outside doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved of by Landlord. Tenant shall not place anything or allow anything to be placed near the glass of any window, door partition or wall which may appear unsightly from outside the Premises. IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Lease as of the day and year last written below. LANDLORD: TENANT: ARRILLAGA FAMILY TRUST TRANSMETA CORPORATION a California corporation By /s/ JOHN ARRILLAGA By /s/ DAVID R. DITZEL -------------------------------- ---------------------------------- John Arrillaga, Trustee Dated: 11/13/95 Title: President and CEO ------------------------------ RICHARD T. PERRY Print or Type Name: David R. Ditzel SEPARATE PROPERTY TRUST ----------------- By /s/ RICHARD T. PEERY Dated: Nov. 13, 1995 -------------------------------- ------------------------------ Richard T. Peery, Trustee Dated: 11/14/95 ---------------------------- 22 23 Paragraphs 43 through 49 to Lease Agreement Dated November 1, 1995, By and Between the Arrillaga Family Trust and the Richard T. Peery Separate Property Trust, as Landlord, and TRANSMETA CORPORATION, a California corporation, as Tenant for 22,500+ Square Feet of Space Located at 3940 Freedom Circle, Santa Clara, California 95054. 43. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate sum of TWO MILLION SEVEN HUNDRED NINE THOUSAND SEVEN HUNDRED FIVE AND 15/100 DOLLARS ($2,709,705.15), shall be payable as follows: On December 1, 1995, the sum of FIFTEEN THOUSAND ONE HUNDRED EIGHTY SEVEN AND 50/100 DOLLARS ($15,187.50) shall be due, and a like sum due on the first day of each month thereafter, through and including May 1, 1996. On June 1, 1996, the sum of TWENTY TWO THOUSAND SEVEN HUNDRED EIGHTY ONE AND 25/100 DOLLARS ($22,781.25) shall be due, and a like sum due on the first day of each month thereafter, through and including August 1, 1996. On September 1, 1996, the sum of TWENTY SIX THOUSAND FIVE HUNDRED SEVENTY EIGHT AND 80/100 DOLLARS ($26,578.80) shall be due, and a like sum due on the first day of each month thereafter, through and including November 1, 1996. On December 1, 1996, the sum of THIRTY ONE THOUSAND FIVE HUNDRED AND NO/100 DOLLARS ($31,500.00) shall be due, and a like sum due on the first day of each month thereafter, through and including November 1, 1997. On December 1, 1997, the sum of THIRTY TWO THOUSAND SIX HUNDRED TWENTY FIVE AND NO/100 DOLLARS ($32,625.00) shall be due, and a like sum due on the first day of each month thereafter, through and including November 1, 1998. On December 1, 1998, the sum of THIRTY THREE THOUSAND SEVEN HUNDRED FIFTY AND NO/100 DOLLARS ($33,750.00) shall be due, and a like sum due on the first day of each month thereafter, through and including November 1, 1999. On December 1, 1999, the sum of THIRTY FOUR THOUSAND EIGHT HUNDRED SEVENTY FIVE AND NO/100 DOLLARS ($34,875.00) shall be due, and a like sum due on the first day of each month thereafter, through and including November 1, 2000. On December 1, 2000, the sum of THIRTY SIX THOUSAND AND NO/100 DOLLARS ($36,000.00) shall be due, and a like sum due on the first day of each month thereafter, through and including November 1, 2001. On December 1, 2001, the sum of THIRTY SEVEN THOUSAND ONE HUNDRED TWENTY FIVE AND NO/100 DOLLARS ($37,125.00) shall be due, and a like sum due on the first day of each month thereafter, through and including November 1, 2002; or until the entire aggregate sum of TWO MILLION SEVEN HUNDRED NINE THOUSAND SEVEN HUNDRED FIVE AND 15/100 DOLLARS ($2,709,705.15) has been paid. 23 24 44. EARLY ENTRY: Tenant and its agents and contractors shall be permitted to enter the Premises prior to the Commencement Date for the purpose of installing at Tenant's sole cost and expense, Tenant's trade fixtures and equipment, telephone equipment, security systems and cabling for computers. Such entry shall be subject to all of the terms and conditions of this Lease, except that Tenant shall not be required to pay any Rent on account thereof. Any entry or installation work by Tenant and its agents in the Premises pursuant to this Paragraph 44 shall (i) be undertaken at Tenant's sole risk, (ii) not interfere with or delay Landlord's work in the Premises (if any), and (iii) not be deemed occupancy or possession of the Premises for purposes of the Lease. Tenant shall indemnify, defend, and hold Landlord harmless from any and all loss, damage, liability, expense (including reasonable attorney's fees), claim or demand of whatsoever character, direct or consequential, including, but without limiting thereby the generality of the foregoing, injury to or death of persons and damage to or loss of property arising out of the exercise by Tenant of any early entry right granted hereunder. In the event Tenant's work in said Premises delays the completion of the interior improvements to be provided by Landlord, if any, or in the event Tenant has not completed construction of it's interior improvements by the scheduled Commencement Date, it is agreed between the parties that this Lease will commence on the scheduled Commencement Date of December 1, 1995 regardless of the construction status of said interior improvements completed or to be completed by Tenant or Landlord. It is the intent of the parties hereto that the commencement of Tenant's obligation to pay Rent under the Lease not be delayed by any of such causes or by any other act of Tenant (except as expressly provided herein) and, in the event it is so delayed, Tenant's obligation to pay Rent under the Lease shall commence as of the date it would otherwise have commenced absent delay caused by Tenant. 45. "AS-IS" BASIS: Subject only to Paragraphs 48 and 49 and to Landlord making the improvements shown on Exhibit B to be attached hereto, it is hereby agreed that the Premises leased hereunder is leased strictly on an "as-is" basis and in its present condition, and in the configuration as shown on Exhibit B to be attached hereto, and by reference made a part hereof. Except as noted herein, it is specifically agreed between the parties that after Landlord makes the interior improvements as shown on Exhibit B, Landlord shall not be required to make, nor be responsible for any cost, in connection with any repair, restoration, and/or improvement to the Premises in order for this Lease to commence, or thereafter, throughout the Term of this Lease. Landlord makes no warranty or representation of any kind or nature whatsoever as to the condition or repair of the Premises, nor as to the use or occupancy which may be made thereof. 46. CONSENT: Whenever the consent of one party to the other is required hereunder, such consent shall not be unreasonably withheld. 47. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to the existence or use of "Hazardous Materials" (as defined herein) on, in, under or about the Premises and real property located beneath said Premises (hereinafter collectively referred to as the "Property") and the Complex: As used herein, the term "Hazardous Materials" shall mean any hazardous or toxic substance, material or waste which is or becomes subject to or regulated by any local governmental authority, the State of California, or the United States Government. The term "Hazardous Materials" includes, without limitation any material or hazardous substance which is (i) listed under Article 9 or defined as "hazardous" or "extremely hazardous" pursuant to Article 11 of Title 22 of the California Administrative Code, Division 4, Chapter 30, (ii) listed or defined as a "hazardous waste" pursuant to the Federal Resource Conservation and Recovery Act, Section 42 U.S.C. Section 6901 et. seq., (iii) listed or defined 24 25 as a "hazardous substance" pursuant to the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et. seq. (42 U.S.C. Section 9601), (iv) petroleum or any derivative of petroleum, or (v) asbestos. Subject to the terms of this Paragraph 47, Tenant shall have no obligation to "clean up", reimburse, release, indemnify, or defend Landlord with respect to any Hazardous Materials or wastes which Tenant (prior to and during the term of the Lease) or other parties on the Property or Complex, as described below, (during the term of this Lease) did not store, dispose, or transport in, use, or cause to be on the Property or which Tenant, its agents, employees, contractors, invitees or its future subtenants and/or assignees (if any) (during the Term of this Lease), did not store, dispose, or transport in, use or cause to be on the Complex in violation of applicable law. Tenant shall be 100 percent liable and responsible for: (i) any and all "investigation and cleanup" of said Hazardous Materials contamination which Tenant, its agents, employees, contractors, invitees or its future subtenants and/or assignees (if any), or other parties on the Property, does store, dispose, or transport in, use or cause to be on the Property, and which Tenant, its agents, employees, contractors, invitees or its future subtenants and/or assignees (if any) does store, dispose, or transport in, use or cause to be on the Complex and (ii) any claims, including third party claims, resulting from such Hazardous Materials contamination. Tenant shall indemnify Landlord and hold Landlord harmless from any liabilities, demands, costs, expenses and damages, including, without limitation, attorney fees incurred as a result of any claims resulting from such Hazardous Materials contamination. Tenant also agrees not to use or dispose of any Hazardous Materials on the Property or the Complex without first obtaining Landlord's written consent. Tenant agrees to complete compliance with governmental regulations regarding the use or removal or remediation of Hazardous Materials used, stored, disposed of, transported or caused to be on the Property or the Complex as stated above, and prior to the termination of said Lease Tenant agrees to follow the proper closure procedures and will obtain a clearance from the local fire department and/or the appropriate governing agency. If Tenant uses Hazardous Materials, Tenant also agrees to install, at Tenant's expense, such Hazardous Materials monitoring devices as Landlord deems reasonably necessary. It is agreed that the Tenant's responsibilities related to Hazardous Materials will survive the termination date of the Lease and that Landlord may obtain specific performance of Tenant's responsibilities under this Paragraph 47. 48. MAINTENANCE OF THE PREMISES: In addition to, and notwithstanding anything to the contrary in Paragraph 10, Landlord shall maintain the structural shell, foundation, and roof structure (but not the interior improvements, roof membrane, or glazing) of the building leased hereunder at Landlord's cost and expense provided Tenant has not caused such damage, in which event Tenant shall be responsible for 100 percent of any such costs for repair or damage so caused by the Tenant. Notwithstanding the foregoing, a crack in the foundation, or exterior walls that does not endanger the structural integrity of the building, or which is not life-threatening, shall not be considered material, nor shall Landlord be responsible for repair of same. 49. PUNCH LIST: In addition to and notwithstanding anything to the contrary in Paragraphs 8 and 45 of this Lease, Tenant shall have fifteen (15) days after the Commencement Date to provide Landlord with a written "punch list" pertaining to defects in the Building and in the interior improvements constructed by Landlord for Tenant. As soon as reasonably possible thereafter, Landlord, or one of Landlord's representatives (if so approved by Landlord), and Tenant shall conduct a joint walk-through of the Premises (if Landlord so requires), and inspect such Tenant Improvements, using their best efforts to agree on the incomplete or defective construction related to the Tenant Improvements installed by 26 Landlord. After such inspection has been completed, Landlord shall prepare, and both parties shall sign, a list of all "punch list" items which the parties reasonably agree are to be corrected by Landlord (but which shall exclude any damage or defects caused by Tenant, its employees, agents or parties Tenant has contracted with to work on the Premises). Landlord shall have thirty (30) days thereafter (or longer if necessary, provided Landlord is diligently pursuing the completion of the same) to complete, at Landlord's expense, the "punch list" items without the Commencement Date of the Lease and Tenant's obligation to pay Rental thereunder being affected. Notwithstanding the foregoing, a crack in the foundation, or exterior walls that does not endanger the structural integrity of the building, or which is not life-threatening, shall not be considered material, nor shall Landlord be responsible for repair of same. This Paragraph shall be of no force and effect if Tenant shall fail to give any such notice to Landlord within fifteen (15) days after the Commencement Date of this Lease. 26 27 AMENDMENT NO. 1 TO LEASE THIS AMENDMENT NO. 1 is made and entered into this 29th day of January, 1997, by and between JOHN ARRILLAGA, Trustee, or his Successor Trustee UTA dated 7/20/77 (ARRILLAGA FAMILY TRUST) as amended, and RICHARD T. PEERY, Trustee, or his Successor Trustee UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended, collectively as LANDLORD, and TRANSMETA CORPORATION, a California corporation, as TENANT. RECITALS A. WHEREAS, by Lease Agreement dated November 1, 1995 Landlord leased to Tenant all of that certain 22,500+ square foot building located at 3940 Freedom Circle, Santa Clara, California, the details of which are more particularly set forth in said November 1, 1995 Lease Agreement, and B. WHEREAS, said Lease was amended by the Commencement Letter dated December 13, 1995 which confirmed the Commencement Date of the Lease of December 1, 1995, and confirmed the Termination Date November 30, 2002, and, C. WHEREAS, it is now the desire of the parties hereto to amend the Lease by adding a "Cross Default", a "Co-terminous", a "Choice of Law/Severability", and an "Authority to Execute" Paragraph to said Lease Agreement as hereinafter set forth. AGREEMENT NOW THEREFORE, for valuable consideration, receipt of which is hereby acknowledged, and in consideration of the hereinafter mutual promises, the parties hereto do agree as follows: 1. CROSS DEFAULT: It is understood that concurrently with the execution of this Amendment No. 1, Landlord and Tenant shall enter into another lease, dated September 29, 1997, for premises located at 2540 Mission College Blvd., Santa Clara, California (hereinafter referred to as the "Marriott B Lease"), which property is contiguous to the Premises leased hereunder. As a material part of the consideration for the execution of said Marriott B Lease by Landlord, it is agreed between Landlord and Tenant that a default under this Lease, or a default under said Marriott B Lease may, at the option of Landlord, be considered a default under both leases, in which event Landlord shall be entitled (but in no event required) to apply all rights and remedies of Landlord under the terms of one lease to both leases including, but not limited to, the right to terminate one or both of said leases by reason of a default under said Marriott B Lease or hereunder. 2. LEASE TERMS CO-TERMINOUS: It is acknowledged that it is the intention of the parties that the term of this Lease be co-terminous with the term of the Marriott B Lease such that the terms of both leases expire on the same date; provided, however, the termination of this Lease resulting from the terms and conditions stated under Paragraph 22 "Bankruptcy and Default" (subject to Landlord's option as stated above and in the Marriott B Lease's "Cross Default" Paragraph) or Paragraph 24 "Destruction" or Paragraph 25 "Eminent Domain" shall not result in a termination of the Marriott B Lease, unless Landlord elects, at its sole and absolute discretion, to terminate either or both of the leases. 27 28 3. CHOICE OF LAW; SEVERABILITY. This Lease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any provisions of this Lease shall be invalid, unenforceable, or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. 4. AUTHORITY TO EXECUTE. The parties executing this Agreement hereby warrant and represent that they are properly authorized to execute this Agreement and bind the parties on behalf of whom they execute this Agreement and to all of the terms, covenants and conditions of this Agreement as they relate to the respective parties hereto. EXCEPT AS MODIFIED HEREIN, all other terms, covenants, and conditions of said November 1, 1995 Lease Agreement shall remain in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment No. 1 to Lease as of the day and year last written below. LANDLORD: TENANT: ARRILLAGA FAMILY TRUST TRANSMETA CORPORATION a California corporation By /s/ JOHN ARRILLAGA By /s/ COLIN HUNTER -------------------------------- ---------------------------------- John Arrillaga, Trustee Date: 3/10/97 Colin Hunter ----------------------------- ------------------------------------- Print or Type Name RICHARD T. PEERY SEPARATE Title: CFO PROPERTY TRUST ------------------------------ By /s/ RICHARD T. PEERY Date: 2/7/97 -------------------------------- ------------------------------- Richard T. Peery, Trustee Date: 2/28/97 ----------------------------- 28 29 AMENDMENT NO. 2 TO LEASE THIS AMENDMENT NO. 2 is made and entered into this 2nd day of April, 1998, by and between JOHN ARRILLAGA, Trustee, or his Successor Trustee UTA dated 7/20/77 (JOHN ARRILLAGA SURVIVOR'S TRUST) (previously known as the "Arrillaga Family Trust") as amended, and RICHARD T. PEERY, Trustee, or his Successor Trustee UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended, collectively as LANDLORD, and TRANSMETA CORPORATION, a California corporation, as TENANT. RECITALS A. WHEREAS, by Lease Agreement dated November 1, 1995 Landlord leased to Tenant all of that certain 22,500+ square foot building located at 3940 Freedom Circle, Santa Clara, California, the details of which are more particularly set forth in said November 1, 1995 Lease Agreement, and B. WHEREAS, said Lease was amended by Commencement Letter dated December 13, 1995 which confirmed the December 1, 1995 Lease Commencement Date and the November 30, 2002 Lease Termination Date, and C. WHEREAS, said Lease was amended by Amendment No. 1 dated January 29, 1997 which added paragraphs ("Cross Default"), ("Lease Terms Co-Terminous"), ("Choice of Law: Severability") and ("Authority to Execute"), and D. WHEREAS, it is now the desire of the parties hereto to amend the Lease by (i) extending the Term for five years and seven months, changing the Termination Date from November 30, 2002 to June 30, 2008, (ii) amending the Basic Rent schedule and Aggregate Rent accordingly, (iii) increasing the Security Deposit required under the Lease, (iv) amending the Management Fee charged to Tenant, (vii) amending Lease Paragraph 19 ("Assignment and Subletting"), and (viii) replacing: Lease Paragraph 39 ("Limitation of Liability"); Paragraph 1 to Amendment No. 1 ("Lease Terms Co-terminous"); and Paragraph 2 to Amendment No. 1 ("Cross Default") as hereinafter set forth. AGREEMENT NOW THEREFORE, for valuable consideration, receipt of which is hereby acknowledged, and in consideration of the hereinafter mutual promises, the parties hereto do agree as follows: 1. TERM OF LEASE: It is agreed between the parties that the Term of said Lease Agreement shall be extended for an additional five (5) year seven (7) month period, and the Lease Termination Date shall be changed from November 30, 2002 to June 30, 2008. 2. BASIC RENTAL FOR EXTENDED TERM OF LEASE: The monthly Basic Rental for the Extended Term of Lease shall be as follows: 29 30 On December 1, 2002, the sum of FIFTY NINE THOUSAND SIX HUNDRED TWENTY FIVE AND NO/100 DOLLARS ($59,625.00) shall be due, and a like sum due on the first day of each month thereafter through and including June 1, 2003. On July 1, 2003, the sum of SIXTY ONE THOUSAND EIGHT HUNDRED SEVENTY FIVE AND NO/100 DOLLARS ($61,875.00) shall be due, and a like sum due on the first day of each month thereafter through and including June 1, 2004. On July 1, 2004, the sum of SIXTY FOUR THOUSAND ONE HUNDRED TWENTY FIVE AND NO/100 DOLLARS ($64,125.00) shall be due, and a like sum due on the first day of each month thereafter through and including June 1, 2005. On July 1, 2005, the sum of SIXTY SIX THOUSAND THREE HUNDRED SEVENTY FIVE AND NO/100 DOLLARS ($66,375.00) shall be due, and a like sum due on the first day of each month thereafter through and including June 1, 2006. On July 1, 2006, the sum of SIXTY EIGHT THOUSAND SIX HUNDRED TWENTY FIVE AND NO/100 DOLLARS ($68,625.00) shall be due, and a like sum due on the first day of each month thereafter through and including June 1, 2007. On July 1, 2007, the sum of SEVENTY THOUSAND EIGHT HUNDRED SEVENTY FIVE AND NO/100 DOLLARS ($70,875.00) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2008. The Aggregate Basic Rent for the Lease shall be increased by $4,399,875.00 or from $2,709,705.15 to $7,109,580.15. 3. SECURITY DEPOSIT: Tenant's Security Deposit shall be increased by $67,500.00, or from $74,250.00 to $141,750.00, payable upon Tenant's execution of this Amendment No. 1. 4. MANAGEMENT FEE: Beginning December 1, 2002, Tenant shall pay to Landlord, in addition to the Basic Rent and Additional Rent, a fixed monthly management fee ("Management Fee") equal to two percent (2%) of the Basic Rent due for each month throughout the remaining Lease Term. Tenant shall remain liable for the five percent (5%) management fee previously charged against Additional Rent through November 30, 2002. 5. ASSIGNMENT AND SUBLETTING: Lease Paragraph 19 ("Assignment and Subletting") shall be amended to include the following language: "Any and all sublease agreement(s) between Tenant and any and all subtenant(s) (which agreements must be consented to by Landlord, pursuant to the requirements of this Lease) shall contain the following language: "If Landlord and Tenant jointly and voluntarily elect, for any reason whatsoever, to terminate the Master Lease prior to the scheduled Master Lease termination date, then this Sublease (if then still in effect) shall terminate concurrently with the termination of the Master Lease. Subtenant expressly acknowledges and 30 31 agrees that (1) the voluntary termination of the Master Lease by Landlord and Tenant and the resulting termination of this Sublease shall not give Subtenant any right or power to make any legal or equitable claim against Landlord, including without limitation any claim for interference with contract or interference with prospective economic advantage, and (2) Subtenant hereby waives any and all rights it may have under law or at equity against Landlord to challenge such an early termination of the Sublease, and unconditionally releases and relieves Landlord, and its officers, directors, employees and agents, from any and all claims, demands, and/or causes of action whatsoever (collectively, "Claims"), whether such matters are known or unknown, latent or apparent, suspected or unsuspected, foreseeable or unforeseeable, which Subtenant may have arising out of or in connection with any such early termination of this Sublease. Subtenant knowingly and intentionally waives any and all protection which is or may be given by Section 1542 of the California Civil Code which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with debtor. The term of this Sublease is therefore subject to early termination. Subtenant's initials here below evidence (a) Subtenant's consideration of and agreement to this early termination provision, (b) Subtenant's acknowledgment that, in determining the net benefits to be derived by Subtenant under the terms of this Sublease, Subtenant has anticipated the potential for early termination, and (c) Subtenant's agreement to the general waiver and release of Claims above. Initials: __________ Initials: __________" Subtenant Tenant In no event will Landlord consent to a sub-sublease." 6. LIMITATION OF LIABILITY: Lease Paragraph 39 ("Limitation of Liability") shall be deleted and replaced in its entirety by the following: "LIMITATION OF LIABILITY: In consideration of the benefits accruing hereunder, Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord: (i) the sole and exclusive remedy shall be against Landlord's interest in the Premises leased herein; (ii) no partner of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction of the partnership); (iii) no service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership); (iv) no partner of Landlord shall be required to answer or otherwise plead to any service of process; (v) no judgment will be taken against any partner of Landlord; (vi) any judgment taken against any partner of Landlord may be vacated and set aside at any time without hearing; 31 32 (vii) no writ of execution will ever be levied against the assets of any partner of Landlord; (viii) these covenants and agreements are enforceable both by Landlord and also by any partner of Landlord. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by statute or at common law." 7. LEASE TERMS CO-TERMINOUS: Paragraph 1 to Amendment No. 1 ("Lease Terms Co-terminous") is hereby deleted in its entirety and replaced with the following: "LEASE TERMS CO-TERMINOUS: It is hereby acknowledged that (i) Landlord and Tenant have previously executed a separate lease agreement, dated January 29, 1997, for premises located at 2540 Mission College Blvd., Santa Clara, California (hereinafter referred to as the "Marriott B Lease"), (ii) concurrently with the execution of this Amendment, Landlord and Tenant shall execute two separate lease agreements, dated April 2, 1998, for premises located at 2560 Mission College Blvd., Santa Clara California (the "Marriott C Lease") and for premises located at 3990 Freedom Circle, Santa Clara, California (the "Marriott D Lease") and (iii) it is the intention of the parties that the Term of this Lease be co-terminous with the terms of the Marriott B Lease, the Marriott C Lease and the Marriott D Lease (collectively the "Marriott B, C, and D Leases") such that the terms of all leases expire on the same date; provided, however, the termination of this Lease resulting from the terms and conditions stated under Paragraph 22 ("Bankruptcy and Default") (subject to Landlord's option as stated below and in the Marriott B, C and D Leases' "Cross Default Paragraph) or Paragraph 24 ("Destruction") or Paragraph 25 ("Eminent Domain") shall not result in a termination of the Marriott B, C or D Leases, unless Landlord elects, at its sole and absolute discretion, to terminate any or all of the Marriott B, C or D Leases." 8. CROSS DEFAULT: Paragraph 2 to Amendment No. 1 ("Cross Default") is hereby deleted in its entirety and replaced with the following: "CROSS DEFAULT: As a material part of the consideration for the execution of this Lease by Landlord, it is agreed between Landlord and Tenant that a default under this Lease, or a default under said Marriott B, C and/or D Lease may, at the option of Landlord, be considered a default under all four leases, in which event Landlord shall be entitled (but in no event required) to apply all rights and remedies of Landlord under the terms of one lease to all four leases including, but not limited to, the right to terminate one or all of said leases by reason of a default under said Marriott B, C and/or D Lease or hereunder." EXCEPT AS MODIFIED HEREIN, all other terms, covenants, and conditions of said January 29, 1997 Lease Agreement shall remain in full force and effect. 32 33 IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment No. 1 to Lease as of the day and year last written below. LANDLORD: TENANT: JOHN ARRILLAGA SURVIVOR'S TRUST TRANSMETA CORPORATION a California corporation By /s/ JOHN ARRILLAGA By /s/ COLIN HUNTER -------------------------------- --------------------------------- John Arrillaga, Trustee Date: 6/8/98 Colin Hunter ----------------------------- ------------------------------------ Print or Type Name RICHARD T. PEERY SEPARATE Title: CFO PROPERTY TRUST ----------------------------- By /s/ RICHARD T. PEERY Date: June 5, 1998 -------------------------------- ------------------------------ Richard T. Peery, Trustee Date: 6/8/98 ----------------------------- 33 EX-10.09 13 ex10-09.txt EXHIBIT 10.09 1 EXHIBIT 10.09 LEASE AGREEMENT BLDG: Marriott 2 OWNER: 500 PROP: 102 UNIT: 101 TENANT: 10203 THIS LEASE, made this 29th day of January, 1997 between JOHN ARRILLAGA, Trustee, or his Successor Trustee, UTA dated 7/20/77 (ARRILLAGA FAMILY TRUST) as amended, and RICHARD T. PEERY, Trustee, or his Successor Trustee, UTA dated 7/20/77 (RICHARD T PEERY SEPARATE PROPERTY TRUST) as amended, hereinafter called Landlord, and TRANSMETA CORPORATION, a California corporation, hereinafter called Tenant. WITNESSETH: Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord those certain premises (the "Premises") outlined in red on Exhibit "A", attached hereto and incorporated herein by this reference thereto more particularly described us follows: All of that certain 22,500+/- square foot, one-story building located at 2540 Mission College Blvd., Santa Clara, California 95054. Said Premises is more particularly shown within the area outlined in Red on Exhibit A attached hereto. The entire parcel, of which the Premises is a part, is shown within the area outlined in Green on Exhibit A attached. The Premises is leased on an "as-is" basis, in its present condition, and in the configuration as shown in Red on Exhibit B attached hereto. As used herein the Complex shall mean and include all of the land outlined in Green and described in Exhibit "A", attached hereto, and all of the buildings, improvements, fixtures and equipment now or hereafter situated on said land. Said letting and hiring is upon and subject to the terms, covenants and conditions hereinafter set forth and Tenant covenants as a material part of the consideration for this Lease to perform and observe each and all of said terms, covenants and conditions. This Lease is made upon the conditions of such performance and observance. 1. USE Tenant shall use the Premises only in conformance with applicable governmental laws, regulations, roles and ordinances for the purpose of general office, light manufacturing, research and development, and storage and other uses necessary for Tenant to conduct Tenant s business, provided that such uses shall be in accordance with all applicable governmental laws and ordinances, and for no other purpose. Tenant shall not do or permit to be done in or about the Premises or the Complex nor bring or keep or permit to be brought or kept in or about the Premises or the Complex anything which is prohibited by or will in any way increase the existing rate of (or otherwise affect) fire or any insurance covering the Complex or any part thereof, or any of its contents, or will cause a cancellation of any insurance covering the Complex or any part thereof, or any of its contents. Tenant shall not knowingly do or permit to be done anything 2 in, on or about the Premises or the Complex which will in any way obstruct or interfere with the rights of other tenants or occupants of the Complex or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant knowingly cause, maintain or permit any nuisance in, on or about the Premises or the Complex and agrees to take corrective action upon becoming aware of such a problem in this area should one exist. No sale by auction shall be permitted on the Premises. Tenant shall not place any loads upon the floors, walls, or ceiling, which endanger the structure, or place any harmful fluids or other materials in the drainage system of the building, or overload existing electrical or other mechanical systems. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises or outside of the building in which the Premises are a part, except in trash containers placed inside exterior enclosures designated by Landlord for that purpose or inside of the building proper where designated by Landlord. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain outside the Premises or on any portion of common area of the Complex. No loudspeaker or other device, system or apparatus which can be heard outside the Premises shall be used in or at the Premises without the prior written consent of Landlord. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. Tenant shall indemnify, defend and hold Landlord harmless against any loss, expense, damage, attorneys' fees, or liability arising out of failure of Tenant to comply with any applicable law. Tenant shall comply with any covenant, condition, or restriction ("CC&R's") affecting the Premises. The provisions of this paragraph are for the benefit of Landlord only and shall not be construed to be for the benefit of any tenant or occupant of the Complex. 2. TERM A. The term of this Lease shall be far a period of five (5) years nine (9) months (unless sooner terminated as hereinafter provided) and, subject to Paragraphs 2(B) and 3, shall commence on the 1st day of March, 1997 and end on the 30th day November of 2002. B. Subject to Paragraph 54, possession of the Premises shall be deemed tendered and the term of this Lease shall commence on March 1, 1997 or as otherwise agreed in writing. 3. POSSESSION If Landlord, for any reason whatsoever, cannot deliver possession of said premises to Tenant at the commencement of the said term, as hereinbefore specified, this Lease shall not be void or voidable; no obligation of Tenant shall be affected thereby; nor shall Landlord or Landlord's agents be liable to Tenant for any loss or damage resulting therefrom; but in that event the commencement and termination dates of the Lease, and all other dates affected thereby shall be revised to conform to the date of Landlord's delivery of possession, as specified in Paragraph 2(b), above. The above is, however, subject to the provision that the period of delay, of delivery of the premises shall not exceed 60 days from the commencement date herein (except those delays caused by Acts of God, strikes, war, utilities, governmental bodies, weather, unavailable materials, and delays beyond Landlord's control shall be excluded in calculating such period) in which instance Tenant, at its option, may, by written notice to Landlord, terminate this lease. * It is agreed in the event said Lease commences on a date other than the first day of the month the term of the Lease will be extended to account for the number of days in the partial month. 2 3 The Basic Rent during the resulting partial month will be pro-rated (for the number of days in the partial month) at the Basic Rent scheduled for the projected commencement date as shown in Paragraph 43. 4. RENT A. Basic Rent. Tenant agrees to pay to Landlord at such place as Landlord may designate without deduction, offset, prior notice, or demand, and Landlord agrees to accept as Basic Rent for the leased Premises the total sum of THREE MILLION TWO HUNDRED NINETY THOUSAND SIX HUNDRED TWENTY FIVE AND NO/100 ($3,290,625.00) Dollars in lawful money of the United States of America, payable as follows: See Paragraph 43 for Basic Rent Schedule E. Fixed Management Fee. Beginning with the, Commencement Date of the Term of this Lease, Tenant shall pay to Landlord, in addition to the Basic Rent and Additional Rent, a fixed monthly management fee equal to 2% of the Basic Rent due for each month during the Lease Term ("Management Fee"). B. Time for Payment. In the event that the term of this Lease commences on a date other than the first day of a calendar month, on the date of commencement of the term hereof Tenant shall pay to Landlord as rent for the period from such date of commencement to the first day of the next succeeding calendar month that proportion of the monthly rent hereunder which the number of days between such date of commencement and the first day of the next succeeding calendar month bears to thirty (30). In the event that the term of this Lease for any reason ends on a date other than the last day of a calendar month, on the first day of the last calendar month of the term hereof Tenant shall pay to Landlord as rent for the period from said first day of said last calendar month to and including the last day of the term hereof that proportion of the monthly rent hereunder which the number of days between said first day of said last calendar month and the last day of the term hereof bears to thirty (30). C. Late Charge. Notwithstanding any other provision of this Lease, if Tenant is in default in the payment of rental as set forth in this Paragraph 4 when due, or any part hereof, Tenant agrees to pay Landlord, in addition to the delinquent rental due, a late charge for each rental payment in default ten (10) days. Said late charge shall equal ten (10%) percent of each rental payment so in default. D. Additional Rent. Beginning with the commencement date of the term of this Lease, Tenant shall pay to Landlord in addition to the Basic Rent and as Additional Rent the following: (a) Tenant's proportionate share of all Taxes relating to the Complex as set forth in Paragraph 12, and (b) Tenant's proportionate share of all insurance premiums relating to the Complex, as set forth in Paragraph 15, and 3 4 (c) Tenant's proportionate share of expenses for the operation, management, maintenance and repair of the Building (including common areas of the Building) and Common Areas of the Complex in which the Premises are located as set forth in Paragraph 7, and (d) All charges, costs and expenses, which Tenant is required to pay hereunder, together with all interest and penalties, costs and expenses including attorneys' fees and legal expenses, that may accrue thereto in the event of Tenant's failure to pay such amounts, and all damages, reasonable costs and expenses which Landlord may incur by reason of default of Tenant or failure on Tenant's part to comply with the terms of this Lease. In the event of nonpayment by Tenant of Additional Rent Landlord shall have all the rights and remedies with respect thereto as Landlord has for nonpayment of rent. The Additional Rent due hereunder shall be paid to Landlord or Landlord's agent (i) within five days for taxes and insurance and within thirty days for all other Additional Rent items after presentation of invoice from Landlord or Landlord's agent setting the forth such Additional Rent and/or (ii) at the option of Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's prorata share of an amount estimated by Landlord to be Landlord's approximate average monthly expenditure for such Additional Rent Items, which estimated amount shall be reconciled within 120 days of the end of each calendar year or more frequently if Landlord so elects to do so at Landlord's sole and absolute discretion, as compared to Landlord's actual expenditure for said Additional Rent items, with Tenant paying to Landlord, upon demand, any amount of actual expenses expended Landlord in excess of said estimated amount, or Landlord refunding to Tenant (providing Tenant is not in default in the performance of any of the terms, covenants and conditions of this Lease) any amount of estimated payments made by Tenant in excess of Landlord's actual expenditures for said Additional Rent items. The respective obligations of Landlord and Tenant under this paragraph shall survive the expiration or other termination of the term of this Lease, and if the term hereof shall expire or shall otherwise terminate on a day other than the last day of a calendar year, the actual Additional Rent incurred for the calendar year in which the term hereof expires or otherwise terminates shall be determined and settled on the basis of the statement of actual Additional Rent for such calendar year and shall be prorated in the proportion which the number of days in such calendar year preceding such expiration or termination bears to 365. F. Place of Payment of Rent and Additional Rent. All Basic Rent hereunder and all payments hereunder for Additional Rent shall be paid to Landlord at the office of Landlord at Peery/Arrillaga, File 1504, Box 60000, San Francisco, CA 94160 to such other person or to such other place as Landlord may from time to time designate in writing. G. Security Deposit. Concurrently with Tenant's execution of this Lease, Tenant shall deposit with Landlord the sum of ONE HUNDRED ONE THOUSAND TWO HUNDRED FIFTY AND NO/100 ($101,250.00) Dollars. Said sum shall be held by Landlord as a Security Deposit for the faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Lease, including, but not limited to, the provisions relating to the payment of rent and any of the monetary sums due herewith, Landlord may (but shall not be required to) use, apply or retain all or any part of this Security Deposit for the payment of any other amount which Landlord may spend by reason of Tenant's default or to compensate 4 5 Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said Deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in the amount sufficient to restore the Security Deposit to its original amount. Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on such Deposit. If Tenant fully and faithfully performs every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall be returned to Tenant (or at Landlord's option, to the last assignee of Tenant's interest hereunder) at the expiration of the Lease term and after Tenant has vacated the Premises. In the event of termination of Landlord's Interest in this Lease, Landlord shall transfer said Deposit to Landlord's successor in interest whereupon Tenant agrees to release Landlord from liability for the return of such Deposit or the accounting therefor. 5. RULES AND REGULATIONS AND COMMON AREA. Subject to the terms and conditions of this Lease and such Rules and Regulations as Landlord may from time to time prescribe, Tenant and Tenant's employees, invitees and customers shall, in common with other occupants of the Complex in which the Premises are located, and their respective employees, invitees, and customers, and others entitled to the use thereof, have the non-exclusive right to use the access roads, parking areas, and facilities provided and designated by Landlord for the general use and convenience of the occupants of the Complex in which the Premises are located, which areas and facilities are referred to herein as "Common Area". This right shall terminate upon the termination of this Lease. Landlord reserves the right from time to time to make changes in the shape, size, location, amount and extent of Common Area. Landlord further reserves the right to promulgate such reasonable rules and regulations relating to the use of the Common Area, and any part or parts thereof, as Landlord may deem appropriate for the best interests of the occupants of the Complex. The Rules and Regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall abide by them and cooperate in their observance. Such Rules and Regulations may be amended by Landlord from time to time, with or without advance notice, and all amendments shall be effective upon delivery of a copy to Tenant. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Complex of any of said Rules and Regulations. Landlord shall operate, manage and maintain the Common Area. The manner in which the Common Area shall be maintained and the expenditures for such maintenance shall be at the discretion of Landlord. 6. PARKING. Tenant shall have the right to use with other tenants or occupants of the Complex 67 parking spaces in the common parking areas of the Complex. Tenant agrees, that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use parking spaces in excess of said 67 spaces allocated to Tenant hereunder. Landlord shall have the right, at Landlord's sole discretion, to specifically designate the location of Tenant's parking spaces within the common parking areas of the Complex in the event of a dispute among the tenants occupying the building and/or Complex referred to herein, in which event Tenant agrees that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use any parking spaces other than those parking spaces specifically designated by Landlord for Tenant's use. Said parking spaces, if specifically designated by Landlord to Tenant, may be relocated by Landlord at any time, and from time to time. Landlord reserves the right, at Landlord's sole 5 6 discretion, to rescind any specific designation of parking spaces, thereby returning Tenant's parking spaces to the common parking area. Landlord shall give Tenant written notice of any change in Tenant's parking spaces. Tenant shall not, at any time, park, or permit to be parked, any trucks or vehicles adjacent to the loading areas so as to interfere in any way with the use of such areas, nor shall Tenant at any time park, or permit the parking of Tenant's trucks or other vehicles or the trucks and vehicles of Tenant's suppliers or others, in any portion of the common area not designated by Landlord for such use by Tenant. Tenant shall not park nor permit to be parked, any inoperative vehicles or equipment on any portion of the common parking area or other common areas of the Complex. Tenant agrees to assume responsibility for compliance by its employees with the parking provision contained herein. If Tenant or its employees park in other than such designated parking areas, then Landlord may charge Tenant, as an additional charge, and Tenant agrees to pay, ten ($10.00) Dollars per day for each day or partial day each such vehicle is parked in any area other than that designated. Tenant hereby authorizes Landlord at Tenant's sole expense to tow away from the Complex any vehicle belonging to Tenant or Tenant's employees parked in violation of these provisions, or to attached violation stickers or notices to such vehicles. Tenant shall use the parking areas for vehicle parking only, and shall not use the parking areas for storage. 7. EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF THE COMPLEX. As Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of all expenses of operation, management, maintenance and repair of the Common Areas of the Complex including, but not limited to, license, permit, and inspection fees; security; utility charges associated with exterior landscaping and lighting (including water and sewer charges); all charges incurred in the maintenance and replacement of landscaped areas, lakes, parking lots, sidewalks, driveways; maintenance, repair and replacement of all fixtures and electrical, mechanical, and plumbing systems; structural elements and exterior surfaces of the buildings; salaries and employee benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord may amortize its investment in said improvements (together with interest at the rate of fifteen (15%) percent per annum on the unamortized balance) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses. "Additional Rent" as used herein shall not include Landlord's debt repayments; interest on charges; expenses directly or indirectly incurred by Landlord for the benefit of any other tenant; cost for the installation of partitioning or any other tenant improvements; cost of attracting tenants; depreciation; interest, or executive salaries 8. ACCEPTANCE AND SURRENDER OF PREMISES. Subject to Paragraphs 48 and 49, and by entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the building and improvements included in the Premises in their present condition and without representation or warranty by Landlord as to the condition of such building or as to the use or occupancy which may be made thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. Tenant agrees on the 6 7 last day of the Lease term, or on the sooner termination of this Lease, to surrender the Premises promptly and peaceably to Landlord in good condition and repair (damage by Acts of God, fire, normal wear and tear excepted), with all interior walls painted, or cleaned so that they appear freshly painted, and repaired and replaced, if damaged; all floors cleaned and waxed; all carpets cleaned and shampooed; the airconditioning and heating equipment serviced by a reputable and licensed service firm and in good operating condition (provided the maintenance of such equipment has been Tenant's responsibility during the term of this Lease) together with all alterations, additions, and improvements which may have been made in, to, or on the Premises (except movable trade fixtures installed at the expense of Tenant) except that Tenant shall ascertain from Landlord within thirty (30) days before the end of the term of this Lease whether Landlord desires to have the Premises or any part or parts thereof restored to their condition and configuration as when the Premises were delivered to Tenant and if Landlord shall so desire, then Tenant shall restore said Premises or such part or parts thereof before the end of this Lease at Tenant's sole cost and expense. Tenant, on or before the end of the term or sooner termination of this Lease, shall remove all of Tenant's personal property and trade fixtures from the Premises, and all property not so removed on or before the end of the term or sooner termination of this Lease shall be deemed abandoned by Tenant and title to same shall thereupon pass to Landlord without compensation to Tenant. Landlord may, upon termination of this Lease, remove all moveable furniture and equipment so abandoned by Tenant, at Tenant's sole cost, and repair any damage caused by such removal at Tenant's sole cost. If the Premises be not surrendered at the end of the term or sooner termination of this Lease, Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. Nothing contained herein shall be construed as an extension of the term hereof or as a consent of Landlord to any holding over by Tenant. The voluntary or other surrender of this Lease or the Premises by Tenant or mutual cancellation of this Lease shall not work as a merger and, at the option of Landlord, shall either terminate all or any existing subleases or subtenancies or operate as an assignment to Landlord of all or any such subleases or subtenancies. 9. ALTERATIONS AND ADDITIONS. Tenant shall not make, or suffer to be made, any alteration or addition to the Premises, or any part thereof, without the written consent of Landlord first had and obtained by Tenant, but at the cost of Tenant, and any addition to, or alteration of, the Premises, except moveable furniture and trade fixtures, shall at once become a part of the Premises and belong to Landlord. Landlord reserves the right to approve all contractors and mechanics proposed by Tenant to make such alterations and additions. Tenant shall retain title to all moveable furniture and trade fixtures placed in the Premises. All heating, lighting, electrical, airconditioning, floor to ceiling partitioning, drapery, carpeting, and floor installations made by Tenant, together with all property that has become an integral part of the Premises, shall not be deemed trade fixtures. Tenant agrees that it will not proceed to make such alteration or additions, without having obtained consent from Landlord to do so, and until five (5) days from the receipt of such consent, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. Tenant shall, if required by Landlord, secure at Tenant's own cost and expense, a completion and lien indemnity bond, satisfactory to Landlord, for such work. Tenant further covenants and agrees that any mechanic's lien filed against the Premises or against the Complex for work claimed to have been done for, or materials claimed to have been furnished to 7 8 Tenant, will be discharged by Tenant, by bond or otherwise, within ten (10) days after the filing thereof, at the cost and expense of Tenant. Any exceptions to the foregoing must be made in writing and executed by both Landlord and Tenant. 10. TENANT MAINTENANCE. Tenant shall, at its sole cost and expense, keep and maintain the Premises (including appurtenances) and every part thereof in a high standard of maintenance and repair, and in good and sanitary condition. Tenant's maintenance and repair responsibilities herein referred to include, but are not limited to, all windows, window frames, plate glass, glazing, truck doors, plumbing systems (such as water and drain lines, sinks, toilets, faucets, drains, showers and water fountains), electrical systems (such as panels, conduits, outlets, lighting fixtures, lamps, bulbs, tubes, ballasts), heating and air-conditioning systems (such as compressors, fans, air handlers, ducts, mixing boxes, thermostats, time clocks, boilers, heaters, supply and return grills), store fronts, roof, membrane, downspouts, all interior improvements within the premises including but not limited to wall coverings, window coverings, carpet, floor coverings, partitioning, ceilings, doors (both interior and exterior, including closing mechanisms, latches, locks, skylights (if any), automatic fire extinguishing systems, and elevators and all other interior improvements of any nature whatsoever. Tenant agrees to provide carpet shields under all rolling chairs or to otherwise be responsible for wear and tear of the carpet caused by such rolling chairs if such wear and tear exceeds that caused by normal foot traffic in surrounding areas. Areas of excessive wear shall be replaced at Tenant's sole expense upon Lease termination. Tenant hereby waives all rights under, and benefits of, subsection 1 of Section 1932 and Section 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect. See Paragraph 53 11. UTILITIES. Tenant shall pay promptly, as the same become due, all charges for water, gas, electricity, telephone, telex and other electronic communications service, sewer service, waste pick-up and any other utilities, materials or services furnished directly to or used by Tenant on or about the Premises during the term of this Lease, including, without limitation, any temporary or permanent utility surcharge or other exactions whether or not hereinafter imposed. Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of rent by reason of any interruption or failure of utility services to the Premises when such interruption or failure is caused by accident, breakage, repair, strikes, lockouts, or other labor disturbances or labor disputes of any nature, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. 12. TAXES A. As Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share of all Real Property Taxes, which prorata share shall be allocated to the leased Premises by square footage or other equitable basis, as calculated by Landlord. The term "Real Property Taxes", as used herein, shall mean (i) all taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting, from reassessment caused by any change in ownership of the Complex) now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessment, which are levied or assessed against, or with respect to the value, occupancy or use of, all or any portion of the Complex (as now constructed or as may at any time hereafter be constructed, altered, or otherwise changed) or Landlord's 8 9 interest therein: any improvements located within the Complex (regardless of ownership); the fixtures, equipment and other property of Landlord, real or personal, that are an integral part of and located in the Complex; or parking areas, public utilities, or energy within the Complex; (ii) all charges, levies or fees imposed by reason of environmental regulation or other governmental control of the Complex; and (iii) all costs and fees (including attorneys' fees) incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If at any time during the term of this Lease the taxation or assessment of the Complex prevailing as of the commencement date of this Lease shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate or additional tax or charge (i) on the value, use or occupancy of the Complex or Landlord's interest therein or (ii) on or measured by the gross receipts, income or rentals from the Complex, on Landlord's business of leasing the Complex, or computed in any manner with respect to the operation of the Complex, then any such tax or charge, however designated, shall be included within the meaning of the term "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is based upon property or rents unrelated to the Complex, then only that part of such Real Property Tax that is fairly allocable to the Complex shall be included within the meaning of the term "Real Property Taxes". Notwithstanding the foregoing, the term "Real Property Taxes" shall not include estate, inheritance, gift or franchise taxes of Landlord or the federal or state net income imposed on Landlord's income from all sources. B. Taxes on Tenant's Property (a) Tenant shall be liable for and shall pay ten days before delinquency, taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises. If any such taxes on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant and if Landlord, after written notice to Tenant, pays the taxes based on such increased assessment, which Landlord shall have the right to do regardless of the validity thereof, but only under proper protest if requested by Tenant, Tenant shall upon demand, as the case may be, repay to Landlord the taxes so levied against Landlord, or the proportion of such taxes resulting from such increase in the assessment; provided that in any such event Tenant shall have the right, in the name of Landlord and with Landlord's full cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes so paid under protest, and any amount so recovered shall belong to Tenant. (b) If the Tenant improvements in the Premises, whether installed, and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which standard office improvements in other space in the Complex are assessed, then the real property taxes and assessments levied against Landlord or the Complex by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of 12Ba, above. If the records of the County Assessor are available and sufficiently detailed to serve as a basis for determining whether said Tenant improvements are assessed at a higher valuation than standard office improvements in other space in the 9 10 Complex, such records shall be binding on both the Landlord and the Tenant. If the records of the County Assessor are not available or sufficiently detailed to serve as a basis for making said determination, the actual cost of construction shall be used. 13. LIABILITY INSURANCE. Tenant at Tenant's expense, agrees to keep in force during the term of this Lease a policy of commercial general liability insurance with a combined single limit coverage of not less than Two Million Dollars ($2,000,000) per occurrence for injuries to or death of persons occurring in, on or about the Premises or the Complex, and property damage insurance with limits of $500,000. The policy or policies affecting such insurance, certificates of insurance of which shall be furnished to Landlord, shall name Landlord as additional insureds, and shall insure any liability of Landlord, contingent or otherwise, as respects acts or omissions of Tenant, its agents, employees or invitees or otherwise by any conduct or transactions of any of said persons in or about or concerning the Premises, including any failure of Tenant to observe or perform any of its obligations hereunder; shall be issued by an insurance company admitted to transact business in the State of California; and shall provide that the insurance effected thereby shall not be canceled, except upon thirty (30) days' prior written notice to Landlord. If, during the term of this Lease, in the considered opinion of Landlord's Lender. insurance advisor, or counsel, the amount of insurance described in this paragraph 13 is not adequate, Tenant agrees to increase said coverage to such reasonable amount as Landlord's Lender, insurance advisor, or counsel shall deem adequate. 14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE. Tenant shall maintain a policy or policies of fire and damage insurance in "all risk" form with a sprinkler leakage endorsement insuring the personal property, inventory, trade fixtures, and leasehold improvements within the leased Premises for the full replacement value thereof. The proceeds from any of such policies shall be used for the repairer replacement of such items so insured. Tenant shall also maintain a policy or policies of workman's compensation insurance and any other employee benefit insurance sufficient to comply with all laws. 15. PROPERTY INSURANCE. Landlord shall purchase and keep in force and as Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay Landlord (or Landlord's agent if so directed by Landlord) Tenant's proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of the deductibles on insurance claims and the cost of policy or policies of insurance covering loss or damage to the Premises and Complex in the amount of the full replacement value thereof, providing protection against those perils included within the classification of "all risks" insurance and flood and/or earthquake insurance, if available, plus a policy of rental income insurance in the amount of one hundred (100%) percent of twelve (12) months Basic Rent, plus sums paid as Additional Rent and any deductibles related thereto. If such insurance cost is increased due to Tenant's use of the Premises or the Complex, Tenant agrees to pay to Landlord the full cost of such increase. Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord for the Complex. Landlord and Tenant do each hereby respectively release the other, to the extent of insurance coverage of the releasing party, from any liability for loss or damage caused by fire or any of the extended coverage casualties included in the releasing party's insurance policies, irrespective of the cause of such fire or casualty; provided, however, that if the insurance policy 10 11 of either releasing party prohibits such waiver, then this waiver shall rim take effect until consent to such waiver is obtained. If such waiver is so prohibited, the insured party affected shall promptly notify the other party thereof. 16. INDEMNIFICATION. Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or death of any person or damage to or destruction of property in or about the Premises or the Complex by or from any cause whatsoever, including, without limitation, gas, fire, oil, electricity or leakage of any character from the roof, walls, basement or other portion of the Premises or the Complex but excluding, however, the willful misconduct or negligence of Landlord, its agents, servants, employees, invitees, or contractors of which negligence Landlord has knowledge and reasonable time to correct. Except as to injury to persons or damage to property the negligence of Landlord, its agents, servants, employees, invitees or contractors to the extent arising from the willful misconduct or Tenant shall hold Landlord harmless from and defend Landlord against any and all expenses, including reasonable attorneys' fees, in connection therewith, arising out of any injury to or death of any person or damage to or destruction of property occurring in, on or about the Premises, or any part thereof, from any cause whatsoever. 17. COMPLIANCE Tenant, at its sole cost and expense, shall promptly comply with all laws, statutes, ordinances and governmental roles, regulations or requirements now or hereafter in effect; with the requirements of any board of fire underwriters or other similar body now or hereafter constituted; and with any direction or occupancy certificate issued pursuant to law by any public officer; provided, however, that no such failure shall be deemed a breach of the provision if Tenant, immediately upon notification, commences to remedy or rectify said failure. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such law, statute, ordinance or governmental rule, regulation, requirement, direction or provision, shall be conclusive of that fact as between landlord and Tenant. This paragraph shall not be interpreted as requiring tenant to make structural changes or improvements, except to the extent such changes or improvement are required as a result of Tenant's use of the Premises. Tenant shall, at its sole cost and expense, comply with any and all requirements pertaining to said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance covering the Premises. 18. LIENS. Tenant shall keep the Premises and the Complex free from any liens arising out of any work perfumed, materials furnished or obligation incurred by Tenant. In the event that Tenant shall not within twenty (20) days following the imposition or such lien, cause the same to be released of record. Landlord shall have, in addition to all other remedies provided herein and by law, the right, but no obligation, to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord for such purpose, and all expenses incurred by it in connection therewith, shall be payable to Landlord by Tenant on demand with interest at the prime rate of interest as quoted by the Bank of America. 19. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, transfer, or hypothecate the leasehold estate under this Lease, or any interest herein, and shall not sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person or entity 11 12 to occupy or use the Premises, or any portion thereof, without, in each case, the prior written consent of Landlord which consent will not be unreasonably withheld. As a condition for granting this consent to any assignment, transfer, or subletting, Landlord shall require Tenant to pay to Landlord, as additional rent, fifty percent (50%) of all rents and additional consideration due Tenant from its assignees, transferees, or subtenants in excess of the Basic Rent payable by Tenant to Landlord hereunder. Tenant shall, by thirty (30) days written notice, advise Landlord of its intent to assign or transfer Tenant's interest in the Lease or sublet the Premises or any portion thereof for any part of the term hereof. Within thirty (30) days after receipt of said written notice, Landlord may, in its sole discretion, elect to terminate this Lease as to the portion of the Premises described in Tenant's notice on the date specified in Tenant's notice by giving written notice of such election to terminate. If no such notice to terminate is given to Tenant within said thirty (30) day period, Tenant may proceed to locate an acceptable sublessee, assignee, or other transferee for presentment to Landlord for Landlord's approval, all in accordance with the terms, covenants, and conditions of this paragraph 19. If Tenant intends to sublet the entire Premises and Landlord elects to terminate this Lease, this Lease shall be terminated on the date specified in Tenant's notice. If, however, this Lease shall terminate pursuant to the foregoing with respect to less than all the Premises, the rent, as defined and reserved hereinabove shall be adjusted on a pro rata basis to the number of square feet retained by Tenant, and this Lease as so amended shall continue in full force and effect. In the event Tenant is allowed to assign, transfer or sublet the whole or any part of the Premises, with the prior written consent of Landlord, no assignee, transferee or subtenant shall assign or transfer this Lease, either in whole or in part, or sublet the whole or any part of the Premises, without also having obtained the prior written consent of Landlord. A consent of Landlord to one assignment, transfer, hypothecation, subletting, occupation or use by any other person shall not release Tenant from any of Tenant's obligations hereunder or be deemed to be a consent to any subsequent similar or dissimilar assignment, transfer, hypothecation, subletting, occupation or use by any other person. Any such assignment, transfer, hypothecation, subletting, occupation or use without such consent shall be void and shall constitute a breach of this Lease by Tenant and shall, at the option of Landlord exercised by written notice to Tenant, terminate this Lease. The leasehold estate under this Lease shall not, nor shall any interest therein, be assignable for any purpose by operation of law without the written consent of Landlord. As a condition to its consent, Landlord shall require Tenant to pay all expenses in connection with the assignment, and Landlord shall require Tenant's assignee or transferee (or other assignees or transferees) to assume in writing all of the obligations under this Lease and for Tenant to remain liable to Landlord under the Lease. Notwithstanding the above, in no event will Landlord consent to a sub-sublease. See Paragraph 49 20. SUBORDINATION AND MORTGAGES. In the event Landlord's title or leasehold interest is now or hereafter encumbered by a deed of trust, upon the interest of Landlord in the land and buildings in which the demised Premises are located, to secure a loan from a lender (hereinafter referred to as "Lender") to Landlord. Tenant shall, at the request of Landlord or Lender, execute in writing an agreement subordinating its rights under this Lease to the lien of such decd of trust, or, if so requested, agreeing that the lien of Lender's deed of trust shall be or remain subject and subordinate to the rights of Tenant under this Lease. Notwithstanding any such subordination, Tenant's possession under this Lease shall not be disturbed if Tenant is not in default and so long as Tenant shall pay all rent and observe and perform all of the provisions set forth in this Lease. 12 13 21. ENTRY BY LANDLORD. Landlord reserves, and shall at all reasonable time after at least 24 hours notice (except in emergencies) have, the right to enter the Premises to inspect them; to perform any services to be provided by Landlord hereunder; to submit the Premises to prospective purchasers, mortgagors or tenants; to post notices of nonresponsibility; and to alter, improve or repair the Premises and any portion of the Complex, all without abatement of rent; and may erect scaffolding and other necessary structures in or through the Premises where reasonably required by the character of the work to be performed; provided, however that the business of Tenant shall be interfered with to the least extent that is reasonably practical. For each of the foregoing purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, or Tenant from the Premises or any portion thereof. Landlord shall also have the right at any time to change the arrangement or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilers or other public parts of the Complex and to change the name, number or designation by which the Complex is commonly known, and none of the foregoing shall be deemed an actual or constructive eviction of Tenant, or shall entitle Tenant to any reduction of rent hereunder. 22. BANKRUPTCY AND DEFAULT. The commencement of a bankruptcy action or liquidation action or reorganization action or insolvency action or an assignment of or by Tenant for the benefit of creditors, or any similar action undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option, constitute a breach of this Lease by Tenant. If the trustee or receiver appointed to serve during a bankruptcy, liquidation, reorganization, insolvency or similar action elects to reject Tenant's unexpired Lease, the trustee or receiver shall notify Landlord in writing of its election within thirty (30) days after an order for relief in a liquidation action or within thirty (30) days after the commencement of any action. Within thirty (30) days after court approval of the assumption of this Lease, the trustee or receiver shall cure (or provide adequate assurance to the reasonable satisfaction of Landlord that the trustee or receiver shall cure) any and all previous defaults under the unexpired Lease and shall compensate Landlord for all actual pecuniary loss and shall provide adequate assurance of future performance under said Lease to the reasonable satisfaction of Landlord. Adequate assurance of future performance, as used herein, includes, but shall not be limited to: (i) assurance of source and payment of rent, and other consideration due under this Lease; (ii) assurance that the assumption or assignment of this Lease will not breach substantially any provision, such as radius, location, use, or exclusivity provision, in any agreement relating to the above described Premises. Nothing contained in this section shall affect the existing right of Landlord to refuse to accept an assignment upon commencement of or in connection with a bankruptcy, liquidation, reorganization or insolvency action or an assignment of Tenant for the benefit of creditors or other similar act. Nothing contained in this Lease shall be construed as giving or granting or creating an equity in the demised Premises to Tenant. In no event shall the leasehold estate under this Lease, or any interest therein, be assigned by voluntary or involuntary bankruptcy proceeding without the prior written consent of Landlord. In no event shall this Lease or any 13 14 rights or privileges hereunder be an asset of Tenant under any bankruptcy, insolvency or reorganization proceedings. The failure to perform or honor any covenant, condition or representation made under this Lease shall constitute a default hereunder by Tenant upon expiration of the appropriate grace period hereinafter provided. Tenant shall have a period or five (5) days from the date of written notice from Landlord within which to cure any default in the payment of rental or adjustment thereto. Tenant shall have a period of thirty (30) days from the date of written notice from Landlord within which to cure any other default under this Lease; provided, however, that if the nature of Tenant's failure is such that more than thirty (30) days is reasonably required to cure the same, Tenant shall not be in default so long as Tenant commences performance within such thirty (30) day period and thereafter prosecutes the same to completion. Upon an uncured default of this Lease by Tenant, Landlord shall have the following rights and remedies in addition to any other rights or remedies available to Landlord at law or in equity; (a) The rights and remedies provided for by California Civil Code Section 1951.2, including but not limited to, recovery of the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount or rental loss for the same period that Tenant proves could be reasonably avoided, as computed pursuant to subsection (b) of said Section 1951.2. Any proof by Tenant under subparagraphs (2) and (3) of Section 1951.2 of the California Civil Code of the amount of rental loss that could be reasonably avoided shall be made in the following manner: Landlord and Tenant shall each select a licensed real estate broker in the business of renting property of the same type and use as the Premises and in the same geographic vicinity. Such two real estate brokers shall select a third licensed real estate broker, and the three licensed real estate brokers so selected shall determine the amount of the rental loss that could be reasonably avoided from the balance of the term of this Lease after the time of award. The decision of the majority of said licensed real estate brokers shall be final and binding upon the parties hereto. (b) The rights and remedies provided by California Civil Code Section which allows Landlord to continue the Lease in effect and to enforce all or its rights and remedies under this Lease, including the right to recover rent as it becomes due, for so long as Landlord does not terminate Tenant's right to possession: acts of maintenance or preservation, efforts to select the Premises, or the appointment of a receiver upon Landlord's initiative to protect its interest under this Lease shall not constitute a termination of Tenant's right to possession. (c) The right to terminate this Lease by giving notice to Tenant in accordance with applicable law. (d) To the extent permitted by law, the right and power, to enter the Premises and remove therefrom all persons and property, to store such property in a public warehouse or elsewhere at the cost of and for the account of Tenant, and to sell such property and apply such proceeds therefrom pursuant to applicable California law. Landlord, may from time to time sublet the Premises or any part thereof for such term or terms (which may extend beyond the term of this Lease) and at such rent and other terms as Landlord in its sole discretion may deem advisable, with the right to make alterations and repairs to the Premises. Upon each subletting, (i) Tenant shall be immediately liable to pay Landlord, in addition to indebtedness other than rent 14 15 due hereunder, the cost of such subletting, including, but not limited to, reasonable attorneys' fees, and any real estate commissions actually paid, and the cost of such alterations and repairs incurred by Landlord and the amount, if any, by which the rent hereunder for the period of such subletting (to the extent such period does not exceed the term hereof) exceeds the amount to be paid as rent for the Premises for such period or (ii) at the option of Landlord, rents received from such subletting shall be applied first to payment or indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such subletting and of such alterations and repairs; third to payment of rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same becomes due hereunder. If Tenant has been credited with any rent to be received by such subletting under option (i) and such rent shall not be promptly paid to Landlord by the subtenants), or if such rentals received from such subletting under option (ii) during any month be less than that to be paid during that month by Tenant hereunder. Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No taking possession of the Premises by Landlord, shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant. Notwithstanding any such subletting without termination, Landlord may at any time hereafter elect to terminate this Lease for such previous breach. (e) The right to have a receiver appointed for Tenant upon application by Landlord, to take possession of the Premises, and to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Landlord pursuant to subparagraph d above (except that Tenant may vacate so long as it pays rent, provides an on-site security guard during normal business hours from Monday through Friday, and otherwise performs its obligations hereunder). 24. DESTRUCTION. In the event the Premises are destroyed in whole or in part from any cause, except for routine maintenance and repairs and incidental damage and destruction caused from vandalism and accidents for which Tenant is responsible for under Paragraph 10, Landlord may, at its option: (a) Rebuild or restore the Premises to their condition prior to the damage or destruction, or (b) Terminate this Lease, (providing that the Premises is damaged to the extent of 33 1/3% or more of the replacement cost). If landlord does not give Tenant notice in writing within thirty (30) days from the destruction of the Premises of its election to either rebuild and restore them, or to terminate this Lease, Landlord shall be deemed to have elected to rebuild or restore them, in which event Landlord agrees, at its expense, promptly to rebuild or restore the Premises to their condition prior to the damage or destruction. Tenant shall be entitled to a reduction in rent while such repair is being made in the proportion that the area of the Promises rendered untenantable by such damage bears to the total area of the Premises. If Landlord initially estimates that the rebuilding or restoration will exceed 180 days or 60 days if the destruction occurs within the last eighteen (18) months of the Lease Term, or if Landlord does not complete the rebuilding or restoration within one hundred eighty (180) days (or sixty (60) days if the destruction occurs 15 16 within the last eighteen (18) months of the Lease Term) following the date of destruction (such period of time to be extended for delays caused by the fault or neglect of Tenant or because of Acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond the control of Landlord), then Tenant shall have the right to terminate this Lease by giving fifteen (15) days prior written notice to Landlord. Notwithstanding anything herein to the contrary, Landlord's obligation to rebuild or restore shall be limited to the building and interior improvements constructed by Landlord as they existed as of the commencement date of the Lease and shall not include restoration of Tenant's trade fixtures, equipment, merchandise, or any improvements, alterations or additions made by Tenant to the Premises, which Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense provided this Lease is not cancelled according to the provisions above. Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect. Tenant hereby expressly waives the provisions of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of the California Civil Code. In the event that the building in which the Premises are situated is damaged or destroyed to the extent of not less than 33% of the replacement cost thereof, Landlord may elect to terminate this Lease, whether the Premises be injured or not. Notwithstanding anything to the contrary herein, Landlord may terminate this Lease in the event of an uninsured event or if insurance proceeds are insufficient to cover one hundred percent of the rebuilding costs net of the deductible. 25. EMINENT DOMAIN. If all or any part of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, this Lease shall terminate as to any portion of the Premises so taken or conveyed on the date when title vests in the condemnor, and Landlord shall be entitled to any and all payment, income, rent, award, or any interest therein whatsoever which maybe paid or made in connection with such taking or conveyance, and Tenant shall have no claim against Landlord or otherwise for the value of any unexpired term of this Lease. Notwithstanding the foregoing paragraph, any compensation specifically awarded Tenant for loss of business, Tenant's personal property, moving cost or loss of goodwill, shall be and remain the property of Tenant. If (i) any action or proceeding is commenced for such taking of the Premises or any part thereof, or if Landlord is advised in writing by any entity or body having the right or power of condemnation of its intention to condemn the premises or any portion thereof, or (ii) any of the foregoing events occur with respect to the taking of any space in the Complex not leased hereby, or if any such spaces so taken or conveyed in lieu of such taking and Landlord shall decide to discontinue the use and operation of the Complex, or decide to demolish, alter or rebuild the Complex, then, in any of such events Landlord shall have the right to terminate this Lease by giving Tenant written notice thereof within sixty (60) days of the date of receipt of said written advice, or commencement of said action or proceeding, or taking conveyance, which termination shall take place as of the first to occur or the last day of the calendar month next following the month in which such notice is given or the date on which title to the Premises shall vest in the condemnor. 16 17 In the event of such a partial taking or conveyance of the Premises, if the portion of the Premises taken or conveyed is so substantial that the Tenant can no longer reasonably conduct its business, Tenant shall have the privilege of terminating this Lease within sixty (60) days from the date of such taking or conveyance, upon written notice to Landlord of its intention so to do, and upon giving of such notice this Lease shall terminate on the last day of the calendar month next following the month in which such notice is given, upon payment by Tenant of the rent from the date of such taking or conveyance to the date of termination. If a portion of the Premises be taken by condemnation or conveyance in lieu thereof and neither Landlord nor Tenant shall terminate this Lease as provided herein, this Lease shall continue in full force and effect as to the part of the Premises not so taken or conveyed, and the rent herein shall be apportioned as of the date of such taking or conveyance so that thereafter the rent to be paid by Tenant shall be in the ratio that the area of the portion of the Premises not so taken or conveyed bears to the total area of the Premises prior to such taking. 26. SALE OR CONVEYANCE BY LANDLORD. In the event of a sale or conveyance of the Complex or any interest therein, by any owner of the reversion then constituting Landlord, the transferor shall thereby be released from any further liability upon any of the terms, covenants or conditions (express or implied) herein contained in favor of Tenant, and in such event, insofar as such transfer is concerned, Tenant agrees to look solely to the responsibility of the successor in interest of such transferor in and to the Complex and this Lease. This Lease shall not be affected by any such sale or conveyance, and Tenant agrees to attorn to the successor in interest of such transferor. 27. ATTORNMENT TO LENDER OR THIRD PARTY. In the event the interest of Landlord in the land and buildings in which the leased Premises arc located (whether such interest of Landlord is a fee title interest or a leasehold interest is encumbered by deed of trust, and such interest is acquired by the lender or any third party through judicial foreclosure or by exercise of a power of sale at private trustee's foreclosure sale. Tenant hereby agrees to attorn to the purchase at any such foreclosure sale and to recognize such purchaser as the Landlord under this lease. In the event the lien of the deed of trust securing the loan from a Lender to Landlord is prior and paramount to the Lease, this lease shall nonetheless continue in full force and effect for the remainder of the unexpired tern hereof, at the same rental herein reserved and upon all the other terms, conditions and covenants herein contained. 28. HOLDING OVER. Any holding over by Tenant after expiration or other termination of the term of this Lease with the written consent of Landlord delivered to Tenant shall not constitute a renewal or extension of the lease or give Tenant any rights in or to the leased Premises except as expressly provided in this Lease. Any holding over after the expiration or other termination of the term of this Lease, with the consent of Landlord, shall be construed to be a tenancy from month to month, on the same terms and conditions herein specified insofar as applicable except that the monthly Basic Rent shall be increased to an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent required during the last month of the Lease term. 29. CERTIFICATE OF ESTOPPEL. Tenant shall at any time upon not less than ten (10) days' prior written notice to Landlord execute, acknowledge and deliver to Landlord a statement 17 18 in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults, if any, are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord, that there arc no uncured defaults in Landlord's performance, and that not more than one month's rent has been paid in advance. 30. CONSTRUCTION CHANGES. It is understood that the description of the Premises and the location of ductwork, plumbing and other facilities therein are subject to such minor changes as Landlord or Landlord's architect determines to be desirable in the course of construction of the Premises, and no such changes, or any changes in plans for any other portions of the Complex shall affect this Lease or entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. Landlord does not guarantee the accuracy of any drawings supplied to Tenant and verification of the accuracy of such drawings rests with Tenant. 31. RIGHT OF LANDLORD TO PERFORM. All terms, covenants and conditions of this Lease to be performed or observed by Tenant shall be performed or observed by Tenant at Tenant's sole cost and expense and without any reduction of rent. If Tenant shall fail to pay any sum of money, or other rent, required to be paid by it hereunder or shall fail to perform any other term or covenant hereunder on its part to be performed, and such failure shall continue for five (5) days after written notice thereof by Landlord, Landlord, without waiving or releasing Tenant from any obligation of Tenant hereunder, may, but shall not be obligated to, make any such payment or perform any such other term or covenant on Tenant's part to be performed. All sums so paid by Landlord and all necessary costs of such performance by Landlord together with Interest thereon at the rate of the prime rate of interest per annum as quoted by the Bank of America from the date of such payment or performance by Landlord, shall be paid (and Tenant covenants to make such payment) to Landlord on demand by Landlord, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of nonpayment by Tenant as in the case of failure by Tenant in the payment of rent hereunder. 32. ATTORNEYS' FEES. (A) In the event that either Landlord or Tenant should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease, or for any other relief against the other party hereunder, then all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment. (B) Should Landlord be named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including a reasonable attorney's fee. 18 19 33. WAIVER. The waiver by either party of the other party's failure to perform or observe any term, covenant or condition herein contained to be performed or observed by such waiving party shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent failure of the party failing to perform or observe the same or any other such term, covenant or condition therein contained, and no custom or practice which may develop between the parties hereto during the term hereof shall be deemed a waiver of, or in anyway affect, the right of either party to insist upon performance and observance by the other party in strict accordance with the terms hereof. 34. NOTICES. All notices, demands, requests, advices or designations which may be or are required to be given by either party to the other hereunder shall be in writing. All notices, demands, requests, advices or designations by Landlord to Tenant shall be sufficiently given, made or delivered if personally served on Tenant by leaving the same at the Premises or if sent by United States certified or registered mail, postage prepaid, addressed to Tenant at the Premises. All notices demands, requests, advices or designations by Tenant to Landlord shall be sent by United States certified or registered mail, postage prepaid, addressed to Landlord at its offices at Peery/Arrillaga, 2560 Mission College Blvd., #101, Santa Clara, CA 95054. Each notice, request, demand, advice or designation referred to in this paragraph shall be deemed received on the date of the personal service or mailing thereof in the manner herein provided, as the case may be. 35. EXAMINATION OF LEASE. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for a lease, and this instrument is not effective as a lease or otherwise until its execution and delivery by both Landlord and Tenant. 36. DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event earlier than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have heretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligations; provided, however, that if the nature of Landlord's obligations is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 37. CORPORATE AUTHORITY. If Tenant is a corporation, (or a partnership) each individual executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation (or partnership) in accordance with the by-laws of said corporation (or partnership in accordance with the partnership agreement) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. If Tenant is a corporation, Tenant shall, within thirty (30) days after execution of this Lease, deliver to Landlord a certified copy of the resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Lease. 38. [Intentionally Deleted.] 19 20 39. LIMITATION OF LIABILITY. In consideration of the benefits accruing hereunder, Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord: (i) the sole and exclusive remedy shall be against Landlord's interest in the Premises leased herein; (ii) no partner of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction of the partnership) (iii) no service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership) (iv) no partner of Landlord shall be required to answer or otherwise plead to any service of process; (v) no judgment will be taken against any partner of Landlord; (vi) any judgment taken against any partner of Landlord may be vacated and set aside at any time without hearing; (vii) no writ of execution will ever be levied against the assets of any partner of Landlord; (viii) these covenants and agreement are enforceable both by Landlord and also by any partner of Landlord. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by statute or at common law. 40. MISCELLANEOUS AND GENERAL PROVISIONS a. Tenant shall not, without the written consent of Landlord, use the name of the building for any purpose other than as the address of the business conducted by Tenant in the Premises. b. This Lease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any provision of this Lease shall be invalid, unenforceable or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. c. The term "Premises" includes the space leased hereby and any improvements now or hereafter installed therein or attached thereto. The term "Landlord" or any pronoun used in place thereof includes the plural as well as the singular and the successors and assigns of Landlord. The term "Tenant" or any pronoun used in place thereof includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations, and their and each of their respective heirs, executors, administrators, successors and permitted assigns, according to the context hereof, and the provisions of this Lease shall inure to the benefit of and bind such heirs, executors, administrators, successors and permitted assigns. The term "person" includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations. Words used in any gender include 20 21 other genders. If there be more than one Tenant the obligations of Tenant hereunder are joint and several. The paragraph headings of this Lease are for convenience of reference only and shall have no effect upon the construction or interpretation of any provision hereof. d. Time is of the essence of this Lease and of each and all of its provisions. e. At the expiration or earlier termination of this Lease, Tenant shall execute, acknowledge and deliver to Landlord, within ten (10) days after written demand from Landlord to Tenant, any quitclaim deed or other document required by any reputable title company, licensed to operate in the State of California, to remove the cloud or encumbrance created by this Lease from the real property of which Tenant's Premises are a part. f. Any instrument along with any exhibits and attachments hereto constitutes the entire agreement between Landlord and Tenant relative to the Premises and this agreement and the exhibits and attachments may be altered, amended or revoked only by an instrument in writing signed by both Landlord and Tenant, Landlord and Tenant agree hereby that all prior or contemporaneous oral agreements between and among themselves and their agents or representatives relative to the leasing of the Premises are merged in or revoked by this agreement. g. Neither Landlord nor Tenant shall record this Lease or a short form memorandum hereof without the consent of the other. h. Tenant further agrees to execute any amendments required by a lender to enable Landlord to obtain financing, so long as Tenant's rights hereunder are not substantially affected. i. Paragraphs 43 through 54 are added hereto and are included as a part of this lease. j. Clauses, plats and riders, if any, signed by Landlord and Tenant and endorsed on or affixed to this Lease are a part hereof. k. Tenant covenants and agrees that no diminution or shutting off of light, air or view by any structure which may be hereafter erected (whether or not by Landlord) shall in any way affect his Lease, entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. 41. BROKERS. Tenant warrants that it had dealings with only the following real estate brokers or agents in connection with the negotiation of this Lease: none and that it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. 42. SIGNS. No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or to any part of the outside of the Premises or any exterior windows of the Premises without the written consent of Landlord first had and obtained and Landlord shall have the right to remove any unauthorized sign, placard, picture, advertisement, name or notice without notice to and at the expense of Tenant. If Tenant is allowed to print or 21 22 affix or in any way place a sign in, on, or about the Premises, upon expiration or other sooner termination of this Lease, Tenant at Tenant's sole cost and expense shall both remove such sign and repair all damage in such a manner as to restore all aspects of the appearance of the Premises to the condition prior to the placement of said sign. All approved signs or lettering on outside doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved of by Landlord. Tenant shall not place anything or allow anything to be placed near the glass of any window, door partition or wall which may appear unsightly from outside the Premises. IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Lease as of the day and year last written below. LANDLORD: TENANT: ARRILLAGA FAMILY TRUST TRANSMETA CORPORATION a California corporation By /s/ JOHN ARRILLAGA By /s/ COLIN HUNTER -------------------------------- --------------------------------- John Arrillaga, Trustee Date: 3/10/97 Title CFO ----------------------------- ------------------------------ RICHARD T. PEERY SEPARATE PROPERTY TRUST By /s/ RICHARD T. PEERY Print or Type Name Colin Hunter -------------------------------- ----------------- Richard T. Peery, Trustee Date: 2/28/97 Date: 2/7/97 ----------------------------- ------------------------------ 22 23 Paragraphs 43 through 54 to Lease Agreement dated January 29, 1997, By and Between the Arrillaga Family Trust and the Richard T. Peery Separate Property Trust, as Landlord, and TRANSMETA CORPORATION, a California corporation, as Tenant for 22,500 (plus or minus) Square Feet of Space Located at 2540 Mission College Blvd., Santa Clara, California. 43. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate sum of THREE MILLION TWO HUNDRED NINETY THOUSAND SIX HUNDRED TWENTY FIVE AND NO/100 DOLLARS ($3,290,625.00), shall be payable as follows: On March 1, 1997, the sum of FORTY FIVE THOUSAND AND NO/100 DOLLARS ($45,000.00) shall be due, and a like sum due on the first day of each month thereafter, through and including February 1, 1998. On March 1, 1998, the sum of FORTY SIX THOUSAND ONE HUNDRED TWENTY FIVE AND NO/100 DOLLARS ($46,125.00) shall be due, and a like sum due on the first day of each month thereafter, through and including February 1, 1999. On March 1, 1999, the sum of FORTY SEVEN THOUSAND TWO HUNDRED FIFTY AND NO/100 DOLLARS ($47,250.00) shall be due, and a like sum due on the first day of each month thereafter, through and including February 1, 2000. On March 1, 2000, the sum of FORTY EIGHT THOUSAND THREE HUNDRED SEVENTY FIVE AND NO/100 DOLLARS ($48,375.00) shall be due, and a like sum due on the first day of each month thereafter, through and including February 1, 2001. On March 1, 2001, the sum of FORTY NINE THOUSAND FIVE HUNDRED AND NO/100 DOLLARS ($49,500.00) shall be due, and a like sum due on the first day of each month thereafter, through and including February 1, 2002. On March 1, 2002, the sum of FIFTY THOUSAND SIX HUNDRED TWENTY FIVE AND NO/100 DOLLARS ($50,625.00) shall be due, and a like sum due on the first day of each month thereafter, through and including November 1, 2002; or until the entire aggregate sum of THREE MILLION TWO HUNDRED NINETY THOUSAND SIX HUNDRED TWENTY FIVE AND NO/100 DOLLARS ($3,290,625.00) has been paid. 44. "AS-IS" BASIS: It is hereby agreed that the Premises leased hereunder is leased strictly on an "as-is" basis and in its present condition, and in the configuration as shown on Exhibit B attached hereto, and by reference made a part hereof. It is specifically agreed between the parties that Landlord shall not be required to make, nor be responsible for any cost, in connection with any repair, restoration, and/or improvement to the Premises in order for this Lease to commence, or thereafter, throughout the Term of this Lease. Notwithstanding anything to the contrary within this Lease, Landlord makes no warranty or representation of any kind or nature whatsoever as to 23 24 the condition or repair of the Premises, nor as to the use or occupancy which may be made thereof. 45. CONSENT: Whenever the consent of one party to the other is required hereunder, such consent shall not be unreasonably withheld. 46. CHOICE OF LAW; SEVERABILITY. This Lease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any provisions of this Lease shall be invalid, unenforceable, or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. 47. AUTHORITY TO EXECUTE. The parties executing this Lease Agreement hereby warrant and represent that they are properly authorized to execute this Lease Agreement and bind the parties on behalf of whom they execute this Lease Agreement and to all of the terms, covenants and conditions of this Lease Agreement as they relate to the respective parties hereto. 48. ASSESSMENT CREDITS: The demised property herein may be subject to a special assessment levied by the City of Santa Clara as part of an Improvement District. As a part of said special assessment proceedings (if any), additional bonds were or may be sold and assessments were or may be levied to provide for construction contingencies and reserve funds. Interest shall be earned on such funds created for contingencies and on reserve funds which will be credited for the benefit of said assessment district. To the extent surpluses are created in said district through unused contingency funds, interest earnings or reserve funds, such surpluses shall be deemed the property of Landlord. Notwithstanding that such surpluses may be credited on assessments otherwise due against the Leased Premises, Tenant shall pay to Landlord, as additional rent if, and at the time of any such credit of surpluses, an amount equal to all such surpluses so credited. For example: if (i) the property is subject to an annual assessment of $1,000.00, and (ii) a surplus of $200.00 is credited towards the current year's assessment which reduces the assessment amount shown on the property tax bill from $1,000.00 to $800.00, Tenant shall, upon receipt of notice from Landlord, pay to Landlord said $200.00 credit as Additional Rent. 49. ASSIGNMENT AND SUBLETTING (CONTINUED): Any and all sublease agreement(s) between Tenant and any and all subtenant(s) (which agreements must be consented to by Landlord, pursuant to the requirements of this Lease) shall contain the following language: "If Landlord and Tenant jointly and voluntarily elect, for any reason whatsoever, to terminate the Master Lease prior to the scheduled Master Lease termination date, then this Sublease (if then still in effect) shall terminate concurrently with the termination of the Master Lease. Subtenant expressly acknowledges and agrees that (1) the voluntary termination of the Master Lease by Landlord and Tenant and the resulting termination of this Sublease shall not give Subtenant any right or 24 25 power to make any legal or equitable claim against Landlord, including without limitation any claim for interference with contract or interference with prospective economic advantage, and (2) Subtenant hereby waives any and all rights it may have under law or at equity against Landlord to challenge such an early termination of the Sublease, and unconditionally releases and relieves Landlord, and its officers, directors, employees and agents, from any and all claims, demands, and/or causes of action whatsoever (collectively, "Claims"), whether such matters are known or unknown, latent or apparent, suspected or unsuspected, foreseeable or unforeseeable, which Subtenant may have arising out of or in connection with any such early termination of this Sublease. Subtenant knowingly and intentionally waives any and all protection which is or may be given by Section 1542 of the California Civil Code which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with debtor. The term of this Sublease is therefore subject to early termination. Subtenant's initials here below evidence (a) Subtenant's consideration of and agreement to this early termination provision, (b) Subtenant's acknowledgment that, in determining the net benefits to be derived by Subtenant under the terms of this Sublease, Subtenant has anticipated the potential for early termination, and (c) Subtenant's agreement to the general waiver and release of Claims above. Initials: __________ Initials: _________" Subtenant Tenant 50. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to the existence or use of "Hazardous Materials" (as defined herein) on, in, under or about the Premises and real property located beneath said Premises and the common areas of the Complex (hereinafter collectively referred to as the "Property"): A. As used herein, the term "Hazardous Materials" shall mean any material, waste, chemical, mixture or byproduct which is or hereafter is defined, listed or designated under Environmental Laws (defined below) as a pollutant, or as a contaminant, or as a toxic or hazardous substance, waste or material, or any other unwholesome, hazardous, toxic, biohazardous, or radioactive material, waste, chemical, mixture or byproduct, or which is listed, regulated or restricted by any Environmental Law (including, without limitation, petroleum hydrocarbons or any distillates or derivatives or fractions thereof, polychlorinated biphenyls, or asbestos). As used herein, the term "Environmental Laws" shall mean any applicable Federal, State of California or local government law (including common law), statute, regulation, rule, ordinance, permit, license, order, requirement, agreement, or approval, or any determination, judgment, directive, or order of any executive or judicial authority at any level of Federal, State of California or local government (whether now existing or subsequently adopted or 25 26 promulgated) relating to pollution or the protection of the environment, ecology, natural resources, or public health and safety. B. Tenant shall obtain Landlord's written consent, which may be withheld in Landlord's discretion, prior to the occurrence of any Tenant's Hazardous Materials Activities (defined below); provided, however, that Landlord's consent shall not be required for normal use in compliance with applicable Environmental Laws of customary household and office supplies (Tenant shall first provide Landlord with a list of said materials use), such as mild cleaners, lubricants and copier toner. As used herein, the term "Tenant's Hazardous Materials Activities" shall mean any and all use, handling, generation, storage, disposal, treatment, transportation, release, discharge, or emission of any Hazardous Materials on, in, beneath, to, from, at or about the Property, in connection with Tenant's use of the Property, or by Tenant or by any of Tenant's agents, employees, contractors, vendors, invitees, visitors or its future subtenants or assignees. Tenant agrees that any and all Tenant's Hazardous Materials Activities shall be conducted in strict, full compliance with applicable Environmental Laws at Tenant's expense, and shall not result in any contamination of the Property or the environment. Tenant agrees to provide Landlord with prompt written notice of any spill or release of Hazardous Materials at the Property during the term of the Lease of which Tenant becomes aware, and further agrees to provide Landlord with prompt written notice of any violation of Environmental Laws in connection with Tenant's Hazardous Materials Activities of which Tenant becomes aware. If Tenant's Hazardous Materials Activities involve Hazardous Materials other than normal use of customary household and office supplies, Tenant also agrees at Tenant's expense: (i) to install such Hazardous Materials monitoring, storage and containment devices as Landlord reasonably deems necessary (Landlord shall have no obligation to evaluate the need for any such installation or to require any such installation); (ii) provide Landlord with a written inventory of such Hazardous Materials, including an update of same each year upon the anniversary date of the Commencement Date of the Lease ("Anniversary Date"); and (iii) on each Anniversary Date, to retain a qualified environmental consultant, acceptable to Landlord, to evaluate whether Tenant is in compliance with all applicable Environmental Laws with respect to Tenant's Hazardous Materials Activities. Tenant, at its expense, shall submit to Landlord a report from such environmental consultant which discusses the environmental consultant's findings within two (2) months of each Anniversary Date. Tenant, at its expense, shall promptly undertake and complete any and all steps necessary, and in full compliance with applicable Environmental Laws, to fully correct any and all problems or deficiencies identified by the environmental consultant, and promptly provide Landlord with documentation of all such corrections. C. Prior to termination or expiration of the Lease, Tenant, at its expense, shall (i) properly remove from the Property all Hazardous Materials which come to be located at the Property in connection with Tenant's Hazardous Materials Activities, and (ii) fully comply with and complete all facility closure requirements of applicable Environmental Laws regarding Tenant's Hazardous Materials Activities, including but not limited to (x) properly restoring and repairing the Property to the extent damaged by such closure activities, and (y) obtaining from the local Fire Department or other appropriate governmental authority with jurisdiction a written concurrence that closure has been completed in compliance with applicable Environmental Laws. Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any such closure activities. 26 27 D. If Landlord, in its sole discretion, believes that the Property has become contaminated as a result of Tenant's Hazardous Materials Activities, Landlord in addition to any other rights it may have under this Lease or under Environmental Laws or other laws, may enter upon the Property and conduct inspection, sampling and analysis, including but not limited to obtaining and analyzing samples of soil and groundwater, for the purpose of determining the nature and extent of such contamination. Tenant shall promptly reimburse Landlord for the costs of such an investigation, including but not limited to reasonable attorneys' fees Landlord incurs with respect to such investigation, that discloses Hazardous Materials contamination for which Tenant is liable under this Lease. Except as may be required of Tenant by applicable Environmental Laws, Tenant shall not perform any sampling, testing, or drilling to identify the presence of any Hazardous Materials at the Property, without Landlord's prior written consent which may be withheld in Landlord's discretion. Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any sampling, testing or drilling performed pursuant to the preceding sentence. E. Tenant shall indemnify, defend (with legal counsel acceptable to Landlord, whose consent shall not unreasonably be withheld) and hold harmless Landlord, its employees, assigns, successors, successors-in-interest, agents and representatives from and against any and all claims (including but not limited to third party claims from a private party or a government authority), liabilities, obligations, losses, causes of action, demands, governmental proceedings or directives, fines, penalties, expenses, costs (including but not limited to reasonable attorneys', consultants' and other experts' fees and costs), and damages, which arise from or relate to: (i) Tenant's Hazardous Materials Activities; (ii) any Hazardous Materials contamination caused by Tenant prior to the Commencement Date of the Lease; or (iii) the breach of any obligation of Tenant under this Paragraph 50 (collectively, "Tenant's Environmental Indemnification"). Tenant's Environmental Indemnification shall include but is not limited to the obligation to promptly and fully reimburse Landlord for losses in or reductions to rental income, and diminution in fair market value of the Property. Tenant's Environmental Indemnification shall further include but is not limited to the obligation to diligently and properly implement to completion, at Tenant's expense, any and all environmental investigation, removal, remediation, monitoring, reporting, closure activities, or other environmental response action (collectively, "Response Actions"). Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any Response Actions. It is agreed that the Tenant's responsibilities related to Hazardous Materials will survive the expiration or termination of this Lease and that Landlord may obtain specific performance of Tenant's responsibilities under this Paragraph 50. 51. LEASE TERMS CO-TERMINOUS: It is acknowledged that (i) Landlord and Tenant have previously executed a separate lease agreement, dated November 1, 1995, for premises located at 3940 Freedom Circle, Santa Clara, California (hereinafter referred to as the "Marriott A Lease"), which property is contiguous to the Premises leased hereunder, and (ii) it is the intention of the parties that the Term of this Lease be co-terminous with the term of the Marriott A Lease such that the terms of both leases expire on the same date; provided, however, the 27 28 termination of this Lease resulting from the terms and conditions stated under Paragraph 22 ("Bankruptcy and Default") (subject to Landlord's option as stated below and in the Marriott A Lease's "Cross Default" Paragraph) or Paragraph 24 ("Destruction") or Paragraph 25 ("Eminent Domain") shall not result in a termination of the Marriott A Lease, unless Landlord elects, at its sole and absolute discretion, to terminate either or both of the leases. 52. CROSS DEFAULT: As a material part of the consideration for the execution of this Lease by Landlord, it is agreed between Landlord and Tenant that a default under this Lease, or a default under said Marriott A Lease may, at the option of Landlord, be considered a default under both leases, in which event Landlord shall be entitled (but in no event required) to apply all rights and remedies of Landlord under the terms of one lease to both leases including, but not limited to, the right to terminate one or both of said leases by reason of a default under said Marriott A Lease or hereunder. 53. MAINTENANCE OF THE PREMISES: Notwithstanding anything to the contrary in Paragraph 10, Landlord shall repair damage to the structural shell, foundation, and roof structure (but not the interior improvements, roof membrane, or glazing) of the building leased hereunder at Landlord's cost and expense provided Tenant has not caused such damage, in which event Tenant shall be responsible for 100 percent of any such costs for repair or damage so caused by the Tenant. Notwithstanding the foregoing, a crack in the foundation, or exterior walls that does not endanger the structural integrity of the building, or which is not life-threatening, shall not be considered material, nor shall Landlord be responsible for repair of same. 54. LEASE CONTINGENT UPON LANDLORD OBTAINING TERMINATION AGREEMENT WITH CURRENT TENANT: This Lease is subject to and conditional upon Landlord obtaining from UB Networks, Inc. ("UB Networks"), the current tenant occupying the Premises leased hereunder, a Termination Agreement satisfactory to Landlord on or before February 28, 1997. In the event Landlord is unable to obtain said satisfactory Termination Agreement on or before February 28, 1997, this Lease Agreement shall, at Landlord's option (a) be rescinded, or (b) the Commencement Date hereof shall be modified to reflect the date Landlord so obtains said satisfactory Termination Agreement and receives possession of the Premises hereunder free and clear of UB Networks' occupancy; provided, however, that said period of delay caused by UB Networks shall not extend beyond April 30, 1997. In the event this Lease does not commence by April 30, 1997 (subject only to the delays covered in Paragraph 3) this Lease shall be automatically rescinded. 28 29 AMENDMENT NO. 1 TO LEASE THIS AMENDMENT NO. 1 is made and entered into this 2nd day of April, 1998, by and between JOHN ARRILLAGA, Trustee, or his Successor Trustee UTA dated 7/20/77 (JOHN ARRILLAGA SURVIVOR'S TRUST) (previously known as the "Arrillaga Family Trust") as amended, and RICHARD T. PEERY, Trustee, or his Successor Trustee UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended, collectively as LANDLORD, and TRANSMETA CORPORATION, a California corporation, as TENANT. RECITALS A. WHEREAS, by Lease Agreement dated January 29, 1997 Landlord leased to Tenant all of that certain 22,500 (plus or minus) square foot building located at 2540 Mission College Blvd., Santa Clara, California, the details of which are more particularly set forth in said January 29, 1997 Lease Agreement, and B. WHEREAS, it is now the desire of the parties hereto to amend the Lease by (i) extending the Term for five years and seven months, changing the Termination Date from November 30, 2002 to June 30, 2008, (ii) amending the Basic Rent schedule and Aggregate Rent accordingly, (iii) increasing the Security Deposit required under the Lease, and (iv) replacing Lease Paragraphs 51 ("Lease Terms Co-terminous") and 52 ("Cross Default") of said Lease Agreement as hereinafter set forth. AGREEMENT NOW THEREFORE, for valuable consideration, receipt of which is hereby acknowledged, and in consideration of the hereinafter mutual promises, the parties hereto do agree as follows: 1. TERM OF LEASE: It is agreed between the parties that the Term of said Lease Agreement shall be extended for an additional five (5) year seven (7) month period, and the Lease Termination Date shall be changed from November 30, 2002 to June 30, 2008. 2. BASIC RENTAL FOR EXTENDED TERM OF LEASE: The monthly Basic Rental for the Extended Term of Lease shall be as follows: On December 1, 2002, the sum of FIFTY NINE THOUSAND SIX HUNDRED TWENTY FIVE AND NO/100 DOLLARS ($59,625.00) shall be due, and a like sum due on the first day of each month thereafter through and including June 1, 2003. On July 1, 2003, the sum of SIXTY ONE THOUSAND EIGHT HUNDRED SEVENTY FIVE AND NO/100 DOLLARS ($61,875.00) shall be due, and a like sum due on the first day of each month thereafter through and including June 1, 2004. 29 30 On July 1, 2004, the sum of SIXTY FOUR THOUSAND ONE HUNDRED TWENTY FIVE AND NO/100 DOLLARS ($64,125.00) shall be due, and a like sum due on the first day of each month thereafter through and including June 1, 2005. On July 1, 2005, the sum of SIXTY SIX THOUSAND THREE HUNDRED SEVENTY FIVE AND NO/100 DOLLARS ($66,375.00) shall be due, and a like sum due on the first day of each month thereafter through and including June 1, 2006. On July 1, 2006, the sum of SIXTY EIGHT THOUSAND SIX HUNDRED TWENTY FIVE AND NO/100 DOLLARS ($68,625.00) shall be due, and a like sum due on the first day of each month thereafter through and including June 1, 2007. On July 1, 2007, the sum of SEVENTY THOUSAND EIGHT HUNDRED SEVENTY FIVE AND NO/100 DOLLARS ($70,875.00) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2008. The Aggregate Basic Rent for the Lease shall be increased by $4,399,875.00 or from $3,290,625.00 to $7,690,500.00. 3. SECURITY DEPOSIT: Tenant's Security Deposit shall be increased by $40,500.00, or from $101,250.00 to $141,750.00, payable upon Tenant's execution of this Amendment No. 1. 4. LEASE TERMS CO-TERMINOUS: Lease Paragraph 51 ("Lease Terms Co-terminous") is hereby deleted in its entirety and replaced with the following: "LEASE TERMS CO-TERMINOUS: It is hereby acknowledged that (i) Landlord and Tenant have previously executed a separate lease agreement, dated November 1, 1995, for premises located at 3940 Freedom Circle, Santa Clara, California (hereinafter referred to as the "Marriott A Lease"), (ii) concurrently with the execution of this Amendment, Landlord and Tenant shall execute two separate lease agreements, dated April 2, 1998, for premises located at 2560 Mission College Blvd., Santa Clara California (the "Marriott C Lease") and for premises located at 3990 Freedom Circle, Santa Clara, California (the "Marriott D Lease") and (iii) it is the intention of the parties that the Term of this Lease be co-terminous with the terms of the Marriott A Lease, the Marriott C Lease and the Marriott D Lease (collectively the "Marriott A, C, and D Leases") such that the terms of all leases expire on the same date; provided, however, the termination of this Lease resulting from the terms and conditions stated under Paragraph 22 ("Bankruptcy and Default") (subject to Landlord's option as stated below and in the Marriott A, C and D Leases' "Cross Default Paragraph) or Paragraph 24 ("Destruction") or Paragraph 25 ("Eminent Domain") shall not result in a termination of the Marriott A, C or D Leases, unless Landlord elects, at its sole and absolute discretion, to terminate any or all of the Marriott A, C or D Leases." 5. CROSS DEFAULT: Lease Paragraph 52 ("Cross Default") is hereby deleted in its entirety and replaced with the following: "CROSS DEFAULT: As a material part of the consideration for the execution of this Lease by Landlord, it is agreed between Landlord and Tenant that a default under this Lease, or a default under said Marriott A, C and/or D Lease may, at the option of Landlord, be considered a default under all four leases, in which event Landlord shall be entitled (but in no event required) to apply all rights and remedies of Landlord under the terms of one lease to all four leases including, but not limited to, the right 30 31 to terminate one or all of said leases by reason of a default under said Marriott A, C and/or D Lease or hereunder." EXCEPT AS MODIFIED HEREIN, all other terms, covenants, and conditions of said January 29, 1997 Lease Agreement shall remain in full force and effect. IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment No. 1 to Lease as of the day and year last written below. LANDLORD: TENANT: JOHN ARRILLAGA SURVIVOR'S TRUST TRANSMETA CORPORATION a California corporation By /s/ JOHN ARRILLAGA By /s/ COLIN HUNTER -------------------------------- -------------------------------- John Arrillaga, Trustee Date: 6/8/98 Colin Hunter ----------------------------- ----------------------------------- Print or Type Name RICHARD T. PEERY SEPARATE Title: CFO PROPERTY TRUST ---------------------------- By /s/ RICHARD T. PEERY Date: June 5, 1998 -------------------------------- ----------------------------- Richard T. Peery, Trustee Date: 6/8/98 ----------------------------- 31 EX-10.10 14 ex10-10.txt EXHIBIT 10.10 1 EXHIBIT 10.10 BLDG: Marriott 1 LEASE AGREEMENT OWNER: 500 PROP: 101 UNIT: 102 TENANT: 10110 THIS LEASE, made this 2nd day of April, 1998 between JOHN ARRILLAGA, Trustee, or his Successor Trustee, UTA dated 7/20/77 (JOHN ARRILLAGA SURVIVOR'S TRUST) as amended, and RICHARD T. PEERY, Trustee, or his Successor Trustee, UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended, hereinafter called Landlord, and TRANSMETA CORPORATION, a California corporation, hereinafter called Tenant. WITNESSETH: Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord those certain premises (the "Premises") outlined in red on Exhibit "A", attached hereto and incorporated herein by this reference thereto more particularly described as follows: A portion of that certain 45,000+ square foot, two-story building located at 2560 Mission College Blvd., Suite 102, Santa Clara, California 95054, consisting of approximately 36,225+/- square feet on the first and second floors of the building. Said Premises is more particularly shown within the area outlined in Red on EXHIBIT A attached hereto. The entire parcel, of which the Premises is a part, is shown within the area outlined in Green on Exhibit A attached. The Premises is leased on an "as-is" basis, in its present condition, and in the configuration as shown in Red on Exhibit B attached hereto. As used herein the Complex shall mean and include all of the land outlined in Green and described in Exhibit "A", attached hereto, and all of the buildings, improvements, fixtures and equipment now or hereafter situated on said land. Said letting and hiring is upon end subject to the terms, covenants and conditions hereinafter set forth and Tenant covenants as a material part of the consideration for this Lease to perform and observe each and all of said terms, covenants and conditions. This Lease is made upon the conditions of such performance and observance. 1. USE Tenant shall use the Premises only in conformance with applicable governmental laws, regulations, rules and ordinances for the purpose of general office, light manufacturing, research and development, and storage and other uses necessary for Tenant to conduct Tenant's business, provided that such uses shall be in accordance with all applicable governmental laws and ordinances and for no other purpose. Tenant shall not do or permit to be done in or about the Premises or the Complex nor bring or keep or permit to be brought or kept in or about the Premises or the Complex anything which is prohibited by or will in any way increase the existing rate of (or otherwise affect) fire or any insurance covering the Complex or any part thereof, or any of its contents, or will cause a cancellation of any insurance covering the Complex or any part thereof, or any of 2 its contents. Tenant shall not knowingly do or permit to be done anything in, on or about the Premises or the Complex which will in any way obstruct or interfere with the rights of other tenants or occupants of the Complex or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant knowingly cause, maintain or permit any nuisance in, on or about the Premises or the Complex and agrees to take immediate corrective action upon becoming aware of such a problem in this area should one exist. No sale by auction shall be permitted on the Premises. Tenant shall not place any loads upon the floors, walls, or ceiling, which endanger the structure, or place any harmful fluids or other materials in the drainage system of the building, or overload existing electrical or other mechanical systems. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises or outside of the building in which the Premises are a part, except in trash containers placed inside exterior enclosures designated by Landlord for that purpose or inside of the building proper where designated by Landlord. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain outside the Premises or on any portion of common area of the Complex. No loudspeaker or other device, system or apparatus which can be heard outside the Premises shall be used in or at the Premises without the prior written consent of Landlord. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. Tenant shall indemnify, defend and hold Landlord harmless against any loss, expense, damage, attorneys' fees, or liability arising out of failure of Tenant to comply with any applicable law. Tenant shall comply with any covenant, condition, or restriction ("CC&R's") affecting the Premises. The provisions of this paragraph are for the benefit of Landlord only and shall not be construed to be for the benefit of any tenant or occupant of the Complex. 2. TERM* A. Subject to Paragraph 56, the term of this Lease shall be for a period of TEN (10) years (unless sooner terminated as hereinafter provided) and, subject to Paragraphs 2(B) and 3, shall commence on the 1st day of July, 1998 and end on the 30th day June of 2008. B. Possession of the Premises shall be deemed tendered and the term of this Lease shall commence on July 1, 1998, or as otherwise agreed in writing. 3. POSSESSION If Landlord, for any reason whatsoever, cannot deliver possession of said premises to Tenant at the commencement of the said term, as hereinbefore specified, this Lease shall not be void or voidable; no obligation of Tenant shall be affected thereby; nor shall Landlord or Landlord's agents be liable to Tenant for any loss or damage - -------------- * It is agreed in the event said Lease commences on a date other than the first day of the month the term of the Lease will be extended to account for the number of days in the partial month. The Basic Rent during the resulting partial month will be pro-rated (for the number of days in the partial month) at the Basic Rent scheduled for the projected commencement date as shown in Paragraph 43. 3 resulting therefrom; but in that event the commencement and termination dates of the Lease, and all other dates affected thereby shall be revised to conform to the date of Landlord's delivery of possession, as specified in Paragraph 2(b), above. The above is, however, subject to the provision that the period of delay, of delivery of the premises shall not exceed 60 days from the commencement date herein (except those delays caused by Acts of God, strikes, war, utilities, governmental bodies, weather, unavailable materials, and delays beyond Landlord's control shall be excluded in calculating such period) in which instance Tenant, at its option, may, by written notice to Landlord, terminate this Lease. 4. RENT A. Basic Rent. Tenant agrees to pay to Landlord at such place as Landlord may designate without deduction, offset, prior notice, or demand, and Landlord agrees to accept as Basic Rent for the leased Premises the total sum of ELEVEN MILLION SIX HUNDRED FIFTY NINE THOUSAND TWO HUNDRED SEVENTY TWO AND NO/100 ($11,659,272.00) Dollars in lawful money of the United States of America, payable as follows: SEE PARAGRAPH 43 FOR BASIC RENT SCHEDULE. B. Time for Payment. In the event that the term of this Lease commences on a date other than the first day of a calendar month, on the date of commencement of the term hereof Tenant shall pay to Landlord as rent for the period from such date of commencement to the first day of the next succeeding calendar month that proportion of the monthly rent hereunder which the number of days between such date of commencement and the first day of the next succeeding calendar month bears to thirty (30). In the event that the term of this Lease for any reason ends on a date other than the last day of a calendar month, on the first day of the last calendar month of the term hereof Tenant shall pay to Landlord as rent for the period from said first day of said last calendar month to and including the last day of the term hereof that proportion of the monthly rent hereunder which the number of days between said first day of said last calendar month and the last day of the term hereof bears to thirty (30). C. Late Charge. Notwithstanding any other provision of this Lease, if Tenant is in default in the payment of rental as set forth in this Paragraph 4 when due, or any part thereof, Tenant agrees to pay Landlord, in addition to the delinquent rental due, a late charge for each rental payment in default ten (10) days. Said late charge shall equal ten (10%) percent of each rental payment so in default. D. Additional Rent. Beginning with the commencement date of the term of this Lease, Tenant shall pay to Landlord in addition to the Basic Rent and as Additional Rent the following: (a) Tenant's proportionate share of all Taxes relating to the Complex as set forth in Paragraph 12, and 4 (b) Tenant's proportionate share of all insurance premiums relating to the Complex as set forth in Paragraph 15, and (c) Tenant's proportionate share of expenses for the operation, management, maintenance and repair of the Building (including common areas of the Building) and Common Areas of the Complex in which the Premises are located as set forth in Paragraph 7, and (d) All charges, costs and expenses, which Tenant is required to pay hereunder, together with all interest and penalties, costs and expenses including attorneys' fees and legal expenses, that may accrue thereto in the event of Tenant's failure to pay such amounts, and all damages, reasonable costs and expenses which Landlord may incur by reason of default of Tenant or failure on Tenant's part to comply with the terms of this Lease. In the event of nonpayment by Tenant of Additional Rent, Landlord shall have all the rights and remedies with respect thereto as Landlord has for nonpayment of rent. The Additional Rent due hereunder shall be paid to Landlord or Landlord's agent (i) within five days for taxes and insurance and within thirty days for all other Additional Rent items after presentation of invoice from Landlord or Landlord's agent setting forth such Additional Rent and/or (ii) at the option of Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's prorata share of an amount estimated by Landlord to be Landlord's approximate average monthly expenditure for such Additional Rent items, which estimated amount shall be reconciled within 120 days of the end of each calendar year or more frequently if Landlord so elects to do so at Landlord's sole and absolute discretion, as compared to Landlord's actual expenditure for said Additional Rent items, with Tenant paying to Landlord, upon demand, any amount of actual expenses expended by Landlord in excess of said estimated amount, or Landlord crediting to Tenant (providing Tenant is not in default in the performance of any of the terms, covenants and conditions of this lease) any amount of estimated payments made by Tenant in excess of Landlord's actual expenditures for said Additional Rent items. The respective obligations of Landlord and Tenant under this paragraph shall survive the expiration or other termination of the term of this Lease, and if the term hereof shall expire or shall otherwise terminate on a day other than the last day of a calendar year, the actual Additional Rent incurred for the calendar year in which the term hereof expires or otherwise terminates shall be determined and settled on the basis of the statement of actual Additional Rent for such calendar year and shall be prorated in the proportion which the number of days in such calendar year preceding such expiration or termination bears to 365. E. Fixed Management Fee. Beginning with the Commencement Date of the Term of this Lease, Tenant shall pay to Landlord, in addition to the Basic Rent and Additional Rent, a fixed monthly management fee ("Management Fee") equal to 3% of the Basic Rent due for each month during the Lease Term. F. Place of Payment of Rent and Additional Rent. All Basic Rent hereunder and all payments hereunder for Additional Rent shall be paid to Landlord at the office of 5 Landlord at Peery/Arrillaga, File 1504 Box 60000, San Francisco, CA 94160 or to such other person or to such other place as Landlord may from time to time designate in writing. *G. Security Deposit. Concurrently with Tenant's execution of this Lease, Tenant shall deposit with Landlord the sum of TWO HUNDRED TWENTY EIGHT THOUSAND TWO HUNDRED SEVENTEEN AND 50/100 ($228,217.50) Dollars. Said sum shall be held by Landlord as a Security Deposit for the faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Lease, including, but not limited to, the provisions relating to the payment of rent and any of the monetary sums due herewith, Landlord may (but shall not be required to) use, apply or retain all or any part of this Security Deposit for the payment of any other amount which Landlord may spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant' s default. If any portion of said Deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefor, deposit cash with Landlord in the amount sufficient to restore the Security Deposit to its original amount. Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on such Deposit. If Tenant fully and faithfully performs every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall be returned to Tenant (or at Landlord's option, to the last assignee of Tenant's interest hereunder) at the expiration of the Lease term and after Tenant has vacated the Premises. In the event of termination of Landlord's interest in this Lease, Landlord shall transfer said Deposit to Landlord's successor in interest whereupon Tenant agrees to release Landlord from liability for the return of such Deposit or the accounting therefor. 5. RULES AND REGULATIONS AND COMMON AREA Subject to the terms and conditions of this Lease and such Rules and Regulations as Landlord may from time to time prescribe, Tenant and Tenant's employees, invitees and customers shall, in common with other occupants of the Complex in which the Premises are located, and their respective employees, invitees and customers, and others entitled to the use thereof, have the non-exclusive right to use the access roads, parking areas, and facilities provided and designated by Landlord for the general use and convenience of the occupants of the Complex in which the Premises are located, which areas and facilities are referred to herein as "Common Area". This right shall terminate upon the termination of this Lease. Landlord reserves the right from time to time to make changes in the shape, size, location, amount and extent of Common Area. Landlord further reserves the right to promulgate such reasonable rules and regulations relating to the use of the Common Area, and any part or parts thereof, as Landlord may deem appropriate for the best interests of the occupants of the Complex. The Rules and Regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall abide by them and cooperate in their observance. Such Rules and Regulations may be amended by Landlord from time to time, - ---------- * $146,708.10 due upon Lease execution $81,509.40 Promissory Note due July 1, 1999. 6 with or without advance notice, and all amendments shall be effective upon delivery of a copy to Tenant, Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Complex of any of said Rules and Regulations. Landlord shall operate, manage and maintain the Common Area. The manner in which the Common Area shall be maintained and the expenditures for such maintenance shall be at the discretion of Landlord. 6. PARKING Tenant shall have the right to use with other tenants or occupants of the Complex 109 parking spaces in the common parking areas of the Complex. Tenant agrees, that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use parking spaces in excess of said 109 spaces allocated to Tenant hereunder. Landlord shall have the right, at Landlord's sole discretion, to specifically designate the location of Tenant's parking spaces within the common parking areas of the Complex in the event of a dispute among the tenants occupying the building and/or Complex referred to herein, in which event Tenant agrees that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use any parking spaces other than those parking spaces specifically designated by Landlord for Tenant's use. Said parking spaces, if specifically designated by Landlord to Tenant, may be relocated by Landlord at any time, and from time to time, Landlord reserves the right, at Landlord's sole discretion, to rescind any specific designation of parking spaces, thereby returning Tenant's parking spaces to the common parking area. Landlord shall give Tenant written notice of any change in Tenant's parking spaces. Tenant shall not, at any time, park, or permit to be parked, any trucks or vehicles adjacent to the loading areas so as to interfere in any way with the use of such areas, nor shall Tenant at any time park, or permit the parking of Tenant's trucks or other vehicles or the trucks and vehicles of Tenant's suppliers or others, in any portion of the common area not designated by Landlord for such use by Tenant. Tenant shall not park nor permit to be parked, any inoperative vehicles or equipment on any portion of the common parking area or other common areas of the Complex. Tenant agrees to assume responsibility, for compliance by its employees with the parking provision contained herein. If Tenant or its employees park in other than such designated parking areas, then Landlord may charge Tenant, as an additional charge, and Tenant agrees to pay, ten ($10.00) Dollars per day for each day or partial day each such vehicle is parked in any area other than that designated. Tenant hereby authorizes Landlord at Tenant's sole expense to tow away from the Complex any vehicle belonging to Tenant or Tenant's employers parked in violation of these provisions, or to attach violation stickers or notices to such vehicles. Tenant shall use the parking areas for vehicle parking only, and shall not use the parking areas for storage. There will be no charge for parking, except as noted herein. 7. EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF THE COMPLEX AND BUILDING IN WHICH THE PREMISES ARE LOCATED As Additional Rent and in accordance with Paragraph 4 D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of all expenses of operation, management, maintenance and repair of the Common Areas of the Complex including, but not limited to, license, permit, and inspection fees; security; utility charges 7 associated with exterior landscaping and lighting (including water and sewer charges); all charges incurred in the maintenance and replacement of landscaped areas, lakes, parking lots and paved areas (including repairs, replacement, resealing and restriping), sidewalks, driveways; maintenance, repair and replacement of all fixtures and electrical, mechanical, and plumbing systems; structural elements and exterior surfaces of the buildings; salaries and employee benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord may amortize its investment in said improvements (together with interest at the rate of fifteen (15%) percent per annum on the unamortized balance) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses. "Additional Rent" as used herein shall not include Landlord's debt repayments; interest on charges; expenses directly or indirectly incurred by Landlord for the benefit of any other tenant; cost for the installation of partitioning or any other tenant improvements; cost of attracting tenants; depreciation; interest, or executive salaries. As Additional Rent and in accordance with paragraph 4 D of this Lease, Tenant shall pay its proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of the cost of operation (including common utilities), management, maintenance, and repair of the building (including common areas such as lobbies, restrooms, janitor's closets, hallways, elevators, mechanical and telephone rooms, stairwells, entrances, spaces above the ceilings and janitorization of said common areas) in which the Premises are located. The maintenance items herein referred to include, but are not limited to, all windows, window frames, plate glass, glazing, track doors, main plumbing systems of the building (such as water and drain lines, sinks, toilets, faucets, drains, showers and water fountains), main electrical systems (such as panels and conduits), heating and air-conditioning systems (such as compressors, fans, air handlers, ducts, boilers, heaters), store fronts, roofs, downspouts, building common area interiors (such as wall coverings, window coverings, floor coverings and partitioning), ceilings, building exterior doors, skylights (if any), automatic fire extinguishing systems, and elevators; license, permit, and inspection fees; security; salaries and employee benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord may amortize its investment in said improvements (together with interest at the rate of fifteen (15%) percent per annum on the unamortized balance) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses. Tenant hereby waives all rights under, and benefits of, subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect. 8 8. ACCEPTANCE AND SURRENDER OF PREMISES Subject to Paragraph 53 and by entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the building and improvements included in the Premises in their present condition and without representation or warranty by Landlord as to the condition of such building or as to the use or occupancy which may be made thereat. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner termination of this Lease, to surrender the Premises promptly and peaceably to Landlord in good condition and repair (damage by Acts of God, fire, normal wear and tear excepted), with all interior walls painted, or cleaned so that they appear freshly painted, and repaired and replaced, if damaged; all floors cleaned and waxed; all carpets cleaned and shampooed; the airconditioning and heating equipment serviced by a reputable and licensed service firm and in good operating condition (provided the maintenance of such equipment has been Tenant's responsibility during the term of this Lease) together with all alterations, additions, and improvements which may have been made in, to, or on the Premises (except movable trade fixtures installed at the expense of Tenant) except that Tenant shall ascertain from Landlord within thirty (30) days before the end of the term of this Lease whether Landlord desires to have the Premises or any part or parts thereof restored to their condition and configuration as when the Premises were delivered to Tenant and if Landlord shall so desire, then Tenant shall restore said Premises or such part or parts thereof before the end of this Lease at Tenants sole cost and expense. Tenant, on or before the end of the term or sooner termination of this Lease, shall remove all of Tenant's personal property and trade fixtures from the Premises, and all property not so removed on or before the end of the term or sooner termination of this Lease shall be deemed abandoned by Tenant and title to same shall thereupon pass to Landlord without compensation to Tenant. Landlord may, upon termination of this Lease, remove all moveable furniture and equipment so abandoned by Tenant, at Tenant's sole cost, and repair any damage caused by such removal at Tenant's sole cost. If the Premises be not surrendered at the end of the term or sooner termination of this Lease, Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding tenant founded on such delay. Nothing contained herein shall be construed as an extension of the term hereof or as a consent of Landlord to any holding over by Tenant. The voluntary or other surrender of this Lease or the Premises by operate as an assignment to landlord of all or any such subleases or subtenancies. 9. ALTERATIONS AND ADDITIONS Tenant shall not make, or suffer to be made, any alteration or addition to the Premises, or any part thereof, without the written consent of Landlord first had and obtained by Tenant, but at the cost of Tenant, and any addition to, or alteration of, the Premises, except moveable furniture and trade futures, shall at once become a part of Premises and belong to Landlord. Landlord reserves the right to approve all contractors and mechanics proposed by Tenant to make such alterations and additions. Tenant shall retain title to all moveable furniture and trade fixtures placed in the Premises. All heating, lighting, electrical, airconditioning, floor to ceiling partitioning, drapery, carpeting, and floor installations made by Tenant, together with all property that has 9 become an integral part of the Premises, shall not be deemed fixtures. Tenant agrees that it will not proceed to make such alteration or additions, without having obtained consent from Landlord to do so, and until five (5) days from receipt of such consent, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. Tenant shall, if required by Landlord, secure at Tenant's own cost and expense, a completion and lien indemnity bond, satisfactory to landlord, for such work. Tenant further covenants and agrees that any mechanic's lien filed against the Premises or against the Complex for work claimed to have been done for, or materials claimed to have been furnished to Tenant, will be discharged by bond or otherwise, within ten (10) days after the filing thereof, at the cost and expense of Tenant. Any exceptions to the foregoing must be made in writing and executed by both Landlord and Tenant. 10. TENANT MAINTENANCE Team shall, at its sole cost and expense, keep and maintain the Premises (including appurtenances) and every part thereof in a high standard of maintenance and repair, and in good and sanitary condition. Tenant's maintenance and repair responsibilities herein referred to include, but are not limited to, janitorization, plumbing systems within the non-common areas of the Premises (such as water and drain lines, sinks), electrical systems within the non-common areas of the Premises (such as outlets, lighting fixtures, lamps, bulbs, tubes, ballasts), heating and air-conditioning, controls within the non-common areas of the Premises (such as mixing boxes, thermostats, time clocks, supply and return grills), all interior improvements within the premises including but not limited to: wall coverings, window coverings, acoustical ceilings, vinyl tile, carpeting, partitioning, doors (both interior and exterior, including closing mechanisms, latches, locks), and all other interior improvements of any nature whatsoever. Tenant agrees to provide carpet shields under all rolling chairs or to otherwise be responsible for wear and tear of the carpet caused by such rolling chairs if such wear and tear exceeds that caused by normal foot traffic in surrounding areas. Areas of excessive wear shall be replaced at Tenant's sole expense upon Lease termination. 11. UTILITIES OF THE BUILDING IN WHICH THE PREMISES ARE LOCATED As Additional Rent and in accordance with paragraph 4 D of this Lease, Tenant shall pay its proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of the cost of all utility charges such us water, gas, electricity, telephone, telex and other electronic communications service, sewer service, waste-pick-up and any other utilities, materials or services furnished directly to the building in which the Premises are located, including, without limitation, any temporary or permanent utility surcharge or other exactions whether or not hereinafter imposed. Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of rent by reason of any interruption or failure of utility services to the Premises when such interruption or failure is caused by accident, breakage, repair, strikes, lockouts, other labor disturbances or labor disputes of any nature or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. 10 Provided that Tenant is not in default in the performance or observance of any of the terms, covenants or conditions of this Lease to be performed or observed by it, Landlord shall furnish to the Premises between the hours of 8:00 AM and 6:00 PM, Mondays through Fridays (holidays excepted) and subject to the roles and regulations of the Complex hereinbefore referred to, reasonable quantities of water, gas and electricity suitable for the intended use of the Premises and heat and air-conditioning required in Landlord's judgment for the comfortable use and occupation of the Premises for such purposes. Tenant agrees that at all times it will cooperate fully with Landlord and abide by all regulations and requirements that Landlord may prescribe for the proper functioning and protection of the building heating, ventilating and airconditioning systems. Whenever heat generating machines, equipment, or any other devices (including exhaust fans) are used in the Premises by Tenant which affect the temperature or otherwise maintained by the airconditioning system, Landlord shall have the right to install supplementary airconditioning units in the Premises and the cost thereof, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord. Tenant will not, without the written consent of Landlord, use any apparatus or device in the Premises (including, without limitation), electronic data processing machines or machines using current in excess of 110 Volts which will in any way increase the amount of electricity, gas, water or air conditioning usually furnished or supplied to premises being used as general office space, or connect with electric current (except through existing electrical outlets in the Premises), or with gas or water pipes any apparatus or device for the purposes of using electric current, gas, or water. If Tenant shall require water, gas or electric current in excess of that usually furnished or supplied to premises being used as general office space. Tenant shall first obtain the written consent of Landlord, which consent shall not be unreasonably withheld and Landlord may cause an electric current, gas, or water meter to be installed in the Premises in order to measure the amount of electric current, gas or water consumed for any such excess use. The cost of any such meter and of the installation, maintenance and repair thereof, all charges for such excess water, gas and electric current consumed (as shown by such meters and at the rates then charged by the furnishing public utility); and any additional expense incurred by Landlord in keeping account of electric current, gas, or water so consumed shall be paid by Tenant, and Tenant agrees to pay Landlord therefor promptly upon demand by Landlord. 12. TAXES A. As Additional Rent and in accordance with Paragraph 4 D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share of all Real Property Taxes, which prorata share shall be allocated to the leased Premises by square footage or other equitable basis, as calculated by Landlord. The term "Real Property Taxes", as used herein, shall mean (i) all taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments or principal and interest required to pay any general or special assessments for public improvements and any increases resulting from reassessments caused by any change in ownership of the Complex) now or hereafter imposed by any governmental or quasi-governmental authority of special district having the direct or indirect power to tax or levy assessments, which are levied or assessed against, or with respect to the value, occupancy or use of, all or any portion of the Complex (as now constructed or as may at 11 any time hereafter be constructed, altered, or otherwise changed) or Landlord's interest therein; any improvements located within the Complex (regardless of ownership); the fixtures, equipment and other property of Landlord, real or personal, that are an integral part of and located in the Complex; or parking areas, public utilities, or energy within the Complex; (ii) all charges, levies or fees imposed by reason of environmental regulation or other governmental control of the Complex; and (iii) all costs and fees (including attorneys' fees) incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If at any time during the term of this Lease the taxation or assessment of the Complex prevailing as of the commencement date of this Lease shall be altered so that in lieu or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate or additional tax or charge (i) on the value, use or occupancy of the Complex or Landlord's interest therein or (ii) on or measured by the gross receipts, income or rentals from the Complex, on Landlord's business of leasing the Complex, or computed in any manner with respect to the operation of the Complex, then any such tax or charge, however designated, shall be included within the meaning of the term "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is based upon property or rents unrelated to the Complex, then only that part of such real Property Tax that is fairly allocable to the Complex shall be included within the meaning of the term "Real Property Taxes". Notwithstanding the foregoing, the term "Real Property Taxes" shall not include estate, inheritance, gift or franchise taxes of Landlord or the federal or state net income tax imposed on Landlord's income from all sources. B. Taxes on Tenant's Property (a) Tenant shall be liable for and shall pay ten days before delinquency, taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises. If any such taxes on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant and if Landlord, after written notice to Tenant, pays the taxes based on such increased assessment, which Landlord shall have the right to do regardless of the validity thereof, but only under proper protest if requested by Tenant, Tenant shall upon demand, as the case may be, repay to Landlord the taxes so levied against Landlord, or the proportion of such taxes resulting from such increase in the assessment; provided that in any such event Tenant shall have the right, in the name of Landlord and with Landlord's full cooperation, to bring suit in any court of competent jurisdiction to recover the amount orally such taxes so paid under protest, and any amount so recovered shall belong to Tenant. (b) if the Tenant improvements in the Premises, whether installed, and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which standard office improvements in other space in the Complex are assessed, then the real property taxes and assessments levied against Landlord or the 12 Complex by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of 12Ba, above. If the records of the County Assessor are available and sufficiently detailed to serve as a basis for determining whether said Tenant improvements are assessed at a higher valuation than standard office improvements in other space in the Complex, such records shall be binding on both the Landlord and the Tenant. If the records of the County Assessor are not available or sufficiently detailed to serve as a basis for making said determination, the actual cost of construction shall be used. 13. LIABILITY INSURANCE Tenant at Tenant's expense, agrees to keep in force during the term of this Lease a policy of commercial general liability insurance with a combined single limit coverage of not less than Two Million Dollars ($2,000,000) per occurrence for injuries to or death of persons occurring in, on or about the Premises or the Complex, and property damage. The policy or policies affecting such insurance, certificates of insurance of which shall be furnished to Landlord, shall name Landlord as additional insured, and shall insure any liability of Landlord, contingent or otherwise, as respects acts or omissions of Tenant, its agents, employees or invitees or otherwise by any conduct or transactions of any of said persons in or about or concerning the Premises, including including any failure of Tenant to observe or perform any of its obligations hereunder; shall be issued by an insurance company admitted to transact business in the State of California; and shall provide that the insurance effected thereby shall not be canceled, except upon thirty (30) days' prior written notice to Landlord. If, during the tern of this Lease, in the considered opinion of Landlord's Lender, insurance advisor, or counsel, the amount of insurance described in this paragraph 13 is not adequate, Tenant agrees to increase said coverage to such reasonable amount as Landlord's Lender, insurance advisor, or counsel shall deem adequate. 14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE Tenant shall maintain a policy or policies of fire and property damage insurance in "all risk" form with a sprinkler leakage endorsement insuring the personal property, inventory, trade fixtures, and leasehold improvements within the leased Premises for the full replacement value thereof. The proceeds from any of such policies shall be used for the repair or replacement of such items so insured. Tenant shell also maintain a policy or policies of workman's compensation insurance and any other employee benefit insurance sufficient to comply with all laws. 15. PROPERTY INSURANCE Landlord shall purchase and keep in force and as Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord (or Landlord's agent if so directed by Landlord), Tenant's proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of the deductibles on insurance claims and the cost of policy or policies of insurance covering loss or damage to the Premises and Complex in the amount of the full replacement value thereof, providing protection against those perils included within the classification of "all risks" insurance and flood and/or earthquake insurance, if available, plus a policy of rental income insurance in the amount of one hundred (100%) percent of twelve (12) months 13 Basic Rent, plus sums paid as Additional Rent. If such insurance cost is increased due to Tenant's use of the Premises or the Complex, Tenant agrees to pay to Landlord the full cost of such increase. Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord for the Complex. Landlord and Tenant do each hereby respectively release the other, to the extent of insurance coverage of the releasing party, from any liability for loss or damage caused by fire or any of the extended coverage casualties included in the releasing party's insurance policies, irrespective of the cause of such fire or casualty; provided, however, that if the insurance policy of either releasing company prohibits such waiver, then this waiver shall not take effect until consent to such waiver is obtained. If such waiver is so prohibited, the insured party affected shall promptly notify the other party thereof. 16. INDEMNIFICATION Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or death of any person or damage to or destruction of property in or about the Premises or the Complex by or from any cause whatsoever, including, without limitation, gas, fire, oil, electricity or leakage of any character from the roof, walls, basement or other portion of the Premises or the Complex but excluding, however, the willful misconduct or negligence of Landlord, its agent, servants, employees, invitees, or contractors of which negligence Landlord has knowledge and reasonable time to correct. Except as to injury to persons or damage to property to the extent arising from the willful misconduct or the negligence of Landlord, its agents, servants, employees, invitees, or contractors, Tenant shall hold Landlord harmless from and defend Landlord against any and all expenses, including reasonable attorneys' fees, in connection therewith, arising out of any injury to or death of any person or damage to or destruction of property occurring in, on or about the Premises, or any part thereof, from any cause whatsoever. 17. COMPLIANCE Tenant, at its sole cost and expense, shall promptly comply wit a laws, statutes, ordinances and governmental rules, regulations or requirements now or hereafter in effect; with the requirements of any board of fire underwriters or other similar body now or hereafter constituted; and with any direction or occupancy certificate issued pursuant to law by any public officer; provided, however, that no such failure shall be deemed a breach of the provisions if Tenant, immediately upon notification, commences to remedy or rectify said failure. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such law, statute, ordinance or governmental rule, regulation, requirement, direction or provision, shall be conclusive of that fact as between Landlord and Tenant. This paragraph shall not be interpreted as requiring Tenant to make structural changes or improvements, except to the extent such changes or improvements are required as a result of Tenant's use of the Premises. Tenant shall, at its sole cost and expense, comply with any and all requirements pertaining to said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance covering the Premises. 14 18. LIENS Tenant shall keep the Premises and the Complex free from any liens arising out of any work performed, materials furnished or obligation incurred by Tenant. In the event that Tenant shall not, within twenty (20) days following the imposition of such lien, cause the same to be released of record, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but no obligation, to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord for such purpose, and all expenses incurred by it in connection therewith, shall be payable to Landlord by Tenant on demand with interest at the prime rate of interest as quoted by the Bank of America. 19. ASSIGNMENT AND SUBLETTING Tenant shall not assign, transfer, or hypothecate the leasehold estate under this Lease, or any interest therein, and shall not sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person or entity to occupy or use the Premises, or any portion thereof, without, in each case, the prior written consent of Landlord which consent will not be unreasonably withheld. As a condition for granting this consent to any assignment, transfer, or subletting, Landlord shall require Tenant to pay to Landlord, as Additional Rent, all rents and/or additional to consideration due Tenant from its assignees, transferees, or subtenants in excess of the Rent payable by Tenant to Landlord hereunder for the assigned, transferred, and/or subleased space. Tenant shall, by thirty (30) days written notice, advise Landlord of its intent to assign or transfer Tenant's interest in the Lease or sublet the Premises or any portion thereof for any part of the term hereof. Within thirty (30) days after receipt of said written notice, Landlord may, in its sole discretion, elect to terminate this Lease as to the portion of the Premises described in Tenant's notice on the date specified in Tenant's notice by giving written notice of such election to terminate. If no such notice to terminate is given to Tenant within said thirty (30) day period, Tenant may proceed to locate an acceptable sublessee, assignee, or other transferee for presentment to Landlord for Landlord's approval, all in accordance with the terms, covenants, and conditions of this paragraph 19. If Tenant intends to sublet the entire Premises and Landlord elects to terminate this Lease, this Lease shall be terminated on the date specified in Tenant's notice. If, however, this Lease shall terminate pursuant to the foregoing with respect to less than all the Premises, the rent, as defined and reserved hereinabove shall be adjusted on a pro rata basis to the number of square feet retained by Tenant, and this Lease as so amended shall continue in full force and effect. In the event Tenant is allowed to assign, transfer or sublet the whole or any part of the Premises, with the prior written consent of Landlord, no assignee, transferee or subtenant shall assign or transfer this Lease, either in whole or in part, or sublet the whole or any part of the Premises, without also having obtained the prior written consent of Landlord. A consent of Landlord to one assignment, transfer, hypothecation, subletting, occupation or use by any other person shall not release Tenant from any of Tenant's obligations hereunder or be deemed to be a consent to any subsequent similar or dissimilar assignment, transfer, hypothecation, subletting, occupation or use by any other person. Any such assignment, transfer, hypothecation, subletting, occupation or use without such consent shall be void and shall constitute a breach of this Lease by Tenant and shall, at the option of Landlord exercised by written notice to Tenant, terminate this Lease. The leasehold estate under this 15 Lease shall not, nor shall any interest therein, be assignable for any purpose by operation of law without the written consent of Landlord. As a condition to its consent, Landlord shall require Tenant to pay all expenses in connection with the assignment, and Landlord shall require Tenant's assignee or transferee (or other assignees or transferees) to assume in writing all of the obligations under this Lease and for Tenant to remain liable to Landlord under the Lease. Notwithstanding the above, in no event will Landlord consent to a sub-sublease. 20. SUBORDINATION AND MORTGAGES In the event Landlord's title or leasehold interest is now or hereafter encumbered by a decd of trust, upon the interest of Landlord in the land and buildings in which the demised Premises arc located, to secure a loan from a lender (hereinafter referred to as "Lender") to Landlord, Tenant shall, at the request of Landlord or Lender, execute in writing an agreement subordinating its rights under this Lease to the lien of such deed of trust, or, if so requested, agreeing that the lien of Lender's deed of trust shall be or remain subject and subordinate to the rights of Tenant under this Lease. Notwithstanding any such subordination, Tenant's possession under this Lease shall not be disturbed if Tenant is not in default and so long us Tenant shall pay all rent and observe and perform all of the provisions set forth in this Lease. 21. ENTRY BY LANDLORD Landlord reserves, and shall at all reasonable times after at least 24 hours notice (except in emergencies) have, the right to enter the Premises to inspect them; to perform any services to be provided by Landlord hereunder, to submit the Premises to prospective purchasers, mortgages or tenants; to post notices of nonresponsibility; and to alter, improve or repair the Premises and any portion of the Complex, all without abatement of rent; and may erect scaffolding and other necessary structures in or through the Premises where reasonably required by the character of the work to be performed; provided, however that the business of Tenant shall be interfered with to the least extent that is reasonably practical. For each of the foregoing purposes, any entry to the Premises obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof, Landlord shall also have the right at any time to change the arrangement or locution of entrances or passageways, down and doorways, and corridors, elevators, stairs, toilets or other public parts of the Complex and to change the name, number or designation by which the Complex is commonly known, and none of the foregoing shall be deemed an actual or constructive eviction of Tenant, or shall entitle Tenant to any reduction of rent hereunder. 22. BANKRUPTCY AND DEFAULT The commencement of a bankruptcy action or liquidation action or reorganization action or insolvency action or an assignment of or by Tenant for the benefit of creditors, or any similar action undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option, constitute a breach of this Lease by Tenant. If the trustee or receiver appointed to serve during a bankruptcy, liquidation, reorganization, insolvency or similar action elects to reject Tenant's unexpired Lease, the trustee or receiver shall notify Landlord in writing of its election within thirty (30) days 16 after an order for relief in a liquidation action or within thirty (30) days after the commencement of any action. Within thirty (30) days after court approval of the assumption of this Lease, the trustee or receiver shall cure for provide adequate assurance to the reasonable satisfaction of Landlord that the trustee or receiver shall cure) any unit all previous defaults under the unexpired Lease and shall compensate Landlord for all actual pecuniary loss and shall provide adequate assurance of future performance under said Lease to the reasonable satisfaction of Landlord. Adequate assurance of future performance, us used herein, includes, but shall not be limited to: (i) assurance of source and payment of rent, and other consideration due under this Lease; (ii) assurance that the assumption or assignment of this Lease will not breach substantially any provision, such us radius, location, use, or exclusivity provision, in any agreement relating to the above described Premises. Nothing contained in this section shall affect the existing right of Landlord to refuse to accept an assignment upon commencement of or in connection with a bankruptcy, liquidation, reorganization or insolvency action or an assignment of Tenant fur the benefit of creditors or other similar act. Nothing contained in this Lease shall be construed as giving or granting or creating an equity in the demised Premises to Tenant. In no event shall the leasehold estate under this Lease, or any interest therein, be assigned by voluntary or involuntary bankruptcy proceeding without the prior written consent of Landlord. In no event shall this Lease or any rights or privileges hereunder be an asset of Tenant under any bankruptcy, insolvency or reorganization proceedings. The failure to perform or honor any covenant, condition or representation made under this Lease shall constitute a default hereunder by Tenant upon expiration of the appropriate grace period hereinafter provided. Tenant shall have a period of five (5) days from the date of written notice from Landlord within which to cure any default in the payment of rental or adjustment thereto. Tenant shall have a period of thirty (30) days from the date of written notice from Landlord within which to cure any other default under this Lease. Upon an uncured default of this Lease by Tenant, Landlord shall have the following rights and remedies in addition to any other rights or remedies available to Landlord at law or in equity: (a) The rights and remedies provided for by California Civil Code Section 1951.2, including but nut limited to, recovery of the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of rental loss for the same period that Tenant proves could be reasonably avoided, as computed pursuant to subsection (b) of said Section 1951.2. Any proof by Tenant under subparagraphs (2) and (3) of Section 1951.2 of the California Civil Code of the amount of rental loss that could be reasonably avoided shall be made in the following manner; Landlord and Tenant shall each select a licensed real estate broker in the business of rending property of the same type and use as the Premises and in the same geographic vicinity. Such two real estate brokers shall select a third licensed real estate broker, and the three licensed real estate brokers so selected shall determine the amount of the renal loss that could be reasonably avoided from the balance of the term of this Lease 17 after the time of award. The decision of the majority of said licensed real estate brokers shall be final and binding upon the parties hereto. (b) The rights and remedies provided by California Civil Code Section which allows Landlord to continue the Lease in effect and to enforce all of its rights and remedies under this Lease, including the right to recover rent as it becomes due, for so long as Landlord does not terminate Tenant's right to possession; acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver upon Landlord's initiative to protect its interest under this Lease shall not constitute a termination of Tenant's right to possession. (c) The right to terminate this Lease by giving notice to Tenant in accordance with applicable law. (d) To the extent permitted by law the right and power, to enter the Premises and remove therefrom all persons and property, to store such property in a public warehouse or elsewhere at the cost of and for the account of Tenant, and to sell such property and apply such proceeds therefrom pursuant to applicable California law. Landlord, may from time to time sublet the Premises or any part thereof for such term or terms (which may extend beyond the term of this Lease) and at such rent and such other terms as Landlord in its sole discretion may deem advisable, with the right to make alterations and repairs to the Premises. Upon each subletting, (i) Tenant shall be immediately liable to pay Landlord, in addition to indebtedness other than rent due hereunder, the cost of such subletting, including, but not limited to, reasonable attorneys' fees, and any real estate commissions actually paid, and the cost of such alterations and repairs incurred by Landlord and the amount, if any, by which the rent hereunder for the period of such subletting (to the extent such period does not exceed the term hereof) exceeds the amount to be paid as rent for the Premises for such period or (ii) at the option of Landlord, rents received from such subletting shall be applied first to payment of indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such subletting and or such alterations and repairs; third to payment of rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same becomes due hereunder. If Tenant has been credited with any rent to be received by such subletting under option (i) and such rent shall not be promptly paid to Landlord by the subtenant(s), or if such rentals received from such subletting under option (ii) during any month be less than that to be paid during that month by Tenant he hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. For all purposes set forth in this subparagraph d. No taking possession of the Premises by Landlord, shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant. Notwithstanding any such subletting without termination, Landlord may at any time hereafter elect to terminate this Lease for such previous breach. (e) The right to have a receiver appointed for Tenant upon application by landlord, to take possession of the Premises and to apply any rental collected from the 18 Premises and to exercise all other rights and remedies granted to Landlord pursuant to subparagraph d above. 23. ABANDONMENT Tenant shall not vacate or abandon the Premises at any time during the term of this Lease and if Tenant shall abandon, vacate or surrender said Premises, or be dispossessed by the process of law, or otherwise, any personal property belonging to Tenant and left on the Premises shall be deemed to be abandoned, at the option of Landlord, except such property as may be mortgaged to Landlord. 24. DESTRUCTION In the event the Premises are destroyed in whole or in part from any cause, except for routine maintenance and repairs and incidental damage and destruction caused from vandalism and accidents for which Tenant is responsible for under Paragraph 10, Landlord may, at its option: (a) Rebuild or restore the Premises to their condition prior to the damage or destruction, or (b) Terminate this Lease (providing that the Premises is damaged to the extent of 33 1/3 or more of the replacement cost). If Landlord does not give Tenant notice in writing within thirty (30) days from the destruction of the Premises of its election to either rebuild and restore them, or to terminate this Lease, Landlord shall be deemed to have elected to rebuild or restore them, in which event Landlord agrees, at its expense, promptly to rebuild or restore the Premises to their condition prior to the damage or destruction, Tenant shall be entitled to a reduction in rent while such repair is being made in the proportion that the area of the Premises rendered untenantable by such damage bears to the total area of the Premises. If Landlord initially estimates that the rebuilding or restoration will exceed 180 days (or 60 days if the destruction occurs within the last eighteen months of the Lease Term) or if Landlord does not complete the rebuilding or restoration within one hundred eighty (180) days (or sixty (60) days if the destruction occurs within the last eighteen (18) months of the Lease Term) following the date of destruction (such period of time to be extended for delays caused by the fault or neglect of Tenant or because of Acts of God, acts of public agencies, labor disputes. strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond the control of Landlord), then Tenant shall have the right to terminate this Lease by giving fifteen (15) days prior written notice to Landlord. Notwithstanding anything herein to the contrary, Landlord's obligation to rebuild or restore shall be limited to the building and interior or improvements constructed by Landlord as they existed as of the commencement date of the Lease and shall not include restoration of Tenant's trade fixtures, equipment, merchandise, or any improvements, alterations or additions made by Tenant to the Premises, which Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense provided this Lease is not cancelled according to the provisions above. 19 Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect. Tenant hereby expressly waives the provisions of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of the California Civil Code. In the event that the building in which the Premises are situated is damaged or destroyed to the extent of not less than 33 1/3% of the replacement cost thereof, Landlord may elect to terminate this Lease, whether the Premises be insured or not. Notwithstanding anything to the contrary herein, Landlord may terminate this Lease in the event of an uninsured event or if insurance proceeds are insufficient to cover 100% of the rebuilding costs net of the deductible. 25. EMINENT DOMAIN If all or any part of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, this Lease shall terminate as to any portion of the Premises so taken or conveyed on the date when title vests in the condemnor, and Landlord shall be entitled to any and all payment, income, rent, award, or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance, and Tenant shall have no claim against Landlord or otherwise for the value of any unexpired term of this Lease. Notwithstanding the foregoing paragraph, any compensation specifically awarded Tenant for loss of business, Tenant's personal property, moving cost or loss of goodwill, shall be and remain the property of Tenant. If (i) any action or proceeding is commenced for such taking of the Premises or any part thereof, or if Landlord is advised in writing by any entity or body having the right or power of condemnation of its intention to condemn the premises or any portion thereof, or (ii) any of the foregoing events occur with respect to the taking of any space in the Complex not leased hereby, or if any such spaces so taken or conveyed in lieu of such taking and Landlord shall decide to discontinue the use and operation of the Complex, or decide to demolish, alter or rebuild the Complex, then, in any of such events Landlord shall have the right to terminate this Lease by giving Tenant written notice thereof within sixty (60) days of the date of receipt of said written advice, or commencement of said action or proceeding, or taking conveyance, which termination shall take place as of the first to occur of the last day of the calendar month next following the month in which such notice is given or the date on which title to the Premises shall vest in the condemnor. In the event of such a partial taking or conveyance of the Premises, if the portion of the Premises taken or conveyed is so substantial that the Tenant can no longer reasonably conduct its business, Tenant shall have the privilege of terminating this Lease within sixty (60) days from the date of such taking or conveyance, upon written notice to Landlord of its intention so to do, and upon giving of such notice this Lease shall terminate on the last day of the calendar month next following the month in which such notice is given, upon payment by Tenant of the rent from the date of such taking or conveyance to the date of termination. 20 If a portion of the Promises be taken by condemnation or conveyance in lieu thereof and neither Landlord nor Tenant shall terminate this Lease as provided herein, this Lease shall continue in full force and effect as to the part of the Premises not so taken or conveyed, and the rent herein shall be apportioned as of the date of such taking or conveyance so that thereafter the rent to be paid by Tenant shall be in the ratio that the area of the portion of the Premises not so taken or conveyed bears to the total area of the Premises prior to such taking. 26. SALE OR CONVEYANCE BY LANDLORD In the event of a sale or conveyance of the Complex or any interest therein, by any owner of the reversion then constituting Landlord, the transferor shall thereby be released from any further liability upon any of the terms, covenants or conditions (express or implied) herein contained in favor of Tenant, and in such event, insofar as such transfer is concerned, Tenant agrees to look solely to the responsibility of the successor in interest of such transferor in and to the Complex and this Lease. This Lease shall not be affected by any such sale or conveyance, and Tenant agrees to attorn to the successor in interest of such transferor. 27. ATTORNMENT TO LENDER OR THIRD PARTY In the event the interest of Landlord in the land and buildings in which the leased Premises are located (whether such interest of Landlord is a fee title interest or a leasehold interest) is encumbered by deed of trust, and such interest is acquired by the lender or any third party through judicial foreclosure or by exercise of a power of sale at private trustee's foreclosure sale, Tenant hereby agrees to attorn to the purchaser at any such foreclosure sale and to recognize such purchaser as the Landlord under this Lease. In the event the lien of the deed of trust securing the loan from a Lender to Landlord is prior and paramount to the Lease, this Lease shall nonetheless continue in full force and effect for the remainder of the unexpired term hereof, at the same rental herein reserved and upon all the other terms, conditions and covenants herein contained. 28. HOLDING OVER Any holding over by Tenant after expiration or other termination of the term of this Lease with the written consent of Landlord delivered to Tenant shall not constitute a renewal or extension of the Lease or give Tenant any rights in or to the leased Premises except as expressly provided in this Lease. Any holding over after the expiration or other termination of the term of this Lease, with the consent of Landlord, shall be construed to be a tenancy from month to month on the same terms and conditions herein specified insofar as applicable except that the monthly Basic Rent shall be increased to an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent required during the last month of the Lease term. 29. CERTIFICATE OF ESTOPPEL Tenant shall at any time upon not less than ten (10) days' prior written notice from Landlord execute, acknowledge and deliver to Landlord a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such 21 defaults, if any, are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord; that there are no uncured defaults in Landlord's performance, and that not more than one month's rent has been paid in advance. 30. CONSTRUCTION CHANGES It is understood that the description of the Premises and the location of ductwork, plumbing and other facilities therein are subject to such minor changes as Landlord or Landlord's architect determines to be desirable in the course of construction of the Premises, and no such changes, or any changes in plans for any other portions of the Complex shall affect this Lease or entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant, Landlord does not guarantee the accuracy of any drawings supplied to Tenant and verification of the accuracy of such drawings rests with Tenant. 31. RIGHT OF LANDLORD TO PERFORM All terms, covenants and conditions of this Lease to be performed or observed by Tenant shall be performed or observed by Tenant at Tenant's sole cost and expense and without any reduction of rent. If Tenant shall fail pay any sum of money, or other rent, required to be paid by it hereunder and such failure shall continue for five (5) days after written notice by Landlord, or shall fail to perform any other term or covenant hereunder on its part to be performed, and such failure shall continue for thirty (30) days after written notice thereof by Landlord. Landlord, without waiving or releasing Tenant from any obligation of Tenant hereunder, may, but shall not be obligated to, make any such payment or perform any such other term or covenant on Tenant's part to be performed. All sums so paid by Landlord and all necessary costs of such performance by Landlord together with interest thereon at the rate of the prime rate of interest per annum as quoted by the Bank of America from the date of such payment or performance by Landlord, shall be paid (and Tenant covenants to make such payment) to Landlord on demand by Landlord, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of nonpayment by Tenant as in the case of failure by Tenant in the payment of rent hereunder. 32. ATTORNEYS' FEES. (A) In the event that either Landlord or Tenant should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease, or for any other relief against the other party hereunder, then all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgement. (B) Should Landlord be named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant shall 22 pay to Landlord its costs and expenses incurred in such suit, including a reasonable attorney's fee. 33. WAIVER The waiver by either party of the other party's failure to perform or observe any term, covenant or condition herein contained to be performed or observed by such waiving party shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent failure of the party failing to perform or observe the same or any other such term, covenant or condition therein contained, and no custom or practice which may develop between the parties hereto during the term hereof shall be deemed a waiver of, or in any way affect, the right of either party to insist upon performance and observance by the other party in strict accordance with the terms hereof. 34. NOTICES All notices, demands, requests, advice or designations which may be or are required to be given by either party to the other hereunder shall be in writing. All notices, demands, requests, advice or designations by Landlord to Tenant shall be sufficiently given, made or delivered if personally served on Tenant by leaving the same at the Premises or if sent by United States certified or registered mail, postage prepaid, addressed to Tenant at the Premises. All notices, demands, requests, advice or designations by Tenant to Landlord shall be sent by United States certified or registered mail, postage prepaid, addressed to Landlord at its offices at Peery/Arrillaga, 2560 Mission College Blvd., Suite 101, Santa Clara, CA 95054. Each notice, request, demand, advice or designation referred to in this paragraph shall be deemed received on the date of the personal service or mailing thereof in the manner herein provided, as the case may be. 35. EXAMINATION OF LEASE Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for a lease, and this instrument is not effective as a lease or otherwise until its execution and delivery by both Landlord and Tenant. 36. DEFAULT BY LANDLORD Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event earlier than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have heretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligations; provided, however, that if the nature of Landlord's obligations is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 37. CORPORATE AUTHORITY If Tenant is a corporation, (or a partnership) each individual executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation (or partnership) in accordance with the by-laws of said corporation (or partnership in accordance with the partnership agreement) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. If Tenant is a corporation, Tenant shall, within thirty (30) days after execution of this Lease, deliver to 23 Landlord a certified copy of the resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Lease. 38. [Intentionally Deleted.] 39. LIMITATION OF LIABILITY In consideration of the benefits accruing hereunder, Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord: (i) the sole and exclusive remedy shall be against Landlord's interest in the Premises leased herein; (ii) no partner of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction of the partnership); (iii) no service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership); (iv) no partner of Landlord shall be required to answer or otherwise plead to any service of process; (v) no judgment will be taken against any partner of Landlord; (vi) any judgment taken against any partner of Landlord may be vacated and set aside at any time without hearing; (vii) no writ of execution will ever be levied against the assets of any partner of Landlord; (viii) these covenants and agreements arc enforceable both by Landlord and also by any partner of Landlord. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by statute or at common law. 40. MISCELLANEOUS AND GENERAL PROVISIONS. a. Tenant shall not, without the written consent of Landlord, use the name of the building for any purpose other than as the address of the business conducted by Tenant in the Premises. b. This Lease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any provision of this Lease shall be invalid, unenforceable or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. c. The term "Premises" includes the space leased hereby and any improvements now or hereafter installed therein or attached thereto. The term "Landlord" or any pronoun used in place thereof includes the plural as well as the singular and the successors and assigns of Landlord. The term "Tenant" or any pronoun used in place thereof includes the plural as well as the singular and individuals, firms, associations, partnerships and 24 corporations, and their and each of their respective heirs, executors, administrators, successors and permitted assigns. The term "person" includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations. Words used in any gender include other genders. If there be more than one Tenant the obligations of Tenant hereunder are joint and several. The paragraph headings of this Lease are for convenience of reference only and shall have no effect upon the construction or interpretation or any provision hereof. d. Time is of the essence of this Lease and of each and all of its provisions. e. At the expiration or earlier termination of this Lease, Tenant shall execute, acknowledge and deliver to Landlord, within ten (10) days after written demand from Landlord to Tenant, any quitclaim deed or other document required by any reputable title company, licensed to operate in the State of California, to remove the cloud or encumbrance created by this Lease from the real property of which Tenant's Premises are a part. f. This instrument along with any exhibits and attachments hereto constitutes the entire agreement between Landlord and Tenant relative to the Premises and this agreement and the exhibits and attachments may be altered, amended or revoked only by an instrument in writing signed by both Landlord and Tenant. Landlord and Tenant agree hereby that all prior or contemporaneous oral agreements between and among themselves and their agents or representatives relative to the leasing of the Premises are merged in or revoked by this agreement. g. Neither Landlord nor Tenant shall record this Lease or a short form memorandum hereof without the consent of the other. h. Tenant further agrees to execute any amendments required by a lender to enable Landlord to obtain financing, so long as Tenant's rights hereunder are not substantially affected. i. Paragraphs 43 through 56 are added hereto and are included as a part of this lease. j. Clauses, plats and riders, if any, signed by Landlord and Tenant and endorsed on or affixed to this Lease are a part hereof. k. Tenant covenants and agrees that no diminution or shutting off of light, air or view by any structure which may be hereafter erected (whether or not by Landlord) shall in any way affect his Lease, entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. 25 41. BROKERS Tenant warrants that it had dealings with only the following real estate brokers or agents in connection with the negotiation of this Lease: none and that it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. 42. SIGNS No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or to any part of the outside of the Premises or any exterior windows of the Premises without the written consent of Landlord first had and obtained and Landlord shall have the right to remove any such unauthorized sign, placard, picture, advertisement, name or notice without notice to and at the expense of Tenant. If Tenant is allowed to print or affix or in any way place a sign in, on, or about the Premises, upon expiration or other sooner termination of this Lease, Tenant at Tenant's sole cost and expense shall both remove such sign and repair all damage in such a manner as to restore all aspects of the appearance of the Premises to the condition prior to the placement of said sign. All approved signs or lettering on outside doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved of by Landlord. Tenant shall not place anything or allow anything to be placed near the glass of any window, door partition or wall which may appear unsightly from outside the Premises. 26 IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Lease as of the day and year last written below. LANDLORD: TENANT: JOHN ARRILLAGA SURVIVOR'S TRUST TRANSMETA CORPORATION a California corporation /s/ JOHN ARRILLAGA By /s/ COLIN HUNTER - --------------------------------- ------------------------------------- John Arrillaga, Trustee Date: 6/8/98 Title: CFO ---------------------------- --------------------------------- RICHARD T. PEERY SEPARATE Type or Print Name Colin Hunter PROPERTY TRUST --------------------- By /s/ Date: June 5, 1998 -------------------------------- ---------------------------------- Richard T. Peery, Trustee Date: 6/8/98 ----------------------------- 27 Paragraphs 43 through 55 to Lease Agreement dated April 2, 1998, By and Between the John Arrillaga Survivor's Trust and the Richard T. Peery Separate Property Trust, as Landlord, and TRANSMETA CORPORATION, a California corporation, as Tenant for 36,225+ Square Feet of Space Located at 2560 Mission College Blvd., Suite 102, Santa Clara, California. 43. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate sum of ELEVEN MILLION SIX HUNDRED FIFTY NINE THOUSAND TWO HUNDRED SEVENTY TWO AND NO/100 DOLLARS ($11,659,272.00), shall be payable as follows: On July 1, 1998, the sum of SEVENTY FIVE THOUSAND THIRTY SEVEN AND 25/100 DOLLARS ($75,037.25) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 1999. On July 1, 1999, the sum of EIGHTY FIVE THOUSAND ONE HUNDRED TWENTY EIGHT AND 75/100 DOLLARS ($85,128.75) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2000. On July 1, 2000, the sum of EIGHTY EIGHT THOUSAND SEVEN HUNDRED FIFTY ONE AND 25/100 DOLLARS ($88,751.25) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2001. On July 1, 2001, the sum of NINETY TWO THOUSAND THREE HUNDRED SEVENTY THREE AND 75/100 DOLLARS ($92,373.75) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2002. On July 1, 2002, the sum of NINETY FIVE THOUSAND NINE HUNDRED NINETY SIX AND 25/100 DOLLARS ($95,996.25) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2003. On July 1, 2003, the sum of NINETY NINE THOUSAND SIX HUNDRED EIGHTEEN AND 75/100 DOLLARS ($99,618.75) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2004. On July 1, 2004, the sum of ONE HUNDRED THREE THOUSAND TWO HUNDRED FORTY ONE AND 25/100 DOLLARS ($103,241.25) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2005. On July 1, 2005, the sum of ONE HUNDRED SIX THOUSAND EIGHT HUNDRED SIXTY THREE AND 75/100 DOLLARS ($106,863.75) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2006. 28 On July 1, 2006, the sum of ONE HUNDRED TEN THOUSAND FOUR HUNDRED EIGHTY SIX AND 25/100 DOLLARS ($110,486.25) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2007. On July 1, 2007, the sum of ONE HUNDRED FOURTEEN THOUSAND ONE HUNDRED EIGHT AND 75/100 DOLLARS ($114,108.75) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2008; or until the entire aggregate sum of ELEVEN MILLION SIX HUNDRED FIFTY NINE THOUSAND TWO HUNDRED SEVENTY TWO AND NO/100 DOLLARS ($11,659,272.00) has been paid. 44. "AS-IS" BASIS: Subject only to Paragraph 53, it is hereby agreed that the Premises leased hereunder is leased strictly on an "as-is" basis and in its present condition, and in the configuration as shown on Exhibit B attached hereto, and by reference made a part hereof. Except as noted herein, it is specifically agreed between the parties that Landlord shall not be required to make, nor be responsible for any cost, in connection with any repair, restoration, and/or improvement to the Premises in order for this Lease to commence, or thereafter, throughout the Term of this Lease. Notwithstanding anything to the contrary within this Lease, Landlord makes no warranty or representation of any kind or nature whatsoever as to the condition or repair of the Premises, nor as to the use or occupancy which may be made thereof. 45. CONSENT: Whenever the consent of one party to the other is required hereunder, such consent shall not be unreasonably withheld. 46. CHOICE OF LAW; SEVERABILITY. This Lease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any provisions of this Lease shall be invalid, unenforceable, or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. 47. AUTHORITY TO EXECUTE. The parties executing this Lease Agreement hereby warrant and represent that they are properly authorized to execute this Lease Agreement and bind the parties on behalf of whom they execute this Lease Agreement and to all of the terms, covenants and conditions of this Lease Agreement as they relate to the respective parties hereto. 48. ASSESSMENT CREDITS: The demised property herein may be subject to a special assessment levied by the City of Santa Clara as part of an Improvement District. As a part of said special assessment proceedings (if any), additional bonds were or may be sold and assessments were or may be levied to provide for construction contingencies and reserve 29 funds. Interest shall be earned on such funds created for contingencies and on reserve funds which will be credited for the benefit of said assessment district. To the extent surpluses are created in said district through unused contingency funds, interest earnings or reserve funds, such surpluses shall be deemed the property of Landlord. Notwithstanding that such surpluses may be credited on assessments otherwise due against the Leased Premises, Tenant shall pay to Landlord, as additional rent if, and at the time of any such credit of surpluses, an amount equal to all such surpluses so credited. For example: if (i) the property is subject to an annual assessment of $1,000.00, and (ii) a surplus of $200.00 is credited towards the current year's assessment which reduces the assessment amount shown on the property tax bill from $1,000.00 to $800.00, Tenant shall, upon receipt of notice from Landlord, pay to Landlord said $200.00 credit as Additional Rent. 49. ASSIGNMENT AND SUBLETTING (CONTINUED): A. Proposed Sublet Premises. Landlord hereby acknowledges that, during the first year of the Lease Term, Tenant intends to sublease approximately 12,938 square feet of the Leased Premises, which space is located on the first floor of the Building ("Proposed Sublet Premises"). Provided Tenant is not in default of this Lease, Landlord agrees that it will not exercise its right, as provided for in Paragraph 19, to terminate the Lease as a result of a request by Tenant to sublease the Proposed Sublet Premises for a sublease term not to extend beyond June 30, 1999. In such event, Landlord agrees to issue Landlord's standard consent to said sublease, subject to (a) Tenant submitting to Landlord a copy of said sublease (prior to said sublease commencing), (b) Landlord, Tenant and Subtenant thereafter executing Landlord's standard Consent to Sublease agreement and (c) Landlord receives payment from Tenant of Landlord's costs for processing said Sublease Consent prior to said sublease commencing. As an accommodation to Tenant, Landlord has reduced the Base Rent Rate on the Proposed Sublet Premises for the first year of the Lease Term to $1.75 per square foot per month, and as such, Tenant specifically acknowledges that the Base Rent Tenant shall pay for the first year of the Lease Term is a blended rate. Any rents due Tenant from a subtenant on the Proposed Sublet Premises in excess of $1.75 per square foot per month shall be considered excess rent ("Excess Rent"), and pursuant to the terms of Paragraph 19, Tenant shall pay one hundred percent of such Excess Rent to Landlord. However, prior to sharing such Excess Rent, Tenant shall be first entitled to recover from such Excess Rent the amount of all reasonable leasing commissions on said Proposed Sublet Premises paid to third parties not affiliated with Tenant. The parties hereto agree that Landlord will accommodate Tenant by assisting Tenant in finding a subtenant to lease the Proposed Sublet Premises for a sublease term not to exceed June 30, 1999 ("Sublease Term"). Tenant shall be responsible for entering into a sublease agreement with said subtenant and Landlord shall issue its standard Consent to Sublease form which shall be executed by Landlord, Tenant and the subtenant. Said sublease entered into between Tenant and subtenant shall provide for the subtenant to issue 30 payments due under the sublease directly to Landlord during the Sublease Term and Landlord shall make reasonable efforts to collect the amounts due from the subtenant. Said amounts so collected by Landlord shall be credited to Tenant's account under this Lease; however, Landlord shall not be responsible or liable to Tenant for its failure to collect the amounts due from said subtenant, nor shall Tenant be relieved of any of its obligations under the Lease due to Landlord's agreement to collect the amounts due from the subtenant and Tenant shall not be entitled to an offset of the amounts due under Tenant's Lease for Landlord's failure to collect the amounts due from said subtenant under the sublease. Subject to the terms and conditions of this Paragraph 49A, Landlord also agrees to provide reasonable improvements to the Proposed Sublet Premises, at Landlord's expense, provided: (i) Tenant is not in default of this Lease and (ii) said Sublease Term does not exceed June 30, 1999. Notwithstanding the above, Landlord retains the sole and absolute right to determine what improvements are considered reasonable and shall not be liable to Tenant, in any manner whatsoever, for Landlord's refusal to provide said improvements if Landlord determines, in its sole and absolute discretion, that the subtenant improvements are not reasonable. The parties hereto acknowledge and agree that Landlord shall not be liable, in any manner whatsoever, to Tenant if Landlord does not find a subtenant for the Proposed Sublet Premises and Tenant shall have no claim, of any type whatsoever, against Landlord for Landlord's failure to find a subtenant for the Proposed Sublet Premises. B. Notwithstanding the foregoing, Landlord and Tenant agree that it shall not be unreasonable for Landlord to refuse to consent to a proposed assignment, sublease or other transfer ("Proposed Transfer") if the Premises or any other portion of the Property would become subject to additional or different Government Requirements as a direct or indirect consequence of the Proposed Transfer and/or the Proposed Transferee's use and occupancy of the Premises and the Property. However, Landlord may, in its sole discretion, consent to such a Proposed Transfer where Landlord is indemnified by Tenant and (i) Subtenant or (ii) Assignee, in form and substance satisfactory to Landlord's counsel, by Tenant and/or the Proposed Transferee from and against any and all costs, expenses, obligations and liability arising out of the Proposed Transfer and/or the Proposed Transferee's use and occupancy of the Premises and the Property. C. Any and all sublease agreement(s) between Tenant and any and all subtenant(s) (which agreements must be consented to by Landlord, pursuant to the requirements of this Lease) shall contain the following language: "If Landlord and Tenant jointly and voluntarily elect, for any reason whatsoever, to terminate the Master Lease prior to the scheduled Master Lease termination date, then this Sublease (if then still in effect) shall terminate concurrently with the termination of the Master Lease. Subtenant expressly acknowledges and agrees that (1) the voluntary termination of the Master Lease by Landlord and Tenant and the resulting termination of this Sublease shall not give Subtenant any right or power to make any legal or equitable claim against Landlord, including without limitation any claim for interference with contract or interference with prospective economic advantage, and (2) Subtenant hereby 31 waives any and all rights it may have under law or at equity against Landlord to challenge such an early termination of the Sublease, and unconditionally releases and relieves Landlord, and its officers, directors, employees and agents, from any and all claims, demands, and/or causes of action whatsoever (collectively, "Claims"), whether such matters are known or unknown, latent or apparent, suspected or unsuspected, foreseeable or unforeseeable, which Subtenant may have arising out of or in connection with any such early termination of this Sublease. Subtenant knowingly and intentionally waives any and all protection which is or may be given by Section 1542 of the California Civil Code which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with debtor. The term of this Sublease is therefore subject to early termination. Subtenant's initials here below evidence (a) Subtenant's consideration of and agreement to this early termination provision, (b) Subtenant's acknowledgment that, in determining the net benefits to be derived by Subtenant under the terms of this Sublease, Subtenant has anticipated the potential for early termination, and (c) Subtenant's agreement to the general waiver and release of Claims above. Initials:__________ Initials:__________" Subtenant Tenant 50. BANKRUPTCY AND DEFAULT: Paragraph 22 is modified to provide that with respect to non-monetary defaults not involving Tenant's failure to pay Basic Rent or Additional Rent, Tenant shall not be in default of any non-monetary obligation if (i) more than thirty (30) days is required to cure such non-monetary default, and (ii) Tenant commences cure of such default as soon as reasonably practicable after receiving written notice of such default from Landlord and thereafter continuously and with due diligence prosecutes such cure to completion. 51. ABANDONMENT: Paragraph 23 is modified to provide that Tenant shall not be in default under the Lease if it leaves all or any part of Premises vacant so long as (i) Tenant is performing all of its other obligations under the Lease including the obligation to pay Basic Rent and Additional Rent (ii) Tenant provides on-site security during normal business hours for those parts of the Premises left vacant, (iii) such vacancy does not materially and adversely affect the validity or coverage of any policy of insurance carried by Landlord with respect to the Premises, and (iv) the utilities and heating and ventilation system are operated and maintained to the extent necessary to prevent damage to the Premises or its systems. 52. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to the existence or use of "Hazardous Materials" (as defined herein) on, in, under or about the Premises and real property located beneath said Premises and the common areas of the Complex (hereinafter collectively referred to as the "Property"): A. As used herein, the term "Hazardous Materials" shall mean any material, waste, chemical, mixture or byproduct which is or hereafter is defined, listed or designated under Environmental Laws (defined below) as a pollutant, or as a contaminant, or as a toxic or hazardous substance, waste or material, or any other unwholesome, hazardous, toxic, biohazardous, or radioactive material, waste, chemical, mixture or byproduct, or which is listed, regulated or restricted by any Environmental Law (including, without limitation, petroleum hydrocarbons or any distillates or derivatives or fractions thereof, polychlorinated biphenyls, or asbestos). As used herein, the term "Environmental Laws" shall mean any applicable Federal, State of California or local government law (including common law), statute, regulation, rule, ordinance, permit, license, order, requirement, agreement, or approval, or any determination, judgment, directive, or order of any executive or judicial authority at any level of Federal, State of California or local government (whether now existing or subsequently adopted or promulgated) relating to pollution or the protection of the environment, ecology, natural resources, or public health and safety. 32 B. Tenant shall obtain Landlord's written consent, which may be withheld in Landlord's discretion, prior to the occurrence of any Tenant's Hazardous Materials Activities (defined below); provided, however, that Landlord's consent shall not be required for normal use in compliance with applicable Environmental Laws of customary household and office supplies (Tenant shall first provide Landlord with a list of said materials use), such as mild cleaners, lubricants and copier toner. As used herein, the term "Tenant's Hazardous Materials Activities" shall mean any and all use, handling, generation, storage, disposal, treatment, transportation, release, discharge, or emission of any Hazardous Materials on, in, beneath, to, from, at or about the Property, in connection with Tenant's use of the Property, or by Tenant or by any of Tenant's agents, employees, contractors, vendors, invitees, visitors or its future subtenants or assignees. Tenant agrees that any and all Tenant's Hazardous Materials Activities shall be conducted in strict, full compliance with applicable Environmental Laws at Tenant's expense, and shall not result in any contamination of the Property or the environment. Tenant agrees to provide Landlord with prompt written notice of any spill or release of Hazardous Materials at the Property during the term of the Lease of which Tenant becomes aware, and further agrees to provide Landlord with prompt written notice of any violation of Environmental Laws in connection with Tenant's Hazardous Materials Activities of which Tenant becomes aware. If Tenant's Hazardous Materials Activities involve Hazardous Materials other than normal use of customary household and office supplies, Tenant also agrees at Tenant's expense: (i) to install such Hazardous Materials monitoring, storage and containment devices as Landlord reasonably deems necessary (Landlord shall have no obligation to evaluate the need for any such installation or to require any such installation); (ii) provide Landlord with a written inventory of such Hazardous Materials, including an update of same each year upon the anniversary date of the Commencement Date of the Lease ("Anniversary Date"); and (iii) on each Anniversary Date, to retain a qualified environmental consultant, acceptable to Landlord, to evaluate whether Tenant is in compliance with all applicable Environmental Laws with respect to Tenant's Hazardous Materials Activities. Tenant, at its expense, shall submit to Landlord a report from such environmental consultant which discusses the environmental consultant's findings within two (2) months of each Anniversary Date. Tenant, at its expense, shall promptly undertake and complete any and all steps necessary, and in full compliance with applicable Environmental Laws, to fully correct any and all problems or deficiencies identified by the environmental consultant, and promptly provide Landlord with documentation of all such corrections. C. Prior to termination or expiration of the Lease, Tenant, at its expense, shall (i) properly remove from the Property all Hazardous Materials which come to be located at the Property in connection with Tenant's Hazardous Materials Activities, and (ii) fully comply with and complete all facility closure requirements of applicable Environmental Laws regarding Tenant's Hazardous Materials Activities, including but not limited to (x) properly restoring and repairing the Property to the extent damaged by such closure activities, and (y) obtaining from the local Fire Department or other appropriate governmental authority with jurisdiction a written concurrence that closure has been completed in compliance with applicable Environmental Laws. Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any such closure activities. D. If Landlord, in its sole discretion, believes that the Property has become contaminated as a result of Tenant's Hazardous Materials Activities, Landlord in addition to any 33 other rights it may have under this Lease or under Environmental Laws or other laws, may enter upon the Property and conduct inspection, sampling and analysis, including but not limited to obtaining and analyzing samples of soil and groundwater, for the purpose of determining the nature and extent of such contamination. Tenant shall promptly reimburse Landlord for the costs of such an investigation, including but not limited to reasonable attorneys' fees Landlord incurs with respect to such investigation, that discloses Hazardous Materials contamination for which Tenant is liable under this Lease. Except as may be required of Tenant by applicable Environmental Laws, Tenant shall not perform any sampling, testing, or drilling to identify the presence of any Hazardous Materials at the Property, without Landlord's prior written consent which may be withheld in Landlord's discretion. Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any sampling, testing or drilling performed pursuant to the preceding sentence. E. Tenant shall indemnify, defend (with legal counsel acceptable to Landlord, whose consent shall not unreasonably be withheld) and hold harmless Landlord, its employees, assigns, successors, successors-in-interest, agents and representatives from and against any and all claims (including but not limited to third party claims from a private party or a government authority), liabilities, obligations, losses, causes of action, demands, governmental proceedings or directives, fines, penalties, expenses, costs (including but not limited to reasonable attorneys', consultants' and other experts' fees and costs), and damages, which arise from or relate to: (i) Tenant's Hazardous Materials Activities; (ii) any Hazardous Materials contamination caused by Tenant prior to the Commencement Date of the Lease; or (iii) the breach of any obligation of Tenant under this Paragraph 52 (collectively, "Tenant's Environmental Indemnification"). Tenant's Environmental Indemnification shall include but is not limited to the obligation to promptly and fully reimburse Landlord for losses in or reductions to rental income, and diminution in fair market value of the Property. Tenant's Environmental Indemnification shall further include but is not limited to the obligation to diligently and properly implement to completion, at Tenant's expense, any and all environmental investigation, removal, remediation, monitoring, reporting, closure activities, or other environmental response action (collectively, "Response Actions"). Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any Response Actions. It is agreed that the Tenant's responsibilities related to Hazardous Materials will survive the expiration or termination of this Lease and that Landlord may obtain specific performance of Tenant's responsibilities under this Paragraph 52. 53. MAINTENANCE OF THE PREMISES: Notwithstanding anything to the contrary in Paragraph 10, Landlord shall repair, damage to the structural shell, foundation, and roof structure (but not the interior improvements, roof membrane, or glazing) of the building leased hereunder at Landlord's cost and expense provided Tenant has not caused such damage, in which event Tenant shall be responsible for 100 percent of any such costs for repair or damage so caused by the Tenant. Notwithstanding the foregoing, a crack in the foundation or exterior walls, or any other defect in the Building that does not endanger the structural integrity of the building for which Tenant is not responsible, or which is not life-threatening, shall not be considered 34 material, and Landlord may elect, in its sole and absolute discretion, not to repair and/or replace the same. 54. LEASE TERMS CO-TERMINOUS: It is hereby acknowledged that (i) Landlord and Tenant have previously executed two separate lease agreements, dated November 1, 1995 for premises located at 3940 Freedom Circle, Santa Clara, California (hereinafter referred to as the "Marriott A Lease") and dated January 29, 1997 for premises located at 2540 Mission College Blvd., Santa Clara, California (hereinafter referred to the "Marriott B Lease"), (ii) concurrently with the execution of this Amendment, Landlord and Tenant shall execute a separate lease agreement, dated April 2, 1998, for premises located at 3990 Freedom Circle, Santa Clara California (the "Marriott D Lease") and (iii) it is the intention of the parties that the Term of this Lease be co-terminous with the terms of the Marriott A Lease, the Marriott B Lease and the Marriott D Lease (collectively the "Marriott A, B, and D Leases") such that the terms of all leases expire on the same date; provided, however, the termination of this Lease resulting from the terms and conditions stated under Paragraph 22 ("Bankruptcy and Default") (subject to Landlord's option as stated below and in the Marriott A, B and D Leases' "Cross Default Paragraph) or Paragraph 24 ("Destruction") or Paragraph 25 ("Eminent Domain") shall not result in a termination of the Marriott A, B or D Leases, unless Landlord elects, at its sole and absolute discretion, to terminate any or all of the Marriott A, B or D Leases." 55. CROSS DEFAULT: As a material part of the consideration for the execution of this Lease by Landlord, it is agreed between Landlord and Tenant that a default under this Lease, or a default under said Marriott A, B and/or D Lease may, at the option of Landlord, be considered a default under all four leases, in which event Landlord shall be entitled (but in no event required) to apply all rights and remedies of Landlord under the terms of one lease to all four leases including, but not limited to, the right to terminate one or all of said leases by reason of a default under said Marriott A, B and/or D Lease or hereunder." EX-10.11 15 ex10-11.txt EXHIBIT 10.11 1 EXHIBIT 10.11 BLDG: Marriott 7 LEASE AGREEMENT OWNER: 500 PROP: 107 UNIT: 1 TENANT: 10702 THIS LEASE, made this 2nd day of April 1998 between JOHN ARRILLAGA, Trustee, or his Successor Trustee, UTA dated 7/20/77 (JOHN ARRILLAGA SURVIVOR'S TRUST) as amended, and RICHARD T. PEERY, Trustee, or his Successor Trustee, UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended, hereinafter called Landlord, and TRANSMETA CORPORATION, a California corporation, hereinafter called Tenant. WITNESSETH: Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord those certain premises (the "Premises") outlined in red on Exhibit `A', attached hereto and incorporated herein by this reference thereto more particularly described as follows: All of that certain 45,000+ square foot, two-story building located at 3990 Freedom Circle, Santa Clara, California 95054. Said Premises is more particularly shown within the area outlined in Red on Exhibit A attached hereto. The entire parcel, of which the Premises is a part, is shown within the area outlined in Green on Exhibit A attached. The Premises is leased on an "as-is" basis, in its present condition, and in the configuration as shown in Red on Exhibit B attached hereto. As used herein the Complex shall mean and include all of the land outlined in Green and described in Exhibit "A", attached hereto, and all of the buildings, improvements, fixtures and equipment now or hereafter situated on said land. Said letting and hiring is upon and subject to the terms, covenants and conditions hereinafter set forth and Tenant covenants as a material part of the consideration for this Lease to perform and observe each and all of said items, covenants and conditions. This Lease is made upon the conditions of such performance and observance. 1. USE. Tenant shall use the Premises only in conformance with applicable governmental laws, regulations, rules and ordinances for the purpose of general office, light manufacturing, research and development, and storage and other uses necessary for Tenant to conduct Tenant's business, provided that such uses shall be in accordance with all applicable governmental laws and ordinances, and for no other purpose. Tenant shall not do or permit to be done in or about the Premises or the Complex nor bring or keep or permit to be brought or kept in or about the Premises of the Complex anything which is prohibited by or will in any way increase the existing rate of (or otherwise affect) fire or any insurance covering the Complex or any part thereof, or any of its contents, or will cause a cancellation of any insurance covering the Complex or any part thereof, or any of its contents. Tenant shall not knowingly do or permit to be done anything in, on or about the Premises or the Complex which will in any way obstruct or interfere with the 1 of 31 2 rights of other tenants or occupants of the Complex or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant knowingly cause, maintain or permit any nuisance in, on or about the Premises or the Complex and agrees to take immediate corrective action upon becoming aware of such a problem in this area should one exist. No sale by auction shall be permitted on the Premises. Tenant shall not place any loads upon the floors, walls, or ceiling, which endanger the structure, or place any harmful fluids or other materials in the drainage system of the building, or overload existing electrical or other mechanical systems. No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises or outside of the building in which the Premises are a part, except in trash containers placed inside exterior enclosures designated by Landlord for that purpose or inside of the building proper where designated by Landlord. No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain outside the Premises or on any portion of common area of the Complex. No loudspeaker or other device, system or apparatus which can be heard outside the Premises shall be used in or at the Premises without the prior written consent of Landlord. Tenant shall not commit or suffer to be committed any waste in or upon the Premises. Tenant shall indemnify, defend and hold Landlord harmless against any loss, expense, damage, attorneys' fees, or liability arising out of failure of Tenant to comply with any applicable law. Tenant shall comply with any covenant, condition, or restriction ("CC&R's") affecting the Premises. The provisions of this paragraph are for the benefit of Landlord only and shall not be construed to be for the benefit of any tenant or occupant of the Complex. 2. TERM* A. Subject to Paragraph 56, the term of this Lease shall be for a period of TEN (10) years (unless sooner terminated as hereinafter provided) and, subject to Paragraphs 2(B) and 3, shall commence on the 1st day of July 1998 and end on the 30th day June of 2008. B. Possession of the Premises shall be deemed tendered and the term of this Lease shall commence on July 1, 1998, or as otherwise agreed in writing. 3. POSSESSION. If landlord, for any reason whatsoever, cannot deliver possession of said premises to Tenant at the commencement of the said term, as hereinbefore specified, this Lease shall not be void or voidable; no obligation of Tenant shall be affected thereby; nor shall Landlord or Landlord's agents be liable to Tenant for any loss or damage resulting therefrom; but in that event the commencement and termination dates of the Lease, and all other dates affected thereby shall be revised to conform to the date of Landlord's delivery of possession, as specified in Paragraph 2(b), above. The above is, however, subject to the provision that the period of delay of delivery of the premises shall not exceed 60 days from the commencement date herein (except those delays caused by Acts of God, strikes, war, utilities, governmental bodies, weather, unavailable materials, and delays beyond Landlord's control shall be excluded in calculating such period) in which instance Tenant, at its option, may, by written notice to Landlord, terminate this Lease. - -------------- * It is agreed in the event said Lease commences on a date other than the first day of the month the term of the Lease will be extended to account for the number of days in the partial month. The Basic Rent during the resulting partial month will be pro-rated (for the number of days in the partial month) at the Basic Rent scheduled for the projected commencement date as shown in Paragraph 43. 2 of 31 3 4. RENT A. Basic Rent. Tenant agrees to pay to Landlord at such place as Landlord may designate without deduction, offset, prior notice, or demand, and Landlord agrees to accept as Basic Rent for the leased Premises the total sum of Thirteen Million Nine Hundred Eighty Six Thousand and no/100 ($13,986,000.00) Dollars in lawful money of the United States of America, payable as follows: See Paragraph 43 for Basic Rent Schedule. B. Time for Payment. In the event that this Lease commences on a date other than the first day of a calendar month, on the date of commencement of the term hereof Tenant shall pay to Landlord as rent for the period from such date of commencement to the first day of the next succeeding calendar month that proportion of the monthly rent hereunder which the number of days between such date of commencement and the first day of the next succeeding calendar month bears to thirty (30). In the event that the term of this Lease for any reason ends on a date other than the last day of a calendar month, on the first day of the last calendar month of the term hereof Tenant shall pay to Landlord as rent for the period from said first day of said last calendar month to and including the last day of the term hereof that proportion of the monthly rent hereunder which the number of days between said first day of said last calendar month and the last day of the term hereof bears to thirty (30). C. Late Charge. Notwithstanding any other provision of this Lease, if Tenant is in default in the payment of rental as set forth in this Paragraph 4 when due, or any part thereof, Tenant agrees to pay Landlord, in addition to the delinquent rental due, a late charge for each rental payment in default ten (10) days. Said late charge shall equal ten (10%) percent of each rental payment so in default. D. Additional Rent. Beginning with the commencement date of the term of this Lease, Tenant shall pay to Landlord in addition to the Basic Rent and as Additional Rent the following: (a) Tenant's proportionate share of all Taxes relating to the Complex as set forth in Paragraph 12, and (b) Tenant's proportionate share of all insurance premiums relating to the Complex, as set forth in Paragraph 15, and (c) Tenant's proportionate share of expenses for the operation, management, maintenance and repair of the Building (including common areas of the Building) and Common Areas of the Complex in which the Premises are located as set forth in Paragraph 7, and (d) All charges, costs and expenses, which Tenant is required to pay hereunder, together with all interests and penalties, costs and expenses including attorneys' fees and legal expenses, that may accrue thereto in the event of Tenant's failure to pay such amounts, and all damages, reasonable costs and expenses which Landlord may incur by reason of default of Tenant or failure on Tenant's part to comply with the terms of this Lease. In the event of nonpayment by Tenant of 3 of 31 4 Additional Rent, Landlord shall have all the rights and remedies with respect thereto as Landlord has for nonpayment of rent. The Additional Rent due hereunder shall be paid to Landlord or Landlord's agent (i) within five days for taxes and insurance and within thirty days for all other Additional Rent items after presentation of invoice from Landlord or Landlord's agent setting forth such Additional Rent and/or (ii) at the option of Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant's prorata share of an amount estimated by Landlord to be Landlord's approximate average monthly expenditure for such Additional Rent items, which estimated amount shall be reconciled within 120 days of the end of each calendar year as compared to Landlord's actual expenditure for said Additional Rent items, with Tenant paying to Landlord, upon demand, any amount of actual expenses expended by Landlord in excess of said estimated amount, or Landlord crediting to Tenant (providing Tenant is not in default in the performance of any of the terms, covenants and conditions of this Lease) any amount of estimated payments made by Tenant in excess of Landlord's actual expenditures for said Additional Rent items. The respective obligations of Landlord and Tenant under this paragraph shall survive the expiration or other termination of the term of this Lease, and if the item hereof shall expire or shall otherwise terminate on a day other than the last day of a calendar year, the actual Additional Rent incurred for the calendar year in which the terms hereof expires or otherwise terminates shall be determined and settled on the basis of the statement of actual Additional Rent for such calendar year and shall be prorated in the proportion which the number of days in such calendar year preceding such expiration or termination bears to 365. F. Place of Payment of Rent and Additional Rent. All Basic Rent hereunder and all payments hereunder for Additional Rent shall be paid to Landlord at the office of Landlord at Peery/Arrillaga, File 1504, Box 60000, San Francisco, CA 94160 or to such other person or to such other place as Landlord may from time to time designate in writing. G. Security Deposit. On or before July 1, 2000, Tenant shall deposit with Landlord the sum of Two Hundred Eighty Three Thousand Five Hundred and no/100 ($283,500.00) Dollars. Said sum shall be held by Landlord as a Security Deposit for the faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the term hereof. If Tenant defaults with respect to any provision of this Lease, including, but not limited to, the provisions relating to the payment of rent and any of the monetary sums due herewith, Landlord may (but shall not be required to) use, apply or retain all or any part of this Security Deposit for the payment of any other amount which Landlord may spend by reason of Tenant's default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said Deposit is so used or applied, Tenant shall, within ten (10) days after written demand therefore, deposit cash with Landlord in the amount sufficient to restore the Security Deposit to its original amount. Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep this Security Deposit from its general funds, and Tenant shall not be entitled to interest on such Deposit. If Tenant fully and faithfully performs every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall be returned to Tenant (or at Landlord's option, to the last assignee of Tenant's interest hereunder) at the expiration of the Lease term and after Tenant has vacated the Premises. In the event of termination of Landlord's 4 of 31 5 interest in this Lease, Landlord shall transfer said Deposit to Landlord's successor in interest whereupon Tenant agrees to release Landlord from liability for the return of such Deposit or the accounting therefor. 5. RULES AND REGULATIONS AND COMMON AREA. Subject to the terms and conditions of this Lease and such Rules and Regulations as Landlord may from time to time prescribe, Tenant and Tenant's employees, invitees and customers shall, in common with other occupants of the Complex in which the Premises are located, and their respective employees, invitees and customers, and others entitled to the use thereof, have the non-exclusive right to use the access roads, parking areas, and facilities provided and designated by Landlord for the general use and convenience of the occupants of the Complex in which the Premises are located, which areas and facilities are referred to herein as "Common Area". This right shall terminate upon the termination of this Lease. Landlord reserves the right from time to time to make changes in the shape, size, location, amount and extent of Common Area. Landlord further reserves the right to promulgate such reasonable rules and regulations relating to the use of the Common Area, and any part or parts thereof, as Landlord may deem appropriate for the best interests of the occupants of the Complex. The Rules and Regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall abide by them and cooperate in their observance. Such Rules and Regulations may be amended by Landlord from time to time, with or without advance notice, and all amendments shall be effective upon delivery of a copy to Tenant. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Complex of any of said Rules and Regulations. Landlord shall operate, manage and maintain the Common Area. The manner in which the Common Area shall be maintained and the expenditures for such maintenance shall be at the discretion of Landlord. 6. PARKING. Tenant shall have the right to use with other tenants or occupants of the Complex 135 parking spaces in the common parking areas of the Complex. Tenant agrees, that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use parking spaces in excess of said 135 spaces allocated to Tenant hereunder. Landlord shall have the right, at Landlord's sole discretion, to specifically designate the location of Tenant's parking spaces within the common parking areas of the Complex in the event of a dispute among the tenants occupying the building and/or Complex referred to herein, in which event Tenant agrees that Tenant, Tenant's employees, agents, representatives and/or invitees shall not use any parking spaces other than those parking spaces specifically designated by Landlord for Tenant's use. Said parking spaces, if specifically designated by Landlord to Tenant may be relocated by Landlord at any time, and from time to time. Landlord reserves the right, at Landlord's sole discretion, to rescind any specific designation of parking spaces, thereby returning Tenant's parking spaces to the common parking area. Landlord shall give Tenant written notice of any change in Tenant's parking spaces. Tenant shall not, at any time, park, or permit to be parked, any trucks or vehicles adjacent to the loading areas so as to interfere in any way with the use of such areas, nor shall Tenant at any time park, or permit the parking of Tenant's trucks or other vehicles or the trucks and vehicles of Tenant's suppliers or others, in any portion of the common area not designated by Landlord for such use by Tenant. Tenant shall not park nor permit to be parked, any inoperative vehicles or equipment on any portion of the common parking area or other common areas of the Complex. Tenant agrees to assume responsibility for compliance by its employees with the parking provision contained herein. If Tenant or its employees park in other than such designated parking areas, then Landlord may charge Tenant, as an additional 5 of 31 6 charge, and Tenant agrees to pay, ten ($10.00) Dollars per day for each day or partial day each such vehicle is parked in any area other than that designated. Tenant hereby authorizes Landlord at Tenant's sole expense to tow away from the Complex any vehicle belonging to Tenant or Tenant's employees parked in violation of these provisions, or to attach violation stickers or notices to such vehicles. Tenant shall use the parking areas for vehicle parking only, and shall not use the parking areas for storage. There will be no charge for parking, except as noted herein. 7. EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF THE COMPLEX. As Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of all expenses of operation, management, maintenance and repair of the Common Areas of the Complex including, but not limited to, license, permit, and inspection fees; security; utility charges associated with exterior landscaping and lighting (including water and sewer charges); all charges incurred in the maintenance and replacement of landscaped areas, lakes, parking lots and paved areas (including repairs, replacement, resealing and restriping) sidewalks, driveways; maintenance, repair and replacement of all fixtures and electrical, mechanical, and plumbing systems; structural elements and exterior surfaces of the buildings; salaries and employee benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord may amortize its investment in said improvements (together with interest at the rate of fifteen (15%) percent per annum on the unamortized balance) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses. "Additional Rent" as used herein shall not include Landlord's debt repayments; interest on charges; expenses directly or indirectly incurred by Landlord for the benefit of any other tenant; cost for the installation of partitioning or any other tenant improvements; cost of attracting tenants; depreciation; interest, or executive salaries. 8. ACCEPTANCE AND SURRENDER OF PREMISES. Subject to Paragraph 53 and by entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the building and improvements included in the Premises in their present condition and without representation or warranty by Landlord as to the condition of such building or as to the use or occupancy which may be made thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. Tenant agrees on the last day of the Lease term, or on the sooner termination of this Lease, to surrender the Premises promptly and peaceably to Landlord in good condition and repair (damage by Act of God, fire, normal wear and tear excepted), with all interior walls painted, or cleaned so that they appear freshly painted, and repaired and replaced, if damaged; all floors cleaned and waxed; all carpets cleaned and shampooed; the airconditioning and heating equipment serviced by a reputable and licensed service firm and in good operating condition (provided the maintenance of such equipment has been Tenant's responsibility during the term of this Lease) together with all alterations, additions, and improvements which may have been made in, to, or on the Premises (except movable trade fixtures installed at the expense of Tenant) except that Tenant shall 6 of 31 7 ascertain from Landlord within thirty (30) days before the end of the term of this Lease whether Landlord desires to have the Premises or any part or parts thereof restored to their condition and configuration as when the Premises were delivered to Tenant and if Landlord shall so desire, then Tenant shall restore said Premises or such part or parts thereof before the end of this Lease at Tenant's sole cost and expense. Tenant, on or before the end of the term or sooner termination of this Lease, shall remove all of Tenant's personal property and trade fixtures from the Premises, and all property not so removed on or before the end of the term or sooner termination of this Lease shall be deemed abandoned by Tenant and title to same shall thereupon pass to Landlord without compensation to Tenant. Landlord may, upon termination of this Lease, remove all moveable furniture and equipment so abandoned by Tenant, at Tenant's sole cost, and repair any damage caused by such removal at Tenant's sole cost. If the Premises be not surrendered at the end of the term or sooner termination of this Lease, Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in so surrendering the Premises including, without limitation, any claim made by any succeeding tenant founded on such delay. Nothing contained herein shall be construed as an extension of the term hereof or as a consent of Landlord to any holding over by Tenant. The voluntary or other surrender of this Lease or the Premises by Tenant or a mutual cancellation of this Lease shall not work as a merger and, at the option of Landlord, shall either terminate all or any existing subleases or subtenancies or operate as an assignment to Landlord of all or any such subleases or subtenancies. 9. ALTERATIONS AND ADDITIONS. Tenant shall not make, or suffer to be made, any alteration or addition to the Premises, or any part thereof, without the written consent of Landlord first had and obtained by Tenant, but at the cost of Tenant, and any addition to, or alteration of, the Premises, except moveable furniture and trade fixtures, shall at once become a part of the Premises and belong to Landlord. Landlord reserves the right to approve all contractors and mechanics proposed by Tenant to make such alterations and additions. Tenant shall retain title to all moveable furniture and trade fixtures placed in the Premises. All heating, lighting, electrical, airconditioning, floor to ceiling partitioning, drapery, carpeting, and floor installations made by Tenant, together with all property that has become an integral part of the Premises, shall not be deemed trade fixtures. Tenant agrees that it will not proceed to make such alteration or additions, without having obtained consent from Landlord to do so, and until five (5) days from the receipt of such consent, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant's improvements. Tenant will at all times permit such notices to be posted and to remain posted until the completion of work. Tenant shall, if required by Landlord, secure at Tenant's own cost and expense, a completion and lien indemnity bond, satisfactory to Landlord, for such work. Tenant further covenants and agrees that any mechanic's lien filed against the Premises or against the Complex for work claimed to have been done for, or materials claimed to have been furnished to Tenant, will be discharged by Tenant, by bond or otherwise, within ten (10) days after the filing thereof, at the cost and expense of Tenant. Any exceptions to the foregoing must be made in writing and executed by both Landlord and Tenant. 10. TENANT MAINTENANCE. Except for the maintenance of any Common Area as provided for in Paragraph 49A, Tenant shall, at its sole cost and expense, keep and maintain the Premises (including appurtenances) and every part thereto in a high standard of maintenance and repair, and in good and sanitary condition. Tenant's maintenance and repair responsibilities 7 of 31 8 herein referred to include, but are not limited to, all windows, window frames, plate glass, glazing, truck doors, plumbing systems (such as water and drain lines, sinks, toilets, faucets, drains, showers and water fountains), electrical systems (such as panels, conduits, outlets, lighting fixtures, lamps, bulbs, tubes, ballasts), heating and air-conditioning systems (such as compressors, fans, air handlers, ducts, mixing boxes, thermostats, time clocks, boilers, heaters, supply and return grills), store fronts, roof membrane downspouts, all interior improvements within the premises including but not limited to wall coverings, window coverings, carpet, floor coverings, partitioning, ceilings, doors (both interior and exterior, including closing mechanism, latches, locks, skylights (if any), automatic fire extinguishing systems, and elevators and all other interior improvements of any nature whatsoever. Tenant agrees to provide carpet shields under all rolling chairs or to otherwise be responsible for wear and tear of the carpet caused by such rolling chairs if such wear and tear exceeds that caused by normal foot traffic in surrounding areas. Areas of excessive wear shall be replaced at Tenant's sole expense upon Lease termination. Tenant hereby waives all rights under, and benefits of, subsection 1 of Section 1932 and Section 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect. See Paragraph 53. 11. UTILITIES. Tenant shall pay promptly, as the same become due, all charges for water, gas, electricity, telephone, telex and other electronic communications service, sewer service, waste pick-up and any other utilities, materials or services furnished directly to or used by Tenant on or about the Premises during the term of this Lease, including, without limitation, any temporary or permanent utility surcharge or other exactions whether or not hereinafter imposed. Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of rent by reason of any interruption or failure of utility services to the Premises when such interruption or failure is caused by accident, breakage, repair, strikes, lockouts, or other labor disturbances or labor disputes of any nature, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord. 12. TAXES. A. As Additional Rent and in accordance with Paragraph 4 D of this Lease, Tenant shall pay to Landlord Tenant's proportionate share of all Real Property Taxes, which prorata share shall be allocated to the leased Premises by square footage or other equitable basis, as calculated by Landlord. The term "Real Property Taxes", as used herein, shall mean (i) all taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting from reassessments caused by any change in ownership of the Complex) now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed against, or with respect to the value, occupancy or use of, all or any portion of the Complex (as now constructed or as may at any time hereafter be constructed, altered, or otherwise changed) or Landlord's interest therein; any improvements located within the Complex (regardless of ownership); the fixtures, equipment and other property of Landlord, real or personal, that are an integral part of and located in the Complex; or parking areas, public utilities, or energy within the Complex; (iii) all charges, levies or fees imposed by reason of environmental regulation or other governmental control of the Complex; and (iii) all costs and fees (including attorneys' fees) incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real 8 of 31 9 Property Tax. If at any time during the term of this Lease the taxation or assessment of the Complex prevailing as of the commencement date of this Lease shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate or additional tax or charge (i) on the value, use or occupancy of the Complex or Landlord's interest therein or (ii) on or measured by the gross receipts, income or rentals from the Complex, on Landlord's business of leasing the Complex, or computed in any manner with respect to the operation of the Complex, then any such tax or charge, however designated, shall be included within the meaning of the term "Real Property Taxes" for purposes of this Lease. If any Real Property Tax is based upon property or rents unrelated to the Complex, then only that part of such real Property Tax that is fairly allocable to the Complex shall be included within the meaning of the term "Real Property Taxes". Notwithstanding the foregoing, the term "Real Property Taxes" shall not include estate, inheritance, gift or franchise taxes of Landlord or the federal or state net income tax imposed on Landlord's income from all sources. B. Taxes on Tenant's Property (a) Tenant shall be liable for and shall pay ten days before delinquency, taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises. If any such taxes on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant and if Landlord, after written notice to Tenant, pays the taxes based on such increased assessment, which Landlord shall have the right to do regardless of the validity thereof, but only under proper protest if requested by Tenant, Tenant shall upon demand, as the case may be, repay to Landlord the taxes so levied against Landlord, or the proportion of such taxes resulting from such increase in the assessment; provided that in any such event Tenant shall have the right, in the name of Landlord and with Landlord's full cooperation, to bring suit in any court of competent jurisdiction to recover the amount of any such taxes so paid under protest, and any amount so recovered shall belong to Tenant. (b) if the Tenant improvements in the Premises, whether installed, and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which standard office improvements in other space in the Complex, are assessed, then the real property taxes and assessments levied against Landlord or the Complex by reason of such excess assessed valuation shall be deemed to be taxes levied against personal property of Tenant and shall be governed by the provisions of 12Ba above. If the records of the County Assessor are available and sufficiently detailed to serve as a basis for determining whether said Tenant improvements are assessed at a higher valuation than standard office improvements in other space in the Complex, such records shall be binding on both the Landlord and the Tenant. If the records of the County Assessor are not available or sufficiently detailed to serve as a basis for making said determination, the actual cost of construction shall be used. 13. LIABILITY INSURANCE. Tenant, at Tenant's expense, agrees to keep in force during the term of this Lease a policy of commercial general liability insurance with a combined single 9 of 31 10 limit coverage of not less than Two Million Dollars ($2,000,000) per occurrence for injuries to or death of persons occurring in, on or about the Premises or the Complex, and property damage insurance with limits of $550,000. The policy or policies affecting such insurance, certificates of insurance of which shall be furnished to Landlord, shall name Landlord as additional insureds, and shall insure any liability of Landlord, contingent or otherwise, as respects acts or omissions of Tenant, its agents, employees or invitees or otherwise by any conduct or transactions of any of said persons in or about or concerning the Premises, including any failure of Tenant to observe or perform any of its obligations hereunder, shall be issued by an insurance company admitted to transact business in the State of California; and shall provide that the insurance effected thereby shall not be canceled, except upon thirty (30) days' prior written notice to Landlord. If, during the term of this Lease, in the considered opinion of Landlord's Lender, insurance advisor, or counsel, the amount of insurance described in this paragraph 13 is not adequate, Tenant agrees to increase said coverage to such reasonable amount as Landlord's Lender, insurance advisor, or counsel shall deem adequate. 14. TENANT'S PERSONAL PROPERTY INSURANCE AND WORKMAN'S COMPENSATION INSURANCE. Tenant shall maintain a policy or policies of fire and property damage insurance in "all risk" form with a sprinkler leakage endorsement insuring the personal property, inventory, trade fixtures, and leasehold improvements within the leased Premises for the full replacement value thereof. The proceeds from any of such policies shall be used for the repair or replacement of such items so insured. Tenant shall also maintain a policy or policies of workman's compensation insurance and any other employee benefit insurance sufficient to comply with all laws. 15. PROPERTY INSURANCE. Landlord shall purchase and keep in force and as Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant shall pay to Landlord (or Landlord's agent if so directed by Landlord) Tenant's proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of the deductibles on insurance claims and the cost of policy or policies of insurance covering loss or damage to the Premises and Complex in the amount of the full replacement value thereof, providing protection against those perils included within the classification of "all risks" insurance and flood and/or earthquake insurance, if available, plus a policy of rental income insurance in the amount of one hundred (100%) percent of twelve (12) months Basic Rent, plus sums paid as Additional Rent and any deductibles related thereto. If such insurance cost is increased due to Tenant's use of the Premises or the Complex, Tenant agrees to pay to Landlord the full cost of such increase. Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord for the Complex. Landlord and Tenant do each hereby respectively release the other, to the extent of insurance coverage of the releasing party, from any liability for loss or damage caused by fire or any of the extended coverage casualties included in the releasing party's insurance policies, irrespective of the cause of such fire or casualty; provided, however, that if the insurance policy of either releasing party prohibits such waiver, then this waiver shall not take effect until consent to such waiver is obtained. If such waiver is so prohibited, the insured party affected shall promptly notify the other party thereof. 10 of 31 11 16. INDEMNIFICATION. Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or death of any person or damage to or destruction of property in or about the Premises or the Complex by or from any cause whatsoever, including, without limitation, gas, fire, oil, electricity or leakage of any character from the roof, walls, basement or other portion of the Premises or the Complex but excluding, however, the willful misconduct or negligence of Landlord, its agents, servants, employees, invitees, or contractors of which negligence Landlord has knowledge and reasonable time to correct. Except as to injury to persons or damage to property to the extent arising from the willful misconduct or the negligence of Landlord, its agents, servants, employees, invitees, or contractors. Tenant shall hold Landlord harmless from and defend Landlord against any and all expenses, including, reasonable attorneys' fees, in connection therewith, arising out of any injury to or death of any person or damage to or destruction of property occurring in, on or about the Premises, or any part thereof, from any cause whatsoever. 17. COMPLIANCE. tenant, at its sole cost and expense, shall promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now or hereafter in effect; with the requirements of any board of fire underwriters or other similar body now or hereafter constituted; and with any direction or occupancy certificate issued pursuant to law by any public officer; provided, however, that no such failure shall be deemed a breach of the provisions if Tenant, immediately upon notification, commences to remedy or rectify said failure. The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such law, statute, ordinance or governmental rule, regulation, requirement, direction or provision, shall be conclusive of that fact as between Landlord and Tenant. This paragraph shall not be interpreted as requiring Tenant to make structural changes or improvements, except to the extent such changes or improvements are required as a result of Tenant's use of the Premises. Tenant shall, at its sole cost and expense, comply with any and all requirements pertaining to said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance covering requirements pertaining to said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance covering the Premises. 18. LIENS. Tenant shall keep the Premises and the Complex free from any liens arising out of any work performed, materials furnished or obligation incurred by Tenant. In the event that Tenant shall not, within twenty (20) days following the imposition of such lien, cause the same to be released of record, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but no obligation, to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord for such purpose, and all expenses incurred by it in connection therewith, shall be payable to Landlord by Tenant on demand with interest at the prime rate of interest as quoted by the Bank of America. 19. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, transfer, or hypothecate the leasehold estate under this Lease, or any interest herein, and shall not sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person or entity to occupy or use the Premises, or any portion thereof, without, in each case, the prior written consent of Landlord which consent will not be unreasonably withheld. As a condition for 11 of 31 12 granting this consent to any assignment, transfer, or subletting, Landlord shall require Tenant to pay to Landlord, as Additional Rent, all rents and/or additional consideration due Tenant from its assignees, transferees or subtenants in excess of the Rent payable by Tenant to Landlord hereunder for the assigned transferred and/or subleased space. Tenant shall, by thirty (30) days written notice, advise Landlord of its intent to assign or transfer Tenant's interest in the Lease or sublet the Premises or any portion thereof for any part of the term hereof. Within thirty (30) days after receipt of said written notice, Landlord may, in its sole discretion, elect to terminate this Lease as to the portion of the Premises described in Tenant's notice on the date specified in Tenant's notice by giving written notice of such election to terminate. If no such notice to terminate is given to Tenant within said thirty (30) day period, Tenant may proceed to locate an acceptable sublessee, assignee, or other transferee for presentment to Landlord for Landlord's approval, all in accordance with the terms, covenants, and conditions of this paragraph 19. If Tenant intends to sublet the entire Premises and Landlord elects to terminate this Lease, this Lease shall be terminated on the date specified in Tenant's notice. If, however, this Lease shall terminate pursuant to the foregoing with respect to less than all the Premises, the rent, as defined and reserved hereinabove shall be adjusted on a pro rata basis to the number of square feet retained by Tenant, and this Lease as so amended shall continue in full force and effect. In the event Tenant is allowed to assign, transfer or sublet the whole or any part of the Premises, with the prior written consent of Landlord, no assignee, transferee or subtenant shall assign or transfer this Lease, either in whole or in part, or sublet the whole or any part of the Premises, without also having obtained the prior written consent of Landlord. A consent of Landlord to one assignment, transfer, hypothecation, subletting, occupation or use by any other person shall not release Tenant from any of Tenant's obligations hereunder or be deemed to be a consent to any subsequent similar or dissimilar assignment, transfer, hypothecation, subletting, occupation or use by any other person. Any such assignment, transfer, hypothecation, subletting, occupation or use without such consent shall be void and shall constitute a breach of this Lease by Tenant and shall, at the option of Landlord exercised by written notice to Tenant, terminate this Lease. The leasehold estate under this Lease shall not, nor shall any interest therein, be assignable for any purpose by operation of law without the written consent of Landlord. As condition to its consent, Landlord shall require Tenant to pay all expenses in connection with the assignment, and Landlord shall require Tenant's assignee or transferee (or other assignees or transferees) to assume in writing all of the obligations under this Lease and for Tenant to remain liable to Landlord under the Lease. Notwithstanding the above, in no event will Landlord consent to a sub-sublease. 20. SUBORDINATION AND MORTGAGES. In the event Landlord's title or leasehold interest is now or hereafter encumbered by a deed of trust, upon the interest of Landlord in the land and buildings in which the demised Premises are located, to secure a loan from a lender (hereinafter referred to as "Lender") to Landlord, Tenant shall, at the request of Landlord or Lender, execute in writing an agreement subordinating its rights under this Lease to the lien of such deed of trust, or, if so requested, agreeing that the lien of Lender's deed of trust shall be or remain subject and subordinate to the rights of Tenant under this Lease. Notwithstanding any such subordination, Tenant's possession under this Lease shall not be disturbed if Tenant is not in default and so long as Tenant shall pay all rent and observe and perform all of the provisions set forth in this Lease. 12 of 31 13 21. ENTRY BY LANDLORD. Landlord reserves, and shall at all reasonable time after at least 24 hours notice (except in emergencies) have, the right to enter the Premises to inspect them; to perform any services to be provided by Landlord hereunder; to submit the Premises to prospective purchasers, mortgagers or tenants; to post notices of nonresponsibility; and to alter, improve or repair the Premises and any portion of the Complex, all without abatement of rent; and may erect scaffolding and other necessary structures in or through the Premises where reasonably required by the character of the work to be performed; provided, however that the business of Tenant shall be interfered with to the least extent that is reasonably practical. For each of the foregoing purposes, Landlord shall at all times have and retain a key with which to unlock all of the doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof. Landlord shall also have the right at any time to change the arrangement or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets or other public parts of the Complex and to change the name, number or designation by which the Complex is commonly known, and none of the foregoing shall be deemed an actual or constructive eviction of Tenant, or shall entitle Tenant to any reduction of rent hereunder. 22. BANKRUPTCY AND DEFAULT. The commencement of a bankruptcy action or liquidation action or reorganization action or insolvency action or an assignment of or by Tenant for the benefit of creditors, or any similar action undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord's option, constitute a breach of this Lease by Tenant. If the trustee or receiver appointed to serve during a bankruptcy, liquidation, reorganization, insolvency or similar action elects to reject Tenant's unexpired Lease, the trustee or receiver shall notify Landlord in writing of its election within thirty (30) days after an order for relief in a liquidation action or within thirty (30) days after the commencement of any action. Within thirty (30) days after court approval of the assumption of this Lease, the trustee or receiver shall cure (or provide adequate assurance to the reasonable satisfaction of Landlord that the trustee or receiver shall cure) any and all previous defaults under the unexpired Lease and shall compensate Landlord for all actual pecuniary loss and shall provide adequate assurance of future performance under said Lease to the reasonable satisfaction of Landlord. Adequate assurance of future performance, as used herein, includes, but shall not be limited to: (i) assurance of source and payment of rent, and other consideration due under this Lease; (ii) assurance that the assumption or assignment of this Lease will not breach substantially any provision, such as radius, location, use, or exclusivity provision, in any agreement relating to the above described Premises. Nothing contained in this section shall affect the existing right of Landlord to refuse to accept an assignment upon commencement of or in connection with a bankruptcy, liquidation, reorganization or insolvency action or an assignment of Tenant for the benefit of creditors or other similar act. Nothing contained in this Lease shall be construed as giving or granting or creating an equity in the demised Premises to Tenant. In no event shall the leasehold estate under this Lease, or any interest therein, be assigned by voluntary or involuntary bankruptcy proceeding without the prior written consent of Landlord. In no event shall this Lease or any 13 of 31 14 rights or privileges hereunder be an asset of Tenant under any bankruptcy, insolvency or reorganization proceedings. The failure to perform or honor any covenant, condition or representation made under this Lease shall constitute a default hereunder by Tenant upon expiration of the appropriate grace period hereinafter provided. Tenant shall have a period of five (5) days from the date of written notice from Landlord within which to cure any default in the payment of rental or adjustment thereto. Tenant shall have a period of thirty (30) days from the date of written notice from Landlord within which to cure any other default under this Lease; provided, however, that if the nature of Tenant's failure is such that more than thirty (30) days is reasonably required to cure the same, Tenant shall not be in default so long as Tenant commences performance within such thirty (30) day period and thereafter prosecutes the same to completion. Upon an uncured default of this Lease by Tenant, Landlord shall have the following rights and remedies in addition to any other rights or remedies available to Landlord at law or in equity: (a) The rights and remedies provided for by California Civil Code Section 1951,2, including but not limited to, recovery of the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of rental loss for the same period that Tenant proves could be reasonably avoided, as computed pursuant to subsection (b) of said Section 1951.2. Any proof by Tenant under subparagraphs (2) or (3) of Section 1951.2 of the California Civil Code of the amount of rental loss that could be reasonably avoided shall be made in the following manner: Landlord and Tenant shall each select a licensed real estate broker in the business of renting property of the same type and use as the Premises and in the same geographic vicinity. Such two real estate brokers shall select a third licensed real estate broker, and the three licensed real estate brokers so selected shall determine the amount of the rental loss that could be reasonably avoided from the balance of the term of this Lease after the time of award. The decision of the majority of said licensed real estate brokers shall be final and binding upon the parties hereto. (b) The rights and remedies provided by California Civil Code Section which allows Landlord to continue the Lease in effect and to enforce all of its rights and remedies under this Lease, including the right to recover rent as it becomes due, for so long as Landlord does not terminate Tenant's right to possession: acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver upon Landlord's initiative to protect its interest under this Lease shall not constitute a termination of Tenant's right to possession. (c) The right to terminate this Lease by giving notice to Tenant in accordance with applicable law. (d) To the extent permitted by law the right and power to enter the Premises and remove therefrom all persons and property, to store such property in a public warehouse or elsewhere at the cost of and for the account of Tenant, and to sell such property and apply such proceeds therefrom pursuant to applicable California law. Landlord, may from time to time sublet the Premises or any part thereof for such term or terms (which may extend beyond the term of this Lease) and at such rent and such other terms as Landlord in its sole discretion may deem advisable, with the right to make alterations and repairs to the Premises. Upon each subletting, (i) Tenant shall be immediately liable to pay Landlord, in addition to indebtedness 14 of 31 15 other than rent due hereunder, the cost of such subletting, including, but not limited to, reasonable attorneys' fees, and any real estate commissions actually paid, and the cost of such alterations and repairs incurred by Landlord and the amount, if any, by which the rent hereunder for the period of such subletting (to the extent such period does not exceed the term hereof) exceeds the amount to be paid as rent for the Premises for such period or (ii) at the option of Landlord, rents received from such subletting shall be applied first to payment of indebtedness other than rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such subletting and of such alterations and repairs; third to payment of rent due and unpaid hereunder, and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same becomes due hereunder. If Tenant has been credited with any rent to be received by such subletting under option (i) and such rent shall not be promptly paid to Landlord by the subtenant(s), or if such rental received from such subletting under option (ii) during any month be less than that to be paid during that month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No taking possession of the Premises by Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant. Notwithstanding any such subletting without termination, Landlord may at any time hereafter elect to terminate this Lease for such previous breach. (e) The right to have a receiver appointed for Tenant upon application by Landlord, to take possession of the Premises, and to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Landlord pursuant to subparagraph d above (except that Tenant may vacate so long as it pays rent, provides an on-site security guard during normal business hours from Monday through Friday, and otherwise performs its obligations hereunder). 23. ABANDONMENT. Tenant shall not vacate or abandon the Premises at any time during the term of this Lease and if Tenant shall abandon, vacate or surrender said Premises, or be dispossessed by the process of law, or otherwise, any personal property belonging to Tenant and left on the Premises shall be deemed to be abandoned, at the option of Landlord, except such property as may be mortgaged to Landlord. 24. DESTRUCTION. In the event the Premises are destroyed in whole or in part from any cause, except for routine maintenance and repairs and incidental damage and destruction caused from vandalism and accidents for which Tenant is responsible for under Paragraph 10, Landlord may, at its option: (a) Rebuild or restore the Premises to their condition prior to the damage or destruction, or (b) Terminate this Lease, (providing that the Premises is damaged to the extent of 33 1/3% or more of the replacement cost). If landlord does not give Tenant notice in writing within thirty (30) days from the destruction of the Premises of its election to either rebuild and restore them, or to terminate this Lease, Landlord shall be deemed to have elected to rebuild or restore them, in which event Landlord agrees, at its expense, promptly to rebuild or restore the Premises to their condition prior to the damage or destruction. Tenant shall be entitled to a reduction in rent while such 15 of 31 16 repair is being made in the proportion that the area of the Promises rendered untenantable by such damage bears to the total area of the Premises. If Landlord initially estimates that the rebuilding or restoration will exceed 180 days or 60 days if the destruction occurs within the last eighteen (18) months of the Lease Term, or if Landlord does not complete the rebuilding or restoration within one hundred eighty (180) days (or sixty (60) days if the destruction occurs within the last eighteen (18) months of the Lease Term) following the date of destruction (such period of time to be extended for delays caused by the fault or neglect of Tenant or because of Acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond the control of Landlord), then Tenant shall have the right to terminate this Lease by giving fifteen (15) days prior written notice to Landlord. Notwithstanding anything herein to the contrary, Landlord's obligation to rebuild or restore shall be limited to the building and interior improvements constructed by Landlord as they existed as of the commencement date of the Lease and shall not include restoration of Tenant's trade fixtures, equipment, merchandise, or any improvements, alterations or additions made by Tenant to the Premises, which Tenant shall forthwith replace or fully repair at Tenant's sole cost and expense provided this Lease is not cancelled according to the provisions above. Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effects. Tenant hereby expressly waives the provisions of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of the California Civil Code. In the event that the building in which the Premises are situated is damaged or destroyed to the extent of not less than 33 1/3% of the replacement cost thereof, Landlord may elect to terminate this Lease, whether the Premises be injured or not. Notwithstanding anything to the contrary herein, Landlord may terminate this Lease in the event of an uninsured event or if insurance proceeds are insufficient to cover one hundred percent of the rebuilding costs net of the deductible. 25. EMINENT DOMAIN. If all or part of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, this Lease shall terminate as to any portion of the Premises so taken or conveyed on the date when title vests in the condemnor, and Landlord shall be entitled to any and all payment, income, rent, award, or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance, and Tenant shall have no claim against Landlord or otherwise for the value of any unexpired term of this Lease. Notwithstanding the foregoing paragraph, any compensation specifically awarded Tenant for loss of business, Tenant's personal property, moving cost or loss of goodwill, shall be and remain the property of Tenant. If (i) any action or proceeding is commenced for such taking of the Premises or any part thereof, or if Landlord is advised in writing by any entity or body having the right or power of condemnation of its intention to condemn the premises or any portion thereof, or (ii) any of the foregoing events occur with respect to the taking of any space in the Complex not leased hereby, or if any such spaces so taken or conveyed in lieu of such taking and Landlord shall decide to discontinue the use and operation of the Complex, or decide to demolish, alter or rebuild the Complex, then, in any of such events Landlord shall have the right to terminate this Lease by 16 of 31 17 giving Tenant written notice thereof within sixty (60) days of the date of receipt of said written advice, or commencement of said action or proceeding, or taking conveyance, which termination shall take place as of the first to occur of the last day of the calendar month next following the month in which such notice is given or the date on which title to the Premises shall vest in the condemnor. In the event of such a partial taking or conveyance of the Premises, if the portion of the Premises taken or conveyed is so substantial that the Tenant can no longer reasonably conduct its business, Tenant shall have the privilege of terminating this Lease within sixty (60) days from the date of such taking or conveyance, upon written notice to Landlord of its intention so to do, and upon giving of such notice this Lease shall terminate on the last day of the calendar month next following the month in which such notice is given, upon payment by Tenant of the rent from the date of such taking or conveyance to the date of termination. If a portion of the Premises be taken by condemnation or conveyance in lieu thereof and neither Landlord nor Tenant shall terminate this Lease as provided herein, this Lease shall continue in full force and effect as to the part of the Premises not so taken or conveyed, and the rent herein shall be apportioned as of the date of such taking or conveyance so that thereafter the rent to be paid by Tenant shall be in the ratio that the area of the portion of the Premises not so taken or conveyed bears to the total area of the Premises prior to such taking. 26. SALE OR CONVEYANCE BY LANDLORD. In the event of a sale or conveyance of the Complex or any interest therein, by any owner of the reversion then constituting Landlord, the transferor shall thereby be released from any further liability upon any of the terms, covenants or conditions (express or implied) herein contained in favor of Tenant, and in such event, insofar as such transfer is concerned, Tenant agrees to look solely to the responsibility of the successor in interest of such transferor in and to the Complex and this Lease. This Lease shall not be affected by any such sale or conveyance, and Tenant agrees to attorn to the successor in interest of such transferor. 27. ATTORNMENT TO LENDER OR THIRD PARTY. In the event the interest of Landlord in the land and buildings in which the leased premises are located (whether such interest of Landlord is a fee title interest or a leasehold interest) is encumbered by deed of trust, and such interest is acquired by the lender or any third party through judicial foreclosure or by exercise of a power of sale at private trustee's foreclosure sale, Tenant hereby agrees to attorn to the purchaser at any such foreclosure sale and to recognize such purchaser as the Landlord under this Lease. In the event the lien of the deed of trust securing the loan from a Lender to Landlord is prior and paramount to the Lease, this Lease shall nonetheless continue in full force and effect for the remainder of the unexpired term hereof, at the same rental herein reserved and upon all the other terms, conditions and covenants herein contained. 28. HOLDING OVER. Any holding over by Tenant after expiration or other termination of the term of this Lease with the written consent of Landlord delivered to Tenant shall not constitute a renewal or extension of the Lease or give Tenant any rights in or to the leased Premises except as expressly provided in this Lease. Any holding over after the expiration or other termination of the term of this Lease, with the consent of Landlord, shall be construed to be a tenancy from month to month, on the same terms and conditions herein specified insofar as 17 of 31 18 applicable except that the monthly Basic Rent shall be increased to an amount equal to one hundred fifty (150%) percent of the monthly Basic Rent required during the last month of the Lease term. 29. CERTIFICATE OF ESTOPPEL. Tenant shall at any time upon not less than ten (10) days' prior written notice to Landlord execute, acknowledge and deliver to Landlord a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults, if any, are claimed. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord: that there are no uncured defaults in Landlord's performance, and that not more than one month's rent has been paid in advance. 30. CONSTRUCTION CHANGES. It is understood that the description of the Premises and the location of ductwork, plumbing and other facilities therein are subject to such minor changes as Landlord or Landlord's architect determines to be desirable in the course of construction of the Premises, and no such changes, or any changes in plans for any other portions of the Complex shall affect this Lease or entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. Landlord does not guarantee the accuracy of any drawing supplied to Tenant and verification of the accuracy of such drawing rests with Tenant. 31. RIGHT OF LANDLORD TO PERFORM. All terms, covenants and conditions of this Lease to be performed or observed by Tenant shall be performed or observed by Tenant at Tenant's sole cost and expense and without any reduction of rent. If Tenant shall fail to pay any sum of money, or other rent, required to be paid by it hereunder and such failure shall continue for five (5) days after written notice thereof by Landlord, or shall fail to perform any other term or covenant hereunder on its part to be performed, and such failure shall continue for thirty (30) days after written notice thereof by Landlord, Landlord, without waiving or releasing Tenant from any obligation of Tenant hereunder, may, but shall not be obligated to, make any such payment or perform any such other term or covenant on Tenant's part to be performed. All sums so paid by Landlord and all necessary costs of such performance by Landlord together with interest thereon at the rate of the prime rate of interest per annum as quoted by the Bank of America from the date of such payment or performance by Landlord, shall be paid (and Tenant covenants to make such payment) to Landlord on demand by Landlord, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of nonpayment by Tenant as in the case of failure by Tenant in the payment of rent hereunder. 32. ATTORNEYS' FEES. (A) In the event that either Landlord or Tenant should bring full suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease, or for any other relief against the other party hereunder, then all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party 18 of 31 19 therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment. (B) Should Landlord be named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including a reasonable attorney's fee. 33. WAIVER. The waiver by either party of the other party's failure to perform or observe any term, covenant or condition herein contained to be performed or observed by such waiving party shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent failure of the party failing to perform or observe the same or any other such term, covenant or condition therein contained, and no custom or practice which may develop between the parties hereto during the term hereof shall be deemed a waiver of, or in any way affect, the right of either party to insist upon performance and observance by the other party in strict accordance with the terms hereof. 34. NOTICES. All notices, demands, requests, advice or designations which may be or are required to be given by either party to the other hereunder shall be in writing. All notices, demands, requests, advice or designations by Landlord to Tenant shall be sufficiently given, made or delivered if personally served on Tenant by leaving the same at the Premises or if sent by United States certified or registered mail, postage prepaid, addressed to Tenant at the Premises. All notices, demands, requests, advice or designations by Tenant to Landlord shall be sent by United States certified or registered mail, postage prepaid, addressed to Landlord at its offices at Peery/Arrillaga, 2560 Mission College Blvd., Suite 101, Santa Clara, CA 95054. Each notice, request, demand, advice or designation referred to in this paragraph shall be deemed received on the date of the personal service or mailing thereof in the manner herein provided, as the case may be. 35. EXAMINATION OF LEASE. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for a lease, and this instrument is not effective as a lease or otherwise until its execution and delivery by both Landlord and Tenant. 36. DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event earlier than thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have heretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligations; provided, however, that if the nature of Landlord's obligations is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion. 37. CORPORATE AUTHORITY. If Tenant is a corporation (or a partnership), each individual executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation 19 of 31 20 (or partnership) in accordance with the by-laws of said corporation (or partnership in accordance with the partnership agreement) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms. If Tenant is a corporation, Tenant shall, within thirty (30) days after execution of this Lease, deliver to Landlord a certified copy of the resolution of the Board of Directors of said corporation authorizing or ratifying the execution of this Lease. 38. [Intentionally Deleted.] 39. LIMITATION OF LIABILITY. In consideration of the benefits accruing hereunder, Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord: (i) the sole and exclusive remedy shall be against Landlord's interest in the Premises leased herein; (ii) no partner of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction of the partnership); (iii) no service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership) (iv) no partner of Landlord shall be required to answer or otherwise plead to any service of process; (v) no judgment will be taken against any partner of Landlord; (vi) no judgment taken against any partner of Landlord may be vacated and set aside at any time without hearing; (vii) no writ of execution will ever be levied against the assets of any partner of Landlord; (viii) these covenants and agreements are enforceable both by Landlord and also by any partner of Landlord. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by statute or at common law. 40. MISCELLANEOUS AND GENERAL PROVISIONS a Tenant shall not, without the written consent of Landlord, use the name of the building for any purpose other than as the address of the business conducted by Tenant in the Premises. b This Lease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any provision of this Lease shall be invalid, unenforceable or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. 20 of 31 21 c The term "Premises" includes the space leased hereby and any improvements now or hereafter installed therein or attached thereto. The term "Landlord" or any pronoun used in place thereof includes the plural as well as the singular and the successors and assigns of Landlord. The term "Tenant" or any pronoun used in place thereof includes the plural as well as the singular and individuals, firms, associations, partnership and corporations, and their and each of their respective heirs, executors, administrators, successors and permitted assigns, according to the context hereof, and the provisions of this Lease shall inure to the benefit of and bind such heirs, executors, administrators, successors and permitted assigns. The term "person" includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations. Words used in any gender include other genders. If there be more than one Tenant the obligations of Tenant hereunder are joint and several. The paragraph headings of this Lease are for convenience of reference only and shall have no effect upon the construction or interpretation of any provision hereof. d Time is of the essence of this Lease and of each and all of its provisions. e At the expiration or earlier termination of this Lease, Tenant shall execute, acknowledge and deliver to Landlord, within ten (10) days after written demand from Landlord to Tenant, any quitclaim deed or other document required by any reputable title company, licensed to operate in the State of California, to remove the cloud or encumbrance created by this Lease from the real property of which Tenant's Premises are a part. f This instrument along with any exhibits and attachments hereto constitutes the entire agreement between Landlord and Tenant relative to the Premises and this agreement and the exhibits and attachments may be altered, amended or revoked only by an instrument in writing signed by both Landlord and Tenant. Landlord and Tenant agree hereby that all prior or contemporaneous oral agreements between and among themselves and their agents or representatives relative to the leasing of the Premises are merged in or revoked by this agreement. g Neither Landlord nor Tenant shall record this Lease or a short form memorandum hereof without the consent of the other. h Tenant further agrees to execute any amendments required by a lender to enable Landlord to obtain financing, so long as Tenant's rights hereunder are not substantially affected. i Paragraphs 43 through 56 are added hereto and are included as a part of this lease. j Clauses, plats and riders, if any, signed by Landlord and Tenant and endorsed on or affixed to this Lease are a part hereof. k Tenant covenants and agrees that no diminution or shutting off of light, air or view by any structure which may be hereafter erected (whether or not by Landlord) shall 21 of 31 22 in any way affect his Lease, entitle Tenant to any reduction of rent hereunder or result in any liability of Landlord to Tenant. 41. BROKERS. Tenant warrants that it had dealings with only the following real estate brokers or agents in connection with the negotiation of this Lease: none. And that it knows of no other real estate broker or agent who is entitled to a commission in connection with this Lease. 42. SIGNS. No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or to any part of the outside of the Premises or any exterior windows of the Premises without the written consent of Landlord first had and obtained and Landlord shall have the right to remove any such sign, placard, picture, advertisement, name or notice without notice to and at the expense of Tenant. If Tenant is allowed to print or affix or in any way place a sign in, on, or about the Premises, upon expiration or other sooner termination of this Lease, Tenant at Tenant's sole cost and expense shall both remove such sign and repair all damage in such a manner as to restore all aspects of the appearance of the Premises to the condition prior to the placement of said sign. All approved signs or lettering on outside doors shall be printed, painted, affixed or inscribed at the expense of Tenant by a person approved of by Landlord. Tenant shall not place anything or allow anything to be placed near the glass of any window, door partition or wall which may appear unsightly from outside the Premises. IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Lease as of the day and year last written below. LANDLORD: TENANT: JOHN ARRILLAGA TRANSMETA CORPORATION SURVIVOR'S TRUST a California corporation /s/ JOHN ARRILLAGA /s/ COLIN HUNTER -------------------------------- --------------------------------- By: John Arrillaga, Trustee By: Date: 6/8/98 Title: CFO ------------------------------ Colin Hunter ------------------------------------ Print or Type Name RICHARD T. PERRY SEPARATE PROPERTY TRUST /s/ Date: June 5, 1998 ------------------------------- By: Richard T. Peery, Trustee Date: 6/8/98 22 of 31 23 Paragraphs 43 through 55 to Lease Agreement dated April 2, 1998, By and Between the John Arrillaga Survivor's Trust and the Richard T. Peery Separate Property Trust, as Landlord, and TRANSMETA CORPORATION, a California corporation, as Tenant for 45,000+ Square Feet of Space Located at 3990 Freedom Circle, Santa Clara, California. 43. BASIC RENT: In accordance with Paragraph 4A herein, the total aggregate sum of THIRTEEN MILLION NINE HUNDRED EIGHTY SIX THOUSAND AND NO/100 DOLLARS ($13,986,000.00), shall be payable as follows: On July 1, 1998, the sum of SEVENTY EIGHT THOUSAND SEVEN HUNDRED FIFTY AND NO/100 DOLLARS ($78,750.00) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2000. On July 1, 2000, the sum of ONE HUNDRED TEN THOUSAND TWO HUNDRED FIFTY AND NO/100 DOLLARS ($110,250.00) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2001. On July 1, 2001, the sum of ONE HUNDRED FOURTEEN THOUSAND SEVEN HUNDRED FIFTY AND NO/100 DOLLARS ($114,750.00) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2002. On July 1, 2002, the sum of ONE HUNDRED NINETEEN THOUSAND TWO HUNDRED FIFTY AND NO/100 DOLLARS ($119,250.00) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2003. On July 1, 2003, the sum of ONE HUNDRED TWENTY THREE THOUSAND SEVEN HUNDRED FIFTY AND NO/100 DOLLARS ($123,750.00) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2004. On July 1, 2004, the sum of ONE HUNDRED TWENTY EIGHT THOUSAND TWO HUNDRED FIFTY AND NO/100 DOLLARS ($128,250.00) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2005. On July 1, 2005, the sum of ONE HUNDRED THIRTY TWO THOUSAND SEVEN HUNDRED FIFTY AND NO/100 DOLLARS ($132,750.00) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2006. On July 1, 2006, the sum of ONE HUNDRED THIRTY SEVEN THOUSAND TWO HUNDRED FIFTY AND NO/100 DOLLARS ($137,250.00) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2007. On July 1, 2007, the sum of ONE HUNDRED FORTY ONE THOUSAND SEVEN HUNDRED FIFTY AND NO/100 DOLLARS ($141,750.00) shall be due, and a like sum due on the first day of each month thereafter, through and including June 1, 2008; or until the entire 23 of 31 24 aggregate sum of THIRTEEN MILLION NINE HUNDRED EIGHTY SIX THOUSAND AND NO/100 DOLLARS ($13,986,000.00) has been paid. 44. "AS-IS" BASIS: Subject only to Paragraph 53, it is hereby agreed that the Premises leased hereunder is leased strictly on an "as-is" basis and in its present condition, and in the configuration as shown on Exhibit B attached hereto, and by reference made a part hereof. Except as noted herein, it is specifically agreed between the parties that Landlord shall not be required to make, nor be responsible for any cost, in connection with any repair, restoration, and/or improvement to the Premises in order for this Lease to commence, or thereafter, throughout the Term of this Lease. Notwithstanding anything to the contrary within this Lease, Landlord makes no warranty or representation of any kind or nature whatsoever as to the condition or repair of the Premises, nor as to the use or occupancy which may be made thereof. 45. CONSENT: Whenever the consent of one party to the other is required hereunder, such consent shall not be unreasonably withheld. 46. CHOICE OF LAW; SEVERABILITY. This Lease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any provisions of this Lease shall be invalid, unenforceable, or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect. 47. AUTHORITY TO EXECUTE. The parties executing this Lease Agreement hereby warrant and represent that they are properly authorized to execute this Lease Agreement and bind the parties on behalf of whom they execute this Lease Agreement and to all of the terms, covenants and conditions of this Lease Agreement as they relate to the respective parties hereto. 48. ASSESSMENT CREDITS: The demised property herein may be subject to a special assessment levied by the City of Santa Clara as part of an Improvement District. As a part of said special assessment proceedings (if any), additional bonds were or may be sold and assessments were or may be levied to provide for construction contingencies and reserve funds. Interest shall be earned on such funds created for contingencies and on reserve funds which will be credited for the benefit of said assessment district. To the extent surpluses are created in said district through unused contingency funds, interest earnings or reserve funds, such surpluses shall be deemed the property of Landlord. Notwithstanding that such surpluses may be credited on assessments otherwise due against the Leased Premises, Tenant shall pay to Landlord, as additional rent if, and at the time of any such credit of surpluses, an amount equal to all such surpluses so credited. For example: if (i) the property is subject to an annual assessment of $1,000.00, and (ii) a surplus of $200.00 is credited towards the current year's assessment which reduces the assessment amount shown on the property tax bill from $1,000.00 to $800.00, Tenant shall, upon receipt of notice from Landlord, pay to Landlord said $200.00 credit as Additional Rent. 24 of 31 25 49. ASSIGNMENT AND SUBLETTING (CONTINUED): A. Proposed Sublet Premises. Landlord hereby acknowledges that, during the first two years of the Lease Term, Tenant intends to sublease one hundred percent of the Leased Premises. Provided Tenant is not in default of this Lease, Landlord agrees that it will not exercise its right, as provided for in Paragraph 19, to terminate the Lease as a result of a request by Tenant to sublease the Premises for a sublease term not to extend beyond June 30, 2000. In such event, Landlord agrees to issue Landlord's standard consent to said sublease, subject to (a) Tenant submitting to Landlord a copy of said sublease (prior to said sublease commencing), (b) Landlord, Tenant and Subtenant thereafter executing Landlord's standard Consent to Sublease agreement and (c) Landlord receives payment from Tenant of Landlord's costs for processing said Sublease Consent prior to said sublease commencing. In addition to and notwithstanding anything to the contrary in Paragraph 19, prior to sharing any rents due Tenant from a subtenant on the Proposed Sublet Premises in excess of the Rent payable by Tenant to Landlord hereunder ("Excess Rent"), Tenant shall be first entitled to recover from such Excess Rent the amount of all reasonable leasing commissions on said Proposed Sublet Premises paid to third parties not affiliated with Tenant. The parties hereto agree that Landlord will accommodate Tenant by assisting Tenant in finding a subtenant to lease the Proposed Sublet Premises for a sublease term not to exceed June 30, 2000 ("Sublease Term"). Tenant shall be responsible for entering into a sublease agreement with said subtenant and Landlord shall issue its standard Consent to Sublease form which shall be executed by Landlord, Tenant and the subtenant. Said sublease entered into between Tenant and subtenant shall provide for the subtenant to issue payments due under the sublease directly to Landlord during the Sublease Term and Landlord shall make reasonable efforts to collect the amounts due from the subtenant. Said amounts so collected by Landlord shall be credited to Tenant's account under this Lease; however, Landlord shall not be responsible or liable to Tenant for its failure to collect the amounts due from said subtenant, nor shall Tenant be relieved of any of its obligations under the Lease due to Landlord's agreement to collect the amounts due from the subtenant and Tenant shall not be entitled to an offset of the amounts due under Tenant's Lease for Landlord's failure to collect the amounts due from said subtenant under the sublease. Subject to the terms and conditions of this Paragraph 49A, Landlord also agrees to provide reasonable improvements to the Proposed Sublet Premises, at Landlord's expense, provided: (i) Tenant is not in default of this Lease and (ii) said Sublease Term does not exceed June 30, 2000. Notwithstanding the above, Landlord retains the sole and absolute right to determine what improvements are considered reasonable and shall not be liable to Tenant, in any manner whatsoever, for Landlord's refusal to provide said improvements if Landlord determines, in its sole and absolute discretion, that the subtenant improvements are not reasonable. The parties hereto acknowledge and agree that Landlord shall not be liable, in any manner whatsoever, to Tenant if Landlord does not find a subtenant for the Proposed Sublet Premises and Tenant shall have no claim, of any type whatsoever, against Landlord for Landlord's failure to find a subtenant for the Proposed Sublet Premises. 25 of 31 26 In the event the Proposed Sublet Premises is subleased to more that one subtenant, Landlord further agrees to maintain the common areas of the Building. The manner in which the Common Area shall be maintained and the expenditures for such maintenance shall be at the discretion of Landlord. As Additional Rent and in accordance with Paragraph 4D of this Lease, Tenant and any subtenants shall pay their proportionate share (calculated on a square footage or other equitable basis as calculated by Landlord) of the cost of operation (including common utilities), management, maintenance, and repair of the building (including common areas such as lobbies, restrooms, janitor's closets, hallways, elevators, mechanical and telephone rooms, stairwells, entrances, spaces above the ceilings and janitorization of said common areas) in which the Proposed Sublet Premises are located. The maintenance items herein referred to include, but are not limited to, all windows, window frames, plate glass, glazing, truck doors, main plumbing systems of the building (such as water drain lines, sinks, toilets, faucets, drains, showers and water fountains), main electrical systems (such as panels and conduits), heating and air conditioning systems (such as compressors, fans, air handlers, ducts, boilers, heaters), store fronts, roofs, downspouts, building common area interiors (such as wall coverings, window coverings, floor coverings and partitioning), ceilings, building exterior doors, skylights (if any), automatic fire extinguishing systems, and elevators (if any); license, permit and inspection fees; security, salaries and employee benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord may amortize its investment in said improvements (together with interest at the rate of fifteen (15%) percent per annum on the unamortized balance) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses. Tenant hereby waives all rights hereunder, and benefits of, subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect. B. Notwithstanding the foregoing, Landlord and Tenant agree that it shall not be unreasonable for Landlord to refuse to consent to a proposed assignment, sublease or other transfer ("Proposed Transfer") if the Premises or any other portion of the Property would become subject to additional or different Government Requirements as a direct or indirect consequence of the Proposed Transfer and/or the Proposed Transferee's use and occupancy of the Premises and the Property. However, Landlord may, in its sole discretion, consent to such a Proposed Transfer where Landlord is indemnified by Tenant and (i) Subtenant or (ii) Assignee, in form and substance satisfactory to Landlord's counsel, by Tenant and/or the Proposed Transferee from and against any and all costs, expenses, obligations and liability arising out of the Proposed Transfer and/or the Proposed Transferee's use and occupancy of the Premises and the Property. C. Any and all sublease agreement(s) between Tenant and any and all subtenant(s) (which agreements must be consented to by Landlord, pursuant to the requirements of this Lease) shall contain the following language: "If Landlord and Tenant jointly and voluntarily elect, for any reason whatsoever, to terminate the Master Lease prior to the scheduled Master Lease termination date, then this 26 of 31 27 Sublease (if then still in effect) shall terminate concurrently with the termination of the Master Lease. Subtenant expressly acknowledges and agrees that (1) the voluntary termination of the Master Lease by Landlord and Tenant and the resulting termination of this Sublease shall not give Subtenant any right or power to make any legal or equitable claim against Landlord, including without limitation any claim for interference with contract or interference with prospective economic advantage, and (2) Subtenant hereby waives any and all rights it may have under law or at equity against Landlord to challenge such an early termination of the Sublease, and unconditionally releases and relieves Landlord, and its officers, directors, employees and agents, from any and all claims, demands, and/or causes of action whatsoever (collectively, "Claims"), whether such matters are known or unknown, latent or apparent, suspected or unsuspected, foreseeable or unforeseeable, which Subtenant may have arising out of or in connection with any such early termination of this Sublease. Subtenant knowingly and intentionally waives any and all protection which is or may be given by Section 1542 of the California Civil Code which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with debtor. The term of this Sublease is therefore subject to early termination. Subtenant's initials here below evidence (a) Subtenant's consideration of and agreement to this early termination provision, (b) Subtenant's acknowledgment that, in determining the net benefits to be derived by Subtenant under the terms of this Sublease, Subtenant has anticipated the potential for early termination, and (c) Subtenant's agreement to the general waiver and release of Claims above. Initials:__________ Initials:__________" Subtenant Tenant 50. BANKRUPTCY AND DEFAULT: Paragraph 22 is modified to provide that with respect to non-monetary defaults not involving Tenant's failure to pay Basic Rent or Additional Rent, Tenant shall not be in default of any non-monetary obligation if (i) more than thirty (30) days is required to cure such non-monetary default, and (ii) Tenant commences cure of such default as soon as reasonably practicable after receiving written notice of such default from Landlord and thereafter continuously and with due diligence prosecutes such cure to completion. 51. ABANDONMENT: Paragraph 23 is modified to provide that Tenant shall not be in default under the Lease if it leaves all or any part of Premises vacant so long as (i) Tenant is performing all of its other obligations under the Lease including the obligation to pay Basic Rent and Additional Rent (ii) Tenant provides on-site security during normal business hours for those parts of the Premises left vacant, (iii) such vacancy does not materially and adversely affect the validity or coverage of any policy of insurance carried by Landlord with respect to the Premises, and (iv) the utilities and heating and ventilation system are operated and maintained to the extent necessary to prevent damage to the Premises or its systems. 27 of 31 28 52. HAZARDOUS MATERIALS: Landlord and Tenant agree as follows with respect to the existence or use of "Hazardous Materials" (as defined herein) on, in, under or about the Premises and real property located beneath said Premises and the common areas of the Complex (hereinafter collectively referred to as the "Property"): A. As used herein, the term "Hazardous Materials" shall mean any material, waste, chemical, mixture or byproduct which is or hereafter is defined, listed or designated under Environmental Laws (defined below) as a pollutant, or as a contaminant, or as a toxic or hazardous substance, waste or material, or any other unwholesome, hazardous, toxic, biohazardous, or radioactive material, waste, chemical, mixture or byproduct, or which is listed, regulated or restricted by any Environmental Law (including, without limitation, petroleum hydrocarbons or any distillates or derivatives or fractions thereof, polychlorinated biphenyls, or asbestos). As used herein, the term "Environmental Laws" shall mean any applicable Federal, State of California or local government law (including common law), statute, regulation, rule, ordinance, permit, license, order, requirement, agreement, or approval, or any determination, judgment, directive, or order of any executive or judicial authority at any level of Federal, State of California or local government (whether now existing or subsequently adopted or promulgated) relating to pollution or the protection of the environment, ecology, natural resources, or public health and safety. B. Tenant shall obtain Landlord's written consent, which may be withheld in Landlord's discretion, prior to the occurrence of any Tenant's Hazardous Materials Activities (defined below); provided, however, that Landlord's consent shall not be required for normal use in compliance with applicable Environmental Laws of customary household and office supplies (Tenant shall first provide Landlord with a list of said materials use), such as mild cleaners, lubricants and copier toner. As used herein, the term "Tenant's Hazardous Materials Activities" shall mean any and all use, handling, generation, storage, disposal, treatment, transportation, release, discharge, or emission of any Hazardous Materials on, in, beneath, to, from, at or about the Property, in connection with Tenant's use of the Property, or by Tenant or by any of Tenant's agents, employees, contractors, vendors, invitees, visitors or its future subtenants or assignees. Tenant agrees that any and all Tenant's Hazardous Materials Activities shall be conducted in strict, full compliance with applicable Environmental Laws at Tenant's expense, and shall not result in any contamination of the Property or the environment. Tenant agrees to provide Landlord with prompt written notice of any spill or release of Hazardous Materials at the Property during the term of the Lease of which Tenant becomes aware, and further agrees to provide Landlord with prompt written notice of any violation of Environmental Laws in connection with Tenant's Hazardous Materials Activities of which Tenant becomes aware. If Tenant's Hazardous Materials Activities involve Hazardous Materials other than normal use of customary household and office supplies, Tenant also agrees at Tenant's expense: (i) to install such Hazardous Materials monitoring, storage and containment devices as Landlord reasonably deems necessary (Landlord shall have no obligation to evaluate the need for any such installation or to require any such installation); (ii) provide Landlord with a written inventory of such Hazardous Materials, including an update of same each year upon the anniversary date of the Commencement Date of the Lease ("Anniversary Date"); and (iii) on each Anniversary Date, to retain a qualified environmental consultant, acceptable to Landlord, to evaluate whether Tenant is in compliance with all applicable Environmental Laws with respect to Tenant's Hazardous 28 of 31 29 Materials Activities. Tenant, at its expense, shall submit to Landlord a report from such environmental consultant which discusses the environmental consultant's findings within two (2) months of each Anniversary Date. Tenant, at its expense, shall promptly undertake and complete any and all steps necessary, and in full compliance with applicable Environmental Laws, to fully correct any and all problems or deficiencies identified by the environmental consultant, and promptly provide Landlord with documentation of all such corrections. C. Prior to termination or expiration of the Lease, Tenant, at its expense, shall (i) properly remove from the Property all Hazardous Materials which come to be located at the Property in connection with Tenant's Hazardous Materials Activities, and (ii) fully comply with and complete all facility closure requirements of applicable Environmental Laws regarding Tenant's Hazardous Materials Activities, including but not limited to (x) properly restoring and repairing the Property to the extent damaged by such closure activities, and (y) obtaining from the local Fire Department or other appropriate governmental authority with jurisdiction a written concurrence that closure has been completed in compliance with applicable Environmental Laws. Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any such closure activities. D. If Landlord, in its sole discretion, believes that the Property has become contaminated as a result of Tenant's Hazardous Materials Activities, Landlord in addition to any other rights it may have under this Lease or under Environmental Laws or other laws, may enter upon the Property and conduct inspection, sampling and analysis, including but not limited to obtaining and analyzing samples of soil and groundwater, for the purpose of determining the nature and extent of such contamination. Tenant shall promptly reimburse Landlord for the costs of such an investigation, including but not limited to reasonable attorneys' fees Landlord incurs with respect to such investigation, that discloses Hazardous Materials contamination for which Tenant is liable under this Lease. Except as may be required of Tenant by applicable Environmental Laws, Tenant shall not perform any sampling, testing, or drilling to identify the presence of any Hazardous Materials at the Property, without Landlord's prior written consent which may be withheld in Landlord's discretion. Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any sampling, testing or drilling performed pursuant to the preceding sentence. E. Tenant shall indemnify, defend (with legal counsel acceptable to Landlord, whose consent shall not unreasonably be withheld) and hold harmless Landlord, its employees, assigns, successors, successors-in-interest, agents and representatives from and against any and all claims (including but not limited to third party claims from a private party or a government authority), liabilities, obligations, losses, causes of action, demands, governmental proceedings or directives, fines, penalties, expenses, costs (including but not limited to reasonable attorneys', consultants' and other experts' fees and costs), and damages, which arise from or relate to: (i) Tenant's Hazardous Materials Activities; (ii) any Hazardous Materials contamination caused by Tenant prior to the Commencement Date of the Lease; or (iii) the breach of any obligation of Tenant under this Paragraph 52 (collectively, "Tenant's Environmental Indemnification"). Tenant's Environmental Indemnification shall include but is not limited to the obligation to promptly and fully reimburse Landlord for losses in or reductions to rental income, and diminution in fair market value of the Property. Tenant's Environmental Indemnification shall 29 of 31 30 further include but is not limited to the obligation to diligently and properly implement to completion, at Tenant's expense, any and all environmental investigation, removal, remediation, monitoring, reporting, closure activities, or other environmental response action (collectively, "Response Actions"). Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any Response Actions. It is agreed that the Tenant's responsibilities related to Hazardous Materials will survive the expiration or termination of this Lease and that Landlord may obtain specific performance of Tenant's responsibilities under this Paragraph 52. 53. MAINTENANCE OF THE PREMISES: Notwithstanding anything to the contrary in Paragraph 10, Landlord shall repair, damage to the structural shell, foundation, and roof structure (but not the interior improvements, roof membrane, or glazing) of the building leased hereunder at Landlord's cost and expense provided Tenant has not caused such damage, in which event Tenant shall be responsible for 100 percent of any such costs for repair or damage so caused by the Tenant. Notwithstanding the foregoing, a crack in the foundation or exterior walls, or any other defect in the Building that does not endanger the structural integrity of the building for which Tenant is not responsible, or which is not life-threatening, shall not be considered material, and Landlord may elect, in its sole and absolute discretion, not to repair and/or replace the same. 54. LEASE TERMS CO-TERMINOUS: It is hereby acknowledged that (i) Landlord and Tenant have previously executed two separate lease agreements, dated November 1, 1995 for premises located at 3940 Freedom Circle, Santa Clara, California (hereinafter referred to as the "Marriott A Lease") and dated January 29, 1997 for premises located at 2540 Mission College Blvd., Santa Clara, California (hereinafter referred to the "Marriott B Lease"), (ii) concurrently with the execution of this Amendment, Landlord and Tenant shall execute a separate lease agreement, dated April 2, 1998, for premises located at 2560 Mission College Blvd., Santa Clara California (the "Marriott C Lease") and (iii) it is the intention of the parties that the Term of this Lease be co-terminous with the terms of the Marriott A Lease, the Marriott B Lease and the Marriott C Lease (collectively the "Marriott A, B, and C Leases") such that the terms of all leases expire on the same date; provided, however, the termination of this Lease resulting from the terms and conditions stated under Paragraph 22 ("Bankruptcy and Default") (subject to Landlord's option as stated below and in the Marriott A, B and C Leases' "Cross Default Paragraph) or Paragraph 24 ("Destruction") or Paragraph 25 ("Eminent Domain") shall not result in a termination of the Marriott A, B or C Leases, unless Landlord elects, at its sole and absolute discretion, to terminate any or all of the Marriott A, B or C Leases." 55. CROSS DEFAULT: As a material part of the consideration for the execution of this Lease by Landlord, it is agreed between Landlord and Tenant that a default under this Lease, or a default under said Marriott A, B and/or C Lease may, at the option of Landlord, be considered a default under all four leases, in which event Landlord shall be entitled (but in no event required) 30 of 31 31 to apply all rights and remedies of Landlord under the terms of one lease to all four leases including, but not limited to, the right to terminate one or all of said leases by reason of a default under said Marriott A, B and/or C Lease or hereunder." 31 of 31 EX-10.12 16 ex10-12.txt EXHIBIT 10.12 1 EXHIBIT 10.12 SUBLEASE Sublandlord: Transmeta Corporation Master Premises: 3990 Freedom Circle Santa Clara, California Subtenant: Mitel, Inc. Date: October 28, 1998 1. Parties: This Sublease is made and entered into as of Wednesday, October 28, 1998, by and between Transmeta Corporation ("Sublandlord") and Mitel, Inc. ("Subtenant"), under the Master Lease dated April 2, 1998 between John Arrillaga and Richard T. Peery as "Landlord", and Sublandlord as "Tenant", ("Master Lease"). A copy of the Master Lease is attached hereto as "Attachment I" and incorporated herein by this reference. Pursuant to the Master Lease, Sublandlord leases all of that certain Forty-five Thousand (45,000+/-) square foot, two-story building located at 3990 Freedom Circle, Santa Clara, California (the "Master Premises"). 2. Provisions Constituting Sublease: 2.1 This Sublease is subject to all of the terms and conditions of the Master Lease. Subtenant hereby assumes and agrees to perform all of the obligations of "Tenant" under the Master Lease to the extent said obligations apply to the Subleased Premises and Subtenant's use of the Common Areas as depicted in "Exhibit A" attached, except as specifically set forth herein. Sublandlord hereby agrees to use reasonable efforts to cause Landlord under the Master Lease to perform all of the obligations of Landlord thereunder to the extent said obligations apply to the Subleased Premises and Subtenant's use of the Common Areas. Neither Subtenant nor its employees, agents, contractors or invitees ("Subtenant's Agents") shall commit on the Subleased Premises or on any other portion of the Master Premises any act or omission which violates the rights of any other party or parties hereto who are affected thereby, neither of the parties hereto will, by renegotiation of the Master Lease assignment, subletting, default or any other voluntary action, avoid or seek to avoid the observance or performance of the terms to be observed or performed hereunder by such party, but will at all times in good faith assist in carrying out all the terms of this Sublease and in taking all such action as may be necessary or appropriate to protect the rights of the other party or parties hereto who are affected thereby against impairment. Nothing contained in this Section 2.1 or elsewhere in this Sublease shall prevent or prohibit Sublandlord (a) from exercising its right to terminate the Master Lease pursuant to the terms thereof or (b) from assigning its interest in this Sublease or subletting portions of the Master Premises other than the Subleased Premises. 2.2 With respect to all of the provisions of the Master Lease incorporated into this Sublease, wherever the word "Premises" is used in the Master Lease, for purposes of this Sublease, the word "Subleased Premises" shall be substituted and any calculation of charges shall be prorated on the basis of the proportionate share which the Subleased Premises represents per paragraph 3.2 below (i.e. 30,000 square feet); wherever in the Master Lease the word "Tenant" appears, for purposes of this Sublease, the word "Subtenant" shall be substituted; wherever in the Master Lease the word "Landlord" appears, for the purposes of this Sublease, the word "Sublandlord" shall be substituted. Notwithstanding the foregoing, 2 the word "Landlord" in Paragraph 5 of the Master Lease shall be deemed to refer to "Master Landlord", and the word "Sublandlord" shall not be substituted therefor. All of the terms and conditions contained in the Master Lease are incorporated herein, except as specifically provided below, and the terms and conditions of this Sublease, except the following paragraphs of the Master Lease which shall solely be the obligation of Sublandlord: the description of the premises leased pursuant to the Master Lease, Paragraphs 2, 3, 4A, 4F, 34, 41, 43, 55 and substitute "Exhibit B" with "Exhibit A of the Sublease" in Paragraph 44, and substitute the amount of $283,500.00 as noted in Paragraph 4g of the Master Lease with $29,400.00. 3. Subleased Premises and Rent: 3.1 Subleased Premises: Sublandlord leases to Subtenant and Subtenant leases from Sublandlord the Subleased Premises upon all of the terms, covenants and conditions contained in the Sublease. The Subleased Premises consists of approximately 33,600 +/- square feet of the Master Premises and as shown in red on "Exhibit A" attached hereto, approximately 22,500 square feet on the second floor and 11,100 square feet on the first floor. Sublandlord represents and warrants to Subtenant that Sublandlord is presently in possession of the Subleased Premises and has been continuously since July 1, 1998. Sublandlord reserves the option to recapture a certain approximate 2,846 to 2,890 +/- square feet on the first floor, as shown on Exhibit A as indicated in "Exhibit A." In order to exercise this option, Sublandlord must provide Subtenant with 60 days prior written notice and is solely responsible for the cost and expense of demising and securing the space. In the event that Sublandlord does recapture this space, there will be no reduction in the monthly gross rent due from the Subtenant. 3.2 Rent:
Approximate Month NNN Rent Base Rent Rentable Area 01 - 12 $56,700.00 per month $1.89/sf/mo. 30,000 sq.ft. 13 - 24 $56,700.00 per month $1.89/sf/mo. 30,000 sq.ft. 25 - 36 $66,900.00 per month $2.23/sf/mo. 30,000 sq.ft.
Subtenant shall pay to Sublandlord rent for the Subleased Premises without deductions, offset, prior notice or demand. Rent shall be payable by Subtenant to Sublandlord in consecutive monthly installments on or before the first day of each calendar month during the Sublease Term. This is a net rent. As set forth in the Master Lease, Subtenant shall be responsible for all additional rent, including, but not limited to Paragraphs 7, 10, 11, 12 and 15, based only on 30,000 square feet. All such expenses shall be determined on a pro-rata basis and paid monthly to Sublandlord as additional rent, except Sublandlord shall be responsible for costs associated with repairing or replacing the roof membrane under Paragraph 10 of the Master Lease for the first twelve (12) months of the Sublease term. All personal property insurance of Subtenant shall be the sole responsibility of the Subtenant. Sublandlord shall not be responsible for providing janitorial for Subleased Premises, however, Sublandlord shall be responsible for maintaining the Common Areas as identified in "Exhibit A" including, but not limited to, the restrooms. Maintenance shall be provided five (5) days a week. 2 3 3.3. Security Deposit: In addition to the Rent specified above, Subtenant shall pay to Sublandlord $70,000.00 as a non-interest bearing Security Deposit. Sublandlord shall return to Subtenant, within ten days after Subtenant has vacated the Subleased Premises, the Security Deposit less any sums due and owing to Sublandlord and/or the cost to Sublandlord to cure any other of the Subtenant's breaches of the Sublease, all in accordance with California Civil Code Section 1950.7 or any successor statute thereto. 3.4 Subsequent to execution of the Sublease Agreement by both parties and upon consent thereto by Landlord, Subtenant shall pay to Sublandlord the Security Deposit and the first month's base rent and additional rent. 4. Rights of Access and Use: 4.1 Use: Subtenant shall use the Subleased Premises only for those purposes permitted in the Master Lease and the purpose of sales office, unless Sublandlord and Master Landlord consent in writing to other uses prior to the commencement thereof. 5. Sublease Term: 5.1 Sublease Term: The Sublease Term shall commence on the earlier of December 1, 1998, or upon substantial completion of Sublandlord's tenant improvements (demising the space and restroom upgrade), whichever is sooner and subject to adjustment as set forth in Paragraph 5.3 ("Commencement Date") and terminate thirty-six (36) months after Sublease commencement. In no event shall the Sublease Term extend beyond the Term of the Master Lease. 5.2 Upon the Commencement Date, Sublandlord shall deliver the Subleased Premises with the roof, fire sprinkler system, HVAC system, electrical (including all outlets), plumbing, exterior doors, interior doors and lighting in good working condition. Sublandlord to have all systems serviced and warrant that all are in a good, safe, working condition at Sublandlord's cost before December 1, 1998. 5.3 Inability to Deliver Possession: In the event Sublandlord is unable to deliver possession of the Subleased Premises on December 1, 1998, Sublandlord shall not be liable for any damage caused thereby, nor shall this Sublease be void or voidable except as provided for in this paragraph 5.3 but Subtenant shall not be liable for Rent until such time as Sublandlord offers to deliver possession of the Subleased Premises to Subtenant, but the term hereof shall not be extended by such delay. If Subtenant, with Sublandlord's consent, takes possession prior to commencement of the term, Subtenant shall do so subject to all the covenants and conditions hereof and shall pay Rent for the period ending with the commencement of the term at the same rental as that prescribed for the first month of the term prorated at the rate of 1/30th thereof per day. In the event Sublandlord has been unable to deliver possession of the Subleased Premises or secure Landlord's consent to this Sublease by Ninety (90) days Subtenant, at Subtenant's 3 4 option, may terminate this Sublease and Sublandlord shall return to Subtenant all money Subtenant may have paid whether as a security deposit, rent or otherwise. 6. Parking: Sublandlord will grant Subtenant their prorata share of the parking spaces granted to the building by the Master Lease. Said proration to be determined by dividing square footage of Subleased Premises per paragraph 3.2 below (i.e. 30,000 square feet) by the total Master Premises' square footage (i.e. 45,000 square feet) then multiplying this percent (66.67%) by the total parking spaces granted (135) for a total of approximately 90 parking spaces. Sublandlord will not charge Subtenant for parking except as noted in Paragraph 6 in the Master Lease. 7. HVAC Maintenance: Notwithstanding Paragraph 10 of the Master Lease, Sublandlord shall be responsible for maintaining heating and air conditioning systems which service the Subleased Premises only, the cost of which will be included as part of Subtenant's additional rent due on a monthly basis. 8. Tenant Improvements: Sublandlord, at Sublandlord's sole cost and expense, shall demise the Subleased Premises with floor to ceiling walls and upgrade the restrooms and all entrances and egress routes within the Premises to current ADA code. Subtenant will have to remove and restore only those improvements or alterations that Sublandlord designates as such upon Sublandlord's approval of these improvements or alterations. Sublandlord will provide Subtenant with an improvement allowance of $280,000.00 based on the attached Exhibit A, which will be paid to the Subtenant 15 days after receipt of invoice and after verification by Transmeta's architect and representative that the work has been completed. Any additional improvements beyond this allowance will be at Subtenant's sole cost and expense. Subtenant shall be responsible for constructing all improvements with Sublandlord's prior written approval, and will employ a contractor jointly agreed upon by Sublandlord and Subtenant. Sublandlord will not withhold its consent unreasonably. Subtenant shall have both Sublandlord's and Master Landlord's prior written consent. 9. Alterations: Subtenant shall not make any alterations to the interior or exterior of the Premises without prior written consent of Sublandlord. 10. Notices: Any notice or report required or desired to be given regarding this Sublease shall be in writing, may be given by personal delivery, by facsimile, by courier service or by certified mail, return receipt requested. Any notice or report addressed to Subtenant or to Sublandlord at the address shown below, shall be deemed to have been given (I) on the date the U.S. Post Office certifies delivery, nondeliverability or refusal of delivery if such notice or report was deposited in the United States mail, certified, postage prepaid, (ii) when delivered if given by personal delivery, (iii) on the business day following deposit, cost prepaid, with Federal Express or similar private carrier, if next business day delivery was requested and a delivery receipt is generated, and (iv) in all other cases when actually received. Either party may change its address by giving notice of the same in accordance with this Paragraph. The term "business day" shall mean a day on which the carrier used (Federal Express or other private carrier, or the U.S. Postal Service, as applicable) delivers, whether by special request or in the ordinary course of operations. 4 5 All notices, demands, requests, advices or designations by Subtenant shall be addressed to Sublandlord at its offices at Transmeta Corporation, 2540 Mission College Boulevard, Santa Clara, California 95054. All notices, demands, requests, advices or designations by Sublandlord or Master Landlord shall be addressed to Subtenant at its offices at 205 Van Buren Street, Suite 400, Herndon, VA 20170-5336 Attention: Law Department. 11. Agency: Sublandlord and Subtenant acknowledge that CPS represents the Sublandlord, and CPS and Cushman Realty represent the Subtenant, and therefore CPS will be acting as a dual agent of each of the parties. We understand and consent to this dual agency and waive any possible or actual conflict of interest which may arise from this representation. As a dual agent, CPS is obligated to disclose to both parties all material facts or confidential information known to it which would affect the decisions of a party. However, CPS will not be obligated to disclose, nor will it disclose, the fact that either party is willing to offer more favorable terms than that party's last authorized offer. 12. Broker Fee: Sublandlord shall pay CPS and Cushman Realty, licensed real estate brokers representing Sublandlord and Subtenant, fees set forth in a separate agreement between Sublandlord and Broker. Subtenant shall have no obligation to Broker for payment of any fees. 13. Broker: Each party warrants and represents to the other party hereto that it has not dealt with any brokers in connection with this Sublease other than the brokers identified in Paragraph 12 of this Sublease (the "Brokers"). Each party hereby indemnifies and holds the other party harmless from any and all loss, damage, claim, liability, cost or expense (including, but not limited to, reasonable attorneys' fees, expenses and court costs) arising out of or in connection with any breach of the foregoing warranty and representation. The provisions of this Paragraph shall survive the expiration or earlier termination of this Sublease. 14. Assignment and Subletting: Notwithstanding any provision to the contrary in this Sublease, including, without limitation, any provision of the Master Lease incorporated herein, Sublandlord shall not withhold its consent to any assignment or subletting which either does not require the consent of Master Landlord or which requires the consent of Master Landlord and to which Master Landlord consents. If Subtenant desires to Sublease the Subleased Premises, Sublandlord shall have Right of First Refusal of such space. Upon receiving written notice of Subtenant's desire to Sublease, Sublandlord shall respond in writing its decision to Sublease within ten (10) days. The rental rate shall be the same as Paragraph 3.3. 15. Waiver of Subrogation: Notwithstanding any provision to the contrary in this Sublease, including, without limitation, any provision incorporated from the Master Lease, the parties hereto release each other and their respective agents, employees, successors, assignees and subtenants from all liability for damage to any property that is caused by or results from a risk which is actually insured against, which is required to be insured against by either party under this Sublease or the Master Lease, 5 6 or which would normally be covered by the standard form of "all risk extended coverage" property insurance, without regard to the negligence or willful misconduct of the entity so released. Each party shall use its best efforts to cause each insurance policy it obtains to provide that the insurer thereunder waives all right of recovery by way of subrogation as required herein in connection with any injury or damage covered by the policy. If such insurance policy cannot be obtained with such waiver of subrogation, or if such waiver of subrogation is only available at additional cost and the party for whose benefit the waiver is not obtained does not pay such additional cost, then the party obtaining such insurance shall immediately notify the other party of that fact. 16. Waiver of Subrogation in Master Lease: Upon Master Landlord's execution of the Consent to Sublease which follows this Sublease, the waiver of subrogation provision in Paragraph 15 of the Master Lease, notwithstanding any provision to the contrary in this Sublease or the Master Lease, shall be effective between Master Landlord and Subtenant with respect to insured casualties regarding the Subleased Premises as well as between Master Landlord and Sublandlord. 17. Master Lease Enforcement Sublandlord shall diligently attempt to enforce Master Landlord's obligations under the Master Lease with respect to or affecting the Sublandlord Premises and/or any common areas used (or available for use by Subtenant). Subtenant acknowledges that Sublandlord is under no duty to make repairs or improvements to the Subleased Premises accept as specifically set forth in the Master Lease. 18. Sublandlord's Cooperation If Master Landlord's consent is required for any action which Subtenant desires to take under this Sublease, Sublandlord shall cooperate with Subtenant to obtain such consent. If Master Landlord fails to perform any of its obligations under the Master Lease, Sublandlord, at the request of Subtenant, shall use its good faith efforts to obtain Master Landlord's performance of such obligation(s). Sublandlord shall cooperate with Subtenant in bringing any suit or other action against Landlord in the event that Subtenant would otherwise be barred from bringing such suit for want of privity, or any other reason. 19. Subtenant's Corporate Authority Subtenant represents (a) that it is a corporation organized and existing under the laws of the State of Delaware and is qualified to do business in the State of California; (b) that this Sublease has been duly authorized by all required corporate actions; and (c) that the persons executing the Sublease are authorized to execute this Sublease on behalf of Subtenant. 20. Renewal Option Tenant will have an option to extend the lease on the following terms: a. One (1), twelve (12) month option; b. To be exercised by written notice no earlier than 270 days nor later than 180 days prior to the termination of the lease; c. At a new base monthly rent of: $76,500.00 NNN; and d. The option term will be granted only if Tenant is in compliance with all lease terms when notice is given and on the first day of the option period. 6 7 21. Access Subtenant shall have access to the Subleased Premises and the Common Areas 24 hours a day, every day. Master Landlord and Sublessor agree to be accompanied by a Mitel employee if access is required. SUBLANDLORD : Transmeta Corporation BY: /s/ David R. Ditzel BY: /s/ Colin Hunter ------------------------------- --------------------------------- TITLE: President & CEO TITLE: Corporate Secretary ---------------------------- ------------------------------ DATE: 10/29/98 DATE: 10/29/98 ----------------------------- ------------------------------- SUBTENANT: Mitel, Inc. BY: /s/ BY: /s/ ------------------------------- --------------------------------- TITLE: Asst. Corp. Ser. TITLE: Corporate Secretary ---------------------------- ------------------------------ DATE: 10/28/98 DATE: 10/28/98 ----------------------------- ------------------------------- NOTICE TO SUBLANDLORD AND SUBTENANT: CPS IS NOT AUTHORIZED TO GIVE LEGAL OR TAX ADVICE; NOTHING CONTAINED IN THIS SUBLEASE FOR ANY DISCUSSIONS BETWEEN CPS AND SUBLANDLORD AND SUBTENANT SHALL BE DEEMED TO BE A REPRESENTATION OR RECOMMENDATION BY CPS, OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL IMPACT OR TAX CONSEQUENCES OF THIS DOCUMENT OR ANY TRANSACTION RELATING THERETO. ALL PARTIES ARE ENCOURAGED TO CONSULT WITH THEIR INDEPENDENT FINANCIAL CONSULTANTS AND/OR ATTORNEYS REGARDING THE TRANSACTION CONTEMPLATED BY THIS PROPOSAL. CONSENT BY MASTER LANDLORD: The undersigned, Landlord under the Master Lease in Exhibit "C", hereby consents to the subletting of the Premises described herein on the terms and conditions contained in this Sublease. This consent shall apply only to this Sublease and shall not be deemed to be a consent to any other Sublease. MASTER LANDLORD: BY:________________________________ BY:________________________________ TITLE:_____________________________ TITLE:_____________________________ DATE:______________________________ DATE:_____________________________ 7 8 October 29, 1998 Mr. Richard Stiller TRANSMETA CORPORATION 3940 Freedom Circle Santa Clara, CA 95054 Re: CONSENT TO SUBLEASE TO MITEL, INC., A DELAWARE CORPORATION FOR A PERIOD OF THREE YEARS, COMMENCING DECEMBER 1, 1998 AND TERMINATING NOVEMBER 30, 2001 Gentlemen: This letter is written with regard to your proposed sublease of approximately 33,600 square feet of space (as shown on Exhibit A attached hereto) (the "Sublet Premises") of the 45,000 square feet of space leased by Tenant at 3990 Freedom Circle, Santa Clara, California, under Lease Agreement dated April 2, 1998 ("Master Lease"), by and between John Arrillaga Survivor's Trust and Richard T. Peery Separate Property Trust ("Master Landlord"), and Transmeta Corporation, a California corporation ("Tenant"), which Tenant is proposing to sublease to Mitel, Inc., a Delaware corporation ("Subtenant") on the terms and conditions set forth in the proposed Sublease dated October 28, 1998, submitted by Tenant to Master Landlord on October 29, 1998 (the "Sublease"). Pursuant to Master Lease Paragraph 19 ("Assignment and Subletting") Master Landlord hereby approves Tenant's subleasing said space to Subtenant for the thirty six month period ending November 30, 2001, subject to the following terms and conditions: 1. Master Landlord's Consent shall in no way void or alter any of the terms of the Lease by and between Master Landlord and Tenant, nor shall this Consent alter or diminish in any way Tenant's obligations to Master Landlord. 2. Tenant shall not give Subtenant any rights or privileges in excess of those given Tenant under the terms of the Master Lease. 3. Subtenant shall not have a separate address from the address of the Premises. Therefore, Tenant shall provide Subtenant with internal mail delivery. Tenant and Subtenant shall share (the prorata shares to be determined in a separate agreement between Tenant and Subtenant) the existing signage allocated to Tenant for the Premises. 4. Notwithstanding anything to the contrary herein, Master Landlord has not reviewed the 9 terms of any agreement between Tenant and Subtenant, and in approving said Sublease, Master Landlord is in no way approving any term, covenant or condition therein contained, and said Sublease is subject and subordinate to all terms, covenants and conditions of the Master Lease. Master Landlord shall not be bound by any agreement other than the terms of the Master Lease between Master Landlord and Tenant. Except as noted herein, in the event of conflict in the terms, covenants and conditions between the Sublease and the Master Lease, the terms, covenants and conditions of the Master Lease shall prevail and take precedence over said Sublease. Master Landlord does not make any warranties or representations as to the condition of the Leased Premises or the terms of the Lease between Master Landlord and Tenant. This Consent to Sublease shall in no event be construed as consent to any future sublease agreement (including any extensions and/or amendments to the current Sublease) between Tenant and Subtenant, or any other party; and any future sublease agreement (including any extensions and/or amendments to the current Sublease) between Tenant and Subtenant, or any other party shall require the prior written consent of Master Landlord. Under no circumstances will Master Landlord consent to a sub-sublease or assignment under the Sublease. 5. A. It is agreed by all parties hereto that in the event Master Landlord terminates the Master Lease, pursuant to any right therein contained, said Sublease shall automatically terminate simultaneously with the Master Lease. Unless Master Landlord, at Master Landlord's sole option and election, chooses to allow Subtenant to remain in possession of the Sublet Premises leased under said Sublease subject to all terms, covenants and conditions of said Master Lease by giving Subtenant written notice prior to the effective date of termination of said Master Lease, of Master Landlord's election to allow Subtenant to remain in possession of the Sublet Premises in which event Subtenant shall be entitled and obligated to remain in possession of the Sublet Premises under the terms of said Sublease, subject to all terms, covenants and conditions of the Master Lease, including, without limitation to, payment of Basic Rent at the greater of: (i) the rate provided for in the Master Lease, or (ii) the rate provided for in the Sublease. Such election by Master Landlord shall not operate as a waiver of any claims Master Landlord may have against Tenant. Following such written notice by Master Landlord Subtenant shall then, as of the effective date of said termination of said Master Lease, be liable to and shall attorn in writing directly to Master Landlord as though said Sublease were executed directly between Master Landlord and Subtenant; provided, however, it is specifically agreed between the parties hereto, that whether Master Landlord elects to allow Subtenant to remain in possession of the Sublet Premises under the terms of the Sublease, subject to the Master Lease, or allow said Sublease to automatically terminate simultaneously with the Master Lease, Master Landlord shall not, in any event, nor under any circumstances be responsible or liable to Subtenant for (i) the return of any security deposit paid by Subtenant to Tenant, nor shall Subtenant be given credit for any prepaid rental or other monetary consideration paid by Subtenant to Tenant under said Sublease; (ii) any other claim or damage of any kind or nature whatsoever by reason of or in connection with Master Landlord's termination of said Master Lease and/or Sublease; and (iii) any default of Tenant under the Sublease. 10 B. In the event Master Landlord has terminated the Master Lease, and has not elected, in writing prior to the effective date of termination of said Master Lease, to allow Subtenant to remain in the Sublet Premises as set forth above, said Sublease shall terminate co-terminously with the effective termination of the Master Lease automatically, without notice, and Subtenant and/or Tenant, jointly and severally, shall surrender the Sublet Premises to Master Landlord in good condition and repair as of the effective termination of the Master Lease, with Master Landlord having no obligation or liability whatsoever to Subtenant by reason of or in connection with such early termination of the Master Lease. In the event Subtenant and/or Tenant fails to timely surrender the Sublet Premises to Master Landlord in good condition and repair as of the date the Master Lease terminates, Subtenant and/or Tenant, jointly and severally, shall be liable to Master Landlord in such event for all damages, costs, claims, losses, liabilities, fees or expenses sustained by Master Landlord, including, but not limited to, loss of rental income, attorney's fees and court costs resulting from or in connection with Subtenant's failure to timely vacate the Sublet Premises and surrender the Sublet Premises to Master Landlord as of the effective termination date of said Master Lease. C. As a condition to Landlord's consent to the Sublease, by execution of this Consent to Sublease, Subtenant hereby agrees to be bound by the following provision in relation to both Tenant and Master Landlord: If Master Landlord and Tenant jointly and voluntarily elect, for any reason whatsoever, to terminate the Master Lease prior to the scheduled Master Lease Termination Date, then this Sublease (if then still in effect) shall terminate concurrently with the termination of the Master Lease. Subtenant expressly acknowledges and agrees that (1) the voluntary termination of the Master Lease by Master Landlord and Tenant and the resulting termination of this Sublease shall not give Subtenant any right or power to make any legal or equitable claim against Master Landlord, including without limitation any claim for interference with contract or interference with prospective economic advantage, and (2) Subtenant hereby waives any and all rights it may have under law or at equity to challenge such an early termination of the Sublease, and unconditionally releases and relieves Master Landlord, and its officers, directors, employees and agents, from any and all claims, demands, and/or causes of action whatsoever (collectively, "Claims"), whether such matters are known or unknown, latent or apparent, suspected or unsuspected, foreseeable or unforeseeable, which Subtenant may have arising out of or in connection with any such early termination of this Sublease. Subtenant knowingly and intentionally waives any and all protection which is or may be given by Section 1542 of the California Civil Code which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with debtor." The term of this Sublease is therefore subject to early termination. Subtenant's initials here below evidence (a) Subtenant's consideration of and agreement to this early termination provision, (b) Subtenant's acknowledgment that, in determining the net benefits to be derived by 11 Subtenant under the terms of this Sublease, Subtenant has anticipated the potential for early termination, and (c) Subtenant's agreement to the general waiver and release of Claims above. Initials: /s/ Initials: /s/ ----------- ---------- Subtenant Tenant 6. In consideration of Master Landlord's consent to the Sublease, Tenant irrevocably assigns to Master Landlord, as security for Tenant's obligations under this Lease, all rent and income payable to Tenant under the Sublease. Therefore Master Landlord may collect all rent due under the Sublease and apply it towards Tenant's obligations under the Master Lease. Notwithstanding anything to the contrary herein or in the Master Lease, Tenant and Subtenant agree to pay same to Master Landlord upon demand without further consent of Tenant and Subtenant required; provided, however, that until the occurrence of a default by Tenant under the Master Lease, Tenant shall have the right and obligation to collect such rent. Tenant hereby irrevocably authorizes and directs Subtenant, upon receipt of a written notice from Master Landlord stating that a default exists in the performance of Tenant's obligations under the Master Lease, to pay to Master Landlord the rents due and to become due under the Sublease. Tenant agrees that Subtenant shall have the right to rely on any such statement and request from Master Landlord, and that Subtenant shall pay such rents to Master Landlord without any obligation or right to inquire as to whether such default exists and notwithstanding any notice or claim from Tenant to the contrary. Tenant shall have no right or claim against Subtenant or Master Landlord for any such rents so paid by Subtenant to Master Landlord. It is further agreed between the parties hereto that neither Tenant's assignment of such rent and income, nor Master Landlord's acceptance of any payment of rental or other sum due by Subtenant to Tenant under said sublease, whether payable directly to Master Landlord or endorsed to Master Landlord by Tenant, shall in any way nor in any event be construed as creating a direct contractual relationship between Master Landlord and Subtenant, unless the Parties expressly so agree in writing and such acceptance shall be deemed to be an accommodation by Master Landlord to, and for the convenience of, Tenant and Subtenant. Any direct contractual agreement between Master Landlord and Subtenant must be in writing. 7. Pursuant to the provisions of Paragraph 19 entitled "Assignment and Subletting" of the Master Lease, Master Landlord hereby requires Tenant to pay to Master Landlord, as Additional Rent, all rents and/or additional consideration received by Tenant from said Sublease in excess of the Basic Rent payable to Master Landlord in said Lease (after deducting reasonable leasing commissions as provided for in the Lease) (hereinafter referred to as "Excess Rent"). Tenant and Subtenant acknowledge that any Excess Rent is owed to Master Landlord and Tenant hereby agrees to pay any Excess Rent to Master Landlord as due under said Sublease. Tenant and Subtenant represent and warrant to Master Landlord that: (1) the information to be completed and provided by Tenant and Subtenant on the attached Exhibit B "Summary of Amounts/Consideration to be Paid by 12 Subtenant" accurately represents amounts to be paid by Subtenant under said Sublease; (2) no additional consideration is due Tenant under said Sublease, other than the additional consideration (if any) identified on Exhibit B; and (3) no changes in the terms and/or conditions of said Sublease shall be made without Master Landlord's prior written approval. 8. This Consent is conditional upon Master Landlord's receipt of Master Landlord's reasonable costs and attorney's fees, to which Master Landlord is entitled under Paragraph 19 of the Master Lease. Tenant shall pay such fees and costs to Landlord, pursuant to the invoice provided to Tenant by Landlord with this Consent, upon execution of this Consent by Tenant and Subtenant. 9. This Consent to Sublease shall only be considered effective, and Master Landlord's consent to the Sublease given, when (i) Landlord receives payment from Tenant of Landlord's costs, and (ii) this Letter Agreement is executed by Master Landlord, Tenant, and Subtenant, and Guarantors (if any) under the Master Lease. Please execute this letter in the space provided below, obtain the signature of Subtenant, and return all copies to our office no later than November 13, 1998. IN THE EVENT TENANT FAILS TO RETURN THE FULLY EXECUTED DOCUMENTS TO LANDLORD BY NOVEMBER 13, 1998, THIS CONSENT SHALL BE AUTOMATICALLY RESCINDED, IN WHICH EVENT, TENANT SHALL BE REQUIRED TO RESUBMIT ITS REQUEST IN THE EVENT TENANT DESIRES TO GO FORWARD WITH SAID SUBLEASE. A fully executed copy will be returned to you after execution by the Master Landlord. Very truly yours, PEERY/ARRILLAGA By /s/ JOHN ARRILLAGA ------------------------------------ John Arrillaga (SIGNATURES CONTINUED ON FOLLOWING PAGE) 13 THE UNDERSIGNED Tenant and Subtenant do hereby jointly and severally agree to the terms and conditions of this Consent to Sublease. TENANT: SUBTENANT: TRANSMETA CORPORATION MITEL, INC. a California corporation a Delaware corporation By /s/ DAVID DITZEL By /s/ ------------------------------- -------------------------------- Print Name David Ditzel Print Name ----------------------- ------------------------ Title President & CEO Title ---------------------------- ----------------------------- EX-10.13 17 ex10-13.txt EXHIBIT 10.13 1 EXHIBIT 10.13 SUBLEASE Sublandlord: Transmeta Corporation Master Premises: 2560 Mission College Blvd., Santa Clara, California Subtenant: Xuan Nguyen dha Date: April 28, 1999 World Marketing Alliance 1. Parties: This Sublease is made and entered into as of April 28, 1999, by and between Transmeta Corporation ("Sublandlord") and Xuan Nguyen dba World Marketing Alliance ("Subtenant"), under the Master Lease dated April 2, 1998 between John Arrillaga, Trustee, or his Successor Trustee, UTA, dated July 20, 1977 (John Arrillaga Survivor's Trust) as amended, and Richard T. Peery, Trustee, or his successor Trustee, UTA, dated July 20, 1977 (Richard T. Peery Separate Property Trust) as amended, hereinafter called Landlord, as "Landlord", and Sublandlord as "Tenant", ("Master Lease"). A copy of the Master Lease is attached hereto as "Exhibit B" and incorporated herein by this reference. Pursuant to the Master Lease, Sublandlord leases a 36,225+/- square foot portion of that certain Forty-five Thousand+/- (45,000+/-) square foot, two-story building located at 2560 Mission College Boulevard, Santa Clara, California (the "Master Premises"). 2. Provisions Constituting Sublease: 2.1 This Sublease is subject to all of the terms and conditions of the Master Lease. Subtenant hereby assumes and agrees to perform all of the obligations of "Tenant" under the Master Lease to the extent said obligations apply to the Subleased Premises and Subtenant's use of the Common Areas as depicted in "Exhibit A" attached, except as specifically set forth herein. Sublandlord hereby agrees to use reasonable efforts to cause Landlord under the Master Lease to perform all of the obligations of Landlord thereunder to the extent said obligations apply to the Subleased Premises and Subtenant's use of the Common Areas. Neither Subtenant nor its employees, agents. contractors or invitees ("Subtenant's Agents") shall commit on the Subleased Premises or on any other portion of the Master Premises any act or omission which violates the rights of any other party or parties hereto who are affected thereby. Neither of the parties hereto will, by renegotiation of the Master Lease assignment, subletting, default or any other voluntary action, avoid or seek to avoid the observance or performance of the terms to be observed or performed hereunder by such party, but will at all times in good faith assist in carrying out all the terms of this Sublease and in taking all such action as may be necessary or appropriate to protect the rights of the other party of the other party or parties hereto who are affected thereby against impairment. Nothing contained in this Section or elsewhere in this Sublease shall prevent or prohibit Sublandlord from assigning its interest in this Sublease or subletting portions of the Master Premises other than the Subleased Premises. 2.2 With respect to all of the provisions of the Master Lease incorporated into this Sublease, wherever the word "Premises" is used in the Master Lease, for purposes of this Sublease, the word "Subleased Premises" shall be substituted; wherever in the 2 Master Lease the word "Tenant" appears, for purposes of this Sublease, the word "Subtenant" shall be substituted; wherever in the Master Lease the word "Landlord" appears, for the purposes of this Sublease, the word "Sublandlord" shall be substituted. Notwithstanding the foregoing, the word "Landlord" in Paragraph 5 of the Master Lease shall be deemed to refer to "Master Landlord", and the word "Sublandlord" shall not be substituted therefore. All of the terms and conditions contained in the Master Lease are incorporated herein, except as specifically provided below, and the terms and conditions of this Sublease, except the following paragraphs of the Master Lease which shall solely he the obligation of Sublandlord: the description of the premises leased pursuant to the Master Lease, Paragraphs 2, 3, 4A, 4F, 4G, 34, 41, 43, 54, 55 and replace "Exhibit B" with "Exhibit A of the Sublease" in Paragraph 44. 3. Subleased Premises and Rent: 3.1 Subleased Premises: Sublandlord leases to Subtenant and Subtenant leases from Sublandlord the Subleased Premises upon all of the terms, covenants and conditions contained in the Sublease. The Subleased Premises consists of approximately 8,280 +/- square feet of the Master Premises and as shown in red on "Exhibit A" attached hereto. Sublandlord represents and warrants to Subtenant that Sublandlord is presently in possession of the Subleased Premises and has been continuously since July 1, 1998. 3.2 Rent:
Months Base Rent 01-03 No base rent* 04-19 $17,388.00 per month 20-39 $17,802.00 per month
* Tenant is responsible for all additional rent during this period, however, as well as later periods. Subtenant shall pay to Sublandlord rent for the Subleased Premises without deductions, offset, prior notice or demand. Rent shall be payable by Subtenant to Sublandlord in consecutive monthly installments on or before the first day of each calendar month during the Sublease Term. This is a net rent. As set forth in the Master Lease, Subtenant shall be responsible for all additional rent, except as otherwise expressly set forth within, including, but not limited to Paragraphs 7, 10, 11, 12 and 15. All such expenses shall be determined on a pro-rata basis and paid monthly to Sublandlord as additional rent. The obligations of Sublandlord and Subtenant concerning additional rent will be adjusted in the same manner as described in the Master Lease. All personal property insurance of Subtenant shall be the sole responsibility of the Subtenant. Sublandlord shall not be responsible for providing janitorial for Subleased Premises. 3.3. Security Deposit: In addition to the Rent specified above, Subtenant shall pay to Sublandlord $17,388.00 as a non-interest bearing Security Deposit. Sublandlord shall return to Subtenant, within ten days after Subtenant has vacated the Subleased Premises, the Security Deposit less any sums due and owing to Sublandlord and/or the cost to Sublandlord to cure any other of the Subtenant's breaches of the Sublease, all in accordance with California Civil Code Section 1950.7 or any successor statute thereto. 3.4 Upon execution of the Sublease Agreement by both parties, Subtenant shall pay to 2 3 Sublandlord the Security Deposit and the first month's base rent applicable to Month 4 of the term and additional rent. 4. Rights of Access and Use: 4.1 Use: Subtenant shall use the Sublease Premises only for those purposes permitted in the Master Lease and for training purposes, unless Sublandlord and Master Landlord consent in writing to other uses prior to the commencement thereof. 5. Sublease Term: 5.1 Sublease Term: The Sublease Term shall commence on the later of May 1, 1999, subject to adjustment as set forth in Paragraph 5.3 ("Commencement Date") and terminate thirty-nine (39) months after Sublease commencement. In no event shall the Sublease Term extend beyond the Term of the Master Lease. 5.2 Upon the Commencement Date, Sublandlord shall deliver the Subleased Premises in "as-is" condition. 5.3 Inability to Deliver Possession: In the event Sublandlord is unable to deliver possession of the Subleased Premises on May 1, 1999, Sublandlord shall not be liable for any damage caused thereby, nor shall this Sublease be void or voidable but Subtenant shall not be liable for Rent until such time as Sublandlord offers to deliver possession of the Subleased Premises to Subtenant, but the term hereof shall not be extended by such delay, provided, however, that if Sublandlord cannot deliver possession within thirty (30) days following May 1, 1999, then Subtenant may, at its option, terminate this Sublease by giving written notice to Sublandlord. If Subtenant, with Sublandlord's consent, takes possession prior to commencement of the term, Subtenant shall do so subject to all the covenants and conditions hereof and shall pay Rent for the period ending with the commencement of the term at the same rental as that prescribed for the first month of the term prorated at the rate of 1/30th thereof per day. 6. Parking: Sublandlord will grant Subtenant their prorate share of the parking spaces granted to the building by the Master Lease. Said proration to he determined by dividing square footage of Subleased Premises by the total Master Premises' square footage then multiplying this percent by the total parking spaces granted. 7. Tenant Improvements: Sublandlord shall deliver the Premises in "as-is" condition. All other improvements shall be at Subtenant's sole cost and expense and Subtenant shall secure both Sublandlord's and Master Landlord's prior written consent which consent shall not be unreasonably withheld or delayed. Sublandlord agrees that Sublandlord shall not unreasonably withhold it consent to the tenant improvements as described in Exhibit D to this Sublease so long as the final working drawings and specifications for such tenant improvements which are submitted to Sublandlord for its final approval are materially consistent with the tenant improvements described in Exhibit D. Sublandlord will not require Subtenant to remove improvements as described in Exhibit D at the end of the Sublease term. With respect to any other alterations or 3 4 improvements which Subtenant desires to make to the Subleased Premises during the term of this Sublease, Sublandlord shall notify Subtenant at the time of its approval of such alterations or improvements whether Subtenant will be required to remove such alterations or improvements from the Subleased Premises at the expiration or sooner termination of this Sublease and/or restore the Subleased Premises to their condition existing as of the date of this Sublease. 8. Alterations: Subtenant shall not make any alterations to the interior or exterior of the Premises without the prior written consent of Sublandlord, which consent shall not be unreasonably withheld or delayed. 9. Notices: Any notice or report required or desired to be given regarding this Sublease shall be in writing, may be given by personal delivery, by facsimile, by courier service or by certified mail, return receipt requested. Any notice or report addressed to Subtenant or to Sublandlord at the address shown on the signature page hereof, as appropriate, shall be deemed to have been given (i) on the date the U.S. Post Office certifies delivery, nondeliverability or refusal of delivery if such notice or report was deposited in the United States mail, certified, postage prepaid, (ii) when delivered if given by personal delivery, (iii) on the business day following deposit. cost prepaid, with Federal Express or similar private carrier, if next business day delivery was requested, and (iv) in all other cases when actually received. Either party may change its address by giving notice of the same in accordance with this Paragraph. The term "business day" shall mean a day on which the carrier used (Federal Express or other private carrier, or the U.S. Postal Service, as applicable) delivers, whether by special request or in the ordinary course of operations. All notices, demands, requests, advices or designations by Subtenant or Sublandlord shall be addressed to Sublandlord at its offices to Richard Apcar at Transmeta Corporation, 2540 Mission College Boulevard, Santa Clara, California 95054. and to Subtenant, Xuan Nguyen, World Marketing Alliance, 2560 Mission College Blvd., Santa Clara, CA, 95054. 10. Agency: Subtenant and Sublandlord acknowledge that Colliers Parrish (Broker) is acting solely as the agent for the Subtenant in this transaction and that CPS (Broker) is acting solely as the agent for Sublandlord, and that neither Broker represents the other's client. 11. Broker Fee: Sublandlord shall pay CPS, a licensed real estate broker representing Sublandlord, fees set forth in a separate agreement between Sublandlord and Broker. 12. Broker: Each party warrants and represents to the other party hereto that it has not dealt with any brokers in connection with this Sublease other than the brokers identified in Paragraph 10 of this Sublease (the "Brokers"). Each party hereby indemnifies and holds the other party harmless from any and all loss, damage, claim, liability, cost or 4 5 expense (including, but not limited to, reasonable attorneys' fees, expenses and court costs) arising out of or in connection with any breach of the foregoing warranty and representation. The provisions of this Paragraph shall survive the expiration or earlier termination of this Sublease. 13. Assignment and Subletting: Notwithstanding any provision to the contrary in this Sublease, including, without limitation, any provision of the Master Lease incorporated herein, Sublandlord shall not withhold its consent to any assignment or subletting which either does not require the consent of Master Landlord or which requires the consent of Master Landlord and to which Master Landlord consents. If Subtenant desires to Sublease or assign the Subleased Premises, Sublandlord shall have a right of first refusal to lease or assign such space within thirty (30) days from notification by Subtenant. Upon receiving written notice of Subtenant's desire to Sublease. Sublandlord shall respond in writing of its decision to Sublease within ten (10) days. If Subtenant does not sublease or assign the Premises within 30 days of Sublandlord's rejection of such offer, then this right of refusal process shall be repeated. 14. Waiver of Subrogation: Notwithstanding any provision to the contrary in this Sublease, including, without limitation, any provision incorporated from the Master Lease, the parties hereto release each other and their respective agents, employees, successors, assignees and subtenants from all liability for damage to any property that is caused by or results from a risk which is actually insured against, without regard to the negligence or willful misconduct of the entity so released. Each party shall use its best efforts to cause each insurance policy it obtains to provide that the insurer thereunder waives all right of recovery by way of subrogation as required herein in connection with any injury or damage covered by the policy. If such insurance policy cannot be obtained with such waiver of subrogation, or if such waiver of subrogation is only available at additional cost and the party for whose benefit the waiver is not obtained does not pay such additional cost, then the party obtaining such insurance shall immediately notify the other party of that fact. 15. Waiver of Subrogation in Master Lease: Upon Master Landlord's execution of the Consent to Sublease which follows this Sublease, the waiver of subrogation provision in Paragraph 14 of the Master Lease, notwithstanding any provision to the contrary in this Sublease or the Master Lease, shall be effective between Master Landlord and Subtenant with respect to insured casualties regarding the Subleased Premises as well as between Master Landlord and Sublandlord. 16. Master Lease Enforcement: Sublandlord shall diligently attempt to enforce Master Landlord's obligations under the Master Lease with respect to or affecting the Master Premises and/or any common areas used (or available for use by Subtenant). Subtenant acknowledges that Sublandlord is under no duty to make repairs or improvements to the Subleased Premises accept as specifically set forth in the Master Lease. 17. Sublandlord's Cooperation: 5 6 If Master Landlord's consent is required for any action which Subtenant desires to take under this Sublease, Sublandlord shall cooperate with Subtenant to obtain such consent. If Master Landlord fails to perform any of its obligations under the Master Lease, Sublandlord, at the request of Subtenant, shall use its good faith efforts to obtain Master Landlord's performance of such obligation(s). 18. Subtenant's Corporate Authority: Subtenant represents (a) that it is a corporation organized and existing under the laws of the State of Delaware and is qualified to do business in the State of California; (h) that this Sublease has been duly authorized by all required corporate actions; and (c) that the persons executing the Sublease are authorized to execute this Sublease on behalf of Subtenant. 19. If either party commences an action against the other for enforcement of or in connection with this Sublease, the prevailing party shall be entitled to receive costs of suit and reasonable attorney fees incurred in such action. 20. Consent: This sublease is subject to consent of Master Landlord. Sublandlord and Subtenant shall use reasonable efforts to secure Master Landlord's consent. Sublandlord: Transmeta Corporation By: /s/ Rich Stiller By: ------------------------------- --------------------------------- Title: VP Corporate Services Title: ---------------------------- ------------------------------ Date: 4-29-99 Date: ----------------------------- ------------------------------- Subtenant: Xuan Nguyen dba World Marketing Alliance By: /s/ Xuan Nguyen By: ------------------------------- --------------------------------- Title: Field Vice Chairman Title: ---------------------------- ------------------------------ Date: 4-28-99 Date: ----------------------------- ------------------------------- 6 7 April 30, 1999 MR. RICHARD STILLER TRANSMETA CORPORATION 3940 Freedom Circle Santa Clara, CA 95054 Re: CONSENT TO SUBLEASE TO XUAN NGUYEN, AN INDIVIDUAL (D.B.A. WORLD MARKETING ALLIANCE) FOR A PERIOD OF THIRTY NINE MONTHS COMMENCING MAY 1, 1999 AND TERMINATING AUGUST 31, 2002 Gentlemen: This letter is written with regard to your proposed sublease of approximately 8,280 square feet of space (as shown on Exhibit A attached hereto) (the "Sublet Premises") of the 36,225 square feet of space leased by Tenant at 2560 Mission College Blvd., Santa Clara, California, under Lease Agreement dated April 2, 1998 ("Master Lease"), by and between John Arrillaga Separate Property Trust and Richard T. Peery Separate Property Trust ("Master Landlord"), and TRANSMETA CORPORATION, A CALIFORNIA CORPORATION ("TENANT"), which Tenant is proposing to sublease to XUAN NGUYEN, AN INDIVIDUAL ("SUBTENANT") on the terms and conditions set forth in the proposed Sublease dated April 28, 1999, submitted by Tenant to Master Landlord on April 29, 1999 (the "Sublease"). Pursuant to Master Lease Paragraph 19 ("Assignment and Subletting") Master Landlord hereby approves Tenant's subleasing said space to Subtenant, under the Sublease, subject to the following terms and conditions: 1. Master Landlord's Consent shall in no way void or alter any of the terms of the Lease by and between Master Landlord and Tenant, nor shall this Consent alter or diminish in any way Tenant's obligations to Master Landlord. 2. Tenant shall not give Subtenant any rights or privileges in excess of those given Tenant under the terms of the Master Lease. 3. Subtenant shall not have a separate address from the address of the Premises. Therefore, Tenant shall provide Subtenant with internal mail delivery. Tenant and Subtenant shall share (the prorata shares to be determined in a separate agreement between Tenant and Subtenant) the existing signage allocated to Tenant for the Premises. 4. Master Landlord has not reviewed the terms of any agreement between Tenant and 8 Subtenant, and in approving said Sublease, Master Landlord is in no way approving any term, covenant or condition therein contained, and said Sublease is subject and subordinate to all terms, covenants and conditions of the Master Lease. Master Landlord shall not be bound by any agreement other than the terms of the Master Lease between Master Landlord and Tenant. In the event of conflict in the terms, covenants and conditions between the Sublease and the Master Lease, the terms, covenants and conditions of the Master Lease shall prevail and take precedence over said Sublease. Master Landlord does not make any warranties or representations as to the condition of the Leased Premises or the terms of the Lease between Master Landlord and Tenant. This Consent to Sublease shall in no event be construed as consent to any future sublease agreement (including any extensions and/or amendments to the current Sublease) between Tenant and Subtenant, or any other party; and any future sublease agreement (including any extensions and/or amendments to the current Sublease) between Tenant and Subtenant, or any other party shall require the prior written consent of Master Landlord. Under no circumstances will Master Landlord consent to a sub-sublease or assignment under the Sublease. 5. A. It is agreed by all parties hereto that in the event the Master Lease is rejected by Tenant under a Chapter 11 or 7 proceeding and/or Master Landlord terminates the Master Lease, pursuant to any right therein contained, said Sublease shall automatically terminate simultaneously with the Master Lease. Notwithstanding anything to the contrary set forth above, Master Landlord, at Master Landlord's sole option and election, may choose to allow Subtenant to remain in possession of the Sublet Premises leased under said Sublease subject to all terms, covenants and conditions of said Master Lease by giving Subtenant written notice prior to the effective date of termination of said Master Lease, of Master Landlord's election to allow Subtenant to remain in possession of the Sublet Premises in which event Subtenant shall be entitled and obligated to remain in possession of the Sublet Premises under the terms of said Sublease, subject to all terms, covenants and conditions of the Master Lease, including, without limitation to, payment of Basic Rent at the greater of: (i) the rate provided for in the Master Lease, or (ii) the rate provided for in the Sublease. Such election by Master Landlord shall not operate as a waiver of any claims Master Landlord may have against Tenant. Following such written notice by Master Landlord Subtenant shall then, as of the effective date of said termination of said Master Lease, be liable to and shall attorn in writing directly to Master Landlord as though said Sublease were executed directly between Master Landlord and Subtenant; provided, however, it is specifically agreed between the parties hereto, that whether Master Landlord elects to allow Subtenant to remain in possession of the Sublet Premises under the terms of the Sublease, subject to the Master Lease, or allow said Sublease to automatically terminate simultaneously with the Master Lease, Master Landlord shall not, in any event, nor under any circumstances be responsible or liable to Subtenant for (i) the return of any security deposit paid by Subtenant to Tenant, nor shall Subtenant be given credit for any prepaid rental or other monetary consideration paid by Subtenant to Tenant under said Sublease; (ii) any other claim or damage of any kind or nature whatsoever by reason of or in connection with Master Landlord's termination of said Master Lease and/or Sublease; and (iii) any default of Tenant under the Sublease. 9 B. In the event Master Landlord has terminated the Master Lease, and has not elected, in writing prior to the effective date of termination of said Master Lease, to allow Subtenant to remain in the Sublet Premises as set forth above, said Sublease shall terminate co-terminously with the effective termination of the Master Lease automatically, without notice, and Subtenant and/or Tenant, jointly and severally, shall surrender the Sublet Premises to Master Landlord in good condition and repair as of the effective termination of the Master Lease, with Master Landlord having no obligation or liability whatsoever to Subtenant by reason of or in connection with such early termination of the Master Lease. In the event Subtenant and/or Tenant fails to timely surrender the Sublet Premises to Master Landlord in good condition and repair as of the date the Master Lease terminates, Subtenant and/or Tenant, jointly and severally, shall be liable to Master Landlord in such event for all damages, costs, claims, losses, liabilities, fees or expenses sustained by Master Landlord, including, but not limited to, loss of rental income, attorney's fees and court costs resulting from or in connection with Subtenant's failure to timely vacate the Sublet Premises and surrender the Sublet Premises to Master Landlord as of the effective termination date of said Master Lease. C. As a condition to Landlord's consent to the Sublease, by execution of this Consent to Sublease, Subtenant hereby agrees to be bound by the following provision in relation to both Tenant and Master Landlord: If Master Landlord and Tenant jointly and voluntarily elect, for any reason whatsoever, to terminate the Master Lease prior to the scheduled Master Lease Termination Date, then this Sublease (if then still in effect) shall terminate concurrently with the termination of the Master Lease. Subtenant expressly acknowledges and agrees that (1) the voluntary termination of the Master Lease by Master Landlord and Tenant and the resulting termination of this Sublease shall not give Subtenant any right or power to make any legal or equitable claim against Master Landlord or Tenant, including without limitation any claim for interference with contract or interference with prospective economic advantage, and (2) Subtenant hereby waives any and all rights it may have under law or at equity to challenge such an early termination of the Sublease, and unconditionally releases and relieves Master Landlord and Tenant, and their officers, directors, employees and agents, from any and all claims, demands, and/or causes of action whatsoever (collectively, "Claims"), whether such matters are known or unknown, latent or apparent, suspected or unsuspected, foreseeable or unforeseeable, which Subtenant may have arising out of or in connection with any such early termination of this Sublease. Subtenant knowingly and intentionally waives any and all protection which is or may be given by Section 1542 of the California Civil Code which provides as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with debtor. 10 The term of this Sublease is therefore subject to early termination. Subtenants initials here below evidence (a) Subtenants consideration of and agreement to this early termination provision, (b) Subtenants acknowledgment that, in determining the net benefits to be derived by Subtenant under the terms of this Sublease, Subtenant has anticipated the potential for early termination, and (c) Subtenants agreement to the general waiver and release of Claims above. Initials: /s/ RS Initials: /s/ XN ---------- ---------- Subtenant Tenant 6. In consideration of Master Landlord's consent to the Sublease, Tenant irrevocably assigns to Master Landlord, as security for Tenant's obligations under this Lease, all rent and income payable to Tenant under the Sublease. Therefore Master Landlord may collect all rent due under the Sublease and apply it towards Tenant's obligations under the Master Lease. Tenant and Subtenant agree to pay same to Master Landlord upon demand without further consent of Tenant and Subtenant required; provided, however, that until the occurrence of a default by Tenant under the Master Lease, Tenant shall have the right to collect such rent. Tenant hereby irrevocably authorizes and directs Subtenant, upon receipt of a written notice from Master Landlord stating that a default exists in the performance of Tenant's obligations under the Master Lease, to pay to Master Landlord the rents due and to become due under the Sublease. Tenant agrees that Subtenant shall have the right to rely on any such statement and request from Master Landlord, and that Subtenant shall pay such rents to Master Landlord without any obligation or right to inquire as to whether such default exists and notwithstanding any notice or claim from Tenant to the contrary. Tenant shall have no right or claim against Subtenant or Master Landlord for any such rents so paid by Subtenant to Master Landlord. It is further agreed between the parties hereto that neither Tenant's assignment of such rent and income, nor Master Landlord's acceptance of any payment of rental or other sum due by Subtenant to Tenant under said sublease, whether payable directly to Master Landlord or endorsed to Master Landlord by Tenant, shall in any way nor in any event be construed as creating a direct contractual relationship between Master Landlord and Subtenant, unless the Parties expressly so agree in writing and such acceptance shall be deemed to be an accommodation by Master Landlord to, and for the convenience of, Tenant and Subtenant. Any direct contractual agreement between Master Landlord and Subtenant must be in writing. 7. Pursuant to the provisions of Paragraph 19 entitled "Assignment and Subletting" of the Master Lease, Master Landlord hereby requires Tenant to pay to Master Landlord, as Additional Rent, all rents and/or additional consideration received by Tenant from said Sublease in excess of the Basic Rent payable to Master Landlord in said Lease (hereinafter referred to as "Excess Rent") after first recovering from such Excess Rent the amount of all 11 reasonable leasing commissions paid to third parties not affiliated with Tenant. Tenant and Subtenant acknowledge that any Excess Rent is owed to Master Landlord and Tenant hereby agrees to pay any Excess Rent to Master Landlord as due under said Sublease. Tenant and Subtenant represent and warrant to Master Landlord that: (1) the information to be completed and provided by Tenant and Subtenant on the attached Exhibit B "Summary of Amounts/Consideration to be Paid by Subtenant" accurately represents amounts to be paid by Subtenant under said Sublease; (2) no additional consideration is due Tenant under said Sublease, other than the additional consideration (if any) identified on Exhibit B; and (3) no changes in the terms and/or conditions of said Sublease shall be made without Master Landlord's prior written approval. 8. This Consent is conditional upon Master Landlord's receipt of Master Landlord's reasonable costs and attorney's fees, to which Master Landlord is entitled under Paragraph 19 of the Master Lease. Tenant shall pay such fees and costs to Landlord, pursuant to the invoice provided to Tenant by Landlord with this Consent, upon execution of this Consent by Tenant and Subtenant. 11. This Consent to Sublease shall only be considered effective, and Master Landlord's consent to the Sublease given, when (i) Landlord receives payment from Tenant of Landlord's costs, and (ii) this Letter Agreement is executed by Master Landlord, Tenant, and Subtenant, and Guarantors (if any) under the Master Lease. Please execute this letter in the space provided below, obtain the signature of Subtenant, and return all copies to our office no later than May 14, 1999. IN THE EVENT TENANT FAILS TO RETURN THE FULLY EXECUTED DOCUMENTS TO LANDLORD BY MAY 14, 1999, THIS CONSENT SHALL BE AUTOMATICALLY RESCINDED, IN WHICH EVENT, TENANT SHALL BE REQUIRED TO RESUBMIT ITS REQUEST IN THE EVENT TENANT DESIRES TO GO FORWARD WITH SAID SUBLEASE. A fully executed copy will be returned to you after execution by the Master Landlord. Very truly yours, PEERY/ARRILLAGA By /s/ JOHN ARRILLAGA ------------------------------------ John Arrillaga (SIGNATURES CONTINUED ON FOLLOWING PAGE) 12 THE UNDERSIGNED Tenant and Subtenant do hereby jointly and severally agree to the terms and conditions of this Consent to Sublease. TENANT: SUBTENANT: TRANSMETA CORPORATION XUAN NGUYEN a California corporation d.b.a. World Marketing Alliance By /s/ R. STILLER By /s/ XUAN NGUYEN -------------------------------- ----------------------------------- Richard Stiller, Vice President Xuan Nguyen, individually EX-10.14 18 ex10-14.txt EXHIBIT 10.14 1 EXHIBIT 10.14 SUBLEASE Sublandlord: Transmeta Corporation Master Premises: 3990 Freedom Circle Santa Clara, California Subtenant: Moscape, Inc. Date: November 1, 1999 1. Parties: This Sublease is made and entered into as of November 1, 1999 by and between Transmeta Corporation ("Sublandlord") and Moscape, Inc. ("Subtenant"), under the Master Lease dated April 2, 1998 between John Arrillaga, Trustee, or his Successor Trustee, UTA, dated July 20, 1977 (John Arrillaga Survivor's Trust) as amended, and Richard T. Peery, Trustee, or his successor Trustee, UTA, dated July 20, 1977 (Richard T. Peery Separate Property Trust) as amended, hereinafter called Landlord, as "Landlord", and Sublandlord as "Tenant", ("Master Lease"). A copy of the Master Lease is attached hereto as "Exhibit B" and incorporated herein by this reference. Pursuant to the Master Lease, Sublandlord leases all of that certain Forty-five Thousand +/- (45,000+/-) square foot, two-story building located at 3990 Freedom Circle, Santa Clara, California (the "Master Premises"). 2. Provisions Constituting Sublease: 2.1 This Sublease is subject to all of the terms and conditions of the Master Lease. Subtenant hereby assumes and agrees to perform all of the obligations of "Tenant" under the Master Lease to the extent said obligations apply to the Subleased Premises and Subtenant's use of the Common Areas as depicted in "Exhibit A" attached, except as specifically set forth herein. Sublandlord hereby agrees to use reasonable efforts to cause Landlord under the Master Lease to perform all of the obligations of Landlord thereunder to the extent said obligations apply to the Subleased Premises and Subtenant's use of the Common Areas. Neither Subtenant nor its employees, agents, contractors or invitees ("Subtenant's Agents") shall commit on the Subleased Premises or on any other portion of the Master Premises any act or omission which violates the rights of any other party or parties hereto who are affected thereby. Neither of the parties hereto will, by renegotiation of the Master Lease assignment, subletting, default or any other voluntary action, avoid or seek to avoid the observance or performance of the terms to be observed or performed hereunder by such party, but will at all times in good faith assist in carrying out all the terms of this Sublease and in taking all such action as may be necessary or appropriate to protect the rights of the other party or parties hereto who are affected thereby against impairment. Nothing contained in this Section 2.1 or elsewhere in this Sublease shall prevent or prohibit Sublandlord from assigning its interest in this Sublease or subletting portions of the Master Premises other than the Subleased Premises. 2.2 With respect to all of the provisions of the Master Lease incorporated into this Sublease, wherever the word "Premises" is used in the Master Lease, for purposes of this Sublease, the word "Subleased Premises" shall be substituted; wherever in the Master Lease the word "Tenant" appears, for purposes of this Sublease, the word "Subtenant" shall be substituted; wherever in the Master Lease the word "Landlord" appears, for the purposes of this Sublease, 2 the word "Sublandlord" shall be substituted. Notwithstanding the foregoing, the word "Landlord" in Paragraph 5 of the Master Lease shall be deemed to refer to "Master Landlord", and the word "Sublandlord" shall not be substituted therefor. All of the terms and conditions contained in the Master Lease are incorporated herein, except as specifically provided below, and the terms and conditions of this Sublease, except the following paragraphs of the Master Lease which shall solely be the obligation of Sublandlord: the description of the Premises leased pursuant to the Master Lease, Paragraphs 2, 3, 4A, 4F, 4G, 34, 41, 43, 54, 55 and replace "Exhibit B" with "Exhibit A of the Sublease" in Paragraph 44. 3. Subleased Premises and Rent: 3.1 Subleased Premises: Sublandlord leases to Subtenant and Subtenant leases from Sublandlord the Subleased Premises upon all of the terms, covenants and conditions contained in the Sublease. The Subleased Premises consists of approximately 11,400 +/- square feet of the MasteR Premises and as shown in red on "Exhibit A" attached hereto. Sublandlord represents and warrants to Subtenant that Sublandlord is presently in possession of the Subleased Premises and has been continuously since July 1, 1998. 3.2 Rent:
11/1/1999-3/31/2000 No Base Rent* ------------- 4/1/2000--6/30/2000 $1.86 NNN $21,204.00 7/1/2000--6/30/2001 $2.45 NNN $27,930.00 7/1/2001--9/30/2001 $2.55 NNN $29,070.00
* Tenant is responsible for all additional rent during this period, however, as well as later periods. Subtenant shall pay to Sublandlord rent for the Subleased Premises without deductions, offset, prior notice or demand. Rent shall be payable by Subtenant to Sublandlord in consecutive monthly installments on or before the first day of each calendar month during the Sublease Term. This is a net rent. As set forth in the Master Lease, Subtenant shall be responsible for all additional rent, except as otherwise expressly set forth within, including, but not limited to Paragraphs 7, 10, 11, 12 and 15. All such expenses shall be determined on a pro-rata basis and paid monthly to Sublandlord as additional rent. The obligations of Sublandlord and Subtenant concerning additional rent will be adjusted in the same manner as described in the Master Lease. All personal property insurance of Subtenant shall be the sole responsibility of the Subtenant. Sublandlord shall not be responsible for providing janitorial for Subleased Premises however, Sublandlord shall be responsible for maintaining the Common Areas as identified in "Exhibit A" including, but not limited to, the restrooms. Maintenance shall be provided five (5) days a week. 3.3. Security Deposit: In addition to the Rent specified above, Subtenant shall pay to Sublandlord $20,151.00 as a non-interest bearing Security Deposit. Sublandlord shall return to Subtenant, within ten days after Subtenant has vacated the Subleased Premises, the Security Deposit less any sums due and owing to Sublandlord and/or the cost to Sublandlord to cure any other of the Subtenant's breaches of the Sublease, all in accordance with California Civil Code Section 1950.7 or any successor statute thereto. 2 3 3.4 Upon execution of the Sublease Agreement by both parties, Subtenant shall pay to Sublandlord the Security Deposit and the first month's base rent applicable to Month 1 of the term and additional rent. 4. Rights of Access and Use: 4.1 Use: Subtenant shall use the Subleased Premises only for those purposes permitted in the Master Lease, unless Sublandlord and Master Landlord consent in writing to other uses prior to the commencement thereof. 5. Sublease Term: 5.1 Sublease Term: The Sublease Term shall commence on the later of November 1, 1999, subject to adjustment as set forth in Paragraph 5.3 ("Commencement Date") and terminate twenty three (23) months after Sublease commencement. In no event shall the Sublease Term extend beyond the Term of the Master Lease. 5.1 (a) Option to Extend: The Subtenant shall not have an automatic option to extend beyond the initial term of this sublease. However, in the event that sublandlord deems that the premises are excess to its needs, subtenant shall have the right of first refusal. Subtenant will notify sublandlord of its desires ninety (90) prior to the termination of this lease. 5.2 Upon the Commencement Date, Sublandlord shall deliver the Subleased Premises in "as-is" condition. 5.3 Inability to Deliver Possession: In the event Sublandlord is unable to deliver possession of the Subleased Premises on November 1, 1999, Sublandlord shall not be liable for any damage caused thereby, nor shall this Sublease be void or voidable but Subtenant shall not be liable for Rent until such time as Sublandlord offers to deliver possession of the Subleased Premises to Subtenant, but the term hereof shall not be extended by such delay, provided, however, that if Sublandlord cannot deliver possession within thirty (30) days following November 1, 1999, then Subtenant may, at its option, terminate this Sublease by giving written notice to Sublandlord. If Subtenant, with Sublandlord's consent, takes possession prior to commencement of the term, Subtenant shall do so subject to all the covenants and conditions hereof and shall pay Rent for the period ending with the commencement of the term at the same rental as that prescribed for the first month of the term prorated at the rate of 1/30th thereof per day. 6. Parking: Sublandlord will grant Subtenant their prorate share of the parking spaces granted to the building by the Master Lease. Said proration to be determined by dividing square footage of Subleased Premises by the total Master Premises' square footage then multiplying this percent by the total parking spaces granted. 7. Tenant Improvements: Sublandlord shall deliver the Premises in "as-is" condition. All other improvements shall be 3 4 at Subtenant's sole cost and expense and Subtenant shall secure both Sublandlord's and Master Landlord's prior written consent which consent shall not be unreasonably withheld or delayed. Sublandlord agrees that Sublandlord shall not unreasonably withhold its consent to the tenant improvements described in Exhibit D to this Sublease so long as the final working drawings and specifications for such tenant improvements which are submitted to Sublandlord for its final approval are materially consistent with the tenant improvements described in Exhibit D. Sublandlord shall notify Subtenant at the time of Sublandlord's review and approval of such tenant improvements whether Subtenant will be required to remove the tenant improvements whether Subtenant will be required to remove the tenant improvements from the Subleased Premises at the expiration or sooner termination of this Sublease and/or restore the Subleased Premises to their condition existing as of the date of this Sublease. With respect to any other alterations or improvements which Subtenant desires to make to the Subleased Premises during the term of this Sublease, Sublandlord shall notify Subtenant at the time of its approval of such alterations or improvements whether Subtenant will be required to remove such alterations or improvements from the Subleased Premises at the expiration or sooner termination of this Sublease and/or restore the Subleased Premises to their condition existing as of the date of this Sublease. 8. Alterations: Subtenant shall not make any alterations to the interior or exterior of the Premises without prior written consent of Sublandlord, which consent shall not be unreasonably withheld or delayed. 9. Notices: Any notice or report required or desired to be given regarding this Sublease shall be in writing, may be given by personal delivery, by facsimile, by courier service or by certified mail, return receipt requested. Any notice or report addressed to Subtenant or to Sublandlord at the address shown on the signature page hereof, as appropriate, shall be deemed to have been given (i) on the date the U.S. Post Office certifies delivery, nondeliverability or refusal of delivery if such notice or report was deposited in the United States mail, certified, postage prepaid, (ii) when delivered if given by personal delivery, (iii) on the business day following deposit, cost prepaid, with Federal Express or similar private carrier, if next business day delivery was requested, and (iv) in all other cases when actually received. Either party may change its address by giving notice of the same in accordance with this Paragraph. The term "business day" shall mean a day on which the carrier used (Federal Express or other private carrier, or the U.S. Postal Service, as applicable) delivers, whether by special request or in the ordinary course of operations. All notices, demands, requests, advices or designations by Subtenant or Sublandlord shall be addressed to Sublandlord Richard Apcar, at its offices at Transmeta Corporation, 2540 Mission College Boulevard, Santa Clara, California 95054, and to Subtenant Chandra Somanathan, at its offices at Moscape, Inc., 3990 Freedom Circle, Santa Clara, California 95054. 10. Agency: Subtenant and Sublandlord acknowledge that there are no real estate brokers involved in this transaction. l1. Broker Fee: 4 5 No real estate commission shall be paid. 12. Broker: Each party warrants and represents to the other party hereto that it has not dealt with any brokers in connection with this Sublease. Each party hereby indemnifies and holds the other party harmless from any and all loss, damage, claim, liability, cost or expense (including, but not limited to, reasonable attorneys' fees, expenses and court costs) arising out of or in connection with any breach of the foregoing warranty and representation. The provisions of this Paragraph shall survive the expiration or earlier termination of this Sublease. l3. Assignment and Subletting: Notwithstanding any provision to the contrary in this Sublease, including, without limitation, any provision of the Master Lease incorporated herein, Sublandlord shall not withhold its consent to any assignment or subletting which either does not require the consent of Master Landlord or which requires the consent of Master Landlord and to which Master Landlord consents. If Subtenant desires to Sublease or assign the Subleased Premises, Sublandlord shall have right of first refusal to lease or assign such space within thirty (30) days from notification by Subtenant. Upon receiving written notice of Subtenant's desire to Sublease, Sublandlord shall respond in writing its decision to Sublease within ten (10) days. If Subtenant does not sublease or assign the Premises within 30 days of Sublandlord's rejection of such offer, then this right of refusal process shall be repeated. 14. Waiver of Subrogation: Notwithstanding any provision to the contrary in this Sublease, including, without limitation, any provision incorporated from the Master Lease, the parties hereto release each other and their respective agents, employees, successors, assignees and subtenants from all liability for damage to any property that is caused by or results from a risk which is actually insured against, without regard to the negligence or willful misconduct of the entity so released. Each party shall use its best efforts to cause each insurance policy it obtains to provide that the insurer thereunder waives all right of recovery by way of subrogation as required herein in connection with any injury or damage covered by the policy. If such insurance policy cannot be obtained with such waiver of subrogation, or if such waiver of subrogation is only available at additional cost and the party for whose benefit the waiver is not obtained does not pay such additional cost, then the party obtaining such insurance shall immediately notify the other party of that fact. 15. Waiver of Subrogation in Master Lease: Upon Master Landlord's execution of the Consent to Sublease which follows this Sublease, the waiver of subrogation provision in Paragraph 14 of the Master Lease, notwithstanding any provision to the contrary in this Sublease or the Master Lease, shall be effective between Master Landlord and Subtenant with respect to insured casualties regarding the Subleased Premises as well as between Master Landlord and Sublandlord. 16. Master Lease Enforcement: Sublandlord shall diligently attempt to enforce Master Landlord's obligations under the 5 6 Master Lease with respect to or affecting the Master Premises and/or any common areas used (or available for use by Subtenant). Subtenant acknowledges that Sublandlord is under no duty to make repairs or improvements to the Subleased Premises except as specifically set forth in the Master Lease. 17. Sublandlord's Cooperation: If Master Landlord's consent is required for any action which Subtenant desires to take under this Sublease, Sublandlord shall cooperate with Subtenant to obtain such consent. If Master Landlord fails to perform any of its obligations under the Master Lease, Sublandlord, at the request of Subtenant, shall use its good faith efforts to obtain Master Landlord's performance of such obligation(s). If the Master Lease terminates as the result of a breach by Sublandlord, Sublandlord will be liable to Subtenant for damages suffered as a result of such termination 18. Subtenant's Corporate Authority: Subtenant represents (a) that it is a corporation organized and existing under the laws of the State of Delaware and is qualified to do business in the State of California; (b) that this Sublease has been duly authorized by all required corporate actions; and (c) that the persons executing the Sublease are authorized to execute this Sublease on behalf of Subtenant. 19. If either party commences an action against the other for enforcement of or in connection with this Sublease, the prevailing party shall be entitled to receive costs of suit and reasonable attorney fees incurred in such action. 20. Consent: This Sublease is subject to consent of Master Landlord. Sublandlord and Subtenant shall use reasonable efforts to secure Master Landlord's consent. Sublandlord: Transmeta Corporation BY: /s/ Rich Stiller BY: ------------------------------- -------------------------------- TITLE: VP of Corp. Svcs. TITLE: ---------------------------- ----------------------------- DATE: 11/24/99 DATE: ----------------------------- ------------------------------ Subtenant: Moscape, Inc. BY: /s/ Chandra Somanathan BY: ------------------------------- -------------------------------- TITLE: Vice President TITLE: ---------------------------- ----------------------------- DATE: 11/16/99 DATE: ----------------------------- ------------------------------ 6 7 NOTICE TO SUBLANDLORD AND SUBTENANT: CPS IS NOT AUTHORIZED TO GIVE LEGAL OR TAX ADVICE; NOTHING CONTAINED IN THIS SUBLEASE FOR ANY DISCUSSIONS BETWEEN CPS AND SUBLANDLORD AND SUBTENANT SHALL BE DEEMED TO BE A REPRESENTATION OR RECOMMENDATION BY CPS, OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL IMPACT OR TAX CONSEQUENCES OF THIS DOCUMENT OR ANY TRANSACTION RELATING THERETO. ALL PARTIES ARE ENCOURAGED TO CONSULT WITH THEIR INDEPENDENT FINANCIAL CONSULTANTS AND/OR ATTORNEYS REGARDING THE TRANSACTION CONTEMPLATED BY THIS PROPOSAL. CONSENT BY MASTER LANDLORD: The undersigned, Landlord under the Master Lease in Exhibit "C", hereby consents to the subletting of the Premises described herein on the terms and conditions contained in this Sublease. This consent shall apply only to this Sublease and shall not be deemed to be a consent to any other Sublease. MASTER LANDLORD: BY:________________________________ BY:________________________________ TITLE:_____________________________ TITLE:_____________________________ DATE:______________________________ DATE:_____________________________ 8 December 4, 1999 MR. RICHARD APCAR TRANSMETA CORPORATION 3940 Freedom Circle Santa Clara, CA 95054 Re: CONSENT TO SUBLEASE TO MOSCAPE, INC., A DELAWARE CORPORATION FOR A PERIOD OF ONE YEAR ELEVEN MONTHS, COMMENCING NOVEMBER 1, 1999 AND TERMINATING SEPTEMBER 30, 2001 Gentlemen: This letter is written with regard to your proposed sublease of approximately 11,400 square feet of space (as shown on Exhibit A attached hereto) (the "Sublet Premises") of the 45,000 square feet of space leased by Tenant at 3990 Freedom Circle, Santa Clara, California, under Lease Agreement dated April 2, 1998 ("Master Lease"), by and between John Arrillaga Separate Property Trust and Richard T. Peery Separate Property Trust ("Master Landlord"), and TRANSMETA CORPORATION, A CALIFORNIA CORPORATION ("TENANT"), which Tenant is proposing to sublease to MOSCAPE, INC. A DELAWARE CORPORATION ("SUBTENANT") on the terms and conditions set forth in the proposed Sublease dated November 1, 1999, submitted by Tenant to Master Landlord on November 24, 1999 (the "Sublease"). Pursuant to Master Lease Paragraph 19 ("Assignment and Subletting") Master Landlord hereby approves Tenant's subleasing said space to Subtenant, under the Sublease, subject to the following terms and conditions: 1. Master Landlord's Consent shall in no way void or alter any of the terms of the Lease by and between Master Landlord and Tenant, nor shall this Consent alter or diminish in any way Tenant's obligations to Master Landlord. 2. Tenant shall not give Subtenant any rights or privileges in excess of those given Tenant under the terms of the Master Lease. 3. Subtenant shall not have a separate address from the address of the Premises. Therefore, Tenant shall provide Subtenant with internal mail delivery. Tenant and Subtenant shall share (the prorata shares to be determined in a separate agreement between Tenant and Subtenant) the existing signage allocated to Tenant for the Premises. 4. Master Landlord has not reviewed the terms of any agreement between Tenant and Subtenant, and in approving said Sublease, Master Landlord is in no way approving any term, covenant or condition therein contained, and said Sublease is subject and 9 subordinate to all terms, covenants and conditions of the Master Lease. Master Landlord shall not be bound by any agreement other than the terms of the Master Lease between Master Landlord and Tenant. In the event of conflict in the terms, covenants and conditions between the Sublease and the Master Lease, the terms, covenants and conditions of the Master Lease shall prevail and take precedence over said Sublease. Master Landlord does not make any warranties or representations as to the condition of the Leased Premises or the terms of the Lease between Master Landlord and Tenant. This Consent to Sublease shall in no event be construed as consent to any future sublease agreement (including any extensions and/or amendments to the current Sublease) between Tenant and Subtenant, or any other party; and any future sublease agreement (including any extensions and/or amendments to the current Sublease) between Tenant and Subtenant, or any other party shall require the prior written consent of Master Landlord. Under no circumstances will Master Landlord consent to a sub-sublease or assignment under the Sublease. 5. A. It is agreed by all parties hereto that in the event the Master Lease is rejected by Tenant under a Chapter 11 or 7 proceeding and/or Master Landlord terminates the Master Lease, pursuant to any right therein contained, said Sublease shall automatically terminate simultaneously with the Master Lease. Notwithstanding anything to the contrary set forth above, Master Landlord, at Master Landlord's sole option and election, may choose to allow Subtenant to remain in possession of the Sublet Premises leased under said Sublease subject to all terms, covenants and conditions of said Master Lease by giving Subtenant written notice prior to the effective date of termination of said Master Lease, of Master Landlord's election to allow Subtenant to remain in possession of the Sublet Premises in which event Subtenant shall be entitled and obligated to remain in possession of the Sublet Premises under the terms of said Sublease, subject to all terms, covenants and conditions of the Master Lease, including, without limitation to, payment of Basic Rent at the greater of: (i) the rate provided for in the Master Lease, or (ii) the rate provided for in the Sublease. Such election by Master Landlord shall not operate as a waiver of any claims Master Landlord may have against Tenant. Following such written notice by Master Landlord Subtenant shall then, as of the effective date of said termination of said Master Lease, be liable to and shall attorn in writing directly to Master Landlord as though said Sublease were executed directly between Master Landlord and Subtenant; provided, however, it is specifically agreed between the parties hereto, that whether Master Landlord elects to allow Subtenant to remain in possession of the Sublet Premises under the terms of the Sublease, subject to the Master Lease, or allow said Sublease to automatically terminate simultaneously with the Master Lease, Master Landlord shall not, in any event, nor under any circumstances be responsible or liable to Subtenant for (i) the return of any security deposit paid by Subtenant to Tenant, nor shall Subtenant be given credit for any prepaid rental or other monetary consideration paid by Subtenant to Tenant under said Sublease; (ii) any other claim or damage of any kind or nature whatsoever by reason of or in connection with Master Landlord's termination of said Master Lease and/or Sublease; and (iii) any default of Tenant under the Sublease. 10 B. In the event Master Landlord has terminated the Master Lease, and has not elected, in writing prior to the effective date of termination of said Master Lease, to allow Subtenant to remain in the Sublet Premises as set forth above, said Sublease shall terminate co-terminously with the effective termination of the Master Lease automatically, without notice, and Subtenant and/or Tenant, jointly and severally, shall surrender the Sublet Premises to Master Landlord in good condition and repair as of the effective termination of the Master Lease, with Master Landlord having no obligation or liability whatsoever to Subtenant by reason of or in connection with such early termination of the Master Lease. In the event Subtenant and/or Tenant fails to timely surrender the Sublet Premises to Master Landlord in good condition and repair as of the date the Master Lease terminates, Subtenant and/or Tenant, jointly and severally, shall be liable to Master Landlord in such event for all damages, costs, claims, losses, liabilities, fees or expenses sustained by Master Landlord, including, but not limited to, loss of rental income, attorney's fees and court costs resulting from or in connection with Subtenant's failure to timely vacate the Sublet Premises and surrender the Sublet Premises to Master Landlord as of the effective termination date of said Master Lease. C. As a condition to Landlord's consent to the Sublease, by execution of this Consent to Sublease, Subtenant hereby agrees to be bound by the following provision in relation to both Tenant and Master Landlord: If Master Landlord and Tenant jointly and voluntarily elect, for any reason whatsoever, to terminate the Master Lease prior to the scheduled Master Lease Termination Date, then this Sublease (if then still in effect) shall terminate concurrently with the termination of the Master Lease. Subtenant expressly acknowledges and agrees that (1) the voluntary termination of the Master Lease by Master Landlord and Tenant and the resulting termination of this Sublease shall not give Subtenant any right or power to make any legal or equitable claim against Master Landlord or Tenant, including without limitation any claim for interference with contract or interference with prospective economic advantage, and (2) Subtenant hereby waives any and all rights it may have under law or at equity to challenge such an early termination of the Sublease, and unconditionally releases and relieves Master Landlord and Tenant, and their officers, directors, employees and agents, from any and all claims, demands, and/or causes of action whatsoever (collectively, "Claims"), whether such matters are known or unknown, latent or apparent, suspected or unsuspected, foreseeable or unforeseeable, which Subtenant may have arising out of or in connection with any such early termination of this Sublease. Subtenant knowingly and intentionally waives any and all protection which is or may be given by Section 1542 of the California Civil Code which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with 11 debtor." The term of this Sublease is therefore subject to early termination. Subtenant's initials here below evidence (a) Subtenant's consideration of and agreement to this early termination provision, (b) Subtenant's acknowledgment that, in determining the net benefits to be derived by Subtenant under the terms of this Sublease, Subtenant has anticipated the potential for early termination, and (c) Subtenant's agreement to the general waiver and release of Claims above. Initials: /s/ CS Initials: /s/ RS ------------------ ------------------ Subtenant Tenant 6. In consideration of Master Landlord's consent to the Sublease, Tenant irrevocably assigns to Master Landlord, as security for Tenant's obligations under this Lease, all rent and income payable to Tenant under the Sublease. Therefore Master Landlord may collect all rent due under the Sublease and apply it towards Tenant's obligations under the Master Lease. Tenant and Subtenant agree to pay same to Master Landlord upon demand without further consent of Tenant and Subtenant required; provided, however, that until the occurrence of a default by Tenant under the Master Lease, Tenant shall have the right to collect such rent. Tenant hereby irrevocably authorizes and directs Subtenant, upon receipt of a written notice from Master Landlord stating that a default exists in the performance of Tenant's obligations under the Master Lease, to pay to Master Landlord the rents due and to become due under the Sublease. Tenant agrees that Subtenant shall have the right to rely on any such statement and request from Master Landlord, and that Subtenant shall pay such rents to Master Landlord without any obligation or right to inquire as to whether such default exists and notwithstanding any notice or claim from Tenant to the contrary. Tenant shall have no right or claim against Subtenant or Master Landlord for any such rents so paid by Subtenant to Master Landlord. It is further agreed between the parties hereto that neither Tenant's assignment of such rent and income, nor Master Landlord's acceptance of any payment of rental or other sum due by Subtenant to Tenant under said sublease, whether payable directly to Master Landlord or endorsed to Master Landlord by Tenant, shall in any way nor in any event be construed as creating a direct contractual relationship between Master Landlord and Subtenant, unless the Parties expressly so agree in writing and such acceptance shall be deemed to be an accommodation by Master Landlord to, and for the convenience of, Tenant and Subtenant. Any direct contractual agreement between Master Landlord and Subtenant must be in writing. 7. Pursuant to the provisions of Paragraph 19 entitled "Assignment and Subletting" of the Master Lease, Master Landlord hereby requires Tenant to pay to Master Landlord, as Additional Rent, all rents and/or additional consideration received by Tenant from said 12 Subleasein excess of the Basic Rent payable to Master Landlord in said Lease (hereinafter referred to as "Excess Rent"); provided, however, that prior to paying to Landlord such Excess Rent, Tenant shall first be entitled to recover from such Excess Rent the amount of all reasonable leasing commissions paid by Tenant related to this Sublease to third party brokers not affiliated with Tenant. Tenant and Subtenant acknowledge that any Excess Rent is owed to Master Landlord and Tenant hereby agrees to pay any Excess Rent to Master Landlord as due under said Sublease. Tenant and Subtenant represent and warrant to Master Landlord that: (1) the information to be completed and provided by Tenant and Subtenant on the attached Exhibit B "Summary of Amounts/Consideration to be Paid by Subtenant" accurately represents amounts to be paid by Subtenant under said Sublease; (2) no additional consideration is due Tenant under said Sublease, other than the additional consideration (if any) identified on Exhibit B; and (3) no changes in the terms and/or conditions of said Sublease shall be made without Master Landlord's prior written approval. 8. This Consent is conditional upon Master Landlord's receipt of Master Landlord's reasonable costs and attorney's fees, to which Master Landlord is entitled under Paragraph 19 of the Master Lease. Tenant shall pay such fees and costs to Landlord, pursuant to the invoice provided to Tenant by Landlord with this Consent, upon execution of this Consent by Tenant and Subtenant. 9. This Consent to Sublease shall only be considered effective, and Master Landlord's consent to the Sublease given, when (i) Landlord receives payment from Tenant of Landlord's costs, and (ii) this Letter Agreement is executed by Master Landlord, Tenant, and Subtenant, and Guarantors (if any) under the Master Lease. Please execute this letter in the space provided below, obtain the signature of Subtenant, and return all copies to our office no later than December 21, 1999. IN THE EVENT TENANT FAILS TO RETURN THE FULLY EXECUTED DOCUMENTS TO LANDLORD BY DECEMBER 21, 1999, THIS CONSENT SHALL BE AUTOMATICALLY RESCINDED, IN WHICH EVENT, TENANT SHALL BE REQUIRED TO RESUBMIT ITS REQUEST IN THE EVENT TENANT DESIRES TO GO FORWARD WITH SAID SUBLEASE. A fully executed copy will be returned to you after execution by the Master Landlord. Very truly yours, PEERY/ARRILLAGA By /s/ JOHN ARRILLAGA ----------------------------------- John Arrillaga (SIGNATURES CONTINUED ON FOLLOWING PAGE) 13 THE UNDERSIGNED Tenant and Subtenant do hereby jointly and severally agree to the terms and conditions of this Consent to Sublease. TENANT: SUBTENANT: TRANSMETA CORPORATION MOSCAPE, INC. a California corporation a Delaware corporation By /s/ R. STILLER By /s/ C. SOMANATHAN ------------------------------ ------------------------------- Print Name R. Stiller Print Name C. Somanathan ---------------------- ------------------------ Title Vice President Title Vice President --------------------------- ----------------------------- EX-10.15 19 ex10-15.txt EXHIBIT 10.15 1 EXHIBIT 10.15 SUBLEASE THIS SUBLEASE (this "Sublease") is dated for reference purposes as of June 15, 2000, and is made by and between Bitlocker, Inc., a California corporation ("Sublandlord"), and Transmeta Corporation, a California corporation ("Subtenant"). Sublandlord and Subtenant hereby agree as follows: 1. RECITALS: This Sublease is made with reference to the fact that John Arrillaga, Trustee, and Richard T. Peery, Trustee, as landlord ("Master Landlord"), and Sublandlord, as tenant, are parties to that certain Lease dated April 4, 2000 (the " Master Lease"), with respect to those certain premises (the "Master Premises"), in that certain building (the "Building") located at 3930 Freedom Circle, Santa Clara, California, as set forth in the Master Lease. A copy of the Master Lease is attached hereto as Exhibit A. Capitalized terms used and not defined herein shall have the meaning ascribed to them in the Master Lease. 2. SUBLEASED PREMISES: Subject to the terms and conditions of this Sublease, Sublandlord hereby subleases to Subtenant, and Subtenant hereby subleases from Sublandlord, a portion of the Master Premises, conclusively agreed to be 11,250 rentable square feet as more particularly described on Exhibit B attached hereto and incorporated herein by reference (hereinafter, the "Subleased Premises"). Subtenant shall have its pro rata share of the parking rights set forth at Paragraph 6 of the Master Lease [?]. 3. TERM: A. TERM. The term (the "Term") of this Sublease shall be for the period commencing on the date (the "Commencement Date") that is the later of (i) July 1, 2000 (the "Scheduled Commencement Date"), (ii) the date by which Master Landlord consents to this Sublease, and (iii) the date possession of the Subleased Premises is tendered to Subtenant by Sublandlord and ending 365 days after the Commencement Date, unless this Sublease is sooner terminated pursuant to its terms or the Master Lease is sooner terminated pursuant to its terms (the "Expiration Date"). If for any reason Sublandlord does not take possession of the Premises on or before the Scheduled Commencement Date, Sublandlord will not be subject to any liability for this failure, but the Termination Date will be extended by the delay, and the validity of this Sublease will not be impaired. Rent will be abated until tender of possession. However, if Sublandlord has not tendered possession to Subtenant within ninety (90) days after the Scheduled Commencement Date, at any time after that date and before Sublandlord takes possession, Subtenant may give written notice to Sublandlord of Subtenant's intention to cancel this Sublease. The notice will set forth an effective date for the cancellation, which will be at least ten (10) days after delivery of notice to Sublandlord. If Sublandlord takes possession of the Premises on or before this effective date, this Sublease will remain in full force. If Sublandlord fails to take possession on or before such effective date, this Sublease will be canceled. Upon cancellation, all consideration previously paid by Subtenant to Sublandlord on account of this Sublease will be returned to Subtenant, this Sublease will have no further force or effect, and 2 Sublandlord will have no further liability to Subtenant because of such delay or cancellation. If Sublandlord permits Subtenant to take possession prior to the Scheduled Commencement Date, the early possession will not advance the Termination Date and will be subject to the provisions of this Sublease, including, without limitation, the payment of Rent. B. OPTION TO EXTEND. Subtenant shall have no options or rights to extend the Term of this Sublease or expand the Subleased Premises. 4. RENT: A. BASE RENT. Commencing on the Commencement Date and continuing each month throughout the Term of this Sublease, Subtenant shall pay to Sublandlord as base rent for the Subleased Premises equal monthly installments of Fifty Thousand Seven Hundred Thirty Two Dollars and 00/100 ($56,250)("Base Rent"). Base Rent shall be paid in advance on or before the first (1st) day of each month. Rent for any period during the Term hereof which is for less than one (1) month of the Term shall be a pro rata portion of the monthly installment based on a thirty (30) day month. Rent shall be payable without notice or demand and without any deduction, offset, or abatement, in lawful money of the United States of America. Rent shall be paid directly to Sublandlord at __________________________, Attention: _______________, or such other address as may be designated in writing by Sublandlord. B. SERVER ROOM; SYSTEM FURNITURE; POWER DISTRIBUTION; VOICE/DATA Cabling. Subtenant shall pay Sublandlord $125,000.00 upon execution of this Sublease ("Services Rent") as in consideration of Subtenant's use of the server room on a primary basis for the Sublease Term, and use of the power distribution, voice/data cabling and system furniture (exclusive of chairs that Subtenant will provide) [Identify on Exhibit?]. At the end of the Term, the system furniture shall be returned in the same condition as when received by Subtenant, excluding ordinary wear and tear. C. ADDITIONAL RENT. All monies other than Base Rent and Services Rent required to be paid by Subtenant under this Sublease shall be deemed additional rent ("Additional Rent"). Additional Rent shall be paid within ten (10) business days after Subtenant receives a reasonably detailed written statement from Sublandlord with respect to the item of Additional Rent in question. Base Rent and Additional Rent are hereinafter collectively referred to as "Rent". D. PREPAYMENT OF RENT. Upon execution hereof by Subtenant, Subtenant shall pay to Sublandlord in advance Base Rent for the month of July, 2000. 5. SECURITY DEPOSIT: Upon execution hereof, Subtenant shall deposit with Sublandlord the sum of One Hundred Twenty Five Thousand Dollars and 00/100 ($125,000.00) (the "Security Deposit"), in cash, as security for the performance by Subtenant of the terms and conditions of this Sublease. If Subtenant fails to pay Rent or other charges due under this Sublease or otherwise defaults with respect to any provision of this Sublease, then Sublandlord may draw upon, use, apply or retain all or any portion of the Security Deposit for the payment of any Rent or other charge in default, for the payment of any other sum which Sublandlord has 3 become obligated to pay by reason of Subtenant's default, or to compensate Sublandlord for any loss or damage which Sublandlord has suffered thereby. If Sublandlord so uses or applies all or any portion of the Security Deposit, then Subtenant, within ten (10) days after demand by Sublandlord therefor, shall deposit cash with Sublandlord in the amount required to restore the Security Deposit to the full amount stated above. Sublandlord may commingle the Security Deposit with its own funds and Subtenant shall not be entitled to interest on the Security Deposit. Upon the expiration of this Sublease and Subtenant's vacation of the Subleased Premises, Sublandlord shall return to Subtenant so much of the Security Deposit as has not been applied by Sublandlord pursuant to this Paragraph, or which is not otherwise required to cure Subtenant's defaults. 6. HOLDOVER: Subtenant acknowledges that it is critical that Subtenant surrender the Subleased Premises on or before the Expiration Date in accordance with the terms of this Sublease. Accordingly, Subtenant shall indemnify, defend and hold harmless Sublandlord from and against all losses, costs, claims, liabilities and damages resulting from Subtenant's failure to surrender the Subleased Premises on the Expiration Date in the condition required under the terms of this Sublease (including, without limitation, any liability or damages sustained by Sublandlord as a result of a holdover of the Master Premises by Sublandlord occasioned by the holdover of the Subleased Premises by Subtenant). In addition, Subtenant shall pay Sublandlord holdover rent equal to one hundred fifty percent (150%) of Base Rent plus any Additional Rent payable hereunder for any period from the Expiration Date through the date Subtenant surrenders the Premises in the condition required hereunder. 7. REPAIRS: The parties acknowledge and agree that Subtenant is subleasing the Subleased Premises on an "AS IS" basis, and that Sublandlord has made no representations or warranties, express or implied, whatsoever, with respect to the Subleased Premises, including, without limitation, any representation or warranty as to the suitability of the Subleased Premises for Subtenant's intended use. Sublandlord shall have no obligation whatsoever to make or pay the cost of any alterations, improvements or repairs to the Subleased Premises, including, without limitation, any improvement or repair required to comply with any law, regulation, building code or ordinance (including the Americans with Disabilities Act of 1990, as may be amended). In addition, Sublandlord shall have no obligation to perform any repairs or any other obligation of Master Landlord required to be performed by Master Landlord under the terms of the Master Lease and Subtenant shall look solely to Master Landlord for performance of said obligations. Sublandlord shall, however, request performance of the same in writing from Master Landlord promptly after being requested to do so by Subtenant, and shall use Sublandlord's reasonable efforts (not including the payment of money, the incurring of any liabilities, or the institution of legal proceedings) to obtain Master Landlord's performance. Subtenant expressly waives the provisions of Section 1932, subsection 1, and Sections 1941 and 1942 of the Civil Code of California and all rights to make repairs at the expense of Sublandlord as provided in Section 1942 of said Civil Code. 8. RIGHT TO CURE DEFAULTS: If Subtenant fails to pay any sum of money to Sublandlord, or fails to perform any other act on its part to be performed hereunder, then Sublandlord may, but shall not be obligated to, make such payment or perform such act. All such sums paid, and all reasonable costs and expenses of performing any such act, shall be 4 deemed Additional Rent payable by Subtenant to Sublandlord upon demand, together with interest thereon at the lesser of (i) eighteen percent (18%) per annum or (ii) the maximum rate allowable under law (the "Interest Rate") from the date of the expenditure until repaid. 9. INDEMNITY: Except to the extent caused by the gross negligence or willful misconduct of Sublandlord, its agents, employees or contractors, Subtenant shall indemnify, defend with counsel reasonably acceptable to Sublandlord, protect and hold harmless Sublandlord and its agents, employees, directors, shareholders, contractors and representatives from and against any and all losses, claims, liabilities, judgments, causes of action, damages, costs and expenses (including, without limitation, reasonable attorneys' and experts' fees), caused by or arising in connection with: (i) the use, occupancy, operation or condition of the Subleased Premises; (ii) the negligence or willful misconduct of Subtenant or its agents, employees, contractors or invitees; and (iii) a breach of Subtenant's obligations under this Sublease or the provisions of the Master Lease assumed by Subtenant hereunder. Subtenant's covenants under this Paragraph shall survive termination of this Sublease. 10. ASSIGNMENT AND SUBLETTING: Subtenant's rights to assign, transfer or hypothecate the leasehold estate under this Sublease, or any interest therein shall be governed vis-a-vis Master Landlord by Articles 19 and 49 of the Master Lease and vis-a-vis the Sublandlord by such Articles as incorporated into this Sublease. Sublandlord shall not agree to terminate the Master Lease or to amend the Master Lease to the detriment of Subtenant without Subtenant's prior written consent. Neither Sublandlord nor Subtenant shall commit any act or be responsible for any omission that breaches the Master Lease and in the event of any such breach, the breaching party shall be liable to the non-breaching party for all damages suffered by the non-breaching party as the result of such breach. 11. USE: A. Subtenant may use the Subleased Premises for the use specified in the Master Lease only and for no other purpose whatsoever. B. Subtenant shall not use, store, keep, handle, manufacture, transport, release, discharge, emit or dispose of any Hazardous Materials in, on, under, about, to or from the Subleased Premises. Subtenant shall indemnify, defend with counsel reasonably acceptable to Sublandlord and hold harmless Sublandlord and its agents, employees, directors, shareholders, contractors and representatives from and against all claims, actions, suits, proceedings, judgments, losses, costs, personal injuries, damages, liabilities, deficiencies, fines, penalties, damages, attorneys' fees, consultants' fees, investigations, detoxifications, remediations, removals, and expenses of every type and nature, arising from or relating in any manner to the use, storage, handling, manufacture, transportation, release, discharge, emission or disposal of Hazardous Materials on or about the Subleased Premises or Building during the Term of this Sublease by Subtenant or its agents, employees, contractors or invitees. 5 C. Subtenant shall not do or permit anything to be done in or about the Subleased Premises which would (i) injure the Subleased Premises; or (ii) vibrate, shake, overload, or impair the efficient operation of the Subleased Premises or the sprinkler systems, heating, ventilating or air conditioning equipment, or utilities systems located therein. Subtenant shall not store any materials, supplies, finished or unfinished products or articles of any nature outside of the Subleased Premises. Subtenant shall comply with all reasonable rules and regulations promulgated from time to time by Sublandlord and Master Landlord. 12. EFFECT OF CONVEYANCE: As used in this Sublease, the term "Sublandlord" means the holder of the Tenant's interest under the Master Lease. In the event of any assignment or transfer of the Tenant's interest under the Master Lease, which assignment or transfer may occur at any time during the Term hereof in Sublandlord's sole discretion, Sublandlord shall be and hereby is entirely relieved of the future performance of all covenants and obligations of Sublandlord hereunder if such future performance is assumed by the transferee in a writing and a copy thereof is delivered to Subtenant. Sublandlord may transfer and deliver any security of Subtenant to the transferee of the Tenant's interest under the Master Lease, and thereupon Sublandlord shall be discharged from any further liability with respect thereto if such transferee assumes Sublandlord's obligations with regard to such security in a writing delivered to Subtenant. 13. DELIVERY AND ACCEPTANCE: Sublandlord shall deliver the Subleased Premises in broom-clean condition. Subtenant has fully inspected the Subleased Premises and is satisfied with the condition thereof. By taking possession of the Subleased Premises, Subtenant conclusively shall be deemed to have accepted the Subleased Premises in its then-existing, "AS IS" condition, without any representation or warranty whatsoever from Sublandlord with respect thereto. 14. IMPROVEMENTS: Subtenant shall not make any alterations or improvements to the Subleased Premises, except in accordance with the Master Lease, and with the prior written consent of both Master Landlord and Sublandlord. Subject to the consent of Master Landlord, and the review of Sublandlord, Subtenant shall, at its sole cost and expense, separately demise the Subleased Premises. 15. RELEASE AND WAIVER OF SUBROGATION: Notwithstanding anything to the contrary in this Sublease, Sublandlord and Subtenant hereby release each other from any damage to property or loss of any kind which is caused by or results from any risk that normally would be insured against under any property insurance policy required to be carried by either party. This release shall be in effect only so long as the applicable insurance policy contains a clause to the effect that this release shall not affect the right of the insured to recover under the policy. Each party shall use its reasonable efforts to cause each property insurance policy obtained by it to provide that the insurer waives all right of recovery against the other party and its agents and employees in connection with any damage or injury covered by the policy, and each party shall notify the other party if it is unable to obtain a waiver of subrogation. Sublandlord shall not be liable to Subtenant, nor shall Subtenant be entitled to terminate this Sublease or to abate Rent for any reason, including, without limitation, (i) failure or interruption of any utility system or service or (ii) failure of Master Landlord to maintain the Subleased Premises as may be required 6 under the Master Lease. The obligations of Sublandlord shall not constitute the personal obligations of the officers, directors, trustees, partners, joint venturers, members, owners, stockholders or other principals or representatives of the business entity. 16. INSURANCE: Subtenant shall obtain and keep in full force and effect, at Subtenant's sole cost and expense, during the Term the insurance required to be carried by the "Tenant" under the Master Lease. Subtenant shall include Sublandlord and Master Landlord as an additional insured in any policy of insurance carried by Subtenant in connection with this Sublease and shall provide Sublandlord with certificates of insurance upon Sublandlord's request. 17. DEFAULT: Subtenant shall be in material default of its obligations under this Sublease if any of the following events occur: A. Subtenant fails to pay any Rent within five (5) days after Subtenant's receipt of Sublandlord's written notice that such item of Rent is due; or B. Subtenant fails to perform any term, covenant or condition of this Sublease (except those requiring payment of Rent) and fails to cure such breach within ten (10) days after delivery of a written notice to Subtenant specifying the nature of the breach; provided, however, that if more than ten (10) days are reasonably required to remedy the failure, then Subtenant shall not be in default if Subtenant commences the cure within the ten (10) day period and thereafter completes the cure within thirty (30) days after the date of the notice; or C. Subtenant makes a general assignment of its assets for the benefit of its creditors, including attachment of, execution on, or the appointment of a custodian or receiver with respect to a substantial part of Subtenant's property or any property essential to the conduct of its business; or D. Subtenant abandons the Subleased Premises; or E. Subtenant commits any other act or omission which constitutes a default under the Master Lease, which has not been cured after delivery of any written notice required and passage of one-half (1/2) of any applicable grace period provided in the Master Lease as modified, if at all, by the provisions of this Sublease. 18. REMEDIES: In the event of any default by Subtenant, Sublandlord shall have all remedies provided to the "Landlord" in the Master Lease as if an event of default had occurred thereunder and all other rights and remedies otherwise available at law and in equity. Sublandlord may resort to its remedies cumulatively or in the alternative. 19. SURRENDER: On or before the Expiration Date or any sooner termination of this Sublease, Subtenant shall remove all of its trade fixtures, personal property and all alterations constructed by Subtenant in the Subleased Premises which are required to be removed under the terms of this Sublease and shall surrender the Subleased Premises to Sublandlord in (a) good condition, order and repair, reasonable wear and tear excepted and (b) free of Hazardous 7 Materials used, stored, handled, manufactured, transported, released, discharged, emitted or disposed of by Subtenant or it agents, employees, contractors or invitees. Subtenant shall repair any damage to the Subleased Premises caused by Subtenant's removal of its personal property, furnishings and equipment. If the Subleased Premises are not so surrendered, then Subtenant shall be liable to Sublandlord for all costs incurred by Sublandlord as a result of such failure, plus interest thereon at the Interest Rate. 20. BROKER: Sublandlord and Subtenant each represent to the other that they have dealt with no real estate brokers, finders, agents or salesmen in connection with this transaction other than MacMillan, Moore and Buchanan, Inc. representing Sublandlord and CPS, Inc. representing Subtenant. Subtenant shall pay 100% of the commission payable to MacMillan, Moore and Buchanan, Inc. (which party shall pay 50% of such commission to CPS, Inc.). Subtenant agrees to indemnify and hold Sublandlord harmless from and against all claims for brokerage commissions, finder's fees or other compensation made by any agent, broker, salesman or finder as a consequence of Subtenant's actions or dealings with such other agent, broker, salesman, or finder. Sublandlord agrees to indemnify and hold Subtenant harmless from and against all claims for brokerage commissions, finder's fees or other compensation made by any agent, broker, salesman or finder as a consequence of Sublandlord's actions or dealings with such other agent, broker, salesman, or finder. 21. NOTICES: Unless at least five (5) days' prior written notice is given in the manner set forth in this Paragraph, the address of each party for all purposes connected with this Sublease shall be that address set forth below their signatures at the end of this Sublease. All notices, demands or communications in connection with this Sublease shall be properly addressed and delivered as follows: (a) personally delivered; or (b) submitted to an overnight courier service, charges prepaid; or (c) deposited in the mail (certified, return-receipt requested, and postage prepaid). Notices shall be deemed delivered upon receipt, if personally delivered, one (1) business day after being so submitted to an overnight courier service and three (3) business days after deposit in the United States mail, if mailed as set forth above. All notices given to Master Landlord under the Master Lease shall be considered received only when delivered in accordance with the Master Lease. 22. OTHER SUBLEASE TERMS: A. INCORPORATION BY REFERENCE. Except as set forth below and except as otherwise provided in this Sublease, the terms and conditions of this Sublease shall include all of the terms of the Master Lease and such terms are incorporated into this Sublease as if fully set forth herein, except that: (i) each reference in such incorporated sections to "Lease" shall be deemed a reference to this "Sublease"; (ii) each reference to the "Premises" shall be deemed a reference to the "Subleased Premises"; (iii) each reference to "Landlord" and "Tenant" shall be deemed a reference to "Sublandlord" and "Subtenant", respectively, except as otherwise expressly set forth herein; (iv) with respect to work, services, utilities, electricity, repairs (or damage caused by Master Landlord), restoration, insurance, indemnities, reimbursements, representations, warranties or the performance of any other obligation of Master Landlord under the Master Lease, whether or not incorporated herein, the sole obligation of Sublandlord shall be to request the same in writing from Master Landlord as and when requested to do so by 8 Subtenant, and to use Sublandlord's reasonable efforts (not including the payment of money, the incurring of any liabilities, or the institution of legal proceedings) to obtain Master Landlord's performance; (v) with respect to any obligation of Subtenant to be performed under this Sublease, wherever the Master Lease grants to "Tenant" a specified number of days to perform its obligations under the Master Lease, except as otherwise provided herein, Subtenant shall have five (5) fewer days to perform the obligation, including, without limitation, curing any defaults provided, however, that in no event shall Subtenant have fewer than three (3) days to perform the obligation; (vi) with respect to any approval required to be obtained from the "Landlord" under the Master Lease, such approval must be obtained from both Master Landlord and Sublandlord, and Sublandlord's withholding of approval shall in all events be deemed reasonable if for any reason Master Landlord's approval is not obtained; (vii) in any case where the "Landlord" reserves or is granted the right to manage, supervise, control, repair, alter, regulate the use of, enter or use the Premises or any areas beneath, above or adjacent thereto, such reservation or grant of right of entry shall be deemed to be for the benefit of both Master Landlord and Sublandlord; (viii) in any case where "Tenant" is to indemnify, release or waive claims against "Landlord", such indemnity, release or waiver shall be deemed to run from Subtenant to both Master Landlord and Sublandlord; (ix) in any case where "Tenant" is to execute and deliver certain documents or notices to "Landlord", such obligation shall be deemed to run from Subtenant to both Master Landlord and Sublandlord; and (x) the following modifications shall be made to the Master Lease as incorporated herein: (a) the following provisions of the Master Lease are not incorporated herein: Basic Lease Information, Paragraphs 2A, 4A, 4F, 4G, 41, 43, 44 (second paragraph), 53, 54, 57, 58; (b) references to "Landlord" in the following provisions shall mean "Master Landlord" only (subject, however, to clauses (iv) through (ix) of the introductory language to this Paragraph 22.A): 24, 25, 27; (c) any right to abate rent provided to Subtenant through incorporation of the provisions of the Master Lease shall not exceed the rent actually abated under the Master Lease with respect to the Subleased Premises. B. ASSUMPTION OF OBLIGATIONS. This Sublease is and at all times shall be subject and subordinate to the Master Lease and the rights of Master Landlord thereunder. Subtenant hereby expressly assumes and agrees: (i) to comply with all provisions of the Master Lease which are assumed by Subtenant hereunder; and (ii) to perform all the obligations on the part of the "Tenant" to be performed under the terms of the Master Lease with respect to the Subleased Premises during the term of this Sublease. In the event the Master Lease is terminated for any reason whatsoever, this Sublease shall terminate simultaneously with such termination without any liability of Sublandlord to Subtenant. In the event of a conflict between the provisions of this Sublease and the Master Lease, as between Sublandlord and Subtenant, the provisions of this Sublease shall control. 23. DIRECTORY SIGNAGE: Subtenant, at its sole cost, shall be included in the Building directories located in the building to the extent permitted by Master Landlord. 9 24. RIGHT TO CONTEST: If Sublandlord does not have the right to contest any matter in the Master Lease due to expiration of any time limit that may be set forth therein or for any other reason, then notwithstanding any incorporation of any such provision from the Master Lease in this Sublease, Subtenant shall also not have the right to contest any such matter. 25. COVENANT OF QUIET ENJOYMENT: Subtenant peacefully shall have, hold and enjoy the Subleased Premises, subject to the terms and conditions of this Sublease, provided that Subtenant pays all Rent imposed hereunder and otherwise performs all of Subtenant's covenants and agreements contained herein. 26. CONDITIONS PRECEDENT: Notwithstanding anything to the contrary in this Sublease, this Sublease and Sublandlord's and Subtenant's obligations hereunder are conditioned upon Sublandlord's receipt of the written consent of Master Landlord to this Sublease in form and substance satisfactory to Sublandlord. If Sublandlord does not receive such consent within thirty (30) days after execution of this Sublease by Sublandlord, then Sublandlord or Subtenant may terminate this Sublease by giving written notice thereof, and upon such termination, Sublandlord shall return to Subtenant its payment of the first month's Base Rent paid by Subtenant pursuant to Paragraph 4 hereof and the Security Deposit. 27. CHOICE OF LAW; SEVERABILITY: This Sublease shall in all respects be governed by and construed in accordance with the laws of the State of California. If any term of this Sublease is held to be invalid or unenforceable by any court of competent jurisdiction, then the remainder of this Sublease shall remain in full force and effect to the fullest extent possible under the law, and shall not be affected or impaired. 28. AMENDMENT: This Sublease may not be amended except by the written agreement of all parties hereto. 29. ATTORNEYS' FEES: If either party brings any action or legal proceeding with respect to this Sublease, the prevailing party shall be entitled to recover from the other party reasonable attorneys' fees, experts' fees, and court costs. If either party becomes the subject of any bankruptcy or insolvency proceeding, then the other party shall be entitled to recover all reasonable attorneys' fees, experts' fees, and other costs incurred by that party in protecting its rights hereunder and in obtaining any other relief as a consequence of such proceeding. 30. WAIVER: If either Sublandlord or Subtenant waives the performance of any term, covenant or condition contained in this Sublease, such waiver shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition contained herein, or constitute a course of dealing contrary to the expressed terms of this Sublease. The acceptance of Rent by Sublandlord shall not constitute a waiver of any preceding breach by Subtenant of any term, covenant or condition of this Sublease regardless of Sublandlord's knowledge of such preceding breach at the time Sublandlord accepted such Rent. Failure by Sublandlord to enforce any of the terms, covenants or conditions of the Sublease for any length of time shall not be deemed to waive or decrease the right of Sublandlord to insist thereafter upon strict performance by Subtenant. Waiver by Sublandlord of any term, covenant or 10 condition contained in this Sublease may only be made by a written document signed by Sublandlord, based upon full knowledge of the circumstances. 31. NO DRAFTING PRESUMPTION: The parties acknowledge that this Sublease has been agreed to by both the parties, that both Sublandlord and Subtenant have consulted with attorneys with respect to the terms of this Sublease and that no presumption shall be created against Sublandlord because Sublandlord drafted this Sublease. Except as otherwise specifically set forth in this Sublease, with respect to any consent, determination or estimation of Sublandlord required or allowed in this Sublease or requested of Sublandlord, Sublandlord's consent, determination or estimation shall be given or made solely by Sublandlord in Sublandlord's good faith opinion, whether or not objectively reasonable. If Sublandlord fails to respond to any request for its consent within the time period, if any, specified in this Sublease, Sublandlord shall be deemed to have disapproved such request. 32. AUTHORITY TO EXECUTE: Subtenant and Sublandlord each represent and warrant to the other that each person executing this Sublease on behalf of each party is duly authorized to execute and deliver this Sublease on behalf of that party. 33. COUNTERPARTS: This Sublease may be executed in one (1) or more counterparts each of which shall be deemed an original but all of which together shall constitute one (1) and the same instrument. Signature copies may be detached from the counterparts and attached to a single copy of this Sublease physically to form one (1) document. IN WITNESS WHEREOF, the parties have executed this Sublease as of the day and year first above written. SUBLANDLORD: SUBTENANT: BITLOCKER, INC. TRANSMETA CORPORATION By: By: -------------------------------- ------------------------------- Print Name: Print Name: ----------------------- ----------------------- Title: President Title: President ---------------------------- ---------------------------- By: By: -------------------------------- ------------------------------- Print Name: Print Name: ----------------------- ----------------------- Title: Secretary Title: Secretary ---------------------------- ---------------------------- Address: Address: 11 June 30, 2000 Bitlocker, Incorporated 425 Sherman Avenue, Suite 210 Palo Alto, CA 94306 Re: CONSENT TO SUBLEASE TO TRANSMETA CORPORATION, A CALIFORNIA CORPORATION FOR A PERIOD OF TWELVE MONTHS, COMMENCING ON THE LATER OF (i) JULY 1, 2000 OR (ii) THE DATE POSSESSION OF THE SUBLEASED PREMISES IS TENDERED TO SUBLANDLORD BY MASTER LANDLORD AND TERMINATING 365 DAYS THEREAFTER. Gentlemen: This letter is written with regard to your proposed sublease of approximately 11,250 square feet of space (as shown on Exhibit A attached hereto) (the "Sublet Premises") of the 22,500 square feet of space leased by Tenant at 3930 Freedom Circle, Santa Clara, California, under Lease Agreement dated April 4, 2000 ("Master Lease"), by and between John Arrillaga Separate Property Trust and Richard T. Peery Separate Property Trust ("Master Landlord"), and BITLOCKER INCORPORATED, a California corporation ("Tenant"), which Tenant is proposing to sublease to TRANSMETA CORPORATION, a California corporation ("Subtenant") on the terms and conditions set forth in the proposed Sublease dated June 15, 2000, submitted by Tenant to Master Landlord on June 26, 2000 (the "Sublease"). Pursuant to Master Lease Paragraph 19 ("Assignment and Subletting") Master Landlord hereby approves Tenant's subleasing said space to Subtenant, under the Sublease, subject to the following terms and conditions: 1. MASTER LANDLORD IS NOT CONSENTING TO ANY EXPANSION OPTION AND/OR EXTENSION OF TERM OPTION SUBTENANT MAY HAVE IN SAID SUBLEASE. In the event any such option(s) exist in said Sublease and said Subtenant desires to exercise such option(s), Tenant will be required to obtain Landlord's consent to such option(s) (as though Tenant was requesting Landlord's consent to a new sublease) at the time exercised by Subtenant and the parties hereto understand and agree that Landlord may withhold its consent of either or both of said option(s) in its sole and absolute discretion. 2. Master Landlord's Consent shall in no way void or alter any of the terms of the Lease by and between Master Landlord and Tenant, nor shall this Consent alter or diminish in any way Tenant's obligations to Master Landlord. 3. Tenant shall not give Subtenant any rights or privileges in excess of those given Tenant 12 under the terms of the Master Lease. 4. Subtenant shall not have a separate address from the address of the Premises. Therefore, Tenant shall provide Subtenant with internal mail delivery. Tenant and Subtenant shall share (the prorata shares to be determined in a separate agreement between Tenant and Subtenant) the existing signage allocated to Tenant for the Premises. 5. Master Landlord has not reviewed the terms of any agreement between Tenant and Subtenant, and in approving said Sublease, Master Landlord is in no way approving any term, covenant or condition therein contained, and said Sublease is subject and subordinate to all terms, covenants and conditions of the Master Lease. Master Landlord shall not be bound by any agreement other than the terms of the Master Lease between Master Landlord and Tenant. In the event of conflict in the terms, covenants and conditions between the Sublease and the Master Lease, the terms, covenants and conditions of the Master Lease shall prevail and take precedence over said Sublease. Master Landlord does not make any warranties or representations as to the condition of the Leased Premises or the terms of the Lease between Master Landlord and Tenant. THIS CONSENT TO SUBLEASE SHALL IN NO EVENT BE CONSTRUED AS CONSENT TO ANY FUTURE SUBLEASE AGREEMENT (INCLUDING ANY EXTENSIONS AND/OR AMENDMENTS TO THE CURRENT SUBLEASE) BETWEEN TENANT AND SUBTENANT, or any other party; and any future sublease agreement (including any extensions and/or amendments to the current Sublease) between Tenant and Subtenant, or any other party shall require the prior written consent of Master Landlord. Under no circumstances will Master Landlord consent to a sub-sublease or assignment under the Sublease. 6. A. It is agreed by all parties hereto that in the event the Master Lease is rejected by Tenant under a Chapter 11 or 7 proceeding and/or Master Landlord terminates the Master Lease, pursuant to any right therein contained, said Sublease shall automatically terminate simultaneously with the Master Lease. Notwithstanding anything to the contrary set forth above, Master Landlord, at Master Landlord's sole option and election, may choose to allow Subtenant to remain in possession of the Sublet Premises leased under said Sublease subject to all terms, covenants and conditions of said Master Lease by giving Subtenant written notice prior to the effective date of termination of said Master Lease, of Master Landlord's election to allow Subtenant to remain in possession of the Sublet Premises in which event Subtenant shall be entitled and obligated to remain in possession of the Sublet Premises under the terms of said Sublease, subject to all terms, covenants and conditions of the Master Lease, including, without limitation to, payment of Basic Rent at the greater of: (i) the rate provided for in the Master Lease, or (ii) the rate provided for in the Sublease. Such election by Master Landlord shall not operate as a waiver of any claims Master Landlord may have against Tenant. Following such written notice by Master Landlord Subtenant shall then, as of the effective date of said termination of said Master Lease, be liable to and shall attorn in writing directly to Master Landlord as though said Sublease were executed directly between Master Landlord and Subtenant; provided, however, it is specifically agreed between the parties hereto, that whether Master Landlord elects to allow 13 Subtenant to remain in possession of the Sublet Premises under the terms of the Sublease, subject to the Master Lease, or allow said Sublease to automatically terminate simultaneously with the Master Lease, Master Landlord shall not, in any event, nor under any circumstances be responsible or liable to Subtenant for (i) the return of any security deposit paid by Subtenant to Tenant, nor shall Subtenant be given credit for any prepaid rental or other monetary consideration paid by Subtenant to Tenant under said Sublease; (ii) any other claim or damage of any kind or nature whatsoever by reason of or in connection with Master Landlord's termination of said Master Lease and/or Sublease; and (iii) any default of Tenant under the Sublease. B. In the event Master Landlord has terminated the Master Lease, and has not elected, in writing prior to the effective date of termination of said Master Lease, to allow Subtenant to remain in the Sublet Premises as set forth above, said Sublease shall terminate co-terminously with the effective termination of the Master Lease automatically, without notice, and Subtenant and/or Tenant, jointly and severally, shall surrender the Sublet Premises to Master Landlord in good condition and repair as of the effective termination of the Master Lease, with Master Landlord having no obligation or liability whatsoever to Subtenant by reason of or in connection with such early termination of the Master Lease. In the event Subtenant and/or Tenant fails to timely surrender the Sublet Premises to Master Landlord in good condition and repair as of the date the Master Lease terminates, Subtenant and/or Tenant, jointly and severally, shall be liable to Master Landlord in such event for all damages, costs, claims, losses, liabilities, fees or expenses sustained by Master Landlord, including, but not limited to, loss of rental income, attorney's fees and court costs resulting from or in connection with Subtenant's failure to timely vacate the Sublet Premises and surrender the Sublet Premises to Master Landlord as of the effective termination date of said Master Lease. C. As a condition to Landlord's consent to the Sublease, by execution of this Consent to Sublease, Subtenant hereby agrees to be bound by the following provision in relation to both Tenant and Master Landlord: If Master Landlord and Tenant jointly and voluntarily elect, for any reason whatsoever, to terminate the Master Lease prior to the scheduled Master Lease Termination Date, then this Sublease (if then still in effect) shall terminate concurrently with the termination of the Master Lease. Subtenant expressly acknowledges and agrees that (1) the voluntary termination of the Master Lease by Master Landlord and Tenant and the resulting termination of this Sublease shall not give Subtenant any right or power to make any legal or equitable claim against Master Landlord or Tenant, including without limitation any claim for interference with contract or interference with prospective economic advantage, and (2) Subtenant hereby waives any and all rights it may have under law or at equity to challenge such an early termination of the Sublease, and unconditionally releases and relieves Master Landlord and Tenant, and their officers, directors, employees and agents, from any and all claims, demands, and/or causes of action whatsoever 14 (collectively, "Claims"), whether such matters are known or unknown, latent or apparent, suspected or unsuspected, foreseeable or unforeseeable, which Subtenant may have arising out of or in connection with any such early termination of this Sublease. Subtenant knowingly and intentionally waives any and all protection which is or may be given by Section 1542 of the California Civil Code which provides as follows: "A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with debtor." The term of this Sublease is therefore subject to early termination. Subtenant's initials here below evidence (a) Subtenant's consideration of and agreement to this early termination provision, (b) Subtenant's acknowledgment that, in determining the net benefits to be derived by Subtenant under the terms of this Sublease, Subtenant has anticipated the potential for early termination, and (c) Subtenant's agreement to the general waiver and release of Claims above. Initials: /s/ RS Initials: /s/ EAK ----------- ---------- Subtenant Tenant 7. In consideration of Master Landlord's consent to the Sublease, Tenant irrevocably assigns to Master Landlord, as security for Tenant's obligations under this Lease, all rent and income payable to Tenant under the Sublease. Therefore Master Landlord may collect all rent due under the Sublease and apply it towards Tenant's obligations under the Master Lease. Tenant and Subtenant agree to pay same to Master Landlord upon demand without further consent of Tenant and Subtenant required; provided, however, that until the occurrence of a default by Tenant under the Master Lease, Tenant shall have the right to collect such rent. Tenant hereby irrevocably authorizes and directs Subtenant, upon receipt of a written notice from Master Landlord stating that a default exists in the performance of Tenant's obligations under the Master Lease, to pay to Master Landlord the rents due and to become due under the Sublease. Tenant agrees that Subtenant shall have the right to rely on any such statement and request from Master Landlord, and that Subtenant shall pay such rents to Master Landlord without any obligation or right to inquire as to whether such default exists and notwithstanding any notice or claim from Tenant to the contrary. Tenant shall have no right or claim against Subtenant or Master Landlord for any such rents so paid by Subtenant to Master Landlord. It is further agreed between the parties hereto that neither Tenant's assignment of such rent and income, nor Master Landlord's acceptance of any payment of rental or other sum due by Subtenant to Tenant under said sublease, whether payable directly to Master Landlord or endorsed to Master Landlord by Tenant, shall in any way nor in any event be construed as creating a direct contractual relationship between Master Landlord and Subtenant, unless the Parties expressly so agree in writing and such acceptance shall be deemed to be an accommodation by Master Landlord to, and for the convenience of, Tenant and Subtenant. Any direct contractual agreement between Master Landlord and Subtenant must be in writing. 15 8. Pursuant to the provisions of Paragraph 19 entitled "Assignment and Subletting" of the Master Lease, Master Landlord hereby requires Tenant to pay to Master Landlord, as Additional Rent, all rents and/or additional consideration received by Tenant from said Sublease in excess of the Basic Rent payable to Master Landlord in said Lease (hereinafter referred to as "Excess Rent"). Tenant and Subtenant acknowledge that any Excess Rent is owed to Master Landlord and Tenant hereby agrees to pay any Excess Rent to Master Landlord as due under said Sublease. Tenant and Subtenant represent and warrant to Master Landlord that: (1) the information to be completed and provided by Tenant and Subtenant on the attached Exhibit B "Summary of Amounts/Consideration to be Paid by Subtenant" accurately represents amounts to be paid by Subtenant under said Sublease; (2) no additional consideration is due Tenant under said Sublease, other than the additional consideration (if any) identified on Exhibit B; and (3) no changes in the terms and/or conditions of said Sublease shall be made without Master Landlord's prior written approval. 9. This Consent is conditional upon Master Landlord's receipt of Master Landlord's reasonable costs and attorney's fees, to which Master Landlord is entitled under Paragraph 19 of the Master Lease. Tenant shall pay such fees and costs to Landlord, pursuant to the invoice provided to Tenant by Landlord with this Consent, upon execution of this Consent by Tenant and Subtenant. 10. This Consent to Sublease shall only be considered effective, and Master Landlord's consent to the Sublease given, when (i) Landlord receives payment from Tenant of Landlord's costs, and (ii) this Letter Agreement is executed by Master Landlord, Tenant, and Subtenant, and Guarantors (if any) under the Master Lease. Please execute this letter in the space provided below, obtain the signature of Subtenant, and return all copies to our office no later than July 14, 2000. IN THE EVENT TENANT FAILS TO RETURN THE FULLY EXECUTED DOCUMENTS, WITH THE FULL PAYMENT OF $1,000.00 PURSUANT TO THE INVOICE ATTACHED HERETO, TO LANDLORD BY JULY 14, 2000, THIS CONSENT SHALL BE AUTOMATICALLY RESCINDED, IN WHICH EVENT, TENANT SHALL BE REQUIRED TO RESUBMIT ITS REQUEST IN THE EVENT TENANT DESIRES TO GO FORWARD WITH SAID SUBLEASE. A fully executed copy will be returned to you after execution by the Master Landlord. Very truly yours, PEERY/ARRILLAGA By /s/ JOHN ARRILLAGA ------------------------------------ John Arrillaga (SIGNATURES CONTINUED ON FOLLOWING PAGE) 16 THE UNDERSIGNED Tenant and Subtenant do hereby jointly and severally agree to the terms and conditions of this Consent to Sublease. TENANT: SUBTENANT: BITLOCKER, INCORPORATED TRANSMETA CORPORATION a California corporation a California corporation By /s/ E. KRUGLER By /s/ R. STILLER ------------------------------ ------------------------------ Print Name Eric Krugler Print Name Richard Stiller ---------------------- ---------------------- Title CEO Title VP --------------------------- --------------------------- EX-10.16 20 ex10-16.txt EXHIBIT 10.16 1 EXHIBIT 10.16 RIGHT OF FIRST OFFER AND OBSERVATION RIGHTS AGREEMENT This Right of First Offer and Observation Rights Agreement (this "Agreement") is made and entered into as of June 17, 1998 by and between Transmeta Corporation, a California corporation (the "Company"), and Van Wagoner Capital Management, a Delaware corporation ("Investor"). R E C I T A L S A. Investor has agreed to purchase from the Company shares of the Company's Series E Preferred Stock (the "Series E Stock") pursuant to that certain Series E Preferred Stock Purchase Agreement, dated of even date herewith, by and among the Company, Investor and certain other parties. B. In connection with the purchase by Investor of shares of Series E Stock, the Company will provide to Investor a right of first offer in the Company's first public offering of its Common Stock, pursuant to the terms and conditions set forth below. NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1. RIGHT OF FIRST OFFER. 1.1 Right of First Offer. If the Company proposes to offer any shares of its Common Stock ("Offered Securities") other than Excluded Securities (as defined below) in a public offering pursuant to an effective registration statement (the "Registration Statement") filed under the U.S. Securities Act of 1933, as amended (the "Public Offering"), the Company will concurrently therewith make an offering of a portion of such Offered Securities to Investor in accordance with the following provisions: (a) Delivery of Right of First Offer Notice. The Company will deliver by fax or hand delivery a notice ("Right of First Offer Notice") to Investor no less than one day prior to the anticipated effective date of the Registration Statement covering such Public Offering stating (i) the Company's bona fide intention to offer such Offered Securities in a Public Offering, (ii) the number of such Offered Securities to be offered and (iii) the Terms upon which it proposes to offer such Offered Securities. For purposes hereof, "Terms" shall mean the terms set forth in the preliminary prospectus for the Public Offering and the draft of the proposed underwriting agreement to be entered into between the Company and the underwriter of such Public Offering, if any, provided to Investor as part of the Right of First Offer Notice. (b) Exercise of Right of First Offer. By written notification received by the Company, within 24 hours after the Company gives the Right of First Offer Notice, Investor may elect, which election shall be irrevocable as to Investor, to purchase, at the price the Offered Securities are actually sold in the Public Offering pursuant to the Registration Statement and on the Terms specified in the Right of First Offer Notice, up to the lesser of (i) that portion of such Offered Securities which equals Investor's Percentage Share (as defined below) or (ii) 2 3% of the total number of shares of Common Stock offered and sold by the Company in such Public Offering (exclusive of any shares offered and sold pursuant to any underwriter's over-allotment option); provided, however, that the underwriter of such Public Offering, if any, shall be entitled to reduce the number of shares of Offered Securities which Investor shall be entitled to purchase under this Section 1 to the extent deemed necessary in the underwriter's reasonable judgment (x) to the success of such Public Offering for reasons set forth in writing no less than two weeks prior to the anticipated effective date of the Registration Statement covering such Public Offering, or (y) to comply with the rules or regulations of the Securities and Exchange Commission, the National Association of Securities Dealers, Inc., the Nasdaq Stock Market, Inc., or other regulatory body for reasons set forth in writing and given to Investor by fax or hand delivery no less than one day prior to the anticipated effective date of the Registration Statement covering such Public Offering. For the purpose of this Section 1.1(b), "Investor's Percentage Share" will be equal to that proportion that the number of shares of Common Stock of the Company then issued upon conversion of the Series E Stock, or issuable upon conversion of the Series E Stock then issued, and then held by Investor bears to (i) the total number of shares of Common Stock of the Company then outstanding, plus (ii) the total number of shares of Common Stock of the Company into which all then outstanding shares of Preferred Stock of the Company are then convertible, plus (iii) the total number of shares of Common Stock of the Company then issuable by the Company under all then outstanding options and/or warrants or then issuable upon conversion of all shares of Preferred Stock of the Company issuable by the Company under such options and/or warrants. If all Offered Securities that Investor is entitled to obtain pursuant to this Section 1.1 are not elected to be purchased by Investor as provided in this Section 1.1, the Company may, during the thirty (30) day period following the expiration of the 24 hour period provided in the first sentence of this Section 1.1(b), offer the remaining unsubscribed portion of such Offered Securities to any person or persons upon Terms no more materially favorable than specified in the Right of First Offer Notice. If the Company does not, within such thirty (30) day period, consummate the sale of the Offered Securities in the Public Offering upon Terms no more materially favorable than specified in the Right of First Offer Notice, then the right of first offer provided hereunder will be deemed to be revived and such Offered Securities will not be offered in a Public Offering unless a portion thereof are concurrently reoffered to Investor in accordance herewith. 1.2 Excluded Securities. The right of first offer in this Section 1 will not be applicable to securities (the "Excluded Securities") issued pursuant to the acquisition of another corporation or entity by the Company by consolidation, merger, purchase of all or substantially all of the assets, or other reorganization in which the Company acquires, in a single transaction or series of related transactions, all or substantially all of the assets of such other corporation or entity or fifty percent (50%) or more of the voting power of such other corporation or entity or fifty percent (50%) or more of the equity ownership of such other entity. 1.3 Termination. This right of first offer will terminate (a) immediately following the first closing of the first Public Offering, or (b) upon the acquisition of all or substantially all the assets of the Company, or (c) upon an acquisition of the Company by another corporation or entity by consolidation, merger or other reorganization in which the holders of the Company's outstanding voting stock immediately prior to such transaction own, immediately 2 3 after such transaction, securities representing less than fifty percent (50%) or more of the voting power of the corporation or other entity surviving such transaction. 2. OBSERVATION RIGHTS. Commencing on the date of this Agreement, for so long as Van Wagoner Capital Management ("Van Wagoner") holds at least 200,000 shares of Series E Stock or the equivalent number (on an as-converted to Common Stock basis) of shares of Common Stock issued upon conversion of such shares of Series E Stock, it shall be entitled to have one representative of it attend all meetings of the Board of Directors of the Company in a nonvoting observer capacity and to receive notice of all meetings of the Company's Board of Directors; provided, that Van Wagoner shall, and shall cause each of its representatives who may have access to any of the information made available at any meeting of the Company's Board of Directors or provided by the Company to its Board of Directors, hold in confidence and not disclose or use, directly or indirectly, any such information, other than in connection with Van Wagoner's investment in the Company; provided further, that the Company reserves the right not to provide information to Van Wagoner or its representatives and to exclude them from any meeting or portion thereof if attendance at such meeting by them would adversely affect the attorney-client privilege between the Company and its counsel or if any of Van Wagoner or its representatives is or becomes a competitor, or affiliated in any manner with a competitor, of the Company. 3. GENERAL PROVISIONS. 3.1 Notices. Unless otherwise provided, any notice required or permitted under this Agreement will be given in writing and will be deemed effectively given upon personal delivery to the party to be notified, or three (3) days after deposit with the United States Post Office, by registered or certified mail, postage prepaid, or by deposit with a nationally recognized courier service such as FedEx, or by facsimile with confirmed receipt and addressed to the party to be notified at the address indicated for the Company and Investor on the signature page hereof, or at such other address as any party may designate by giving at least ten (10) days advance written notice to all other parties pursuant to this Section 3.1. 3.2 Entire Agreement. This Agreement constitutes the entire agreement and understanding of the parties with respect to the subject matter hereof and supersedes any and all prior negotiations, correspondence, agreements, understandings duties or obligations between the parties with respect to the subject matter hereof. 3.3 Amendment and Waiver. Any provision of this Agreement may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of the Company and Investor. Any amendment or waiver effected in accordance with this Section 3.3 will be binding upon Investor, the Company, and each permitted successor or assignee of Investor or the Company. 3.4 Governing Law. This Agreement will be governed by and construed under the internal laws of the State of California as applied to agreements among California 3 4 residents entered into and to be performed entirely within California, without reference to principles of conflict of laws or choice of laws. 3.5 Severability. If any provision of this Agreement is held to be unenforceable under applicable law, such provision will be excluded from this Agreement and the balance of the Agreement will be interpreted as if such provision were so excluded and will be enforceable in accordance with its terms. 3.6 Third Parties. Nothing in this Agreement, express or implied, is intended to confer upon any person, other than the parties hereto and their successors and assigns, any rights or remedies under or by reason of this Agreement. 3.7 Successors And Assigns. The terms and conditions of this Agreement will inure to the benefit of and be binding upon the respective successors and assigns of the parties. 3.8 Headings. The headings and captions used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. All references in this Agreement to sections, paragraphs, exhibits and schedules will, unless otherwise provided, refer to sections and paragraphs hereof and exhibits and schedules attached hereto, all of which exhibits and schedules are incorporated herein by this reference. 3.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same instrument. 3.10 Costs And Attorneys' Fees. In the event that any action, suit or other proceeding is instituted concerning or arising out of this Agreement or any transaction contemplated hereunder, the prevailing party will recover all of such party's costs and attorneys' fees incurred in each such action, suit or other proceeding, including any and all appeals or petitions therefrom. 3.11 No Finder's Fees. Each party represents that it neither is nor will be obligated for any finder's or broker's fee or commission in connection with this transaction. Investor will indemnify and hold harmless the Company from any liability for any commission or compensation in the nature of a finders' or broker's fee (and any asserted liability) for which Investor or any of its officers, partners, employees, or representatives is responsible. The Company will indemnify and hold Investor harmless from any liability for any commission or compensation in the nature of a finder's or broker's fee (and any asserted liability) for which the Company or any of its officers, employees or representatives is responsible. 3.12 Further Assurances. From and after the date of this Agreement, upon the request of Investor or the Company, the Company and Investor will execute and deliver such instruments, documents or other writings as may be reasonably necessary or desirable to confirm and carry out and to effectuate fully the intent and purposes of this Agreement. 4 5 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written. TRANSMETA CORPORATION: VAN WAGONER CAPITAL MANAGEMENT: By: /s/ David R. Ditzel By: /s/ Audrey Lam -------------------------------- --------------------------------- Name: David R. Ditzel Name: Audrey Lam ------------------------------ ------------------------------- Title: President & CEO Title: Research Analyst ----------------------------- ------------------------------ Date signed: 6/16/98 Date signed: 6/16/98 ----------------------- ------------------------ Address: Address: 3940 Freedom Circle 345 California Street, Suite 2450 Santa Clara, CA 95054 San Francisco, CA 94104 Attention: President Attention: ____________________ Facsimile: 408-327-9840 Facsimile: 415-835-5050 [SIGNATURE PAGE TO TRANSMETA CORPORATION RIGHT OF FIRST OFFER AND OBSERVATION RIGHTS AGREEMENT] 5 EX-21.01 21 ex21-01.txt EXHIBIT 21.01 1 EXHIBIT 21.01 SUBSIDIARIES OF THE REGISTRANT
Percentage Owned Name Jurisdiction of Organization by Registrant - ---- ---------------------------- ------------- Transmeta International Corporation Delaware 100% Transmeta World, Inc. Cayman Islands * Transmeta Singapore Singapore **
*Wholly owned by Transmeta International Corporation. **Wholly owned by Transmeta World, Inc. EX-23.02 22 ex23-02.txt EXHIBIT 23.02 1 EXHIBIT 23.02 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 17, 2000, except for Note 11, as to which the date is , 2000, in the Registration Statement (Form S-1) of Transmeta Corporation (a development stage Company) dated August 17, 2000. Palo Alto, California August 17, 2000 - -------------------------------------------------------------------------------- The foregoing consent is in the form that will be signed upon the reincorporation of company as described in Note 11 to the consolidated financial statements. /s/ ERNST & YOUNG LLP Palo Alto, California August 17, 2000 EX-27.01 23 ex27-01.txt EXHIBIT 27.01
5 1,000 YEAR 6-MOS DEC-31-1999 JUN-30-2000 JAN-01-1999 JAN-01-2000 DEC-31-1999 JUN-30-2000 46,625 112,353 19,799 3,015 0 243 0 0 0 4,047 68,252 122,308 18,082 19,484 (9,545) (12,412) 8,537 7,072 9,340 16,243 0 0 0 0 134,980 222,922 3,967 37,734 (3,074) (25,827) 96,227 157,970 76 358 5,076 358 18 223 18 223 46,151 45,597 0 0 1,952 876 (40,589) (43,393) 500 0 (41,089) (43,393) 0 0 0 0 0 0 (41,089) (43,393) (3.02) (2.81) (3.02) (2.81)
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